Tokeny: How to manage and transfer Security Tokens
Interview with Luc Falempin — CEO of Tokeny
Which problem is Tokeny trying to solve?
There are a number of problems that are present in current financial markets. Our world is full of assets: stocks, real estate, gold, carbon credits, oil, etc. Many of these assets are difficult to physically transfer or subdivide, so buyers and sellers instead trade paper that represents some or all of the asset. However, these paper and complex legal agreements are cumbersome, difficult to transfer and can be hard to track. One solution is to switch to a digital process based on blockchain, that alleviates these problems.
Why should I tokenize my company, fund or real estate?
Tokenized securities allow many intermediary functions to be automated, thus bringing a range of benefits for the issuer. Less middlemen means less individuals asking for fees. The operational costs are therefore reduced in a STO when comparing with an IPO. It’s quite common for these middlemen to have their own ledger of data, leading to the parties’ ledgers differing quite substantially. This problem of human error and inaccuracy is dramatically reduced through the use of automation. Also as some assets are typically illiquid, such as real estate funds or closed-end funds, the process of tokenization brings liquidity to these typically illiquid asset classes. Through a STO, the rights of these assets can be represented on the blockchain and shared instantaneously thanks to peer-to-peer trading and the free flow of capital can be transferred freely.
What is the biggest challenge tokenizing securities?
Mass adoption of traditional asset tokenization is going to take years to fully develop. For this to happen, regulation needs to catch up with the technology. It takes time for traditional players, such as the central securities depository, to recognize new technologies. From their perspective, why change something that has been around for so long? For us, a huge challenge is creating awareness in the market that there is another, much faster, cheaper and reliable way of issuing and managing securities. This is where we are at now, and there is a lot of education to be done in the market.
How do I know if a STO makes sense for my project? What would you recommend to those considering doing an STO?
Does it makes sense to issue a security? Do you need to raise funds or do you only need to tokenize assets? We recommend to think carefully about the added value for their investors (token economics) and the countries where they want to distribute.
How expensive and time consuming is it to do a STO?
Running an STO takes between 2 and 6 months, like a standard fundraising. It costs between 80 and 300k depending on the legal complexity.
How does your Due Diligence process for projects that are requesting your service look like? With whom you work together, with whom not?
Tokeny is processing a deep due diligence based on the SICOP principles. This is a certification methodology to determine if a token sale is compliant to the standards of an ethical, fair, and transparent market. It is based on best practices taken from the IPO industry as well consumer rights and cover token economics, use of technology and of course the regulatory framework being used. It provides a self-regulating framework to the tokenization industry. We do it internally and request proofs from the issuer and from their legal advisors.
Once a Security Token is issued — how does the transfer of these Tokens work, both technically and legally? Are my ownership rights “just” stored on the blockchain or is there an “offline copy”?
Tokens are allocated to every investor according to their subscriptions. Tokeny is providing the only suite of solutions to handle the transfer of tokens and identities. Guaranteeing the technical transfer is one thing but managing the identity is another if you want to transfer ownership. Some countries and states like Delaware or Switzerland currently recognize distributed ledger technologies as the primary register of shares, the same is coming shortly in France and Luxembourg. In other countries, the mirroring of data stored on the blockchain is mandatory. For example, the board of the company will approve the transfers regularly.
The issuer is always liable and supposed to know who their investors are to ensure compliance. This goes beyond the issuance, as with securities the issuer needs to be able to perform corporate actions associated to the lifecycle of the token such as dividend payments, voting and announcements. Tokeny provides the T-REX (Token for Regulated Exchanges) solutions to help the issuer ensure compliance from the issuance of security tokens to post-issuance.
How far are we when it comes to trading of Security Tokens (across borders)? What are the biggest problems and how/when will they be solved?
Many regulated exchanges are currently racing to add security tokens in their offering, whilst other exchanges coming from the crypto-space are trying to get regulated. Also, P2P trading at scale is coming with decentralized networks, and this will bring liquidity into the market. Now that the technology is enforcing compliance in trades, it won’t take long before some regulators give authorization to the first players. Real communication channels between regulators and innovators are now set up and many POCs are currently under tests. 2019 should see the first major player emerge. Liquidity will probably come in 2020. The first security tokens exchanges won’t get the same level of performance than actual stock exchanges, but clearing and settlement processes will be a lot faster. Step by step, it will evolve and create a real alternative market. Before that happens, investors and traders need to learn how to manage their identities on the internet of value.
Many people see a big advantage of tokenizing Venture Capital — thereby bringing more liquidity into the market. Can you explain to us how Security Tokens are enabling this?
Closed-end funds are funds with a subscription phase, followed by an investment phase in the underlying assets (real estate, companies, etc.). Therefore, the money is used to buy the asset and cannot be withdrawn easily by investors. They are usually blocked for five to seven or even 10 years. By tokenizing the shares of the fund, a secondary market becomes possible; investors can sell or buy shares with others, without disturbing the activities of the fund. Through the automation capabilities of blockchain technology, the exchange of value can easily be transferred between participants.
Thank you for the interview.
Note: This interview was conducted on 13.12.2018