Securrency: How to make Security Tokens compliant
Keith Kitagawa is the Director for Institutional Sales at Securrency — a service provider for issuance and trading of Security Tokens.
We are pleased having Keith as our interview guest, sharing this expertise with us.
Which problem is Securrency trying to solve?
There are several problems Securrency is trying to solve. Securrency is helping to decentralize banking, so that issuers have more capital raising opportunities and can reach a potentially broader investor base, thereby reducing their cost of capital. Securrency utilizes concepts of identity credentialing and the advantages of the blockchain to allow capital formation and investment opportunities in a frictionless ecosystem, where both issuers and investors know that their counterparties are credentialed and allowed to invest in the security token. Ultimately, Securrency wants to promote interoperability within the ecosystem, so that there are no individual walled gardens, and issuers and investors of security tokens have the ability to access a global pool, and be able to utilize a security token as a form of crypto payment..
Why should I tokenize my company, fund or real estate?
Securrency allows issuers to realize the benefits of issuing on the blockchain:
- reaching a greater global pool of investors, which should reduce the cost of capital
- having a transparent, immutable recorded ledger
- reduced friction, resulting in faster transactions
Securrency also provides issuers with automated regulatory functionality (such as automated regulatory reporting, shareholder communications, proxy right voting, dividend distributions, audit functionality, and fraud detection) that should greatly reduce the issuer’s regulatory costs in maintaining compliance, after the offering.
What is the biggest challenge tokenizing securities?
Tokenizing securities is relatively straightforward — as long as the issuer has offering documents that meet regulatory scrutiny. Once the security tokens have been minted, they have to be placed with investors — currently the institutional client base is in the very nascent stages, so the demand for security tokens is only forming. Investors need to know that there will be liquidity for security tokens, which will require the approval and development of global exchange venues, whether they be security token exchanges or ATS/MTFs. Investors need to see the development of these exchange venues, otherwise they will likely abstain from investing in security tokens, and need to see that these exchange venues are interconnected to each other so that the investor has the opportunity to obtain the best price. In addition, the issuer needs to maintain distribution control, post-tokenization, both on- and off-chain, so that they do not lose control of their cap table. Securrency provides all the tools to help solve the above challenges.
How expensive and time consuming is it to do a STO?
Legal services to prepare offering documents, and investment banking services to underwrite and distribute the security tokens still comprise the vast majority of expenses. The technical costs to mint a security token are almost trivial compared to legal and broker/dealer services. The preparation of offering documents still take a significant amount of time (several months, exact time dependent on the offering jurisdiction), and the distribution of securities can take 2–4 months depending on market conditions and the ability of the issuer and/or associated investment bank to place the securities.
What differentiates Securrency from other Issuance Services?
Ledger agnostic — Securrency was architected from day 1 to sit above the blockchain ecosystem. This allows Securrency to issue security tokens on Ethereum, Ripple, Stellar, Eos, GoChain, and soon Hashgraph. Issuers even have the ability to issue on multiple ledgers at once, or move their cap table to a new ledger. Other issuance services can only issue on Ethereum.
CAT protocol — Securrency has designed the Compliance Aware Token (CAT) protocol, which writes governing rules onto the token itself so that it will be self-governing, instead of relying on smart contracts and white lists. As a result, Securrency’s CAT protocol can provide for secondary market distribution control both on- and off-chain. Other issuance services can only provide for on-chain distribution control.
Post-tokenization functionality — Securrency has automated regulatory reporting, capital gains tax reporting, shareholder communication, proxy right voting, dividend distributions, audit functionality, and machine learning fraud detection.
Full interoperability — Securrency provides the electronic rails to connect ledgers, exchange venues (exchanges/ATS/MTF), and payment platforms. This allows a security token to travel from an issuing ledger, to an exchange, to another ledger, and then to a payment platform — or any infinite combinations thereof. This interoperability ensures that the only “walled garden” a security token sees is the entire ecosystem itself.
What is the most important thing your clients should know about Security Tokens?
With the proper technology, security tokens can automate many of the functionality of the primary and secondary markets, and ensure that the security token remains in the hands of credentialed, qualified investors.
What would you recommend to companies considering doing an STO?
Issuers will need to be compliant across the entire security token lifecycle, and not just in investor onboarding and tokenization. Issuers need to ensure that their security tokens are only held by investors that are allowed to hold the tokens, and issuers need to account for how the token can travel during secondary market trading, both on- and off-chain. Many issuance platforms purport to have secondary market distribution control, but that is only on-chain. Investors may well take their security tokens to an off-chain exchange or ATS venue, and issuers need to ensure distribution control is maintained off-chain, lest the security token get transferred to the wallet of an uncredentialed investor.
Does offering a Security Token have any major impact on future funding rounds for a company, or present any issues with regard to M&A of a company when the Security Token holders may be distributed around the world?
It should not impact future funding rounds or M&A. Securrency has automated the cap table generation, shareholder communications, and proxy right voting built into the post-tokenization functionality, so issuers should have the flexibility to participate in future funding rounds or M&A, regardless of the number of investors, and regardless of the number of jurisdictions.
What was the biggest learning you made during the last year?
One thing Securrency learned is that architecting and producing the functionality for an end-to-end compliant system takes longer than expected — it took three years to produce the commercial solution, when we initially thought it would take six months. One thing Securrency has observed is that many security token issuers have not accounted for what happens after the tokenization — specifically they haven’t considered the need for secondary market distribution control when lock-ups expire, and the tokens are then free to trade in the secondary market.
Where do you see the Security Token Ecosystem in 5 years?
The ledger technology is very likely to change — it is doubtful that Ethereum will remain the issuing ledger of choice. The favored ledger for security tokens may not even have been invented yet. We hope that the ecosystem does not comprise of a significant amount of “walled gardens”, in that the ecosystem has a bunch of centralized trading venues. Securrency hopes that its ability to interconnect ledgers and exchange venues, along with payment platforms, will promote one ecosystem, where the only walled garden is the ecosystem itself.
Thank you for the interview.
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Note: This interview was conducted on 16.01.2019
