DAPPCON 2025: How Decentralization Enables Compliant Fundraising - Christoph Jentzsch

Transcript

[Applause] One second. Yes, is there. Okay. Thank you very much. It's great to be here again. Um I think I've spoken at almost every Devcon so far, but uh slides are changing and we are developing. So I will today present about tokenize it and but the topic is today about how decentralization enables us to do compliant fundraising something which seems to be a bit counterintuitive. Um but I will show you how the solution we have built is compliant and there's a list of license we don't need. Uh but in the beginning I will give you a short

overview and journey about um where we come from what we have built and then I will get into the topic of compliance and licenses versus decentralization. So in short some people know me for the DAO. Um I worked at Ethereum Foundation in 2014. Um I then created Socket together with my brother Simon and Stefan Toual. We did a project called the DAO. I think most of you know about the story. This was the first big fundraising um on Ethereum raising about $150 million. You know it went wrong. Today we have Ethereum Ethereum Classic which is not the topic. But what happened afterwards? So after the DAO um there was this ICO boom. billions of dollars have been raised and the

experience from that was very problematic projects often meaning many many ICO scams and so on but the fundraising process itself was very nice meaning it is was very easy to invest you could see onchain the market cap how many tokens were issued often you can immediately trade those tokens on decentralized exchanges and others so the fundraising experience was great there was big legal uncertainty and of course way too many ICO scams. So what happened afterwards? Well, the Buffin came, SEC came and say you cannot do it like this. Um so then the work started with security tokens, some successful, some not. And when I started working on

this in 2021, which is actually very late uh for security tokens, a lot of learnings have already been made about what not to do. Um the time is not enough to go into this detail. We took those learnings and we wanted to avoid that companies or like startups have to create an offshore entity to get going like do it in don't know Cayman Islands or some other countries. We wanted to make it work for the German for German startups using a German GmbH. So we worked with lawyers um on creating the GmbH token. So the GmbH token as the name says is focused on the German GmbH also works for UG also works for

Austrian Austrian GmbHes um makes it possible to have an ESC20 token which is representing one company share. So how did we do this? I have one slide explaining the effect of this. So if you create a company in Germany, you have to go to the notary and then there are some shareholders called gazes shaft um and there is a hund register which is a commercial register where you can read who owns how many shares. So if you have a company in this example we have two founders um and there are already some investments or some business angels. So you have an existing cap table and we do not touch the existing shares. So we are

not um tokenizing existing shares or um that you have to go to a notary for any of this. So slides are disappearing but I can continue. So what we are doing we're issuing so-called virtual shares in the form of profit participation rights. So the German vote for this is good. So those are this is basically a contract between the investor and the startup saying that they will participate um in the payout of dividends.

See so payout of dividends, payout of exit proceeds, um even liquidation proceeds. So every time um a shareholder gets money a token holder gets money as well in exactly one token one share. So every time so the amount of euro per share a shareholder is getting is the same amount a token holder is getting per euro. So can you go to the next slide this not directly connected right? Okay.

Okay this was the slide. So again you have those tokens which are one token economically equal to one share and you can issue them on a platform to VCs to business angels um retail investors or employees. So you the the difference is now you can do continuous fundraising. You don't need to have a preed C series A B C D and organize a round. You can still change valuations which can be compared to rounds but you can continuously have an invest now button on your website and get those investors in. So what are the applications now of this legal framework which is a GBH token and technically it's an ESC20 token on Ethereum or

Nosis. Um, so if I describe my startup in one sentence to someone who's not um who doesn't know anything about crypto or blockchain, I'm just saying we give your company an invest now button that works. So you can put this button on your website and depending on if you're on private or public fundraising mode, people can either invest directly or just request to invest. This is the private offer mode. Then you can decide if you want to make them an offer or not.

So this is the invest now button and as I said there's private and public offer mode. Private offer in Germany means if you make this offer only available to less than 150 investors this is considered private. This means you don't need any prospect. You don't need a broker in between you don't have to do video event and all the other stuff. So it is extremely simple meaning if you find at a conference a business angel who wants to invest in your company you can over our platform send him a link and with this link he can execute his investment and in the link when he opens it he can find his offer which is personalized only for this investor that's a different difference to public offer. So for public offer here we do

need a poker license which we have through a liability umbrella and you can raise up to 8 million euros per year in Germany without needing a prospect. You need something which is way um less effort. It's called a key information document on German bases informat bloodlat. It's a three-pager which basically has all the risks and the um information about investment um in the document summarized. But we give you all this data and all the documents as templates. So you can fund raise in Germany a little bit like the ICO days.

They can just click and invest starting with €50. They can pay with Monarium euro e stable coins or they can also just do a zip transaction and invest in your startup. So now I'm getting to the so this was the explanation of what we're doing very short and now what's about compliance and how is decentralization helping with compliance. So if we would do everything ourselves as a service centralized on our servers we technically would need a custody license because we would hold those tokens which are securities. We would need a broker license ourselves. Um if it's not directly done between investor and founder but through us this would mean we are a broker. We would

technically need a payment provider license if we would channel the money or like holding money of um one of our users and secondary market which is not built yet but if we would do this also on our own we would need like a license for having a multilateral multilateral trading facility and we don't have any of those licenses. Um we do have a pro license through our liability umbrella. So not directly as a tight agent. We need this for public offer. But the rest of this we don't do ourselves. So how did we solve those issues? Um so first wallet infrastructure.

Our customers currently are non-crypto people meaning they don't have any idea about a wallet. So what we do in the back end we're giving every founder and every investor a nos is safe which is a two out of two safe or would you sick plus a recovery key. So there are two signers plus one recovery key. If you are familiar how with how safe works this recovery key can basically challenge the safe uh to exchange keys. If the keys v2 against it can do nothing. So there's no control over the assets as long as those two keys are active. But if one of those keys are lost, the recovery key can help recover the wallet. The cryptonative users, they can then in our platform add and remove

keys. So they can take out the existing ones and just add their own. So they can make it fully self-custodial without any external service provider. So this this means for cryptonative it works but for non-crypto people they are actually having this set up. Key number one is the key um issued by the preview wallet infrastructure. So preview if you're familiar with it allows the user to log in with email or with social login like Google or um Apple and others. So it's a very very easy login. Just type in your email or login with Google and in the back end preview generates a two out of three multisig. They're using Shamia

secret sharing for this and key preview is also non-custodial and none of this is on our servers or platform. So we are not holding any keys. So we are purely non-custodial which is very important. So key number one is with prey. Key number two is with a service provider called Tanggoni. They are licensed cryptocustodian and they are purely API based. So those are the two keys. So for cryptonatives they would they could technically kick them out and replace it with their own keys or just keep one of them. For non-crypto people, this is a perfectly fine setup, a non-custodial wallet where they don't have to rely on preview or on Tanggony. So there's no single point of failure, but there's still the ability to recover and they have an easy login. So all the check

boxes are ticked what we needed um for our platform. So this is this is the first very important infrastructure. So we don't need a c custodian license. The second is depending on if you're raising in a private mode or public mode. But I will focus now on the private mode. The private mode in our case is technically a white label solution where the investor doesn't even feel they on a tokenized website. They're seeing your colors. They're seeing your impress and your privacy terms. So they feel like they're on the website of the founder and so it's a direct offer from the founder to the investor and we are just a technical service provider. That's why we do not need a broker license. Um, so the

private office is also by far our most used product. We have now more than 300 private offers closed with a volume of about 8.5 million euros. So that's what startups have raised using um the private offer feature. Public that's where we cannot do this. Here we have to act as a broker through our liability umbrella. Here it's a little bit different. But for private we don't need the broker license because we can do it peer-to-peer. This is also only possible because both sides have a wallet and they can directly exchange like money and tokens which is not going through us. And the third one which is super important is um using a stable coin.

We're using the euroe from from Monarium. We're using this for the public offer product. And in the end I will give you a very short demo about how this works. But this means there's a direct payment in euro e from the investor to the founder. What is very nice about monarium is the zipper integration. So what happens what I will show you in the demo when the investor comes in a public offer goes through a QC process in the back end we're giving this data with the consent of the investor to monarium they are generating a monarium account and generating an IBAN and we're using this IBAN so that investor when he invests money using Zapa because he doesn't have a wallet has no clue about crypto he's

doing a Zapa transaction actually to his own Iben So the bank is not asking any questions because he's sending money to himself and once this is done euroe gets generated and this euroe are in his wallet in the no safe we can get an allowance to push this through the crowd investing or public offer smart contracts in the end it ends up with the founder and we don't pay any fees monium is completely free and it's an instant settlement because there supporting of um sai instant so in summary QAC of the investor investor gets The IBAN transfers euro sapa transaction to his own IBAN and then receives euroe in his own non-custodia wallet and can then use

this to um do the investment in the startup. So with this we do not need any payment provider license because we are not a payment provider. Last but not least we are currently working on a decentralized exchange for those security tokens. Um there are some examples already there. There's swarm.com and Asetera. They are live. Um they're also working in a peer-to-peer mode. So people can exchange the tokens or or buy and sell the tokens they are uh they bought. So now I want to do a little demo. But for this um my laptop needs to be connected. Can we give it another try?

It would be great. I can unplug maybe the USB. Yeah, now it works perfectly. Thank you very much. So what is happening here? This is our website. Um if you click on the invest now button, there's a little popup where you can either just non do a non-binding register as an investment interest. This would be the private offer modus mode or you invest now directly. Let's click invest now. So you have one page here describing the company. You can scroll down and download the pitch deck, the legal docs, get all the information you need. Um, if you have more questions, you can also contact the founder. Once you're convinced and once you say, "I want to invest." You click the invest now button here. I have this preview popup. So, I'm logging in just with

email or Google. You could also continue with your own wallet. So, you can of course use any wallet you want to. I want to showcase now um what most people do, which is logging in with Google. So, if I would be a first time user, there would be now the safe generated. I'm here for the second time or actually more than second time. So what you now don't see is normal users would now go through a video event since I already went through the video event. This is skipped. What also normal users would do. You would ask them like a handful of questions about if they understand the risks which I already did. So this is skipped now those two parts but the rest is still the same. So I could say now I'm investing let's say €200.

Um continue. So what happens now the keyc data which was collected earlier um goes to our liability umbrella concus they are checking if I'm not on any like blacklist money anti monty anti-moneyaundering and so on so then this information goes to monarium so they see that they already created a bank account with me or monarium account to be more precise if I would not have an account they would create this monarium account with me then I can choose the recipient I choosing the tokenized safe. That's how we called it because that's the safe we are giving to our users with the preview and the tangy key as the two signers and the recovery key. But they technically could use the

one they signed signed up with. They can add any wallet to receive the tokens of course. And then they get the summary which is now a little bit hard for you to read maybe about how much you want to invest. Um I choose bank transfer here. If I would have euroe in my account, it would autod detect this and use the euroe in my account. But I want to show you how easy it is for non-crypto users. So if I say this is fine, I approve. What happens next is um this is actually my monarium account. So I need to fund this with at least €200. So what I'm doing right now, I'm opening my traditional banking app.

So let's see how quick this goes. So, and say I want to do a transaction um by just scanning the QR code. Let's do this real quick. Yes. So, I'm now transferring Face ID photo app traditional banking. So, now I initiated um the €200 transfer. Let's see how long it takes until it's here. So, it should be a couple of seconds.

that Monarium receives the €200 and is minting €200 east. That's what happening in the back end now. So we have to wait. Now it's there. So now it received €200 on my account. You can also see this here my balance. And since I already approved, it's now on the Nosis chain. Uh I already gave an allowance that those 200 euroes are transferred to the to the company and tokens are issued into my safe. So this means now in the end for a non-crypto user they can just come there log in with Google get the security of a safe do a save transfer with their banking app and in the back end or using euro

ease everything is happening onchain and execute an investment. So that's in the end what we have built making it super simple to use basically those crypto whales and only because we are using monarium and those um nos safes and so on we do not need a payment provider license we do not need for the private offer a broker license because it's peer-to-peer and and we also don't need the payment provider license so this is what I wanted to show you now I can track all the investments I have done here which of course is just some test investments in the company okay that's it. I hope um you learned something and now we have some time for questions.

Thank you. [Applause] All right, we have time for one question. I see a hand there. Uh yeah, thanks for the talk. Um, with your regulatory experience, do you see any path forward to allow decentralized crowdfunding for nonprofits, cooperatives like goggats right now to be honest? Um, so we have focused on solving it for one platform, but it's only for the GBHS. We're

looking into other countries and also in other types of legal entity, but currently we're not doing um nonprofits. But there is one I think it's something with next um forgot the name but they're not doing it any not onchain it's just like normal crowdfunding platforms for nonprofits but I've not heard there might be some maybe even in the room somebody knows someone can't help you sorry cool thank you so much Kristoff thank you everyone thank you very much Hey.