OpenFinance CEO Juan M.Hernandez: In-depth Analysis of the Security Token industry in the US

The following analysis + interview was produced by the Chinese media company Blocklike, investment company Cabin Capital and translated by Pickin. We ask for your understanding that the translation might sometimes lack a bit of grammatical accuracy. However, we hope you can still enjoy the content. We would like to thank Blocklike to share this interview they conducted with Juan M. Hernandez with us.

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Juan M. Hernandez, founder and CEO of OpenFinance, is a serial entrepreneur and business strategist with over 14 years of experience in business technology and strategy management and over 20 years of Fintech and alternative assets. Juan has built multiple startups including PeerRealty, Endurance Commerce, and the Pop Stock Exchange. Prior to entrepreneurship, Juan spent his career designing and developing financial exchange platforms, algorithmic trading systems and health care security networks.

The Security Token industry has sprouted in 2018. According to the research report on the Security Token Industry done by UnitedTraders, following the first year of ICO in 2017, 2018 has seen the rise of Security Tokens which might have the potential to gradually converge the crypto industry and traditional markets.

One of the major applications of Security Tokens is securitization. However, while getting these assets on chain, there are issues related to compliance, confirmation, KYC and AML procedure. Regulated crypto platforms are working on automatic solution to these issues, among which are leading ones, such as Open Finance, tZero and Polymath.

Juan M. Hernandez, the founder and CEO of OpenFinance Network (here in after referred to OFN) which is the first regulated Security Token trading platform, believes that, “2018 is said to be the year of Security Tokens, but, for us, this is only the beginning. We are committed to supporting all levels of investors in participating in this burgeoning alternative asset ecosystem. As we continue to partner with more security token assets, we are able to offer people more opportunities for wealth generation.”

Today, we are honored to have Juan with us, and talked about the current Security Token industry development as well as the latest progress of the OFN trading platform.

OFN’s First-mover Advantage

On November 29th, 2018, the first compliant security token trading order ever is completed on OFN in America. Headquartered in Chicago, OFN’s trading platform system has gone online several months before in America, and it is the first security token trading platform regulated by America since its Alternative Trading System (hereinafter referred to as ATS) has met necessary regulations. Since December 13th, the platform is officially open to qualified investors, and it’s applied to both accredited and non-accredited investors in America and overseas.

OFN is a decentralized security storage system and a security trading processing protocol and framework at the same time. The framework and protocol standardize the alternative assets, and offer interoperability for participants.

Currently, OFN’s ATS is the only platform for security token trading in America. “There are a number of others working on building their own, but we have a large head start since we started the process over a year ago.” says Juan M.Hernandez.

The ATS license owned by OFN allows them to be compliant with the definition of “exchange” in federal security law and become an electronic trading system regulated by SEC which is able to match instructions from both buyers and sellers. Since an ATS license holder is able to apply for being national exchange, ATS is deemed as of great value as it is hard to acquire in America.

“Many other platforms went out and purchased an existing license, but OFN was the first the built it from scratch in order to trade Digital Securities, specifically security tokens. ”

“We started the process over a year ago, and have worked around the clock to be able to be the very first to launch. While the regulators have been very receptive and open to working with us, both sides are proceeding with caution because it has never been done before.”

According to Juan’s prediction, due to the larger barrier to entry imposed by regulation, there will be many less platforms than in the unregulated world. “Just like how the public equity markets exist today, we think there will be 4–5 large security token platforms as the key players.”

“Huge and Appealing” Alternative Assets Market

OFN have seen a huge demand already for people to list on the platform. Nowadays, the alternative asset market is currently $7.7 trillion , and new issuances of private securities at about $1.8 billion.

Juan M.Hernandez explains that, “alternative assets” refers to any assets deemed not as “typical”, such as stock, bond, and cash. Alternative assets have been historically very difficult to trade and, therefore, also have low liquidity, which refers to how easy it is for buyers/sellers to find a match. Rare art works are great examples of alternative assets, because there are only so many potential buyers at a given time. Art also loses value if you physically split it into pieces. One of the transformative aspects of blockchain technology is that it enables fractional ownership; so for the first time, a work of rare art can be easily owned by multiple parties, represented by digital tokens.

“The tokenization of assets is one of the most obvious use cases for blockchain technology. By tokenizing these historically difficult-to-trade securities assets, the industry could be in for another phase of massive growth. “

“By creating additional liquidity for these markets, we can start to eliminate all the inefficiencies in the market and increase demand for these assets. There will be strong desire for both new companies looking to raise money doing an STO, and existing assets such as REITs looking to tokenize and increase liquidity for their investors.”

“Between our 18+ issuance platform partners, and those coming direct to us, we have spoken to about 200+ unique projects. We think that by the end of next year we can have 100 trading if the ecosystem continues to develop. The interest has been global, with projects coming out of all different countries. While the early ones will be mostly US, we are seeing more and more companies looking to list on a US platform that are not located here. We are set up to trade with customers from all over the world.”

The development of the security token market has attracted firms from traditional financial market to enter and deploy in the arena. Some of the largest companies in the traditional markets have started to get into security tokens. Goldman Sach’s Circle purchased Poloniex and is looking to create a security token marketplace. And Fidelity, with $6.7T under administration, just opened Fidelity Digital, looking to get into security tokens. According to Juan: “Large companies are very, very interested because security tokens are seen as more ‘legit’ than unregulated tokens, and they can buy them since they are regulated, and they won’t risk losing their own licensing.”

Projects Issuing and Evaluating Standards

Juan mentioned that the SEC has been committed to combat fraud and non-compliant ICOs and to establish and implement better industry standards.

He believes that, “It’s important to remember that regulations are intended to protect people from scams and safeguard the market from fraudulent manipulation. The largest institutional investors, such as pension funds and endowments, have yet to take the leap into the burgeoning tokenized assets space in part because of regulatory uncertainty. The caution employed by the biggest players in finance could mean that security tokens serve as an onramp for the mainstream to participate in the token economy. ”

While security tokens present a new solution, trading platform’s approval for compliance is an even more important premise for them to succeed.

Currently, OFN has switched its focus on the security token issuance and the establishment of trading compliance standards. The listing requirements of their trading platform and the difficulty of trading have always been the focus of attention. Three aspects are determining the framework of OFN which are compliance assessment, asset and issuer assessment, and operation and technology assessment. To be listed on OFN, these requirements have to be fulfilled.

Security token projects have technology requirements, “For the technical integration, we want to make sure that the tokens have the compliance checks built in or accounted for at the token level. This is done to make sure that once they leave OFN, they can’t be traded on a non regulated platform like EtherDelta or similar. If you look at our own library, S3, it is an example of what security tokens should look like. We have many other accepted standards, such as DS, R-Token, ST-20, CAT-20, DSS, 1404, Abacus, and are working on more.”

“We can accept projects using US regulated tokens from anywhere.” Currently, OFN is taking listing applications from everywhere, and it’s expected that there will be more tradable security tokens. “As more and more tokens are ready to list on the platform, we will open up the platform to all users globally.” Juan stated.

The investors shall come from all around the world. For investors, OFN uses MataMask to simplify the approval of the investor passport and speed up the compliance procedure to reduce the traditional approving cost. Both accredited and non-accredited investors can trade on OFN. (Note: There will be certain limitations to unaccredited investors.)

Juan also disclosed some of OFN’s next plans, including: “We are currently working on developing new tech that will allow us to capture users from the traditional market, as well as compete against all the major players coming into the security token market. Our next big product is custody solution that will leverage the security of DEX’s while still being as performant as their centralized counterparts. This, along with our APIs will allow us to be attractive to large institutional traders, and create a platform that can rival NASDAQ.”

As we can see, The second half of 2018 has seen the start of the tokenization, from investing funds, luxuries, shares, REIT to even one of Picasso’s drawings. There are many infrastructure builders co-working on the industry, and with all-function security token trading platform, such as OFN, bringing the increase of the additional liquidity, 2019 might be the first year to see the landing of security tokens.

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Note: This insight has been written on 23.01.2019