About Haseeb Awan

Haseeb Awan is a Financial Technology (FinTech) entrepreneur with a track record of two successful business exits, raising over 100M in venture capital & growing the customer base from 0-4 Million users & expanding to 15 countries across 4 continents within 18 months. He has been included among the top 100 influential people in FinTech globally, won multiple international awards, wrote for and is mentioned on multiple international media & frequently speaks at international conferences & government committees. He is Engineer by degree with Master’s in Engineering Management & also has studied Financial Markets from Yale University & holds Project Management Professional (PMP) designation. He is also a Y-Combinator Alumni as well Next Founders & couple of other associations. He is among the earliest entrepreneurs in blockchain space & personal investor in 30+ companies & advisor to over 10 companies.

Stablecoins – A Complete Guide

Preface

Bitcoins was a hope of beacon in the world of crazy inflation that’s impacting every one. Since bitcoin isn’t tied to any country monetary policy it’s only worth what believe it to be worth it. Though it has consistency outperformed every legacy asset on a longer time horizon, it’s still far from mass adoption and one the major reason is price fluctuation.

Here are some of the bitcoin price crashes

Bitcoin historical correction

2017 was the craziest year for cryptocurrencies where we saw crazy gains of 10,000X but 2018 wiped off everything. This led to party moment for few but a nightmare for many.  Fingers on the argument that bitcoin as a storage of value were raised & classic example of tulip mania was back in the market. It’s hard to argue with the pessimists because bitcoins doesn’t have any underlying fundamentals behind it. More & more negative media however has attached a taboo towards this revolutionary technology through which money can be programmed.While I personally have seen crashes multiple times over last 7 years, it’s tough to see market take a toll like this. Overall I am bullish on the cryptocurrencies however sanity has to prevail. It’s hard to deny the advantages cryptocurrencies provide but price volatility is keeping them off field for many serious players. While it’s exciting to see the upside swings, not everyone has an investor mindset. Since majority of the countries regulations are hostile towards cryptocurrencies, volatility keeps the institutional investors further away.  There has been one thing certain about bitcoins & that’s volatility. There are many funny memes & jokes around but the following one is my favourite

A boy asked his bitcoin-investing dad for 1 bitcoin for his birthday.

Dad: What? $15,554??? $14,354 is a lot of money! What do you need $16,782 for anyway?


Bitcoin trader

There is an interesting case of token velocity which is super high when someone is using it as the currency and doesn’t want to hold. In case of cryptocurrencies, if you’re holding for long you’ll get a HODLER ( Hold On for Dear Life). HODLERS are generally regarded as highly respectable in the industry because they’re considered to be in for the long vision rather than flipping. Everyone loves to HODL, however the scary swings aren’t for the faint hearts. 

Read more on HODL here

Welcome Stable Coin which does take care of the volatility problem by being pegged to a fixed value such as fiat or commodity. This is the answer to every day users who don’t want to be exposed to price movements. It does fulfil the basic functionalities of money which are

  1. Means of exchange  
  2. Unit of Account
  3. Storage of value

Transaction in cryptocurrencies have been complicated due to fluctuations & stable coins are supposed to put a stop to that. It’s almost impossible to transact in exact amount. Stable coin prime job is to protect the immutability of the transaction value. This also makes a strong case for cryptocurrencies and graduates it into a mature storage of value. 2018 has been a good year for stable coins which mushroom growth of stable coin provider. Everyone have their own way of approaching the solution but majorly they can be divided into two which are further subdivided into two. The two solutions are first divided by the way they’re designed and then by the virtue of their functionality. Overall they serve the same purpose, provide stability in the price of the user-desired assets.

There are two major types of stable coins philosophies

#1 – Centralized

#2 – Decentralized

Centralized coins are the one where there is a centralized entity keeping possession of the assets while in decentralized case, it’s generally a smart contract stabilizing the value.

Centralized

Centralized coins are issued through a financial institute who has the custody of the asset backing them. There are two major types of assets which are considered colletral while issuing stable coin

  1. Fiat
  2. Commodities

Fiat backed

This is the most common type of coin where the stable coin is issued against fiat currency by a centralized financial institute. Here are the features of fiat-backed stable

  • It’s value is pegged to a fiat currency such as USD in a fixed ratio such as 1 stablecoin would be equal to 1 USD. USD is the most common pair but other pairs are also available.
  • Financial institutes at any time is in the possession of the fiat currency backing the coin.
  • Transaction may run off-chain or it’s own private or dedicated public chain
  • Total collateral should be equivalent to circulating supply at any given time.

Technical wise, this is the most simplest way to issue a stable coins since the financial institutes just issues coins based on the amount they’ve. They are tradeable on exchanges and redeemable by issuing financial institutes. Trust in the entity backing is super important. Financial institutes does have an incentive in increasing the fiat backing because they can earn interest on the money without any risk. Even at 2% interest for 1 billion deposit, they’re earning 20M/year risk free. Cash handling cost is much lower than this making it a cash cow the financial institute. Cost involved are generally occured by the financial institutes anyways. We’ll see more and more financial institutes issuing similar kind of stable coins.Due to centralized nature, if the financial institute backing the coin has any problem, it’ll have directly impact on the the stable coin issued by them.

Commodities backed

Similar to fiat, there are stable coins which value is pegged to commodities they’re backed by. Most popular form of commodity is gold followed by silver, but we’ll be able to see other precious metals & petroleum based coins as well.

  • It’s value is pegged to an asset such as gold in a fixed ratio such as 1 stablecoin is equal to .01 ounce of gold. Gold is the most popular but silver and other exotic commodities are also being issued.
  • Financial institutes at any time is in the possession of the commodities  backing the coin.
  • Transaction may run off-chain or it’s own private or dedicated public chain
  • Total collateral should be equivalent to circulating supply at any given time.

Technical wise, it isn’t difficult either but the fluctuating price of underlying asset does require financial management and generally the storage cost is higher as compared to fiat. Commodities which are generally supported by stablecoins has to be fluid and tradeable on exchanges. They are tradeable on exchanges and redeemable by issuing financial institutes. Trust in the entity backing is super important. Having higher deposit strengthen the balance sheet which empowers the financial institute be leverage. Similar to fiat-backed stable coins, we’ll see more of commodity based coins as well.

Decentralized Stablecoins

Decentralized coins are not controlled by a single entity but more by code that stabilizes the value. There are multiple 3rd parties who have to participate in order for the value to be stable.

Decentralized stable coin

Cryptocurrency backed

Most common form of decentralized stable coin are backed by cryptocurrency. There isn’t major difference between cryptocurrency and fiat backed stable coins in terms of logic but due to nature of the transaction everything is done through smart contract & is on-chain. User put up their funds as collateral which is generally significantly higher than the stablecoin issued to cover up in case there is a flash crash. Despite higher loan to value, there are still liquidation events which even has more impact on the price and has lead to black swan events.

Here are some of characteristics of stablecoins

  • Value is pegged to fiat but it’s pegged by a cryptocurrency
  • No centralized body is in control of collateral but it’s locked through smart contract & is executed on-chain
  • There are additional supplementary instruments and concept of oracle which keeps the price stable. These oracles have act more like a bounty hunter which is looking for liquidations and make a small profits whenever it is able to execute properly

Though it’s very similar to any centralized stablecoins in terms of mechanics, risks are far higher. Biggest risk is code exploitation which can lead to collapse of entire system. Though there are constant audits, but still history is full of breaches and hacks. Here the stakes are much much higher. Smart contract doesn’t execute by itself but requires a third party execution so the system has to rely on them. If they fail to act in time, liquidations might not happen in time destroying the peg value.  Easiest option is to have a very high value of collateral with respect to loan however it may make tit unattractive since investors are looking to leverage up not the other way around.

Seigniorage (algorithmic)

They’re similar to a Decentralized Autonomous Organization ( DAO) which controls issuance and pricing, which are referred to as seigniorage-style (or algorithmic) stablecoins. They’re completely digitalized and non-dependent on any collateral whatsoever. Supply, demand & target price is controlled by the code which makes it truly decentralized and no regulatory oversight. Both of these features increases its ability to scale as compared to counter part solutions since there are not any additional collateral requirement with supply increase

Here are the major features

  • Full decentralized,
  • High scalable,
  • Executed on-chain,
  • Cheaper to maintain the price immutability due to lack of collateral requirement

It operates on the basic principle of supply and demand where coins are issued if there is enough demand & destroyed if the demand drops. This issuance and destruction keeps the price stable. Generally if the price goes down. Bonds are issued and if the price goes up seigniorage shares are issued. This is most exciting form of stablecoins but haven’t been in production yet.

There are also creative proposals on how to achieve stability while keeping the decentralization property and it’s a work in progress.

Concerns:

  1. Stable coins aren’t stable

There hasn’t been a single example of stable coin that have been successful at keeping the exact peg for extended period of time. Multiple times they’re traded few percent above or below their actual value. Theoretically they’re great but they’re prone to market fluctuations as well. In one case, value of a stable coin has dropped by 70%.

  1. Do they bring stability ?

Bitcoin does have a connection with alternative coins when it comes to price movement so generally the overall market doesn’t move much with respect to  each other. Bear and bull markets are correlated. Stable coins adds a different dimension to market pricing where people can bring in fiat and take a short/long position making the market extremely unstable. So with stable coins, the term shouldn’t confused with the fact that it’ll bring stability to the market. It just keeps the value stable for the holder of that specific coin

    3.  Vulnerable

It is a new concept and haven’t been tested over long period. There are chances that one of them will break causing a spiral downward market crash. It has happened in the past but they were not as popular at that time having minimal impact. Even decentralized coins are prone to hacks Stable coins generally require us to trust a central third party. In case of centralized coins, there are always risk of custodial going illiquid.


Pursuit to perfection

Cryptocurrencies basic moto is decentralization but there isn’t a fool proof system to get  a perfect solution. We’re far from perfection but we have came a long way. Stable coins are on the rise with over 2 dozens companies working on the solutions. Every has a unique approach and hopefully we’ll have a perfect solution soon. Stable coins are the holy grail of crypto and is a necessity piece in the puzzle. With extreme volatility in cryptocurrencies, it would encourage people to get in and out of the market whenever they want. None of the solutions are reliable so they’ should be only treated as an ad hoc solution. Right now it’s limited to startups, but bigger financial institutes will move into the game and I won’t be surprised if countries start issuing their own digital currencies on the principle of cryptography. Rome wasn’t built in a day & future won’t be either. It’s an evolution towards better & better

2018-12-17T04:38:56+00:00December 19th, 2018|

HODL – Worse Use Case ?

HODL is a term that got popular through a forum post where a person claimed to hold the bitcoins forever once the markets crashed. HODL stands for Hold On for dear Life on in simple word never selling them. Now either it was intentional or unintentional, HODL did become famous in the cryptocurrency industry. 

 King Leonidas from 300

Out of the total 17M bitcoins in existence, 9M haven’t moved in the last 12 months. This represents around 53% of the total bitcoins but I am confident that this number is close to 75% in actual. It’s not possible to get the data on individual users who store their bitcoins on the exchanges

Source : Bitinfo Charts

While HODLing does promote the message of hope & avoid capitulation in bear markets, it isn’t right for the network bitcoin. Bitcoin network runs due to support from miners who mines bitcoins in hope of getting bitcoins in return.

If the blocks are solved exactly 10 minutes apart, all the bitcoins will be mined by 2140 which is 122 years from now. Margin of difference actually would be +/- 10 years.

I suspect if we go that far but for a moment let’s consider we did. In that case, there are no more bitcoins to be mined so miners make money by validating transactions. Now imagine every one is HODLing and there are no transactions happening at all. There isn’t any incentive for miners to exist because the economic incentive has collapsed. 

Bitcoin network strength depends on the hashpower supporting network and with the departure of miner, there isn’t any network or just a weak network. HODLing is celebrated & cheered upon in the industry, however it’s a threat to the fundamentals of cryptocurrency.  

If you consider bitcoin a instrument for Storage of Value then HODLers are the #1 or Most Valuable Users ( MVP) for bitcoins. 

While HODL certainly make sense to avoid the panic attacks in tough markets, it doesn’t make sense over life time of any other asset that doesn’t generate dividend. Real estate being the #1 fav HOLDing asset. 

So while times are time, don’t panic & when times are great, it’s always good to take off some profits off the table. Capitulate & HODL both are bad from economical point of view 

What’s your strategy when the times are great or when they aren’t that great !

2018-12-14T14:26:09+00:00December 15th, 2018|

Blockchains Tourists – Time to Pack up !

2018 has been the worse year for blockchains if you look at the price. Unfortunately, measurement of success in this industry has been measured by market cap. It has roughly lost 85% of its financial value within12 months which may be among the worst performance for any asset in the modern history. There are many other indicators showing all time worse situation for the industry. Question is it all over for blockchain or we can recover from here.

Capital preservation is the #1 reason behind success of wealthy people. If you look at the chart below, it shows how much gains are required to make up for the loss. Summary is It’s much difficult to make up for a loss.

Gains required to makeup for the loss occured

If you look at the history of bitcoins, it has been pronounced dead 100s of times. I’ll do a blog post on death announcements vs price action some later day. Bitcoin has lost 85% or more around 5 times now in last 6 years. Defying every traditional law of finance, it has however recovered strong every time. This exponential rise isn’t alien in the tech world and hockey stick pattern is fairly common.

I got into bitcoin purely because of FOMO 7 years ago. I couldn’t resist staying out while watching everyone around me flaunting about their crazy gains. For me it was unreal & there was no chance I was going to lose. Sadly, I bought my first bitcoins at All Time High (ATH). Bitcoin crashed the very next day losing 50% of the value. I’ll be honest I was really upset over what just happened and pessimism was at all-time high. Fear of losing everything almost made me sell it, but then I figured I’ve already lost 50%, what if I lose the another 50%. Bitcoin at that time was already up by some crazy 12X or so, so there was a hope it can do it again. That was almost 7years ago when bitcoin dropped from $260’s to $40’s.

Looking back, it seems very easy to make the decision toHODL, but it’s not an easy choice when you’re in that moment.  It’s very simple to classify the early bitcoiners as lucky but as a matter of fact, they’ve scars all over them. Perseverance in the end paid off for majority of them, but it was super difficult back then.

Bitcoin is lucky enough to have a cult following composed of libertarians, economic freaks & tech geeks who’re in for ideology rather than monetary benefits. This bear market has little impact on them. While everyone is hurt, they’ll continue to BUIDL. With every price rise, there has been a new set of people who come in but as things start to fall apart, they’re the first to pack their bags. In case of a disaster, it’s the tourist who leave first. Habitants stay and focus on rehabilitation.

Photocredits ” by James Nachtwey

Cryptocurrency is going through its tough time when it comes to valuations however adoption is all time high. There hasn’t been a time in history when there were this number of intelligent brains working on brilliant ideas. I’ll call it crypto winters where majority of the project don’t have enough resources to survive. It would be a litmus test that’ll differentiate the boys from men. Let’s see how long this survive & most importantly who survives.

Terms Used:

  • HODL – Hold on for Dear Life. A term very popular referring to holding on the bitcoin regardless of whatever is the price.
  • BUIDL – Derived from HODL meaning Build for Dear Life. Meaning keep on building regardless of whatever is the price
  • FOMO – Fear of Missing Out which makes you take an irrational risk without any due diligence in fear of missing on a massive potential upside
  • ATH – All time high means you’re the sucker who bought at a price at which you may not be able to offload.
2018-12-13T21:54:12+00:00December 11th, 2018|

Security Tokens: 20 Important Things you need to know (Detailed Guide)

What is a security token?

Security Token Offering can be best defined as a “Public-Private” security offering that utilizes regulatory body framework such as Securities and Exchange Commission ( SEC ) or Ontario Securities Commission ( OSC) to offer investment products via blockchain technology.

Preface

A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose. A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose.

STOs would be a process to move traditional assets to blockchain & evolving the way assets are issued, traded, held & transferred. It’s a work in progress with blocks built around it to support the ecosystem.

Background of Security Tokens:

Blockchain, cryptocurrencies, bitcoins, smart contracts aren’t alien terms anymore. Information is at all time high but there is a fair bit of noise on the benefits with thousands of companies finding the use cases for this revolutionary technology. While there has been interesting technical progress, there hasn’t been a killer case which would attract industry wide adoption. Exciting news on how the industry is progressing is a weekly affair but it rarely has put a dent on world economy more than pure speculation. Bitcoin did emerge as a libertarian movement with a promise of banking the unbanked, revolution against the status-quo, decentralized system with no manipulation but so far there is very little to show. Despite all of these there isn’t any reason to write-off this industry, because we’re still in infant stages. It’s a work in progress for last 10 years & it may take maybe a decade before utopia dream is fulfilled. Digitisation had a lot of impact on our daily lives in multiple sectors but financial industry is far from perfection when it comes to frictionless banking. I still have to go to bank to do a wire transfer & it takes couple of days for funds to get to other end at a exorbitant cost. Counter-argument would be that the banks are already digital & majority of the people don’t go to the bank anymore, so we’re on the right track. I take cryptocurrencies as an experiment lab or a sandbox where ideas can be tried, tested & could be launched into masses if successful. Current regulatory environment is fairly conservative when it comes to investment product or any other financial instrument. It’s either due protection of consumer or status-quo, that’s a different discussion, but it is what it is.

We’ve seen the exponential rise in cryptocurrency valuations, institutional interest through acquisitions & whopping billions dollar of raise in Initial Coin Offerings ( ICOs). ICOs could be simply explained as pre-prepaid credits in a game that was sold before the game was launched. It was fine till recently there were issues with this model.

  1. The game was never launched
  2.  these credits were trade-able way-before game launch leading to speculations & hype.

That ended about 10,000X returns in few cases & 99% loss in value from All Time High(ATH) in extreme cases.

Fear of Missing out ( FOMO) is a common term in which a person gets into a deal without due diligence because time clock is kicking in. Majority of the time it doesn’t end well. This FOMO lead to retail investors buying useful tokens of every kind. Doge currency was created to make fun of these tokens but that lead to 1.5B in valuation while the creator clearly mentioned that it’s a joke. In an another case a person clearly mentioned that he is creating a useless token with no use however people still bought them. Around that time Ripple CEO was worth more than
CEO of Facebook. While these tokens were marketed along the lines of prepaid tokens, they clearly weren’t. This is where Security Exchange Commission (SEC) & other regulatory bodies jump in.

Despite the legal language used in building analogies around network usage, setting up non-profit foundations in friendly offshore jurisdictions, taking shelter behind fancy buzzwords such as open-source software movements, decentralisation, blockchain 99% of them are securities & I’ve doubt about the remaining 1%.

There is a famous duck test,

“If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck”

This term was popularised in the US during the cold war in 1950 when Richard Cunninghand Patterson Jr, US ambassador to Guatemala at that time accused Jacobo Arbenz Guzman government of being Communist. These were the exact words
“Suppose you see a bird walking around in a farm yard. This bird has no label that says ‘duck’. But the bird certainly looks like a duck. Also, he goes to the pond and you notice that he swims like a duck. Then he opens his beak and quacks like a duck. Well, by this time you have probably reached the conclusion that the bird is a duck, whether he’s wearing a label or not”
In 1946, Supreme Court heard a case that set the precedent on what’s a security

  • It is an investment of money
  • There is an expectation of profits from the investment
  • The investment of money is in a common enterprise
  • Any profit comes from the efforts of a promoter or third party

If either of the above points satisfies during a financial transaction, whole new set of requirements kick-in. Entity is bound to register with the Security Exchange Commision ( SEC) regardless of whatever they think they’re. SEC only however generally looks over cases that involves US entities but other countries follow similar guidelines in their jurisdiction. Despite billion in funding ICOs have very little to show. Lack of investor rights, governance structure & geographical restrictions people are left with these useless tokens, but SEC has intervened in multiple cases leading to fines, capital return & other punishment. I expect them to rise, however despite all this drama, there is a very good case for issuing tokens that are actually securities but still have the benefits that a token provides. There is where Security tokens come into play which will have the legitimacy of a Initial Public Offerings (IPO) but flexibility of ICO ( Initial Coin Offering ). Welcome Security Token Offering (STO).

Business Case

There is a capital scarcity when it comes to private markets for small & medium business (SMBs) . Just to talk in terms of numbers, there are 28 Million small business in the US vs 3671 publicly traded companies. Number of public companies is decreasing year over year & this trend will continue to drop due to complicated nature of managing public market listings. SMBs are the backbone of any country economy & 70% of new job creation is due to them, but still they suffer growth due to lack of capital available. There are Venture capitalists, predatory lenders, angels & limited public after JOBS act, but that’s still a very limited segment. If they are able to access debt in return for a fractional ownership in the firm, that can be traded back & forth, it will get them out of the capital drought. It could be debt, equity, convertible note or combination of these but important point is access. This could lead to trillions of dollars in economic benefits.

Real estate is considered to be the best & safest asset class however it’s expensive to own. We’ve Real Estate Investment Trust ( REITs), but they’re still fairly out of reach for the masses. Real estate globally is worth around 265 Trillion but only 1% is accessible through these complex REIT structures. Security Token offering can remove lot of overhead making it flexible, simple & convenient for average investor to participate in an potential economic upside event. Lot of investments currently require the investor to have an accredited investor status despite there isn’t any relationship between IQ & wealth, but net worth does serves as a barometer for qualification of investor acumen. There is an argument that it’s not an acumen test but more of a ability to sustain loses. If that’s the case why isn’t a test before entering a casino or any high-end luxury store. No one gets inquired of his/her financial health at the gate while entering these establishments. If these high-risk or luxury establishments aren’t bound to do a background test on the consumer ability, why should a potential upside event be restricted ? Regardless of whatever I think, it’s a law which I respect & abide. This is where I think Security Tokens will make a lot of sense since they can solve major issues around public markets abiding with the current financial structure yet flexibility of tokens.

Here are the 20 major reasons to make a business case for Security Tokens to exist

No.Content
1.Liquidity
2.24/7 markets
3.Fractional ownership
4.Immediate settlement
5.Elimination of 3rd party services
6.Real-time ownership reconciliation
7.Cost reduction
8.Compliance automation
9.Expansion in the offering options
10.Custody
11.Vested Stocks
12.Pedigree proof
13.Preferential treatment
14.Infungibility
15.Debt restructuring
16.Global Assets
17.Larger investor base
18.Stability
19.Front running avoidance
20.Ownership Proof/ Title

1.  Liquidity

90% of the assets in the world are illiquid. It’s not possible to get in/out quickly without accruing significant slippage and/or paying a significant fee.Though liquidity is referred to as speed at which you can trade an asset, however it’s much more than just the speed in practice. Another parameter is also cost. Example is that you may be able to sell your house within 24 hours but that’ll be generally classified as a distressed sale & will lead to a loss in comparison if you wait. Price difference delta between distressed sale & regular sale is the liquidity discount that you’ve to offer. Other impact of these sale is that it lowers the bar for fair market value ( FMV) of similar houses in the vicinity.

In comparison you can trade Microsoft stocks at market value during business hours without having any major impact on the market prices by paying a very small fee. Now there are fractions if you’re a whale and cause market crash. Take this further with cryptocurrency which you to trade even a fraction round the clock.

Total world assets are 700T, but less than 10% of them are liquid. If Security Tokens are able to turn them liquid, there would be trillions dollar worth of economic activity generated.

2. 24/7 markets

Majority of the traditional exchanges operate between business hours such as 8 – 4:00 am in the morning with respect to local time zones. They’re closed during the holidays so if you want to make a move while having Saturday dinner, that’s not possible. Tokens on the other hands are tradeable 24/7. Due to the nature of STOs, it would be possible to trade them round the clock even on Christmas eve.

3. Fractional Ownership

It’s impossible for 95% of the world population to diversify into more than 2 investment classes due to high unit costs but if there is a mechanism to buy a small ownership, it’ll attract a whole new set of investors effectively increasing liquidity & raising premiums. Now in case of equities, there are options to buy them from public markets & similarly you can buy publicly-traded or private market RIETs but an estimated 99% of the real estate assets isn’t available through either of these tools. There would also be ability to make profits when the markets are going down rather than just buy & hold strategy and capture the gains with appreciation. Retail investors are unable to balance their portfolio to de-risk their investments across multiple assets, but availability of vast set of liquid assets would allow them so. Ultimately, it’ll lead to more efficient markets

4. Immediate settlement

There is a time difference between when the actual trade is executed & settled. Example is buying a house today but paperwork, transfer of funds & ownership might take 4-6 weeks. Even in stock exchanges, though you’re able to trade immediately, it’s usually 2 business days (T+2) before the owner get his hands on the purchase. It used to be 3 days but reduced to 2 in 2017. With STOs there should be a possibility of execution & settlement at the same time.

5. Elimination of 3rd party services

Blockchain has the potential to increase settlement speed for securities, but it’s more complicated than a comparison to cryptocurrencies. The degree to which these processes can be automated through interoperable smart contracts will determine the gains in settlement speed. There is a moral hazard with the usage of these companies since they can manipulate with insider information & little oversight on governance matters. With an open system, there’ll be a more transparent, fair & balance playing field.

6. Real-time ownership reconciliation

Even though the trade Trading books are balanced by the end of day. It’s costly & not optimistic. After stock issuance, there is a bundle of paperwork that goes in producing friction that leads to inefficiency. Contractual features including but not limited to liquidation preferences, depositories and depository participants management and drag-along rights etc could be easily calculated making it simple for the participants to decide their risk-reward ratio. Through STO, there would be a chance to have a real-time asset reconciliation in a transparent manner.

7. Cost reduction

There are massive costs associated with operating the exchange which could be reduced by having a lean-operated STO exchange. These smart contracts will reduce the complexity, costs and paperwork with managing securities (collecting signatures, wiring of funds, mailing of distribution checks, collection of W-2s, Sending K9s, etc).

8.  Compliance automation

KYC & AML policy are the two most basic compliance things any financial institute has to take care of. There are two major frictions in the current system

  • Legal Restrictions
    Financial institutes have to filter out the people who’re ineligible to be involved in the transaction mostly due to regulation. These restrictions could be due to buyer financial profile, industry, jurisdiction of transaction/seller/buyer or past history etc. Failure to abide can lead for serious repercussions. It slows down the onboarding process.
  • Complex chain of stakeholders
    There is a chain of stakeholders who’ve to be on the same page during the transaction. Lawyer, government, accountant, exchange is to name the few and all of them have their own of reconciliation which leads to inefficiencies in terms of cost & time. Unless & until all of them can match up their record, it doesn’t go through.

With blockchain, every transaction can be downloaded or broadcasted in a standard format in real time which should be able to make this process more efficient. Customers can get an ID that is verifiable by any party in real time at time of settlement. Currently, you’ve to create an account in every exchange that you use but in future you only provide ID if requested.

9. Expansion in the offering options

Currently there is a very rigid set of requirements to be listed on these exchanges, but in future it might change because companies would be able to innovate on compensating their investors. Staking, proof of work, token burn, forks are few of the unique innovations that has been used to reward investors by the current token offerings.

10. Custody

Financial institutes are generally a storage for your assets and issue you I Owe You(IOU). This increases the risk just if incase a FI goes into default. Beauty of cryptocurrency is that owner can hold the private keys & no 3rd party can seize them. With STOs, investor would have ability to control and take custody of the tokens. He isn’t obliged to store them with any 3rd party if he doesn’t want to. In unforeseen condition such as war, he can transport them himself.

11. Vested Stock

There might be interesting structure for the long-term holders if they lock up their tokens. This effectively reduce the sell-pressure & encourage the company to thing big & focus on long term strategy. Firms can issue more stock in shape of interest to vested folks where if you lock the token for suppose 12 months, you can 2% in extra tokens towards end of year.

12. Pedigree proof

It’s really tough to invest into the top funds or private REITs because they keep it private. Mostly it’s because they don’t want to deal with the headache of onboarding & dealing with new Limited Partners or backers. It’s a relationship play. In regular markets, it’s hard to establish trust & have inroads if you’re trying to get into these funds. Through STOs an investor would be able to prove that he already owns ABC stock for 5 years & that might break the ice. As an investor, I do have to sell companies on taking my money if there is a good interest. I usually do that by telling about my portfolio or testimonials from the founders I’ve worked with. Through STOs I can just show proof of ownership to build the pedigree. A company can also put a restriction to raise money from people who own specific tokens already to maintain the pedigree. Ferrari is a good example of maintaining the exclusivity since they don’t generally sell it to anyone & in few cases you’re required to show a track record of ownership before getting special editions.

13. Preferential treatment

There is a big disconnect between company stock holders & customers. If you work for a company they generally have perks for using their own products, but in case of stockholder no such perks exists. Now, through STOs it would be easy to establish proof of ownership & be entitled to some perks which can be restricted by how long you had them & point. I may buy stocks of airlines I travel on to get into the line first or utilize a dedicated lane at grocery store. Through STOs, businesses will be able to encourage their users to hold onto their tokens which results in stronger brand following.

14. Infungibibility

In private capital, there are different classes of shares with “common” & “preferred” as being the most popular however there is option to have exotic stock structure. In public markets, it has to be the same but through STOs, there is an option to create different STOs for the same asset well suited for the investor type. Commonly investor is either looking at appreciation play or seeking dividends. Ideally he wants both but that isn’t possible in a practical world. Company can separate both type of assets by issuing two types of STOs at different price. You may want dividend so you can purchase stock at a different price than someone who just want to hold for long term. At the moment, it’s somehow built into the price but a clear separation would make much easier for retail investors & help company with their growth plan.

15. Debt restructuring

Debt financing have sunk ships for many businesses. Delay in permits or any other hurdle that temporary caused borrower to default on payment has lead to disaster for many. It’s not an ideal outcome for neither the borrower nor a lender however options are limits. Through tokens debt can be restructured very easily automatically. Imagine you gave someone a loan but he is unable to pay the payments such as in house cases. In this case the bank takes over the entire asset, but what instead of that, bank keeps on adding the default payment towards the loan. In STOs, upon debt issuance, tokens of the assets are pledged towards the loan & in custody of the lender. Effectively borrower is buying back those tokens. If borrower is unable to buy back token at a scheduled time, lender will repossess tokens worth that missed payment providing better breathing space in tough times. It’s fairly complicated in current scenario but through smart contract all of this enforceable & Security Tokens would be really effective at this.

16. Global assets

Access to majority of the assets is limited by geographical limits. It’s impossible or very difficult to invest in Africa from Asia for a retail investor. Approximately 97% of the global assets are inaccessible for entities outside the geographical limits. Security Tokens do eliminate that by empowering companies globally to build an STOs and raise capital. There would be less requirements to issue STOs.

17. Largest investor base

In order to trade on New York Stock Exchange ( NYSE) or NASDAQ investor has to go through a set of stringent requirements which crypto exchanges on the other hand are able to onboard customers globally with excluding sanctioned countries of course. STOs will be able to open doors to these assets to investors globally. This’ll lead to more healthy competition.

18. Stability

Every company wants to list in NYSE or NASDAQ despite them US not being their biggest market. This being said, US economics has impacts on the company valuation which is totally uncorrelated to company’s operating jurisdiction. With Security Tokens, there would be a global set of investors with different sentiments leading to more stabilized markets.

19. Front running avoidance

Front-running also referred to as tailgating is the practice of a broker or trader stepping in front of large orders to gain an economic advantage. It’s a prohibited practice of entering into an equity (stock) trade, option, futures contract, derivative, or security-based swap to take advantage of a confidential information that has impact on price. Multiple times bad actors get away with it due to lack of data availability required to establish a proof. Another reason for this is unfair access to market for different participants. Blockchain treats everyone the same & the books are open, reducing the chances of front running.

20.  Ownership Proof/Title

Whenever you’re acquiring an asset, you generally go for a title check or get a title insurance to make sure the asset is free of any liens or disputes. Blockchain can track back the ownership transfer from inception without the fear of record being forged.

Conclusion:

Majority of the ideas here are not solely linked to tech but also are restricted due to regulation. I consider STOs as being the sandbox for next generation of Securities. They might eventually be offered by traditional exchanges or can operate totally separately where companies graduate from these STO exchanges into the top exchanges.

If Bitcoin is programmable money, then Security Token is a programmable ownership. They do add improvement to current security industry which may be frowned upon status quo but eventually be able to prove it’s worth & get institutional support.

Security tokens would new way to build, fund & grow companies & it’ll happen quicker than many people anticipate.

2018-12-08T17:20:06+00:00December 3rd, 2018|

Justifying Microsoft’s biggest bet since inception

Microsoft just announced to acquire LinkedIn for $26 Billion which is almost 50% higher than the public market valuation. For the sake of comparison, Google purchased YouTube for $1.65 billion 10 years ago. Facebook paid $715 million for Instagram in 2012 and $19 billion for WhatsApp two years ago. (more…)

2018-11-23T22:26:55+00:00June 15th, 2016|

One line that changes your approach

In old times Kings had strange requests and they had advisors whose jobs was to fulfill them. Failure to do so results in punishments that varied from imprisonment, demotion or in severe case even death penalties. (more…)

2018-12-08T17:20:20+00:00March 29th, 2016|

Important vs Urgent – Who takes the lead ?

Time is the most limited commodity that any successful person have & time management is one of the most sought after skill for majority of us. Urgent & Important are the two major parameters used in prioritizing where to focus our resources on.

Eisenhower matrix is ever-green cheat sheet for any one looking to help prioritize their day. Biggest issue we struggle with is “urgent” taking priority over “important”.

Eisen Hower Matrix

If you give some one two tasks with following
– Task A is urgent
– Task B is important

99% of the times, they will go with the urgent one. There could be multiple reasons for this behaviors, but following two are the most common one.

– Urgency creates emergency giving you the adrenaline rush for the day
– It is easy to get motivated while accomplishing a task that is time driven because it could be quantified

The most urgent decisions are rarely the most important ones.
– Dwight D Eisenhower

However, while focusing on urgent task, we oversee important tasks requiring our attention. It could be a business goal as well as personal goal. Such as joining a gym, going on a vacation, spending time with your family, calling an old friend or be by yourself. Even in business, we mightn’t have updated our website or done a SWOT analysis or the most important one – sitting down with the team over dinner.

So next time, there is a choice between Urgency or importance, chose wisely!

2016-03-21T16:13:11+00:00March 21st, 2016|

It’s March – but interest rates are stable

Yesterday, FOMC announced that they are not making any changes to the interest rate. Later last year, they made an upward move after almost a decade.

They also changed their stance on frequency of changing the interest rate. Earlier they indicated that they would change interest rate 4 times in 2016, but it was not well received in the market. Now they have backed-off to resonate with their counterparts. While it’s not as exciting, this will bring stability to the economy. Stable interest rates are boring but it is good in the long run. Feds assurity about the stable interest rate will bring confidence to investors so they can plan and forecast better. Low interest rate acts like a catalyst to economy by encouraging people to rotate the money and invest rather than just leaving it in fixed deposit.

The new stanceis similar to what European Central Bank ( ECB) and Bank of Japan are taking to boost their economy. This however would affect the USD strength against other currencies. People will prefer to invest in alternative assets, making USD less in demand as an asset class. There are both pros and cons of weaker currency, but overall there are always advantages for a stable currency. So if you are an importer, you should be unhappy and if you are an exporter you should be happy. Historically, Fed movements can be well predicted in advance, which is a good indication of them being more realistic with the economic condition. In near future, we should be assure that interest rates are going to be stable and FOMC meetings would have no exciting news to share.

2016-03-17T20:02:34+00:00March 17th, 2016|

Privacy == Liberty

I recently had an honor to meet Mike Janke ( Co-founder & Chairman Silent Circle – Encrypted Communication Firm), which prompted me to write over this issue.

Mike Janke - Silent Circle

From Wikileaks to recent open letter by Apple in response to request for a backdoor in iOS , there are arguments on both sides on privacy and surveillance acceptability. While there is no denial that better information leads to better decision making which will be helpful for the agencies to protect us, however it might violate the citizen rights which includes privacy. There is a reason why we have private house rather than sharing a big house. While I live in an apartment and like people around me, most of the people have economic reasons to live in shared housing.

People in favor of allowing security agencies to access personal data are making a very strong argument that if there is nothing wrong, why do I need to hide? As popular as it looks like, this is not as simple as it looks like.

Many people have camera or stage phobia. As perfect they are in their job, when asked to perform the same job in front of people, they get nervous or are unable to reproduce the same results as they would individually. This is not because they are bad at what they do, it’s because of the external pressure that they have to be extra cautious. Now take the same example and apply it on your daily life.

Imagine a person watching everything that you do; Every word you spoke and every action you did is recorded in an archive which is saved for decades and is accessible by a person unknown to you. How would you feel about it?

Not taking it to an extreme where you are also observed while you are singing in your bath tub, but imagine being watched in your living room. While there is nothing wrong about watching a hockey game with your friends at your home, but would you be able to enjoy it with a camera over you? Taking example of house might turn off a lot of people, even recording the conversations at a dinner-date is totally awkward as well. Next time when you are having a conversation over a phone, imagine an unknown 3rd party listening to it or even worse recording it.

Here is Obama portions from SXSW’16 on encryption

Cell phones, laptops are very personal now and we spend most time with them than any other living or non-living object. It’s no longer the phone that the entire house shared to communicate, but it’s like a private diary.They possibly have the most amount of data or attachment than anything else and allowing it to be watched all the time makes me uncomfortable. Law enforcement is a difficult job and I am thankful to all the wonderful people who are working day and night to ensure our safety but liberty is what allows us to enjoy it the fullest. There should be no absolute stance from either parties & I hope there would be a good balance between liberty and security as we transform into a more progressive society.

2016-03-15T18:18:46+00:00March 15th, 2016|