DeFi for traditional markets: When security tokens?

Transcript

uh okay hello everyone i'm matthew i'm the co-founder at fountain and we are building a decentralized exchange for security tokens and if we say security tokens we really mean like real world assets that are brought on chain as tokens and deemed securities so equity in a company or short-term loans or whatever now uh these tokens like security tokens it's been a while since we talked about them so i just like to pose you a question

namely i mean when was the first time that you heard about security tokens or tokenized securities i mean how long since you know this idea of tokenization and for me it's quite a while so uh i remember like the lost bull run 1718 when we heard about the tokenization of everything right we have all these nice assets out there in the world we bring them on chain and make them even better better versions of themselves and like the idea was really the tokenization of everything but already there we had a focus on different types of assets namely art and collectibles

real estate and venture capital and other types of equity people were focusing on mostly like mid-cap equity and what we saw back then is a lot of fundraising like various of these projects you know they raised 20 50 more millions to launch their projects and a lot of hype and a lot of very high expectations and so what i want to do in this presentation is take a look at what has happened in the last three years and where is this ecosystem at the moment because i think it's not that easy to derive from the news you read and and really gauge this and then uh tell you a little bit about our view at

fountain why we think like what were the biggest hurdles how far have we come in these different dimensions and what gaps are like still open for this ecosystem to to really thrive okay now before we get started with that let's maybe just quickly remember why we even started with the whole tokenization and what we think uh are the promises of tokenized equity so first of all it's liquidity right everybody wants liquidity and why do we think that we get it here it's because transferring tokens is a lot cheaper than transferring shares you disintermediate a bunch of guys and also because of the second point

accessibility so you have more tokens and more people that can buy and sell them so hopefully more liquidity second point accessibility um is mostly you can look at this in different dimensions right the most well known is probably fractionalization so you have very high value assets if you fractionalize them more people can get access to them but you can also think so that's basically like size of asset the dimension another dimension would be time so we're used to trading 24 7 in crypto the rest of the world isn't and with tokenized equities we want to achieve something similar and then because the costs of issuance like over the

whole life cycle of inequity also ownership and transfer decreases and you can have more types of assets that can become tokenized so your essence doesn't need to be as big and as wealthy to be tokenized and people can hold and transfer smaller quantities of these assets because ownership and transfer costs less and so that's all basically accessibility and then the last point was essentially transparency so if you have your share registry on chain obviously everybody's at all times aware of who owns which types of shares you can see when transfer happens when large trades are made

etc and it's actually interesting like in the real world especially for smaller companies that is actually a problem that this share registry is up to date i mean i i couldn't believe this but it happens okay so that's why we started with all of that now um what has happened since now in the last three years so a lot of announcements company x tokenizes 100 million of real estate company-wide tokenizes 10 million of sme loans etc so that's one data point and the other data point is just a lot of money flowing into that so i talked already about like the ico craze where we have this you know 20 50

whatever million races for platforms in that area um but actually that has continued all the way uh through now and just last month uh a platform for tokenization in the states they raised 48 million led by morgan stanley so the institutions are coming and they're pushing money into that but beyond the money and the announcements i cannot see that much to be honest so if you if you uh think of these three aspects that i talked about before namely uh liquidity accessibility um and transparency so if you say you you want to have tokenized assets which are all of these

three things not many actually are left so at fountain over the last two months we have been in very close contact with all the large issuers in europe or or most of them hopefully if someone is here and has an asset for me please please come and talk and and what we found is that yes the assets that could be listed at this point in time or are very few and far in between so the question is why and if you then find out why well has there been other progress and where are we standing in this ecosystem so i think that's really what's interesting for you out there so i'd like to tackle this

along three dimensions so first regulatory then infrastructure and the application ecosystem so first let's look at what were the big hurdles like three years ago when all these projects started and essentially it's still the same things that are necessary to you know to have for a thriving ecosystem at the moment and then in the next step i would like to look at okay how much progress have we made along these three uh dimensions up to now and what are the gaps that are still open that we need to solve to really create a thriving uh tokenized security ecosystem okay

so it's a lot of text just so you can like take a photograph it's basically all our intel gathered and and we're happy to share obviously but i will guide you through that okay regulation i mean it's pretty boring but it's super important uh for all things security tokens right what do we need the most important thing is uh regulation and legal certainty around tokenization right so in the very beginning you created a token and then maybe you trusted some guy that this token represents a sharing what not and that was like as good as he got you created a bunch of contracts around this um but it was really not very certain and so that was like the first

big hurdles like no institution is buying a token if they are not a hundred thousand percent sure what it actually represents in the real world okay big big problem then the next thing kyc aml i mean you all know this it's also a problem in other areas of crypto but for securities especially because well there is regulation that some companies they need to know who their shareholders are etc so it becomes even more important then licenses so there is a whole regulatory framework existing right and you have licenses for custody of securities or for the trading of

securities etc but really like the the the requirements of regulators and the technical capabilities of blockchain there is just a mismatch so if you talk to a regulator about a trading venue so that's the legal slang for exchange i mean they think of who is holding custody where is the broker who is operating this exchange or trading venue um where is the csd so like the century central security depository these are all things like from the old world i didn't even know about right and we don't really need them anymore with blockchain but these people they don't understand that and so you need to educate them and they

need to create laws and that takes time and it's really hard to comply with the old laws that require all these things when there is just no csd or no broker right so that's a big problem and then i'm being pretty vague with all things regulatory why because uh it's a global world right in the us it looks very different than in europe than in asia and even within europe right you have the eu that tries to regulate but it's like super slow then you have the individual member states they also regulate some of them are faster some of them are slower and so you're left with like this uh you know maze that you need to navigate if you work in this space and it's pretty pretty complex and changing all the time

right usually if you have regulation it stays there forever or like a decent amount of time and here like you have nothing and then half a year later something is there and you need to adjust okay so that's all things legal or the most important things i would say so infrastructure that's probably more well known it's similar around the whole sphere so we needed like three years ago again like when all of this started well wallets own ramp custody aml on chain id blah blah blah it's similar for all these apps that we built then what's more specific to securities is the need for stablecoin right

i mean if you have an asset denominated whatever in euro or in dollars and you have some payouts that happen on a regular basis and you want to draw a loan on that you really want to do that in that same currency and then you need tokenization providers like service providers three years ago everybody who wanted to get tokenized did this themselves thought themselves about what types of contract they have to write and how to do this i mean just a lot of replication of everything and also token standards everybody created their own token standards which is not really helpful and then the last point is the application ecosystem so if you

finally bring something on chain i mean what do you do with it right we wanted this liquidity we wanted the transparency and and more and well for liquidity already like trading is really difficult without trading infrastructure uh transparency maybe you get by just looking at the at the blockchain but but yeah like ideally you would have these landing protocols the trading venues liquidity mining etc also working for securities and like back then d5 wasn't even a thing so it's out of the question that we could do that okay so now let's look at the progress that we that we have made in these dimensions um so first regulatory big progress so now we have

laws in different countries uh in europe for example lichtenstein and switzerland where the regulator says okay you can issue a share on chain ma'am so you don't even need to do any strange contract to say that this token represents whatever in reality it's just a share bam done okay and i mean these countries have proven that you can do it and other countries will follow um and then the second thing special crypto regulations uh that has also happened to a certain part in germany we have the buffing crypto custod custody license in switzerland as of august 1st we will have special licenses for trading venues that trade security tokens only so they can for example directly

approach retail customers they can do their own custody so it's very advanced so that's the positive side problems are still like across europe you know there's no unified approach passporting is difficult then also clear regulation of just a adjacent activities like the issuance is more or less clear by now but trading and especially how you integrate uh decentralized infrastructure in all of this is still super unclear um and it's just a case by case question and also i mean even simple things like the applicability of kyc right so by now for everybody it's clear if you issue a new security okay you got to do kyc and then um

even in switzerland with like very advanced regulation you see different players doing different things afterwards some just transfer the tokens without kyc and say you know that's fine and others have a white list and every single sale a person needs to be kyc and and everything stored on chain and you ask like reputed law firms and you get two different opinions with the same facts same legal system everything the same thing so it's just very unsure uh for us as a startup you know we can't go one or the other way that's fine but you won't have a big institution coming doing business with you if that's like the certainty of the legal status okay infrastructure a lot to celebrate i mean all the great

wallets all the uh taxes and i'd see somebody with a uni swap shirt so um on chain analysis to compete with uh aml like stable coins well we have them for usd so a lot of stuff happened right and we also have professional and regulated issuance platforms by now i mean we have companies with banking licenses in europe that do the issuance of tokenized securities so this is like the the grade of seniority or seriousity that you need if you want to deal with institutions so that's there and regarding the token standards we still have many but they look so much alike that for our exchange we were able to basically integrate them

all so i would argue like we have more or less a standard and so for all interested it's essentially like erc 20 plus white listing for the kyc reasons um yeah now the biggest problem i still see is a great on-chain id and we've also been talking about that for about five years or so and it's still really missing and that makes it hard to make these different tokens interoperable and you don't want your user to do kyc 10 times with 10 different providers so at the moment that's it's a hurdle stable coins in other in other currencies so we are dealing mostly in europe that's our focus and you need people you know with euro or swiss franc or

pound stable coins and there are trials but it's not liquid that's basically how it is at the moment um and then yeah the integration with like legacy systems so what a lot of people forget is like if you have a company and you have shares then you tokenize them then they are like on an island if you want to pay a dividend if you want to communicate with your shareholders like you have all this i.t stack that is used to integrate with whatever some kind of software in the real world and you need to bridge the tokenized world into all these different softwares so that um yes everything still works so that's that's something that's missing

okay now regarding defy uh the application ecosystem what can you do with stuff like with tokenized securities that are on chain at the moment not that much i mean we have d5 but all these tokens cannot interact really well with d5 so uni swap you cannot really use for a token with a white list and there's more problems because pooling you shouldn't do that with the securities um etc but you see first protocols like maker for example integrating securities as uh collateral so you have short-term loans that are integrated there but also they are not like really on chain they are not tradable on chain

they are not liquid so it's like we are getting there but it's some intermediate status i would say and so the whole power of d5 is not yet accessible to two assets tokens okay and that's what we are doing so uh in in that area fountain is helping so we've built the decks for security tokens um we focus on like making things as easy as you can on chain trading um it's open so no admin key nothing anybody could use the protocol with all of these security token standards we are aware of and it's true peer-to-peer and non-custodial and that's very very important because like this we can actually be

compliant so we are not regulated but we presented the case to the authorities which are responsible for us and they told us that we don't need to get regulated so it is compliant and that's super important and nobody would deal with you like from the real world again if you're not regulated or like can make a case why you are not why you don't need to be regulated now i mean i wanted to do a demo but it's getting tight so uh anybody that's interested should just reach out and i'm happy to do this i mean this is like a design slide and that's now just screenshots from the actual app i think it looks very much alike you can

trade and create orders and cancel orders etc i mean just the usual stuff for an exchange but it works with security tokens so the the the status that we are at it's deployed it's tested it's audited by chain security we are onboarding our first two customers at the moment in a private beta and we'd hope that some and towards the end of the year we we are actually able to to bring this life for the public as well [Music] yes so just to summarize a little bit what have i found out about the space or you know the last months so essentially i would say even though we've been talking about this for a long

time it's still really early times um but under the hood like you you don't have all these assets that are on chain and being traded but a lot of progress has been made in these three dimensions right that's not something that you as an end user directly see and only if you like go really deep down into the rabbit hole you even are aware of these of these changes and what they mean and uh recently first f's assets have been brought on chain and they actually see traction right at maker with uh centrifuge i mean people buy these assets they invest in them and maker is using them as collateral or also the asset tokens that ftx etc are trading while binance has stopped now so again

regulation is important but people the end users are interested in dealing with it and i think that's that's really important to see that because this validation wasn't really there for a long time and how i see this is as we close more and more of these gaps that i outlined before we put ourselves in a better position to really try out and experiment quickly and find like these these growth flywheels that we really need to to make this space um actually usable and i mean just remember one year ago that's how the tvl looked like of of d5 right and we know all how it exploded like this

in a year and essentially to get there you need to be able to to have this infrastructure and to be able to try out a lot of things and see where where the users basically bite on and we're getting there okay thanks hey sure uh