Note: “Tokenize The World” is made possible by our sponsor BlockTrade.com.

Blocktrade will be the first fully licensed security token exchange in Europe, focused on listing crypto assets, security tokens, and other tokenized financial instruments. By being fully MiFID II compliant they will enable crypto trading to institutional traders while unlocking huge amounts of liquidity with their primary market partners. If you’re someone who’s following the security token space, they have quite a few things to announce in the next couple of weeks, including their public beta launch.  Be sure to go to Blocktrade.com, hit the red subscribe button at the top, and get on their announcement newsletter.

Welcome to part 2 of “Tokenize The World: A Security Token Documentary”

This episode is a deep dive into the mechanics of how security token issuance and secondary trading fundamentally works on tokenized security platforms like Harbor and Polymath.

For all the talk about the merits and drawbacks of security tokenization, I’ve found that there’s very little discussion of the mechanics of token issuance and trading.

My purpose in this second installment is to enrich the debate so we can move beyond high-level philosophy to a deeper discussion of the technologies, methods, and mechanisms required of competent security token platform.

In this part of our series, you'll hear the story of two different tokenized security platforms, Harbor and Polymath. We'll go into detail about how they work, in an effort to provide a better understanding of the constituents, processes, and technical mechanics of the broader security token ecosystem.

United States


00:00:03listening the first in a regional podcasts for full time professional and institutional crypto investors I'm your host clay Collins each week we discussed the cryptocurrency economy new investment strategies for maximizing returns in stories from the front lines of financial disruption good looking dot com to join our newsletter
00:00:19for cricket currency investors and find out just why this podcast is called flipping thank Collins is the CEO of nynex my clay and podcasts guys are selling their own opinion and do not reflect the opinion of non explore any other company this podcast is for informational and entertainment
00:00:34purposes only and should not be relied upon as a basis for investment decisions welcome to part two of token as the world a security token documentary this episode is a deep dive into the mechanics of how security token issuance in secondary trading fundamentally works my purpose with this
00:00:52series is to tell the stories of the project makers issuers investors in influencers driving adoption of security tokens and this episode picks up where the last one left off to the few folks who've written in asking why we're spending three entire episodes of this podcast talking about token
00:01:07I securities I want to remind you that only thirty percent of the world's wealth is in cash in much more than this is held as property and securities in the previous installment of this documentary we discussed three misconceptions about security tokens the first misconception is that security tokens
00:01:21are not valuable because they are centralized around the issuer and in many cases not censorship resistant the second misconception is that security should not be represented with a blockchain because securities are not at their core digital assets and the third misconception is that security tokens are over kill
00:01:37and that all that is needed is a highly efficient database rather than a blockchain to address the needs of issuers and traders part one of this documentary address the first two misconceptions the third is addressed in this episode part one also discussed one how blocking technology has changed
00:01:53trade execution to how tokenization unlocks liquidity three how security tokenization provides different kinds of value to public versus private companies four ideal versus non ideal security token use cases and five which average businesses could benefit most from tokenization if you haven't listened to part one I'd encourage you
00:02:13to start there in this second installation of this series we're digging deep into how security token issuance in secondary trading works indeed for all the talk about the merits and drawbacks of security tokenization I found that there's very little discussion of the mechanics of token issuance and trading
00:02:29for security tokens and it is a downright shame my purpose here today in this second installment is to enrich the debate so that we can move beyond high level philosophy to a deeper discussion of the technologies methods and mechanisms required of a competent security token platform I am
00:02:45especially happy to tell you that this episode of talking as the world is made possible by our sponsor blacktree dot com blacktree dot com will be the first fully licensed security token exchange in Europe focused on listing crypto assets security tokens and other tokenized financial instruments by being
00:03:02fully method to complain they will enable crypto trading to institutional traders while unlocking huge amounts of liquidity with their primary market partners if you're someone is following the security token space they have quite a few huge announcements coming in the next few weeks including their public beta launch
00:03:17be sure to go to a blockade dot com hit the red subscribe button at the top in get on there now newsletter and just to go a script here I had a chance to speak with their CEO look at Kubo and came away really impressed that guy has
00:03:29a deep experience in this space in their building something that I find to be pretty impressive for example they're backing Decepticons has more than one million trades per second which is gonna be pretty important for the institutional investors who they're targeting I do think this is a company
00:03:44that you should keep your eye on and I'm proud to have them as a sponsor so thanks to black trade for stepping in and stepping up and making today show possible okay now let's kick off part two of token eyes the world a documentary about token I securities
00:04:10I started getting interested in security seconds after watching a periscope in April of twenty eighteen back I named Bruce Fenton who created a security token live on the internet for the world to watch who's doing this in real time he was actually talking Ising ownership of his company
00:04:26Atlantic financial and he did it in about ten minutes using a web browser a piece of paper and ten dollars Bruce's stated purpose in creating this video was to show that a legal real compliant security could be tokenized on a blockchain end in my view I think Bruce
00:04:43proved his point it is actually pretty great place to start things off here is a highly edited version of Bruce's live periscope them out thanks to Bruce for giving me permission to use this I'm gonna create a security using what's called a counter party protocol which is a
00:04:59protocol that runs using the bitcoin network the reason I'm using that is because the point is very secure change all that the purpose of today's broadcasters to do is to show that yes it is possible to talk about is a security all this covers is can you talk
00:05:15about is security and the answer is yes and I'm gonna do it right now and show it beyond any doubt hopefully securities are create and companies and shares her creation of humans their creation of law they only exist in the real world there isn't any way to digitize
00:05:31them so people know that which is this much knowledge and then they're learning stops not putting a security on the blockchain what you're doing is changing the way that our security is recognized the first thing is to recognize shares are affect okay their thing they're always going to
00:05:46be centralized never heard of any way to your completely decentralize the existence of corporations itself you have Disney that's a corporation is gonna have an office is going to be centralized apple is centralized Google is centralize their shares are centralized you're already trusting that if she were to
00:06:02follow the hundreds of years of law that we have government corporations and how these things work so the security were to use for this example of my own company financial I don't know how to some of the stock is eighteen year old company is incorporated in Delaware it's
00:06:15real company it has real revenue would on stuff that doesn't really matter what matters is that it's a company and that I own all the shares and I have the authorization do this but I'm going to do it in a super super simple way to show you how
00:06:26it can be done and just to show you how simple I wrote it right here it's me so if you're watching this video you see Bruce holding up a piece of yellow lined notebook paper with his handwriting on it it looks like he hastily scrawled some notes on
00:06:40a piece of notebook paper that he just had lying around his office I presented doesn't need all shares the land mantle thanks to be represented by tokens trading on the counter party protocol Megan it's important now that he's written the name of the counter party token that represent
00:06:56shares in his company on his hand scratched contract essentially the contractor saying that if you hold a counterparty token with the name listed on the contract then you hold a token that represents ownership in Bruce's company Atlantic financial if you don't know what kind of party is it's
00:07:12a peer to peer open source protocol that allows you to create your own tokens that run on top of an are secured by the bitcoin protocol back to Bruce now is this silly is not legally binding you bet it's legally binding it's silly and simple but if I
00:07:26wrote on here I'm selling my tractor to fill for five hundred Bucks and I didn't give my tractor Phil can bring me to court if I say that I'm selling my car for a hundred thousand dollars then this is binding once you have shares this kind of document
00:07:42doesn't name the shares of something is legal you better believe that if Bill Gates met you and love your business plan and didn't happen to have any staff with them or something like that grabbed a little note and said I'd Bill Gates promise to give you ten thousand
00:07:59shares of Microsoft if you present expect going to dress and he wrote it you better believe that that's legal that is legally blind so as a company is a stock issue were securities issuer your centralized anyway big point here is my sell my car as you just admitted
00:08:13he's centralized will yeah that's what companies are Disney centralized apple centralized I can issue with million new shares if I want I can to lose you I can do every other thing and that's not a failure of block chains not a failure of of this government's or anything
00:08:27else that's just the reality of the world issuers are centralized I'm a security issue arm centralized so let's transition now to the part where he created the token with counterparty it's really fast and simple the process could even be said to be on a remarkable from an operational
00:08:43perspective so basically you have this is what kind of party looks like I've put an address in there you can you can put in a dress and you can say created took him it has the token name and you can say what you want the description of me
00:08:57how many you want I could say I want one thousand I want to call the AF token for Atlantic financial and I'm gonna say create token okay that's it if I go and cut and paste this token number to say okay one five one four eight two three
00:09:16nine eight four two five three three eight zero zero zero so if you were to be watching the video that I'm referring you to ET Bruce write the name of the Atlantic financial token on his contract which essentially says that if you possess an Atlantic financial token on
00:09:36the counter party protocol then you possess a share of Bruce's company so I wrote it on the paper again you would want to do that a little bit more carefully this is truly legal document again this believe me as something as simple as this has been held up
00:09:51in court many many many car so that's created if I write this down and then I find it right here hello this is legal I could handle this to someone or make a copy of this sort of put it on the internet this is legally binding again this
00:10:07is for example purposes this is not the kind of thing you want to use with your lawyers it doesn't have enough detail and it hasn't been properly got but this believe me if you gave me five hundred thousand dollars and sisters I'm taking your word for it I'm
00:10:20taking this piece of paper you gave me five hundred thousand dollars and I gave you some percentage of the business I think you have a pretty good case is if they would be weird case because they'd say that's a pretty bizarre document but especially with the videos evidence
00:10:34I mean it's very clear that I've I've intended to have this there you go just like that Bruce talking as his company in a legal binding and enforceable way and of course this isn't the first time that this has been done watching capital use a platform call token
00:10:48had to issue to be kept open which represented ownership in one of its venture capital funds in the public company over stock issued a token I security using a platform called region labs in two thousand and seventeen these companies aren't speculating that all of this is legally enforceable
00:11:03the SEC has recognized token I securities and the state of Delaware has specifically stated that a distributed letter can be used to issue and record chairs now that we see perhaps the most basic example of security tokenization possible let's transition to a high level overview of how security
00:11:30token platforms actually work are you ready here goes at a very high level security token platforms and protocols pretty much work the same way essentially these systems that companies A. K. A. issuers issue security tokens that represent ownership claims in companies these issuers are allowed to create in
00:11:47trade white list of wallet addresses usually if you're in wallet addresses of investors that are allowed to buy ownership stakes in the company this is how compliance is enforced because when these wallet address white list are properly set up compliance enforced because the issue were only admits to
00:12:02qualified investors to the white list so if someone isn't permitted to purchase shares in a given company because of compliance issues with apple couple lies they are not allowed to hold a security token for that company it's important to point out here that insurers can also outsourced correction
00:12:19of one or more white list to trusted third parties like AML KYC providers accredited investor checking services and exchanges that might only admit accredited investors to the platform these white list of investors qualified to purchase security tokens from a given company comprise a liquidity pull of sorts this
00:12:38liquidity pulls essentially a network that can execute secondary trades of that stock with each other what this really means is that everyone on the white list can trade with each other and that's where the real power lies it's unlocking liquidity for secondary trading if all this were done
00:12:53with just a centralized database trade would be restricted to walled gardens and we couldn't have peer to peer security token trades happening for example at a coffee shop a decentralized exchange and OTC desk or by whatever permission list innovation happens in the future that allows folks to swap
00:13:09the things but because security tokens are built with and on top US open source protocols like a fear him anyone is allowed to innovate at the exchange later because token level restrictions are prohibiting non authorized investors to receive or buy shares of the company still the main players
00:13:26in the security token ecosystem are one security token issuers A. K. A. companies issuing stock in their company to folks who are on white list of crypto wall it addresses that are allowed to receive security token so people who are cleared to buy and trade these tokens three
00:13:43trusted third party white was creation services so a male KYC providers accredited investor checking services at tetra for security token platforms that power the underlying technology that make issuance of these tokens possible and five parties that facilitate exchanges like exchanges OTC tasks decentralized exchanges or potentially a service
00:14:06I can to local big points where people can just arrange to meet up and exchange these things in a peer to peer fashion there are of course other players as well for example lawyers help insurers decide who can legally purchase that stock and create disclosure docks file with
00:14:20a cracked entities all that stuff and software engineers who write and edit smart contracts and play a vital role in everything happening here so that's basically security token technology in a nutshell of course all of this gets infinitely more complicated once you go just one level deeper and
00:14:38everything I've said that's far is an oversimplification security tokens can contain transfer restrictions voting rights dividend right and can be configured differently for different classes of shares and a whole lot more it all gets pretty complicated pretty fast so with this high level introduction to security token mechanics
00:14:54established we're going to dive into specific use cases examples and scenarios to help dive into the new ones we're gonna consider different scenarios through the lens of two top security token platforms poly nothing harbor I should note that both of these platforms were started because their founders wanted
00:15:09to issue security tokens found the process unnecessarily cumbersome and decided to start platforms help others automate what they found to be so difficult here's polymath CEO Trevor cover girl describing the polymath origin story so my idea was that I was gonna take might find that was operational and
00:15:28profitable in token eyes it and we're gonna become the world's first dividend paying crypto and after a few months of getting tons of good feedback and tons demand we ran into reality which was the SEC and it turns out what we are trying to create was this was
00:15:44security and we didn't really expect that back then you know we there was no distinction between what a utility coin in the security going was we actually coined the term security quite back in those days and also let us on this journey to say Hey maybe there's a
00:16:00better way to do things you know is very complicated it was very expensive to do a fully compliant security token so we said well we have the protocol level why don't we build a product in an ecosystem that can help launch the next ten thousand security tokens poly
00:16:18math was founded by the guy you just heard from and securities attorney Chris Hauser they raised fifty nine million dollars in January and February of two thousand eighteen through a private SEC complaint token sale polymath differs from the other company were about to talk about in at least
00:16:32two notable ways first polymath has issued a token which harbors not it's called poly second the polymath organization is not required for the underlying protocol to operate harbor on the other hand is designed to fail closed so harbor ever goes away the issue or would have to re
00:16:49issue tokens with a new provider which might take some leg work but in many cases wouldn't be an overly cumbersome thing to do harbor which we're going to dive into you in a bit has a similar story to poly mass in was incubated at craft ventures as the
00:17:03story goes David Sachs was interested in talking Ising craft ventures and realized that there was no compliant way to do this and that gave him the realization that a business opportunity existed here it's worth noting that the guy just mentioned David Sachs is harbors most famous founder David
00:17:18was a co founder and CEO of pay pal so one of the members of the PayPal mafia along with Peter Thiel you line mask and retirement his other two co founders are the former VP of engineering and VP of product its effects where David was once CEO and
00:17:32which was at one time the fastest growing sass company of all time neither harbor no polymath have handled initial issuance for company just yet but both have plans to do so this summer with both of these platforms the big concept here is really the white list here's what
00:17:46I mean there's just no way that a security token protocol can have the rules of one hundred plus jurisdictions baked into it but the vast majority of regulations can be complied with by restricting who can own a security token such as accredited investors US citizens only qualified purchasers
00:18:04etcetera white list creation also allows you to restrict how many total investors can own a stock and this is important because some laws and exceptions require a minimum or maximum number of shareholders to qualify for a given status so both the number of shareholders and the type of
00:18:21shareholders such as accredited investors only can be controlled via the curation maintenance and grooming of these white lists of addresses and wallets that are allowed to receive security tokens here's Chris Hauser CO a polymath talking about the role of white list on their platform the way our platform
00:18:41works is it creates a white list on after him and so the issuer defines a set of criteria that investor needs to have to be able to hold their particular token so let's assume to have a token someone needs to be an accredited American investor they would go
00:18:57through the process to demonstrate that they are American and that their credit and their Easter address would be added to a white list now people on that particular white list are able to trade amongst each other and how they do that it's up to them if if your
00:19:12friend or your neighbor John is also on the white list he's gone through the process you can transfer to his either address and then she can pay you you can go over your house with mags Kasher humo your lawn whatever your deal with that particular investor was you
00:19:28can trade those tokens just it's requires that everyone be on the waitlist whereas right now in most blockchain need to address is can transfer between each other but our standard is really trading restrictions so only a specific set of people was able to hold that token because of
00:19:46the need for you know can I see a non compliance to be either qualified purchaser or an accredited investor you know you couldn't just sit in a coffee shop with two computers that aren't connected to the internet and trade these tokens there is some dialing of home or
00:20:03dialing into different systems to to verify things could you walk us through to sort of step by step who is calling who and what connections are being made to execute a trade and I realize that this is different in different jurisdictions and that there's sort of different pools
00:20:22of you know white list and stuff like that but you know just to make it super specific let's say it's an accredited investor swapping securities with another in credit investor on T. zero let's say we're at that part in the flow where I'm a buyer and I put
00:20:41in an order and there's a seller on the other end who decides they like the price that they're gonna be on the other side of that trade what happens next the beautiful thing about blockchain platforms just crypto currencies in general is people are able to be their own
00:21:01bank you're able to hold your asset yourself you're not reliant on putting it into a bank account where a third party are you the bank is the one that actually hold your assets now the way the majority of these exchanges work and I imagine this is how to
00:21:18use your old work were still out working on our partnership with them but my understanding is they will hold custody of those tokens if you're a seller and you want to sell your tokens on two zero you'll actually have to transfer them to a T. zero controlled address
00:21:36and then it'll be represented in your account you log in it will be on your account and then you create a sell order and then there could be a buyer who's funded their account they make a buy order does too are put together so now the buyer would
00:21:52transfer his let's say you Sir and the seller's securities will transfer to the buyer however that transfer will not be happening on chain it won't be happening on the blockchain it's just going to occur on T. zeros internal database search internal ledger they'll say this person's account now
00:22:10holds this and the seller's account now holds this if the buyer wants the buyer wants to withdraw the bush securities off the exchange and into their own address into their own account provided that they're on the wait list and they've gone through the K. Y. si **** withdraw
00:22:28those securities off of two zero and hold them themselves I think this is a good explanation of the important of white list and I should really state here that the existence of these white list not only helps to ensure compliance with securities laws they also improve the overall
00:22:44security of the systems in general for example if a security token exchange were to be hacked tokens could only be moved off the exchange to white listed addresses all of which have known identities associated with them because they have a YC AML tax since we've heard from polymath
00:23:00let's hear from harbor for a high level review of how their system works so Josh can you walk us through the life cycle of a company using the harbor platform to issue a token on your system so is your comes us I would use the example of the
00:23:20classy office building let's say it's worth fifty million we will provide to a website that markets the investment we set it up see issuers you are also might be WWW also building dot com but will help set up the website they can do it themselves or we can
00:23:35set it up it depends on the technical sophistication you sure they'll show a little bit about the investment will have some nice shots of the building you'll see a little bit about the tenants will say what about the operator and the best opportunity and say are you interested
00:23:47click here that then takes the person the interest investor to the harbor website where they set up an account it's much like accounts steps you're used to before you provide name address other basic biographical info you provide a copy of a government issued identification we then take you
00:24:04through a KYC AML Chuck we take you through an accredited investor certification if that's necessary once you've gone through that you get shown the actual investment documents you you show the offering memorandum or the prospectus you showed the the investor agreement you show whatever other detail disclosures the
00:24:22issuer wants to provide you sign the documents right there on the website you then get put through a purchase order flow so you're you're raising fifty million dollars in your private read with a maximum of two thousand shareholders and that's it incremental twenty five thousand dollars investment so
00:24:38you want four shares are for tokens at twenty five thousand dollars each is a hundred thousand dollars you can wire in fines to the issuers bank account dollars war you can hay in the corner either of the issue once you accept that or if you want to paint
00:24:55crypto currency in the issue once fiat there's a service whereby you can set the corner either you get a spot price that's good for a limited amount of time and then you send in the big winner either at the spot price it gets converted on the back and
00:25:09into dollars for sure when she made the investment then harbor goes through in audit process where we use an outside firm to go in and audit all the records and to tie everything together to make sure all winds up once the our process is done you formally closed
00:25:26the fund issue nurses to the investors at their investment has been accepted we didn't create the security tokens we then re audit that code we ought to care generically that we've developed but then once you actually dropped the tokens we re audit at the tokens get dripped into
00:25:43a wall with a qualified custodian that could set up for the investor and then there's an education campaign just letting the investors know here's where your documents rows here's where you get more information from the issuer here are the venues that are licensed to trade here's what liquidity
00:26:00is possible under the rules that your issu were set for your security and then once that time that holding curious past whether it's ninety days read year or whatever set up that that time they can trade in any compliant we license venue that the issuer is proved got
00:26:16it it really sounds like you do a lot for issuers essentially holding their hand through the whole process and I think it's court one of the main differences between you and other companies more focused on maintaining open source protocols is that you seamlessly coupled your services around the
00:26:33initial issuance with a protocol for secondary trading post issuance let's talk about what harbor dies after the initial issuance of a token when owners of security tokens which were supplied by your platform want to trade with each other and engage in secondary trading how does harbor a dress
00:26:51that harbors a platform for the initial assurance in terms of secondary training we're not making markets were not operating exchanges that is an industry in expertise all that sound as very different requirements across different asset classes different types of securities in different jurisdictions around the world there's a
00:27:10lot of really smart people attacking that problem there's people like open finances people like templum yeah there's people developing the Xerox protocol their scare swap is all these folks who have different takes on it are providing different sets of services and technology so we don't see it as
00:27:25our role we are simply we are a component of the later secondary liquid which is that compliance harbor that compliance layer that allows this token to trade wherever it is around the world whether it's peer to peer more on an exchange harbor allows that to happen so you're
00:27:41not limited to only one Jan you because if you put the controls and at the venue level of the exchange level that you can't allow that token to trade and allow it to trade anywhere else because then again you would lose control your captive we would be able
00:27:56to enforce these rules I can barely see the advantages of being able to work with all these other trading platforms right you don't want to restrict it anyway and and perhaps that's maybe the best case for not including in an order book at the security token level I
00:28:13think it's time to transition here after diving into the essentials of how these systems work let's talk about secondary trading and how security tokens powered by harbor and polymath trade hands after initial issuance a lot of people report buying their first big point over eBay or Craigslist so
00:28:31let's discuss secondary trades for example where person a might just meet with person be and together decide that they want to trade tokens without any intermediary facilitating the process my first question about this topic is directed to crest at poly math where will people be able to exchange
00:28:54does a security token only exchange have to be used or can people spot appear like over Craigslist how does the execution of trades take place once holders you know have the token then and decide they want to trade them I really think liquidity is king and that's what
00:29:14investors want they want to know if they buy something that they're going to be able to trade it at some point right now with private placements and exempt offerings there's generally long hold periods and there's no exit for five to ten years and I think what the blockchain
00:29:29stray springs is more liquidity to these types of offerings and so that's really what we're trying to focus on and work with so we've partnered with cheese zero there NH yes Hey it's me cutting in here from the editors booth so ATS stands for alternative trading system an
00:29:46ATS is a non exchange trading venue that matches buyers and sellers to find counterparties for transactions alternative trading systems are typically regulated as broker dealers rather than as exchanges and for all intents and purposes might be interacted with like an exchange from the end user or traders perspective
00:30:05and we'd like to have tokens that are created by Paul mass to be able to go on to zero to be exchange there and they'll have an order book and they'll have mechanisms to put buyers and sellers together we've heard from Holly maths CEO of Chris Hauser about
00:30:20the topic let's talk to poly maths CEO Trevor cover co about trading as well so getting back to the example of how you got started the big points based you know buying your first pick one over eBay theoretically it sounds like you're saying would be possible for that
00:30:37transaction in it to happen with the polymath soaking his well provided that you were an accredited investor were otherwise white listed by the issue were you could actually take part in a peer to peer transaction with a polymath token that's facilitated through whatever means is that correct yeah
00:30:53I never thought of that but that's that's the beauty of what I've said earlier programmable ownership that's what it means and that's why regulators love it too because it's more secure it's more transparent more a mutable than the current way things are done a lot of the legacy
00:31:09infrastructure was built in nineteen eighty it's astounding even today that underpin Wall Street but but yeah that's the whole point is that there's this master white list that lives in the cloud that secure and private and transparent ironically at the same time but yeah that's that's the whole
00:31:25point is that we could you at a very granular trainable level that I could trade my coin for something else in the regulators we've talked to are cool with it because that's what they care about is making sure only authorized accredited investors are trading with each other it's
00:31:41kind of like a secondary trade you know it's like I have shares of we were all trade you for your shares of Airbnb and that's perfectly okay it sounds like eventually S. security token exchanges do become decentralized that's not a problem because right listing happens at the token
00:31:59level versus at the exchange level you were just made a very profound statement and the implications are very profound and there was some crypto shockwaves that just went out as you said that yes I'm not gonna go down that road in where we think the next phase is
00:32:16going to be you know TI zero and security talking exchanges commercializing but don't think for a second that Patrick's not thinking of decentralized solutions to what the future of of trade is gonna look like and and we want to be from the center there too sure just OTC
00:32:33desk third like the local bit coins for security six I mean there's so many different ways this could go down we've just heard poly mass take on this topic let's also hear what harbors CEO Josh was dying had to say about the topic when I asked him about
00:32:47peer to peer trading Josh can an owner of a security token powered by harbor meet someone who's approved by this token because they're on the the white list for example can I meet with someone at a coffee shop and exchange that token you know if they coordinate through
00:33:07Craigslist or eBay or local date coins are or whatever can one person just trade these coins with another without a intermediary or a rent seeking intermediary in the middle yes so what you think of this over the counter trades or technology think it was peer to peer trance
00:33:26harbors control still works so you can think of harbor is essentially a trade compliance were cool in the system so that that joke in the house a little bit of a small contract in it that means the oracle harbor every time that choking goes change wall dresses it
00:33:42pains harbor harbor checks the who what where the transaction to make sure it's comply it checks the buyer and seller our checks what the trade is and checks where it's occurring to make sure that all of those match all those are compliant no windows harbor was ever involved
00:33:58in the trade goes through if it's not the trade throws an error and it never happens to the harbor oracle which is the referee on a trade here it doesn't have embedded within it securities laws right is it the case that the issuer decides what the rules are
00:34:16and then the harbor oracle makes calls based on those rules correct to think of our harbors a platform plus protocol Sir we on board issue onboard investors so we can always correlate a real world identity with the wall to dress your blockchain identity if you don't always have
00:34:35an up to date database correlating the two there's no way you can properly enforce compliance with the securities laws and whatever additional contractual restrictions the issuer wants from us you have to always be on the quarterly to let's talk about the role of identity and where identity sets
00:34:53within this protocol stack for this taxact where does identity live in the system and are you using civic are using KYC AML providers so we figured just in terms of the categories you haven't in the real world today you have to get your KYC AML check for certain
00:35:11types of investments you have to go through a credit investor check you have to go through in fact check and other sanctions list so those are the checks that you have to do so that you can be bad at that you're allowed to transacted the secures is identity
00:35:25then associated with a wallet address in liking you have I know this is really technical is it the case that there's like multiple wallet addresses that can be associated with a single identity the receiver of the security tokens is like a one to one ratio between identities and
00:35:44wallet addresses or there's something else going on users can have multiple all the dresses they just simply have to register with harbor so that we we can correlate the blockchain I did it with the real world our expectations lots of folks are multiple wall dresses now that we've
00:36:01spoken about how secondary trading might happen in a peer to peer fashion let's transition to discussing how secondary traits might happen on security token exchanges again here's harbor C. L. Josh Steiner how does harbor interact to aids exchanges and how do you think about security token exchanges and
00:36:22the necessity of them so the way harder works just by white listing the exchange wall the dress we're big fans of decentralized exchanges for the Xerox protocol swap some of the others that are springing up we think it's a great model where you don't have an intermediary casting
00:36:41funds and casting securities but there are lots of other models that work very well too in you can think of folks with that sort of hybrid models where the workbook is off chain but then they're settling trades on change are there essentially electronically facilitating an ATC market from
00:36:58our point of view what works best is where the trades are settled on the main chat on the main if you're in blockchain because then that's what triggers the harbor protocol I think the one place where we have a little bit of difficulty is where it's at centralized
00:37:12exchange that does not timely settle trades back to the main chain that's a difficulty because then you can't see the traits that are happening you don't know the actual ownership of the securities I agree with your affinity for decentralized exchanges I think they make a lot more sense
00:37:28for security tokens than they do for perhaps other types of tokens and I certainly would want to like actually possess it my securities versus having them in exchange which could be hacked and who knows what recourse I'd have if those tokens were stolen so would you talk about
00:37:45that so let's talk about the security aspect because I actually take the view of the opposite that security check ins actually have a far lower risk of theft because the token itself is not the security on a technical level the tokenism electronic representation of an uncertified Cade interest
00:38:06and remember someone can't even Steeler take your token unless their wallet has been white list right we could even get them off the exchange unless they could get them anywhere I mean they can't hack it out of your wallet unless they're what has been waitlisted not is always
00:38:21associated with the real world ID then we have the ability to transfer that are shipped to move that token back to a different laws us and by we I mean harbor immediate sure that's something that the issue were the company has a legal obligation to do they have
00:38:38to be able to assign ownership of their shares if there's a divorce court orders a split of assets they have to be able to reassign ownership on their books if there's been a fraudulent conveyance is the court orders are shipped you transferred you have to change the ownership
00:38:53on the books and records of the corporation which is the block jet unlike crypto currencies were once it's gone it's gone it's very different in the security of the world because you always know the real world identity always at the technological ability to transfer the signifier of ownership
00:39:10and remembered the security token just simply represents a real world assets the asset doesn't go away right its ownership claim it but not the actual ownership that's correct so it was very different than what the crypto currency where the asset itself is gone in the asset self is
00:39:27the instrument that is not tied to real world identity is not being tracked to control security is a very different hate this is me again your host and I think a really important aspect of this which Josh touched upon is what happens when a user goes to withdraw
00:39:43security tokens from me exchange we learned a little bit about how harbor addresses this let's hear from Chris Hauser polymath about how their platform addresses on chain activity and withdrawal from exchanges what happens if you don't have a shared white list with an exchange in that circumstance help
00:40:03me understand that the withdrawal aspect that's a really good question for Polly math and for the issuers the way we see it working as yes sure will actually be able to create multiple white lists so let's say they create their security token and they create three white lists
00:40:22now at the onset the issuer would control all three of those white lists and provided and the theory my dresses on any one of those lists it will be eligible to hold that security and so the issue world control those three lists and then let's say six months
00:40:36and they decide to use heroes interesting we'd love to have the added liquidity by putting it on that exchange they would then transfer the one of the white lists to tease heroes control and now T. zero was able to add update modify that one white list as per
00:40:54their verification checks so T. zero isn't controlling the White listen you guys are controlling the wireless it's the issuer that's controlling the White listed sounds like well the issuer controls the white list but then they can divested few well or send the control of one of the white
00:41:13list to another party like a verification service for example are like she's your okay as I imagine if let's say there's a thousand users on two zero everyone of those users will need a different deposit address for their security token so if you log anal say send your
00:41:32tokens to Xerox one two three versifi logged in I would say send your tokens to zero ax five six seven they need to have the ability to update that white list to manage multiple different addresses and they would be a big delay after that particular exchange be a
00:41:49teaser or another exchange and had to go back to the issuer and say can you at this address so we can get another deposit so that's why we see having multiple white lists as a solution to that problem so in this case the issuer would outsource curation of
00:42:08one of the white lace to T. zero who could effectively say we have verified this person and we're gonna add them to the list and provided that the issue or trust T. zero to do that then those people at least could be receivers of of tokens by putting
00:42:25this control it in the hands of issuers that's how you guys get out of the business of managing or automating compliance and a good chili different jurisdictions right exactly as the issuers that have control and they can then outsourced to trusted third parties and the way I see
00:42:43it is if let's say they've outsource it to a party and then the regular say Hey wait a sec only accredited people can have it and Joe the newspaper boy happens to own this token we've discovered that he has and how did he come to be in possession
00:42:58of the security that's only open to accredited people and then you could look through the white list and say oh he was added by company axes white list procedure and I'd say the regulars are then go ask company acts and wonder why they shoulder added this particular person
00:43:16who's not accredited to the white list and so you're sure would take make its best efforts or would you would have a defensible argument that yes we only add people who go through proper verification processes and we did due diligence on company acts and I'm not sure what
00:43:32happened but for some reason they added this non accredited person and I think that would be a defensible argument to stay compliant so exchanges OTC desks etcetera have to white list addresses but in order to move your money off of these exchanges you need to be on a
00:43:49verified address but tokens on these exchanges can only be withdrawn to other security token addresses that are on the white list for that company that doesn't stop someone from buying and selling securities on exchanges if they aren't qualified to only token but that's where outsourcing of white list
00:44:08comes in centralized exchanges like black tree dot com two zero open finance etcetera how to run their own KYC AML checks and the issue or needs to trust them as Chris points out is someone who shouldn't only tokens of owning it fisheries can show in a court of
00:44:24law that they had the right checks in place and attempted to enforce compliance with a lot another interesting topic which I believe needs more tension is how the nature of trust is different and the same with token I securities critic currencies and traditional private securities I'm about to
00:44:41pose a question about this topic to Josh from harbor so Josh how is trust different verses the same when it comes to security tokens versus traditional private securities and corporate currencies how does trust differ among the systems so compared to the judicial private security one aspect of trust
00:45:00doesn't change at all just because you talk about security and that's the investment itself you're still handing over funds that a third party age is administering and you have to trust that it's a good investment if you have a bad investment in U. tokenized it you know how
00:45:14they ate more liquid bad investments so your need for due diligence and a level of trust you have to have the people managing the money is the same regardless of whether you use the blockchain what becomes incrementally better in this goes back to the ministry of efficiency were
00:45:30talking about is the evidence of your ownership you can have more trust so you know there's a real problem today every private company announced their cap table is always messed up in some way is amazingly hard to keep track your cap table no matter how much money you
00:45:45spend on high priced law firms to track it for you and there's an infamous cases dole foods from twenty seventeen I believe dole had they thought they had thirty four million shares outstanding investors thought they had forty six million shares outstanding so that was a rude shock and
00:46:04when there was litigation court kind of threw up his hands and said well you know it's up to the broker dealers that held the council to transfer agents go figure it out and was this classic problem that watches designed to solve no single source of truth not having
00:46:17one ledger that records ownership using critter blockchain doesn't change that trust I need to have in the person managing the money or the investment it gives me more confidence in my ownership at least I know I can see my ownership on the blockchain I know it's not being
00:46:32double counted there's not phantom shares out there with them what becomes really transformative in this is the secondary liquidity is the fact that I can trade twenty four seven three sixty five around the globe with near instantaneous settlement and no counterparty risk that is what is truly transformative
00:46:50about using the blockchain with private secures I think that this last point is really important security tokens enable for the very first time securities to be traded twenty four seven three sixty five around the globe with near instantaneous settlement and no counterparty risk this has never existed before
00:47:08at any meaningful scale while fast settlement and around the clock trading is a nice incremental improvement absolutely transformational peace here is the ability to trade securities around the globe because global trading and locks international exposure to businesses who otherwise couldn't gain a global investor base here's a present
00:47:30for more on this to this day here it is two thousand eighteen him and it's still very difficult for people in different countries to buy different stocks how many Americans do you know who owned Chinese stocks not that many it's a big pain how many Chinese people on
00:47:46IBM stock not that many here has to be done to funds and there's you know ADRs and there's a shares there's all these different ways of doing it's a big last and that thing that I mentioned with DTCC in CD goes big complex mass in the United States
00:48:00there's similar versions that all over there's no global security markets I mean you think it's bad to transfer your money from Merrill Lynch to the other Merrill Lynch down the street and it takes ten days think about how hard it is to transfer your money from Merrill Lynch
00:48:14India tomorrow when she won the forget about any and if it's Merrill Lynch going to Goldman that's even harder you know because that is a different system I had accounts when I was a broker at a financial adviser we'd have people coming in from other countries was very
00:48:28very difficult typically we just have a look liquidate all the money send it to a bank and then wired into a fresh account it's pretty much impossible I don't even know how you do it so amazingly in two thousand eight we don't even have the capability to easily
00:48:41on shares but with tokens we cut people all over the world on a theory on the decline and like corn doesn't matter if they're from Taiwan or China or Kansas they can do that and that's the way that equity should be everybody in the world should be able
00:48:56to buy IBM stock if they wanted to buy some cool color by some companies your other than the American blue chips he has a lot of great companies in the world some of the biggest banks and auto companies and other ones are outside the United States Bruce just
00:49:09touch on how security tokenization unlocks capital from investors all over the world this is relevant because frictionless global trading allows investors from around the world to access secondary markets let's change gears here to explore how security tokens impact a company when it comes to the initial issuance of
00:49:26the securities here's a question I asked Josh was dying from harbor about this Josh how do you think about jurisdictions and the role that jurisdictions play when it comes to initial issuance of security tokens it sounds like you guys our jurisdiction agnostic and can work with anyone located
00:49:43anywhere provided that there eight hearing to the law that's correct we are not fully up to speed on all the different foreign jurisdiction rules or something like a hundred eighty six different countries but we've looked at a number of them and was looking particularly for US issuers of
00:49:58securities them what rules apply for other jurisdictions with investors overseas and the investment in the fund is in the US we've already gotten enquiries from folks looking to tokenized assets in the UK and elsewhere we're very excited about the opportunities internationally as well if you go back to
00:50:16the promise the blockchain what we begin this interview with it really does allow for the issues point of view the people raising capital to get a jump start their business and our economy it allows them to draw from investor base around the world criticizes that just went into
00:50:33the point you the investor it allows them to look at investment opportunities around the world far easier way with regards to how security token platforms like harbor and polymath work we've discussed white listing secondary trading primary issuance and exchanges another issue that merits discussion our disclosures in the
00:50:51United States and most other jurisdictions laws require companies conducting a securities offering to tell potential investors all material information about the company its principles and the investment opportunity including the rest of the investment that a reasonable person would want to know in order to make an informed investment
00:51:08decision let's ask Trevor from polymath about how they handle disclosures does Plymouth facilitate disclosures that are required by securities regulations like you've got it disclosed risk factors some returns operating agreements things like that is any of that facilitated by poly math but you still need to file those
00:51:28things short answer no we're not council we don't give legal advice and that's something we don't do what we are working towards it in kind of version two you know version one is like get a lawyer and get going version two is you know we have a network
00:51:44of legal templates and kind of like get help for lawyers and we're gonna make it a lot more streamliner legalzoom for a security token offering like all these things with KYC and polymath in the ecosystem in the protocol we build is designed to have all of these organic
00:52:02community members and stakeholders help an issuer get through that process in a decentralized way so in our white paper you'll see that's a big component of it is how can we incentivize this network of independent third parties to work together towards a common goal we had this overwhelming
00:52:19demand and that's why to win this market we have to be self serve we have to be open we have to let them be in control because there's no way we could service so much demand if we did it as a high touch point advisory business model as
00:52:33you heard polymath doesn't really handle the creation or publication of disclosures they prefer to outsource that to their community believing that in order to scale they need to pursue a self service approach and they might just be right about that time will tell there are of course disadvantages
00:52:48and advantages to the do it yourself approach that you need to take if you're going to issue tokens on polymath a disadvantage is that when it comes to initial issuance everything from purchase close to disclosure docks must be handled by the issuer or at the very least an
00:53:03issuer will need to find a third party service provider that operates within the polymath ecosystem to handle everything for them at the end of the day a company will need a team that likely will include black teen developers in order to launch a security token with polymath pulling
00:53:18out doesn't hold your hand through the process are your code etcetera however on the other hand takes a different approach does that appear website I your code constructed purchase flow publisher disclosures it's that try it's really an Indian solution for initial issuance and at its core to services
00:53:35business at least right now one advantage that poly Matt has going for it at least in my view is censorship resistance and decentralization here's what I mean because polymath doesn't as a company directly handle issuance for an issue where there's less of a need for poly math to
00:53:52exert control over the system here with more is Chris from polymath let's say hypothetically someone is using the poly chain protocol in a way that you certainly had anticipated but they are engaging in fraud or illegal activities in the SEC comes to you and says were investigating them
00:54:14you know we have a warrant you know judges approve this in and we would like you to shut down their activities on change is that something that you guys can do or not no so the polymath courts it's pushed out to the Assyrian blockchain and it then is
00:54:32a decentralized application that we don't control we don't have servers that house any data it's all entirely on the blockchain as a smart contract if they SEC wanted to shout something down that in fact we have to try to shut down the whole Assyrian blockchain sort of a
00:54:50follow on question let's say all point math organizations go away and some sort of miraculous event happened and I won't is hit by a bus because that's morbid but everyone is sucked into %HESITATION at that worked upon at this sucked into an alternate dimension that can't interact with
00:55:08this world what happens do things move forward yeah that's exactly it and I did I tell that to the team regularly that you know we're still building some stuff out but once it's out and working yeah we hit by a bus as you said we're not needed that's
00:55:27really the goal is that our team is not needed but this suite of tools is available online for the world to use and is this same as big point so torsion Akimoto no one knows who he is he's gone to our knowledge and he's not helping out develop
00:55:43decline any further but is thriving and now I think the same could be said for calling us and that's that's our eventual hope Hey it's quite from the editors booth I think that the question what would happen if you were hit by a bus is really a great
00:55:59point of differentiation poor understanding differences between polymath and harbor let me pose essentially the same question to Josh from harbor what is the boundary between harbor the protocol and harbor the business if harbor the business goes away I is it the case that the protocol still continues and
00:56:19these tokens can still be swapped indefinitely harbors to sign to fail closed serve harbor went away the tokens would not trade with allies you should use than reshoot opens with a new provider hate clay again cutting in from the editors booth I think the fact that harbor fails
00:56:38close is important but I want to ensure that this is put into perspective I took it is just an electronic representation of a security and its primary purpose is making trading easier if harbor shuts down that doesn't mean that your ownership claim in a business goes away it
00:56:53does however mean that you have to trust the issue or to do the right thing when it comes to suspending trading reissuing tokens moving talking through new blockchain when that represents an advantage and otherwise acting in the best interest of shareholders and if an investor doesn't trust the
00:57:07company to act ethically in the best interest of shareholders then what they do with their tokens should be the least of investors' worries I think it's actually the issuers contractually need to have the right to suspend trading at times because they may want to move to a different
00:57:23provider they may want to move to a different blockchain suppose we made a big bet on it you're in just got the best opportunity but it may be for certain types of securities or it may be developers down the road you'd be better off on a different blockchain
00:57:36you can just simply suspend trading our resident knowledge yet freeze trading across the entire security assurance you freeze the trading and then you just reissue tokens people on that new blockchain technology the real world asset has gone away that company that piece of real estate is still there
00:57:55the token is just an electronic representation of the security that makes it easier to trade and so you can just this like an email you can send a new email very easily Sir where US polymath is more of a D. I. Y. option it's also meant to be
00:58:10a censorship resistant open and open source protocol that can survive the death of its parent company the crypto piercing me really likes this aspect of poly math while the pragmatist in me like that I could just go to one company like harbor and have them handle almost everything
00:58:26for me so these platforms have their pros and cons let's learn a little bit more about the business behind the protocols starting with Chris from poly math and the conversation I had with him just the inner workings of the organization where as poly math domiciled how does playing
00:58:43that make money have you disclose how much you raise during your IC I'll just add an operational level how does the organization work in an operating how's it legally classified and all that stuff I should say we have a few companies a polymath ink is a Barbados company
00:59:00it's the company that is creating the core protocol for people to work with on the Assyrian blockchain it's where the I PS houses for the poly token is used to access the features in the suite of tools four point not so we have developers in Barbados we have
00:59:20some foreign developers as well and bonus there is London England and around the world that are working on that core protocol as well as the community we've had a few members just submit improvement protocols and procedures to the platform and that people want to help out and that's
00:59:37what's great about the blockchain spaces that it creates this community of individuals that want to really push together to help the space grow that's our Barbados company that's where we did a sale for this polymath token back in the fall of twenty seventeen we filed an exempt offering
00:59:55with the SEC and then we have a separate company that's in Canada and this company is an advisory company it helps these issuers with additional development or custom developments for their polymath token offerings and they don't even necessarily have to be polymath offerings if they want to do
01:00:14something not related to the platform that's okay too it's essentially an advisory shop for blockchain offerings like a services business you exactly how much did you raise your nice yellow so we didn't do an I. CO we did a private sale to our group of friends both Trevor
01:00:34myself have been in the blockchain straight him since twenty twelve he always praises that he bought a bit coin for twenty dollars myself since twenty thirteen so we did a private offering to accredited people in the space and raced fifty eight or fifty nine million dollars I must
01:00:52be confused I could've sworn I saw ads were those for a token offering or was that for something else that was post offering O. okay got it that was just to promote our platform and to promote our website and grow our community the odd one up action on
01:01:11Christmas Eve on the twenty fourth of December which was post offering okay now let's turn to harbors CEO and learn a bit about their business and business model how does harbor make money I understand that you guys have not issued a token which is the price system in
01:01:31this space how are you guys set up is our youth services business yes into my check is to make money off fashion way we earn it we make money through direct charges so we charge as a technology company where technology provider we charge for setting up in issuing
01:01:48the initial tokens an onboarding initial dusters and then I think long term we're gonna develop additional value add services to people been asking about the ability to pay dividends people when asked about the ability she talks documents people ask about the ability for other capital management tools and
01:02:02so I think there's a lot of value added services there to provide down the road got it so it's some kind of initial set up fee plus a percentage of transaction volume I would divide it into the initial issuance the secondary trades and other value added services center
01:02:20on the initial razor the initial issue once we charge for services that we don't currently plan on charging for later trains but that may come in down the road we'll just have to see what the cost is associate with that with the vines like and then there's the
01:02:35value add services we're providing capital management where you're facilitating the distribution dividends via crypto means and and other things like that well it's time to wrap up the second part of our audio documentary on talking I securities my intention here was to consider how to different token I
01:03:02security platforms work in order to help you gain a broader understanding of the constituents prophecies and technical mechanics of a security token ecosystem and how they interact with each other I chose harbor in polymath as a lens through which to view how these platforms generally work and I
01:03:19don't want to in any way imply that these are the only two platforms out there that would be far from the truth platforms like securitized at I. L. region labs which did they tease your lunch and talking hub which did blocking capitals token offering has been up and
01:03:33running here for a bit so that's it I hope this was helpful and that you learn something and of course stay tuned for part three coming next week where we squint as hard as we can answer to the future to explore what happens when digitized securities make it
01:03:46faster cheaper and easier to unbundle and re bundle new financial instruments and a river of investments the potential future here it looks pretty compelling and crazy shout out again to black tree dot com for making all of this possible blacktree dot com will be the first fully licensed
01:04:01acuity token in Europe and I encourage you to go to their website blacktree dot com hit the red subscribe button and follow what they're doing I think it's pretty exciting okay see you next week for part three of token eyes the world take care this podcast was produced
01:04:18by me click on my idea producer and collaborator is the talented and came special thanks to our guests and everyone who has helped make this year's possible including our sponsor blacktree dot com if you have questions or comments you can contact me on Twitter at Collins thanks for
01:04:33listening that's it for this week to sign up for a free trip to investing newsletter listen to other episodes or get the show notes from this episode please visit flipping dot com I also invite you to check out the start up funds this podcast nami spelled in no
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