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- [00:00]
A
I think Tom Farley, the CEO of Bullish posted the other day something very interesting. He said, look, I'm the CEO of Bullish and then there's somebody that has created a derivative of Bullish Equity that trades offshore in, you know, without kyc, in a permissionless environment. So as a CEO, I can actually, my cfo, let's say, can go there and buy or sell those derivatives completely anonymously the day before the earning announcements. And this is obviously breaks a million different rules as you can imagine, because you're an insider and you're not allowed to trade before earning announcements because you know what's going to happen or you can know whether the results are good or bad and how the stock is going to move.
- [00:39]
B
Hi everyone. Welcome to Unchained, your no hype resource for all things crypto. I'm your host Laura Shin. Thanks for joining this live stream. But just so you know, this was pre recorded a few weeks before. This episode is brought to you by Kape America's privacy First mobile carrier. Same premium service you'd expect from any other carrier, but designed so your number, your location and your data actually stay yours. Get 33% off six months at Cape Co Unchained. Today's guest is Carlos Domingo, founder and CEO of Securitize. Welcome Carlos.
- [01:16]
A
Thanks for having me again. Laura.
- [01:19]
B
Yeah nice to see you. And congratulations on your ipo.
- [01:22]
A
Thank you.
- [01:23]
B
For a long while there's been a trend where startups stay private for longer, which obviously we're seeing with a lot of these AI companies and things everybody's excited about. But securitized went in a different direction. So why did Securitize decide to go public earlier than is typical nowadays?
- [01:41]
A
Well, first from our age perspective, we are more than eight years old. So I think we've been around for, for a while. From a size perspective, we're a lot smaller than some of the companies that stay private longer. But I don't know, like I, I, when I started in tech it was the opposite. Like companies used to IPO as soon as possible because you know, you get access to public markets, you then have the credibility of being publicly traded. Your equity becomes liquid. I remember companies like Amazon, et cetera, the, the IPO when they were like few hundred million dollars in, in market cap and somehow in the middle, you know, I think it was Google and Facebook and these companies that started like delaying, delaying, delaying the going public and everything became private markets. But I think.
- [02:22]
B
So why was this the right time for you?
- [02:24]
A
For us it was the right time because first, the IPO market was open for crypto companies after many years, as you know, that, you know, since the Coinbase IPO, I guess that there was no other crypto IPOs except for miners. So we IPO after or we started the process when we saw that Circle was going public and other companies like Gemini or Etoto, later, Bitgo, et cetera, they were also planning to go public. So talking to bankers, they told us, yes, definitely the market, it's open. The second thing is, as I mentioned, we were already eight years old. We've been growing a lot the last couple of years. Tokenization was a huge narrative in the industry. And I think that the Circle IPO was really inspiring because, you know, Circle tokenizes dollars, we tokenize everything else. And the, the amount of, you know, attention and interest they got from public markets, you know, was an eye opening for us in terms of, of the, the interest that could be in, in our company. And the final thing is, you know, a couple of more things. One is obviously most of our counterparties are very large traditional financial services companies. So I think going public and make sure that they don't have any concerns about the long term viability of the company because now they can see our balance sheet, they can see how much, I mean, hundreds of millions of dollars we have there and that we're not going to go out of business anytime soon. It kind of give us also credibility with our customers. And the final thing is that I think crypto is going to consolidate. I mean, you and I have been in this industry for a very long time and there's a lot of M and A happening now, but it hasn't really been a thing for many, many years. And I guess part of the reason is precisely because there's no public literary companies, right? And when you're private, it's a lot more difficult to acquire another company. When you're public, the price of your company is, is set by the market, your stock is liquid. So somebody else, they're not taking the same risk as taking private shares in another company, et cetera. And we thought that this was a good opportunity to reinforce the balance sheet, you know, provide visibility and credibility to the company and then being able to tap into the, the M and A market. So
- [04:26]
B
great. So you also did a SPAC with Cantor Equity Partners too, and you tokenize more than $265 million worth of your own stock. So why did you go both routes?
- [04:38]
A
So I don't think that today that the tokenized equity market is ready for just only be traded on chain. I don't think there is enough liquidity. If you look at the size of the market is very small between I think US and Figure and Superstate, which are the only ones that doing like real tokenization, where the token does represent equity, it's is around, I don't know, $600 million or something like that. And the rest, which is more or less double that these are all these derivatives that are not real equity and that all you offer offshore. So this is not a market where you can think of only IPO in there or only trade on chain. There is not enough liquidity. So we thought let's, let's do a traditional listing, let's list on the New York Stock Exchange in our case, but then at the same time put our shares on chain for people that want to trade them. And more in particular, we wanted to do it in the US So people understand that, you know, all this narrative in the crypto saying oh, we, we do these derivatives offshore because it's impossible to do in the US this is actually not true. These are people playing regulatory arbitrage that they just don't want to do it following the, the existing regulations in, in the US it is doable to do it with native equity tokenization. It's doable to do it in the US Is doable to trade on chain following all the regulations, etc. So we wanted to showcase, you know, our technology and our licenses at the same time that they were doing the traditional listing.
- [05:54]
B
Well, I just had Johan Kerber on the show, so it sounds like you're talking about Robinhood crypto because they just.
- [06:01]
A
Robinhood. But a lot of people are doing things offshore and for, for different reasons and might be fine. If you want to do things offshore, that's your problem. But if it shouldn't be because you can't do it in the U.S. you don't do it in the U.S. because you don't want to do it in the US because you don't want to follow US regulations and you don't want to go through the process of getting licenses here, which of course you've been in crypto for a long time. You know, that's how crypto companies sometimes operate, right? Regulatory arbitrage, deal things offshore, don't get licenses and wait to see what happens. I do remember in 2021, you might remember this as well when there were all these shadow banks that they were saying, oh, we provide yield for your crypto and for your stable coins. And that's what Banks do. We don't need to bank license because we're crypto, blah, blah, blah. And then all of them went bankrupt in some cases, CEOs went to jail. So I don't think that this is a long term sustainable business. Eventually regulators catch up to you when you do something that is illegal. And that has never been our approach, our approach has always been to comply with regulations, to do it out of the US which is the largest capital market, and then build something that is sustainable and that lives across whatever administration it's in charge at the moment.
- [07:12]
B
Yeah. And I think eventually Robinhood will bring that onshore here. But they're starting in the EU than
- [07:18]
A
welcome to the Robinhood equity natively in the US and let them create it here in tokenized form. It's something that I think eventually they will do as well.
- [07:28]
B
So I'm so curious because obviously this is the world that you live and breathe tokenizing real world assets. But since you underwent the experience of going public via both methods, the traditional method and then going the tokenized route, I'd love to hear how the experience of both of these methods differed. And if you're making this pitch that this future tokenized world is better, I wonder how you felt about it as a customer. What parts of it felt like a better experience to you and what parts felt like it needed to be improved.
- [08:03]
A
So first, I don't think that is either or. I think both markets are going to coexist and the tokenized equity markets is a very nascent market. So I don't think that it's, it's ready, as I mentioned, to replace the other markets in terms of market participants, liquidity, access, users, et cetera. The way I see it is similar to when talking about Robinhood. Robinhood actually pioneered something which was the retail access to IPOs. I remember five or six years ago, IPOs were basically only for institutions and you can only participate in an IPO if you are an institution. And Robinhood pioneer giving access to Robinhood users. I'm a Robinhood user for my traditional equities. And then they give you access to to an IPO as a retail person. And that started being very small, started being only companies that nobody knew about it. But over time it became a thing. And now you've had examples like a SpaceX IPO which had a huge retail portion and participation. The crypto companies like Bullis had a huge portion of their IPO also on the retail hand. So I think that the tokenized equity IPOs are going to follow the same process. We're going to start with something, it's going to be small at the beginning and then over time it's just going to become something that every single company does and that grows over time until it becomes a percentage of the rest of the market. Now, in terms of the experience, look, tokenizing our shares, we did it ourselves, it was very smooth. Even though we had to actually build a lot of tech, especially for the trading side of things, because trading on chain today, it's complicated because of the existing regulations that are designed for traditional markets that you still have to comply with the other IPO process. What I will say is that it's a huge regulatory burden. I didn't expect that it was going to be such a long process. And I know Chair Atkins is saying that we need to simplify disclosures and the IPO process to stimulate more companies going public. And having done the process, I really hope that they do it and that more people go public earlier because they make it cheaper and easier. It's a complicated process. You have to do a lot of disclosures, there's a lot of, it's expensive because of the, the legal cost, the bankers you need to use, etc. But hopefully this is all for the good and for the company. And so far we're pretty happy with the outcome.
- [10:25]
B
All right, so in a moment, we will talk a little bit more about the tokenized security securitized stock. But first we're going to take a quick word from the sponsors who make this show possible. If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T. Verizon and T Mobile have been breached again and again. And SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Kape comes in. America's privacy. First mobile carrier, same premium service, but Kape rotates the identifier on Your Sim every 24 hours, deletes your call and text metadata after a day, and protects against SIM swaps with a 24 word recovery phrase that only you control. You also get two middle to end encrypted secondary numbers for banking and signups. So you stop handing your real number to every app that asks go to Cape Co Unchained and use code UNCHAINED for 33% off your first six months. Back to my conversation with Carlos. As mentioned earlier, you tokenized Secz and you did so on Solana and Avalanche and I was curious why you chose those chains.
- [11:40]
A
So first we wanted to be in more than one chain to also prove that you don't have to be on a single chain. We can actually track the cap table and the ownership of the securities across multiple chains simultaneously. We also wanted to kind of pick two different ecosystems. So Avalanche is obviously an EVM chain that is very focused on on lwa. Solana is more focused on, on the trading side of things. So actually the shares that are on Solana, the ones that are currently trading, like if you go and buy, you know, the, the, the sexy shares on, on chain, you do it through the, the Solana implementation. We're doing it together with Jump Crypto, who is our market maker. They have a, a prop. Mm technology that they've been using for digital assets that we together adapted for tokenized equities. And then, then we tokenize the, the, some of the restricted shares we offer all the shareholders if they wanted to have their shares on chain which are not tradable yet, we have a, a lockup period for six months. That, that will be the. We will then enable trading them on Avalanche as well down the road. So.
- [12:42]
B
And you, you know, talked a little bit about the process about tokenizing Secz, but, but I wondered like, you know, what did you. What are all the things that any other issuer who wants to do the same would have to either build in the background or what processes would they have to follow in order to be able to offer the same.
- [13:06]
A
So the key entity there that helps you get this happen is the transfer agent, right? So when you go public, it's mandatory that you engage with a transfer agent. A transfer agent is an ICC regulated entity that basically manages the cap table. And then the transfer agent then manages shares that are in two different locations. Some shares are the ones that you'll be able to trade through Robinhood, let's say, and those sit on dtcc, which is the central securities depository. But then they also manage shares that are under the actual investor name. So those shares are like in our case, they're under my name or under the name of other investors, et cetera. And those shares are on the books and records of the transfer agent, which is basically a ledger, right? It's not a blockchain, but it's a ledger. Now if you want to move them into tokenized form, you have to work with the transfer agent. So our transfer agent for the company, for the SPAC that we merged with was Continental. So we strike a partnership with them. So we became their tokenization agent. So in that case then Continental facilitated two things. One it facilitated that we actually, you know, inform all the shareholders when they were going to receive their, their SEC shares that they could get them on tokenized form. So we have to ask them to register a wallet and then you know, we send the whitelisted the wallet and then send the shares there. And we also use a broker dealer to basically purchase shares from the on prem market and move them outside of dtcc. So we can then put them on chain and trade them separately from traditional markets. So everything that is on the TCC trades through the existing market structure, right? The exchanges, the broker dealers, et cetera. So once you move them on chain, they're kind of outside of that scope. So you can actually trade them any way you want as far as you follow obviously with regulation. So as I mentioned, we then created this version of the JAM crypto prop AMM that follows regulations for trading public securities. Right? Securities are, you know, national market securities, our shares and then those are trading there. They have, you know, they have more availability in terms of trading hours. They settle instantly. You can trade them against USDC so they actually behave more like crypto. If you look at the experiences like going to Unis swap where you go there, you connect your wallet, then you see USDC and sexy shares and you can decide which one you want. And then you know, either you submit shares if you have them and then you get stable coins, USDC in this case, or you submit USDC and you get shares and that's an instant process. You get the shares onto your wallet. There's no settlement period. Once you're there, you could potentially do other things that were now enabled like borrow against them, et cetera. So it's a very kind of like cryptocentric experience as opposed to going to a traditional broker dealer and trade them there.
- [15:57]
B
So for investors who are interested in owning securitized stocks, how should they think about which form or which wrapper to buy? Like what are the trade offs on either side?
- [16:09]
A
So first, this is not a wrapper. These are the same shares whether you get a token or you get, you get them on dtcc, there's no, yeah,
- [16:16]
B
wrapper I guess is the wrong word. Format.
- [16:19]
A
Format, yeah, format is more appropriate. So, so first when you, when you can go to Robinhood and buy shares and you will see, you know, our ticker there on, on your account and, and those shares are actually, you know, on the cap table. Like it doesn't, people don't realize that when you're buying something on Robinhood you're actually not getting the shares, what you're getting is an entitlement towards shares that sit on dtcc. So if you want to do something with them, if you want to transfer them quickly somewhere else, another broker, dealer to another investor, if you want to place them as collateral to borrow against it, then it becomes a process, right? It's like a very manual and convoluted process of doing all these processes. Now if you want to buy them in tokenized form, it's much simpler. You just go there, you have stable coins, you submit, let's say $100 of USDC, you get your shares there instantly on your wallet. You are actually at that point in time on the cap table. So we know who you are. We can conduct corporate actions like dividends and proxy votes directly with you instantly because there's no intermediaries. We actually know who is on the cap table. When somebody has shares on Robinhood, we don't even know they exist because they're not on the cap table. And then let's say in the near future, when we enable lending against it, then you'll be able to post them, let's say on Camino, for instance, and then borrow against them in a kind of like a defi manner. And those are things. Or if you want to transfer to another whitelisted wallet of another investor, you can just send them on chain and they arrive instantly. And then that's it. The shares have been transferred. So it's a kind of a completely different experience from that perspective. And I guess they're going to be different audiences and different people that want to do different things with the shares. So, so,
- [17:55]
B
and for, you know, thinking about kind of these two different versions of the stock, what are the risks of, of having the two versions? You know, one of them trades 24 7, the other only trades during weekday market hours. Like, how do you think about that, both as an issuer but also even just from the perspective of the investor.
- [18:19]
A
So first, as an investor, when you're taking native tokenized shares, you don't have any risk against any counterparty because there's no intermediary that has created a derivative version. Like, let's say when you buy these derivatives offshore, in some cases, you're getting a debt instrument against a company that has purchased the shares that have them on an spb. So there's intermediaries there and typically crypto companies that you're taking a counterparty risk against. In our case, it's the same whether you have, if you have them on Robinhood, the risk is Robinhood Going out of business, which is obviously very unlikely. But broker dealers, when you have them at a broker dealer because they're not under your name, you have that problem. When you have them under yourself, under your own name on the cap table and wallet then I will argue is less risky because you are at that point in time on the cap table. These are permission assets and securities. Therefore, if you were to lose the keys of your wallet will be able to verify that you are an investor and reissue the barn the old shares and reissue the new tokenized shares. Now in terms of trading, they actually trade at the same price because there's something called National Best Bid Offer mbbo, which is a regulation that when you trade registered shares during market hours, you have to always offer investors the best price and the best execution. So whether you trade them on Robinhood or you trade them on our, you know, prop AMM technology with Jam, you're going to get the same price. So there's also not, you know, let's say risk of oh, I'm buying the ones on chain and I get a worse price, et cetera. Then outside of market hours, that's a different story. Outside of market hours, things trade at whatever price it trade. We actually trade extended hours. Not 24, 7 yet, but we're working on Enable Land. But during the extended hours you might actually get different prices in different venues. But that's what happens to the international markets as well. Like if you buy, you know, things outside of market hours, there's no guarantee of what price or what a spread you, you're going to get. But doing market hours, this is completely consistent and, and we trade exactly at the same price that you will get if you buy them on Robinhood.
- [20:21]
B
Okay, I'm, I'm, I'm confused though because if one format stops trading, even just even if you're doing extended hours, there's some period where it's not and then the other version is continuously trading. Then how is it that the prices never diverge?
- [20:36]
A
Because the market maker has a regulatory obligation to offer you the same price that you will get if you buy them from. So there is something, these prices are published, right? So any broker dealer that is selling shares has to always look at this tape that has updated pricing. So what we do is we actually inject the real time pricing on chain for JAMF to be able to read it and offer you that price.
- [21:06]
B
So it's literally all done through the market maker or is there even, I guess because it's centralized. So immediately my head went to an Oracle, I guess that's a new. Because it's centralized.
- [21:20]
A
That's a good way to think about it. It's an oracle that takes the price from, you know, the national markets where things are trading continuously. And it's com. It's constantly feeding that price into the on chain trading mechanism. So when you trade on chain, you actually get the same price and then the market maker is guaranteeing you that you get that price.
- [21:41]
B
Okay.
- [21:42]
A
It's their job to, you know, how they hedge the price and how you do that. So that's what market makers do for a living. But the price that you. That we are getting on chain, it's the same price that you're getting off chain. It's actually a regulatory obligation, by the way.
- [21:56]
B
Okay, okay. And I guess like typically, most people, when they talk about that, they would say that the one that is continuously trading while the other is not trading would, you know, see changes in the price that then might be, you know, not reflected in the one that isn't trading. But you're just talking because, like so much more of the liquidity is on the stock side that the price essentially is being set. There is that kind of.
- [22:27]
A
That's correct. So this is something that is very controversial, by the way. This was something that was set up in 2005 by the SEC. And I like to talk also about how the SEC is trying to change that, which is a good thing for crypto. But at that time they created something called Rule 611. Okay. I don't know if you ever heard of Rule 611. All right, so Rule 611 is called the Order Protection Rule. And that is a rule that says that quotes are protected to make sure that when you trade on one venue, you can't get a worse price than what's displaced on another venue. Because most people don't realize that equities don't trade on the same place. Equities trade on tons of different places. Even if you're listed on the New York Stock Exchange, you have atss and you have broker dealers. So equities are all the time trading in. In a variety of venues. In fact, what happens with this Rule 611 is actually created more venues because every venue could just know at what price they were trained. But anyway, that was created in 2005. It's called Order Protection Rule, Rule 611. And that basically the way they guarantee that this is the best price is because there's something called the securities information processors, the SIPs, that actually publish data feeds that aggregate from all the venues. So those SIPs aggregate data from all the venues. And then anybody that trades has to look at the sip, it's called the tape as well. And then you see, oh, it trades at 11.5. And then at that point in time, you have to offer 11.5 to somebody trying to buy that security. So whether it's on chain or it's off chain, it doesn't matter. Everybody actually does that. And that's how markets actually work today. Now, this introduces complexity because, you know, then you have to follow a price that has been set somewhere else, et cetera. So if you think about how crypto works, crypto doesn't work that way, right? So in crypto you have Coinbase trading Bitcoin and Binance trading Bitcoin and they don't talk to each other. And then when you buy the price, the Bitcoin in Binance, you're getting whatever price Binance is offering you. When you buy in Coinbase, you're getting whatever price in Coinbase is offering you. Now, in spite of that, it actually trades at the same price. Right. Why? Because market makers eliminate the spread. So if it's anytime Bitcoin trades higher on Nasdaq, then people are going to buy it on Coinbase and sell it on Binance and it's going to adjust the price. So that's how crypto works, but that's not how traditional markets for equities work because of this rule 611. Now this is something that, as I mentioned, introduces a lot of complexity and doesn't necessarily solve any problem because as I mentioned, crypto doesn't have those rules and it doesn't have the problem of things trading at different prices. So the SEC recently has published a document trying to repel Rule 611. So they're trying to eliminate Rule 611. And this is something largely that the crypto markets have not paid a lot of attention because I don't think most people understand how it works. But it's actually pretty relevant for crypto because it means we'll be able to trade on chain at whatever price it trades on chain and not have to do this convoluted process while we do fetching with an Oracle, the SIP data, send it on chain, forcing market maker to trade a particular price, et cetera. And then at that point in time, they can trade at different prices. But if they trade at different prices, market makers will come and eliminate the discrepancy and that will increase liquidity because the Market makers will be making money, which is exactly how crypto works. So I think that we're in a. Kind of an interesting point in the industry because the SEC is trying to eliminate a rule for traditional markets that can actually have a very important implication for crypto markets when equities start trading there.
- [26:07]
B
Okay. Okay. Yeah. It's funny because I realized that initially when I asked my questions, it didn't even occur to me that the price on chain would be set by anything other than the market. So during that period where the equities markets are closed, I assume the price would keep changing on chain. But you're saying that whatever it closes at will be whatever the price will be on chain somehow.
- [26:35]
A
No, no. So once market close, when the market close, then this rule. Reagan, Ms. Rules do not apply. Then you trade at whatever price market trades that your market, let's say the on chain market.
- [26:47]
B
Okay, but. But that's what I was asking about earlier. So then when the equities market opens, if the prices have to start trading
- [26:54]
A
back at the whatever price it opens on the equity markets.
- [26:57]
B
Wait, I'm sorry, say that again.
- [26:58]
A
You. You have to then start trading at the. At the price that everybody else is trading.
- [27:04]
B
Oh, okay. Right. So that's what I meant. Like, if you own the stock, you can kind of get screwed, right?
- [27:12]
A
Well, no, no. So, but that happens as well. Let's say if you're in Japan, and then you trade equities in Japan, when the US Markets are closed, you're also getting a different price because you're getting whatever that market is offering you because US Markets are closed. So, so that's how equities trade. Actually, equities trade, you know, not 247 but 24 5. And then outside of market hours, they don't have to follow reg and ms, so they might actually trade at a different price than what the actual. Let's see, let's say opening price is going to be when markets open or what the close. Closing price was. That's exactly how I guess.
- [27:51]
B
No, but I guess what I'm trying to say is. So like, let's say that something happens where on chain suddenly drops considerably, but you own the stock and you cannot sell it because the market is closed. And so what happens is when the market opens, you will just have to absorb that loss. You cannot, like, let's say, okay, let's say the market closes at, you know, so let's say there's. There's. I'm just going to make it up, like between midnight and 8am suddenly like you cannot sell and something happens at 4am and you, you know, you would like to act on it, but you can't. Do you see what I'm saying?
- [28:29]
A
Yeah, what I'm. So you're trying to, to trade and there's no liquidity. You can't trade. And then. Yeah, so first, you know, if you wait to trade until the market opens, then you're going to get whatever market price is. So. And then.
- [28:42]
B
Right, but the people who own the tokenized stock, they can act because it's open. That's what I'm talking about.
- [28:49]
A
Correct. But the same happens with traditional stocks as well, that they trade outside of market hours in, in some restricted manner. So, so that's, that's actually how markets work. When you're trading outside of market hours, you might get a different, a worse price. And that's, that's why markets are inefficient for 24,7 because outside of market hours are very liquid. And then the same experience you're going to have on chain that when you trade off market hours, there's less liquidity in general, both on chain and off chain. And there's also no price protection because they can trade at any price. And then if you trade at those outside of market hours, you actually might get a worse price.
- [29:26]
B
Right, Okay, I see. You're saying it's trade offs either way and you can either be a beneficiary or be at a disadvantage no matter what. Okay, got it. That makes a lot of sense. Well, let's kind of go back to something that you alluded to earlier. Obviously there's been a lot of discussion about what it is exactly that investors own when they buy a tokenized stock. So go ahead and explain kind of like the different variations on what the rights are that different investors have and what the spectrum is that is available now.
- [30:04]
A
Yeah. So largely there's kind of like three models if you want the one we use, the one that figure is using, the one that Bullish is using, Superstate, etc, which is basically, you go through the transfer agent and then you're basically getting an entry on the transfer agent cap table. And the transfer agent happens to use a blockchain as their underlying ledger. And therefore you get a token as the entry on that ledger. Right. Which is what, what a blockchain is. A blockchain is a ledger where the entry of what you own on that ledger is represented by a token that you can hold on a wallet. Right. So, so in that case, you're buying the same instrument, it's the same Q sip, the same rights, you get access to dividends, you get access to voting rights, splits are done, et cetera. So you're basically buying essentially the same security. Okay. And that's what most people refer at ISTs or issuer sponsored Tokenization, where the issuer basically works alongside their transfer agent to make sure that there's some shares that are tokenized properly. So the transfer agents are computer shared. You know, Equinity computer share has partnered with us. Equinity has, is in the process of being acquired by Bullis. As you know, Continental is also partnered with us, which is the one we use for our own equity. And there's like a lot of other small ones out there, but those three represent like the large majority for publicly traded equities in the US and then you have to go through the transfer agent to make this, this happen. Now the second model is kind of like the DTCC model which is you tokenize the entitlement. What does that mean? As I mentioned, when you have shares on Robinhood, you actually don't have the shares under your name. What Robinhood has is a claim under your name towards shares that sit on dtcc, which is the central securities depository. So DTC helds trillions of dollars in shares and those shares are under dtcc. So the transfer agent only sees, it's called cdnco, which is a company that DTC owns as the kind of like the beneficiary owner. But those shares in reality belong to the actual investor that has bought them through a broker dealer. So what you have there, it's an entitlement, it's called, and those shares are, you know, you have the same rights. You don't have the shares, but you have the same rights. So that's the DTCC model where they are tokenizing their entitlements, et cetera. Now the disadvantage of that model is not you're not getting the same rights, you are getting the same rights is that you're still sitting within the DTCC infrastructure, right? So you kind of take the shares on your self custody wallet. I kind of move them outside to trade them somewhere else. I cannot go and post them as collateral for defi, et cetera. So the shares have, the tokenized shares have, or tokenized entitlements have less utility is more like an efficiency for the existing market participants. And that's not allowed to create a new ecosystem as we're trying to create that is fully on chain. Okay. And then the other model are these derivatives that are offshore, where you're not getting the shares right, you're getting. And it's kind of funny because a lot of people claim, oh, is it one to one back or it's regulated, blah, blah, blah. But the first, if you wanted to do one to one, then there's a way to do it natively in the US and regulate it. So those are, I think most of the structures are structures as a debt. So where you know you are, somebody is buying shares on the open market, is holding them somewhere at an SPV or a broker dealer and you get a debt instrument against that spv. And that's how most of these offshore derivatives work, where you're not getting the shares, you're not on the cap table. In some cases you don't have access to the same rights because they also offer them permissionless. So for instance, if there's a dividend payout and you're on your wallet, you've never done kyc, you're never going to receive your dividends. They're misled because they are showing this as tokenized equities, but it's not tokenized equity. You're getting a debt instrument, so you're getting a different instrument that has a price tracker against the shares that sit somewhere else. So those models, obviously in some cases the way they are structured, they are not legal in the us that's why they block the us. They also issue them as permissionless tokens, which has all sort of regulatory issues and OFAC issues because they can go into sanction wallets. They're being distributed by unlicensed exchanges that you have no protection as an investor when you're buying because you're not buying from a regulated broker dealer. I remember one of the issuers without mentioning anybody, but they actually issued this tokenized equity for, I believe it was for Netflix and then Netflix did a split and then the on chain version did not do the split and they were trading at five times different price because the token does not really. Doesn't really represent the shares.
- [34:50]
B
Right.
- [34:50]
A
So there's nobody that actually took care of doing the split. So these are the kind of problems you're going to be facing when you buy these derivatives that you might run into issues when a dividend is paid and you don't receive it, or you're not part of a proxy vote or this is split and you're not affected, or one of these companies might actually go out of business and then you lose your shares because they are held under their, their SPVs in some cases, not bankruptcy, remote, etc. So.
- [35:18]
B
So, yeah, this touches on a wider debate that's happening right now where the securities Transfer association, which is an industry group for transfer agents, is, you know, saying to the SEC that they think that tokenized securities should be authorized by the underlying issuer. And it sounds like you're on that
- [35:40]
A
side, you're on the board of this association. Well, we are very well aligned with that view.
- [35:49]
B
Can you just give a sense of why the other side wants to not have them be issued by the underlying or. Yeah. Not be authorized by the underlying issuer?
- [36:03]
A
Well, it's very simple because it's easier if you don't have to ask permission, but forgiveness. Right. So. And this is why you end up having, you know, Coinbase has not tokenized their equity. Right. Or Robinhood, but there is five different versions of derivatives of Robinhood Equity or Coinbase Equity that had been issued completely without Coinbase permission, completely without Robinhood permission. Then those things are actually different because they're not the same instrument. They're all different derivatives issued by different companies. They are using the name of the company without their permission. In some cases, they list the qcip. Like, if this was a real security, QCIP is this legal number that every security has. They are offering them as tokenized stocks, even though they're not stocks and they're tokenized, something else. So if I was an issuer, I would not want that to happen. Also, it's a kind of worms, right? So I think Tom Farley, the CEO of Bullish, posted the other day something very interesting. He said, look, I'm the CEO of bullies. And then there's somebody that has created a derivative of Bullish Equity that trades offshore in, you know, without kyc, in a permissionless environment. So as a CEO, I can actually, my cfo, let's say, can go there and buy or sell those derivatives completely anonymously the day before the earning announcements. And this obviously breaks a million different rules, as you can imagine, because you're an insider and you're not allowed to trade before earning announcements because you know what's going to happen or you can know whether the results are good or bad and how the stock is going to move. So as an issuer, you're just opening up for a lot of issues internally. Your own employees can get in trouble, like some affiliates, et cetera. Not to mention that also your securities might actually be held or derivatives of your securities might be held by sanctioned people in sanctioned countries. And, you know, opening to OFACA rules et cetera, So I think that the reason they're doing it is obviously because it's easier to do that. They can create 100 different derivatives of 100 different names without talking to anybody. So obviously, you know, that's, there's a lot of, there's less friction to that than you have to go to every issuer and convince them to do it and work with a transfer agent, et cetera. But the transfer agent association, rightly so, is saying this is not the model because issuers need to be able to control what happens with their securities, with their company name, with their QCIPs. And they need to authorize what you do the same way that I authorize our shares trade on New York Stock Exchange. And it's not that NASDAQ can go and pick my shares and trade them there. Has to be done with my authorization. So it's the same situation here, which, by the way, this feels to me like a very normal fare ask. Right, because they're your securities and it's your company name and your company reputation that is going to be exposed to all these potential problems happening there.
- [38:55]
B
Okay, yeah, I mean, I think, you know, it's, it seems like I understand and that makes a lot of sense. And yet at the same time, there's something about it, like just coming from the crypto perspective, where there's this notion of permissionlessness and censorship resistance. But I agree, maybe by the way,
- [39:20]
A
this notion of permissionless and censorship resistant, these things are issued through centralized offshore exchanges. There's nothing decentralized there. So don't want to mention the names, but everybody knows who they are. And they're also allowing Chinese people through VPNs to connect there to trade, use derivatives or US stocks, et cetera. So I don't think it's because of the ethos of the industries to be permissionless and decentralized. I think it's because playing regulatory arbitrage simplifies your business model. There's less friction, there's less cost, there's wider distribution because of course you can use unlicensed venues to distribute, et cetera. So I don't think that this is a crypto has moved. I don't think a lot of people that are doing these things are because they are, you know, really believing on, on a permissionless, decentralized world. It's just because, you know, they can make more money easier without less problems.
- [40:15]
B
Yeah, yeah, no, I, I, I see what you're saying and it makes a lot of sense, I guess. Just one question. So if people were still to try to pursue the derivatives in other jurisdictions. You know, so let's say that happened to securitize. Like, could you go after them in some other jurisdiction? Or like, how would that work?
- [40:39]
A
That's a good question. So since we printed the problem, because we sure are on equity, we don't have that problem as other companies have it. So I, I don't know what kind of recourse I have if that happens, to be honest with you, because this is done in, in, in offshore jurisdictions, sometimes in places like Jersey or places like that that are hard to reach. I guess you can always ask them not to use your company name without your permission, I guess.
- [41:12]
B
Okay, so let's now just talk generally about tokenization because you're sort of at the center of this world. I'm sure that every single financial institution is coming to you and, you know, wants to at the very least talk. But I would imagine that you're also hearing a lot of questions or concerns from them. And so, you know, what are those conversations? Like what are the issues that you think need to be addressed before we see a much larger wave of tokenization?
- [41:42]
A
I think that, you know, large, let's say asset managers that are tokenizing assets and put them on chain, they are obviously concerned about two different things. One, they are concerned about not following regulations because they don't want to get in trouble with the regulator that can affect their broader business, which is obviously much bigger than whatever the tokenized portion of their business is, which is today is very nascent. Right. So obviously their concern is make sure it's all legal, that these regulated entities that are involved, that those entities comply with the, with the law, that people are not doing kind of like weird things, et cetera, because that can get them in trouble. And then the other thing is reputational concerns, right? Like, where are these things going to trade? Are they going to trade in places where maybe, I don't know, people from sanctioned countries are being involved? Because these are permissionless protocols, et cetera. While it will not imply the asset manager doing anything wrong, it has a reputational impact in their brand. If somebody, you know, is out there and says that, oh, this, you know, somebody in North Korea is buying, you know, some particular asset or is lending against it, et cetera. So, so I think it's a combination of regulatory and, and, and reputational in terms of getting into crypto. And unfortunately, because crypto has had this unfortunate history of problems, you know, over the years, then people are concerned, rightly so, because it seems that we don't actually learn from the past, right? We continue doing these things in spite of these things in the past ended up wrongly. I do remember in 2021 when we raised our CSV, we actually had a deal with a very large US bank, one of the top three, just without saying which one. And then FTX and Celsius and blockfi and all these things happen, right? And then they came to us and they said like, we just, we don't want to continue with the project because we don't want to be on a, you know, on the Wall Street Journal article saying, oh, we've tokenized this with Securitize and you know, this guy is going to jail and the other guy is going to jail and this company went bankrupt and people lost a lot of money. We just don't want to be associated with that. So. So I think crypto needs to try to mature and self regulate themselves a little bit by, by, you know, understanding that unless, you know, people are comfortable about the space, you know, the large institutions are not going to come. And all this thing about institutional adoption, etc. Is all predicated on them feeling comfortable that they're not going to get in trouble, but they're also not going to have any reputational impact to their brands. So. And by the way, it's much better now than it used to be. But still we have ways to go. And in a tokenization front, one of the things worries me is that one of these things blows up, right? Because these things are completely unregulated. They're done offshore without any controls, distributed by people without licenses, et cetera. So something can actually go wrong.
- [44:33]
B
Wrong.
- [44:34]
A
The same thing that Celsius went wrong or blockfi went wrong and people were saying, oh, they're just giving you a yield for your deposits like a bank does. Well, they're not banks, right? Banks are regulated and it's much harder for a bank to go out of business than for one of those companies because, you know, those companies were not transparent on what they were doing. So this is the same situation today. Where is this lack of transparency about what they're doing that can actually lead to a problem and that can actually impact the whole space because then all the large institutions will, will get concerned about it and we'll pull out.
- [45:06]
B
So you're in the thick of building this new collaboration with the New York Stock Exchange to help create tokenized versions of traditional financial securities. And I wondered if you could just talk a little bit about what that's like. Just I would Imagine that right now there are so many different problems that need to be solved. And you've probably alluded to different ones of them right now. But, you know, how do you see the road to just having announced this a few months ago to getting to the point where you can launch something?
- [45:38]
A
So this project is very interesting because the entity that is going to operate the on chain trading venue is the New York Stock Exchange, which is the largest exchange in the world. So the fact that they actually do see a future of on chain trading where you have 24, seven, where you have instant settlement, et cetera, it's very interesting because it somehow validates the thesis that there is value there. Otherwise they would not be doing right. Of course, it's a complex project because they need to stand up an ats. In their case, they call it a digital ats, which is an ATS that trades this tokenized native issue, tokenized securities, but they're also going to trade tokenized entitlements, which as I mentioned, they are kind of regulatory equivalent, even though they're not done by the issuer, but they're done by an intermediary. But they're kind of a different story. And then we have been working with them for a few months, as you saw in the announcement. We did. They chose us as the design partner to help them figure out how this works. We're also the first transfer agent has been approved to basically send tokenized equities and ETFs there for trading. Let's say the same thing that we did with Continental for sexy. We'll be doing there for other securities, but we're also a broker dealer. So the New York Stock Exchange won't take subscriptions directly from retail people. They will only allow broker dealers to subscribe to their ATS to see what the price is and what the trades are. And then retail investors will have to come through broker dealers. So Securitized Markets, which is the broker dealer that Securitize has, has been also approved as a broker dealer. And we're now doing all the integration of the broker dealer, the transfer agent. They're standing up their ats. So it's a complex project. They've announced that they're launching in Q4. We're working towards that, that deadline. But it's a very exciting project because I think that will kind of prove really that first there is a way to do it in the right way in the US with the largest exchange, etc. And I think that's going to be a step change in Terms of adoption of tokenized equities.
- [47:42]
B
And do you have a sense of how many you'll launch with?
- [47:47]
A
Well, we've been talking to tons of people, as you can imagine. We'll hope that we launch. So first they're also going to do entitlements, right. Which as I mentioned these are kind of like a DTCC type approach, not the offshore derivatives. And those they can actually have more at launch because those are not issuer sponsor, they're also going to have issuer sponsor so probably they'll have tens of different instruments that you can trade there.
- [48:17]
B
Well, let's also talk about the elephant in the room, dtcc because they are also entering this space but from what I understand they're taking a different approach. So explain what their approach is compared to securitizes.
- [48:31]
A
Yeah, as I mentioned, the DTC approach is the tokenized entitlement where the actual share. So the token does not represent the share, the token represents a claim, a legal claim towards the share that sits on the, on the custodian, which in this case is dtcc. And then that token can only go to wallets that have been created by the cleaning market participants. These are like the broker dealers that are connected to dtcc. So today let's say if you're Robinhood, you have a database, let's say that DTCC gives you that says you have 1 million shares of Apple under Robinhood. And then Robinhood has another database that says oh, these million shares. Carlos has 100, Laura has 200 and and John has 300. So that's how these are layered. Right. So then Robin Hood in this case, instead of getting an entry on a database, it's going to get a token that represents how many entitlements this broker dealer controls. But that is not going to flow back to the end user. That's at least the way this structure for time being. I don't know whether they are going to evolve this in the future or not. So it just keeps things within the the DTC confines and the approved market participants and then the clearing still goes to the tcc. So it's going to clear the plus one. So it's not going to do like instant clearing, instant settlement or 24 7. So it's just more of an efficiency thing of broker dealers there are able to move shares across themselves in a much more efficient way than they do today. I think it solves for a different problem. I think it's great that DTCC is doing this because it's putting the word tokenization out there is forcing a lot of these market participants to start thinking about, oh, I need to get a wallet and maybe to open an account with Bitgo, I think, which is one of the custodians, to get a wallet to get these tokenized entitlements. And that can lead to them doing more things on chain besides that. But I think that the most interesting thing is when you actually move things completely outside and you are able to kind of create new stuff, right, and do new things, which in this case is going to be much more limited. But, you know, kudos for somebody like DTCC for getting into the space. I think it's helping get the word tokenization out there and as I mentioned, getting people to start thinking about wallets and tokens, et cetera. But it's a completely different, you know, model than the one that we're doing.
- [51:04]
B
So one other competitor that we've mentioned a few times in this episode is Robinhood. And I'm sure you were watching what happened with Robinhood Chain, and it seems like originally they were thinking about this for RWAs, at least if we're judging by CEO of Vlad Tenev's initial remarks about it. But very quickly we saw that actually meme coins really started taking off there. And I wondered if you had thoughts on why that happened and if that phenomenon changed your outlook on how big the tokenized real world asset sector could grow.
- [51:40]
A
So first, I just don't see Robinhood as a competitor. We talk to them all the time. I think that they're more focused on distribution. They have a great distribution because they have a ton of retail users. And I think this is why the Robinhood chain has been a very successful launch, because they have a lot of users they can bring quickly on chain. What they're doing of bringing people on chain is great and it benefits everybody. I think that we're more focused on the kind of one step behind the scenes infrastructure of tokenization, working with asset managers or with issuers to issue tokens, et cetera, and that those could actually be very well issued on the Robinhood chain as well as we issue. It's actually based on the Arbitrum technology, which we support, and they can be distributed by Robinhood. So from that perspective, I don't see that ourselves kind of operating exactly on the same space, even though we might overlap a little bit here and there. And in terms of memes, you know, meme coins taking off versus RWAs. Well, what can I say? This is crypto, right? So before crypto, people are drawn towards those things. I think this is a. I don't think this is like a long term sustainable thing and that's what they're intending. I think RWAs have more complexity in terms of adoption because in some cases are regulated as instruments. You might need kyc. You need to understand what you're buying when you buy a mid coin. You're just purely speculating without even thinking about what you're buying or not. But I think that their intention of making Robinhood chain kind of like the preferred chain for RWAs I think is great because they bring distribution there, which is something that's required in this space, for this space to grow. So I was particularly very excited about the success of their launch and look forward to do things with them there as well.
- [53:26]
B
And to go back once more to why it is that you launched Solana. Sorry, why you launched your, your tokenized stock on Solana and Avalanche. I just wanted to ask, you know, because Robinhood, you may remember, had there was a little bit of discussion about their choice of launching an L2 on Ethereum rather than launching on Solana. And there even had been some talk that they had initially chosen Solana. And you obviously you, you work with Ethereum, but you for your own stock you chose Solana and Avalanche. And I wondered like if there was a reason you didn't choose to issue the stock on ethereum or another L2.
- [54:10]
A
So Solana first. We work with many chains, as you know, we've issued some assets first on Ethereum, like Biddle and we obviously like Ethereum and we started there. That's how our company started when there was nothing else. So we are originally like a pure 100% Ethereum shop. And over the years we've kind of diversified and support dollar chains. I think every chain has its own kind of peculiarities in terms of infrastructure. They have different ecosystems, et cetera. The reason we chose those two, obviously we have a long standing relationship with Avalanche. We launched our first tokenized fund with KKR on Avalanche long time ago. Know the team very well, have a lot of respect for them. What they built I think is pretty good. We also use them for getting our license in Europe. They have deterministic settlement, which is actually an interesting characteristics that the L2s don't have. That from a regulatory perspective could create problems because once you settle a trade, you have to report it and then if something happens after that, you have to unwind the trade, then that creates a problem and you're not going to have those on Avalanche or on Solana. And then the Solana portion was, besides us, also working very actively with Solana and the Solana foundation that, you know, the prop AMM technology from JAMF that we wanted to use together with JAMF as a market maker was actually developed originally in Solana. So the tech was already there. As I mentioned, we started with those two, but we don't want to necessarily only support those two. We're now looking at with the Avalanche team. And how can we enable trading on Avalanche as well, the same way that we're doing it on Solana. And we will continue supporting a variety of ecosystems.
- [55:50]
B
All right, well, last quick question. You have said before that Securitize plans to go shopping and make some acquisitions and I wondered if you had any thoughts on, you know, how to add to your current operations. So.
- [56:06]
A
Yes, so. So I think, you know, when you go public, you need to explain to investors what are you going to do with the money? Because otherwise they're not giving you money for, for no reason. We don't need a lot of, you know, we have like $400 million or something like that on the balance sheet now, plus liquid stock. We actually don't need that money to operate the business day to day as opposed to. So, so we, we're going to have, you know, excess cash as well as liquid stock that you should be able to do things. So the things we're looking at are things that are complementary to the business that we already do. So what else our customers need or what, what else our ecosystem needs to kind of make it grow and make tokenization more useful or make it for us, less frictionless to serve customers? You might remember we acquired MG Stobber a couple of years ago, a year and a half ago. That was an acquisition precisely to make the life of our customers easier because Fan Admin is very adjacent to tokenized funds. And then now by having the two assets, then we can actually serve customers much better because they only have to deal with one entity. So we're kind of looking at those type of things. But what else is complementary to what we do in the tokenization of funds as well as tokenization of equities? What other building blocks that is worth for us owning to simplify the life of our customers at the end of the day? And then the second portion is like international expansion. So what jurisdictions we don't have licenses or presence that we think are worth exploring options there? As I mentioned in interviews, I don't think buying like a direct competitor is really what we're looking at. After because I think we have what we need to have from that perspective, from a tokenization perspective, we're already the market leader. So I think it's more interesting for us to figure out how to expand the product offering and the capabilities and doing it through inorganic, which is faster. And if you buy a company that has established company and that has already revenues and tech, et cetera, you de risk the process versus just building it yourself and take a few years to do it. The other area we range is DeFi. We haven't touched about this a lot, but I think that there's going to be a convergence of RWAs and DeFi. Today, DeFi uses digital assets as collateral. As you know, they've had a lot of problems precisely because of the bad quality of collateral that gets hacked and stuff like that. And I think that there is a convergence that is happening on, you know, RWAS and DEFI that is particularly interesting. And we work with a lot of DeFi companies with AAVE, Camino and others. But there's kind of like stuff there that is closer to, let's say, the RWA origination that we've been looking at as well.
- [58:47]
B
All right. Well, Carlos, it has been great catching up with you. Thanks so much for coming on Unchained.
- [58:52]
A
Well, thanks for having me again. It's my pleasure.
- [58:54]
B
And thanks to everyone for joining us and we will catch you next time. Nothing you hear on Unchained is investment advice. This show is for informational and entertainment purposes only, and my guests and I may hold assets discussed on the show. For more disclosures, visit Unchained. Crypto.com.
- [59:23]
A
Sam.