Why Only Issuers Should Be Able to Tokenize Stock, Says Carlos Domingo

Transcript

I think uh Tom Farley the CEO of bullish posted the other day something very interesting. He said look I'm I'm the sea 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 co I can actually my CFO let's say can go there and buy or sell those 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 you're an insider and you're not allowed to trade before earning announcements because you know what's going to happen or you you can know whether the results are good or bad and how the stock is going to move.

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 Cape, 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 6 months at cape.co/chained. Today's guest is Carlos Domingo, founder and CEO of Securitize. Welcome, Carlos.

>> Thanks for having me again, Loa. >> Yeah, nice to see you and congratulations on your IPO. >> Thank you. For a long while, there's been a trend where startups stay private for longer, which obviously we're seeing with, you know, a lot of these AI companies and things everybody's excited about, but Securitize went in a different direction. So, why did Securitize decide to go public earlier than is typical nowadays? >> Well, first from a from a 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 have stayed 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 I remember companies like Amazon etc. 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 delay and delaying the going public and everything became uh private markets but um I think >> so why was this the right time for you? >> For us it was the right time because uh 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 uh you know crypto IPOs except for for miners.

uh so so we IPO after or we started the process when we saw that uh you know circle uh was going public and you know other companies like uh you know Gemini or etoto uh later bid go etc they were also planning to go public so so talking to bankers they told us yes definitely the market uh 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 the circle IPO was very inspiring because you circle tokenizes dollars. We tokenize everything else.

And the the amount of uh you know attention and interest they got from public markets uh you know was an eye openening for us in terms of of the uh 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 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, you know, 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 it kind of give us also credibility with with our um customers. And 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 uh it been there's a lot of M&A happening now, but it hasn't really been uh you know a thing for many many years. And I guess part of the reason is precisely because there's no publicly traded 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 they're not taking the same risk as taking private shares in another company, etc. 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&A market. So >> great. So you also did a spa with Caner Equity Partners too and you tokenized

more than $265 million worth of your own stock. So why did you go both routes? >> So I don't think that today the 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 is 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 um and that only 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 it 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. It's doable to trade on chain uh 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. Well, I just had Johan Kerra on the show, so it sounds like you're talking about Robin Hood crypto because they not >> just Robin Hood, but uh a lot of people are doing things offshore and for for different reasons. Uh and and might be fine if you want to do things offshore. That's your problem. But it shouldn't be because you cannot do it in the US. You don't do it in the US 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 you've been in crypto for a long time. You know, that's how crypto companies sometimes operate, right?

Regulatory arbitrar things offshore, don't get licenses and wait to see, you know, what happens. I I I do remember in 2021, you might remember this as well, when there were all these shadow banks that they were saying, oh, you know, 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. Um, 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 hasn't 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, you know, build something that is sustainable and that lives uh, you know,

across whatever administration uh, it's in charge at the moment. >> Yeah. And I think eventually Robin Hood will you know bring that on shore here, but they're starting it in the EU. and welcome to tokenize the Robin Hood equity natively in the US and uh I'm creating here in tokenized form uh is something that I I think eventually they will do as well. So, I'm so curious because obviously this is the world that you live and breathe, you know, 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 you know, if you're making

this pitch that this future tokenized world is better, I wonder how you felt about it as a customer like what what parts of it felt like a better experience to you and what parts felt like it needed to be improved. >> So first I don't think that is either or or I think both markets are going to coexist. Uh and and the tokenized equity markets is a very nent market. So, so I don't think that it's ready as I mentioned to replace the other markets in terms of market participants, liquidity, access, users, etc. Uh, the way I see it is similar to when talking about Robin Hood. Robin Hood actually pioneered something which was the the the retail access to IPOs, right? I remember five or six years ago, IPOs were basically only for institutions,

right? And you can only participate on an IPO if you were an institution and Robin Hood pioneer giving access to Robin Hood users. I'm a Robin Hood user for my traditional equities and um and then they give you access to to you know an IPO as a retail person right 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 you've had examples like uh you know SpaceX IPO which had a huge retail portion and participation you know other crypto companies like Bullies had a huge portion of their IPO also on the retail hand. So, I think that the tokenized um equity IPOs are going to kind of follow the same process. We're going to start with something. It's going to be small at the beginning um and then, you know,

over time it's just going to become something that every single company does and that grows over time until becomes a percentage of the 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 the other IPO process. What I will say is that you know it's a 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 and and the IPO process to stimulate more companies

going public and I really having done the process I really hope that they they do it and and that more people go earlier public earlier uh because they make it cheaper and and 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 costs the bankers you need to use etc. But um hopefully this all for for the good and for the for the company and uh and so far, you know, we're pretty happy with the outcome. >> 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 the show possible.

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number to every app that asks. Go to cape.co/chained and use code unchained for 33% off your first 6 months. Back to my conversation with Carlos. As mentioned earlier, you tokenized SECZ and you did so on Salana and Avalanche. And I was curious why you chose those chains. >> So first we wanted to be in more than one chain to also prove that you know you don't have to be on a single chain. You can we can actually track the the cap table and the ownership of the securities across uh multiple chains simultaneously. We also wanted to kind of pick two different ecosystems. So Avalanche is obviously an an EVM chain

that is very focused on on RWA. 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 uh you know the the the sexy shares on uh onchain you do it through the the Solana implementation. Um we're doing it together with uh J crypto who is our market maker. They have a a propm technology that they've been using for digital assets that we together adapted for uh 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 lock up uh period for 6 months that that will been the we will then enable trading them uh on avalanch as well down the road.

and you um you know talked a little bit about the process about tokenizing SECZ, 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. So the the the key entity there that helps you get this happen is the transfer agent right. So when you go public uh it's mandatory that you engage with a transfer agent. A transfer agent is an SEC regulated entity that uh basically manages the cap table and then then the transfer agent then manages shares that are in two

different locations. Some shares are the ones that you know you will be able to trade through Robin Hood let's say um and those are those sit on DTCC which is the central securities depository. But then they also manage shares that are under the the actual investor name. So so those shares are uh you know like in in in our case they're under my name or under the name of other investors uh etc. And those shares are on 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 into tokenized form you have to work with the transfer agent. So we our transfer agent for for the company for the spark that we merged with uh was Continental. Uh so we you know 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 uh you know inform all the shareholders when they were going to receive their their SEC shares um 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 we listed the wallet and then send the shares there and we also use uh a broker dealer to basically purchase shares from the onrem 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 DTCC trades through the existing market structure right exchanges the broker dealers etc.

So once you move them on chain they're kind of outside of that scope. So you can actually trade them uh any way you want as far as you follow obviously with uh with regulations. So as I mentioned we then you know created this this version of the jam crypto propm that follows you know regulations for trading public securities right securities that are um you know national market securities uh as our shares and then those are trading there they have uh 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 experience is like going to unis swap where you go there you connect your wallet Then you see USDC and 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 uh stable coins USDC in this case or you submit USDC and you get shares and that's that's an instant process. You get the shares onto your wallet there's no settlement period once you they're there you know you could potentially do other things that were now enabled like borrow against them etc. So it's a very kind of like a cryptocentric experience as opposed to you know going to a traditional broker dealer and and trading there. >> So for investors who are interested in owning securitized stock how should they think about which form or which rapper to buy like what are the tradeoffs on either side?

>> So first this is not a rapper these are the same shares whether you get a token or you get uh you get them on DTCC. There's no >> Yeah, rapper I guess is the wrong word. Format. >> Format. Yeah, format is more. Okay. Uh so so first when you when you can go to Robin Hood 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 Robin Hood 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 property dealer to another investor, if you want to place them as collateral to borrow

against it, then it's a it becomes a process, right? It's like a very manual and convoluted process of of doing all these processes. Now, if you want to buy them in tokenized form, it's much simpler. You just go there, you 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. uh we can conduct corporate actions like you know dividends and proxy boards directly with you instantly. There's no because there's no intermediaries. We actually know who is on the cap table. When somebody has shares on Robin Hood, we don't even know they exist because they're not on the 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 uh manner. And those are things or if you want to transfer to another white listed 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 from that perspective. Uh and I guess they're going to be different audiences and different people that want to do different things with the with the shares. So, >> and for um 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? 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 there's no intermediary that has created a derivative version like let's say when you buy these derivatives offshore you in some cases you're getting a debt instrument against a company that has purchased the shares that have them on SPV. So there's intermediaries there and typically crypto companies that you're taking a counterparty risk against. In in our case, it's the same whether you have if you have them on Robin Hood, the risk is Robin Hood going out of business, which is obviously very unlikely, but 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 uh name on the cap table and wallet, then it's actually, I would argue, is less risky uh because you are at that point in time on on the cap table. These are permission assets and securities. Therefore, if you you were to lose the keys of your wallet, we'll be able to verify that you were an investor and reissue burn the old shares and and reissue the the new tokenized shares. Now, in terms of trading, they actually trade at the same price um because there's something called uh national best bit offer, NBBO, 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 Robin Hood or you trade them on on our uh you know propm 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 etc. 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 247 yet, but we're working on enablement that. But during the extended hours, you might actually get different prices in different venues. But that's what happens to the national markets as well. Like if you buy uh you know things outside of market hours, there's no guarantee of what price or what spread you you're going to get. But during market hours, this is completely uh consistent and and we trade exactly at

the same price uh that you will get if you buy them on Robin Hood. >> 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 how is it that the prices never diverge? Because the market maker has a regulatory obligation to offer you the same price that you will get if you buy them from let's say >> oh >> so so there is something the these prices are published right so so the any broker dealer that is selling shares has to always look at this tape that has the the updated pricing so what we do is we actually inject the the the the

real-time pricing on chain for you know jump to be able to read it and offer you that So it's literally all done through the market maker or is there even I guess I guess because it's centralized. So like immediately my head went to an oracle. I guess that's because that's a good uh 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 onchain 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.

>> Okay? >> It's their job to you know how to 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 offchain. It's actually a regulatory obligation by the way. >> Okay. Okay. And I guess like typically um 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 um 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 on the um stock side that the the price essentially is being set there. Is

that kind of That's correct. So, so, so this is something that is a very controversial by the way. This was something that was set up in in 2005 by by the SEC and and I like to talk also about how the SEC is trying to change that which is a good thing for for crypto. But at that time they they created something called rule 611. Okay, I don't know if you ever heard of rule 611. Um, 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 you know when you trade on one venue, you know, 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. Like equities trade on 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 protection rule, rule 611. And that basically the way they guarantee this that this is the best price is because the this there's something called the the securities information processors, the SIPs that actually publish data feeds that aggregate from all the venues. So, so those SIPs aggregate data from all the venues and then anybody that trades has to look at the 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. Okay. So, whether it's on chain or is off chain, it doesn't matter. Everybody actually does that. And that's how markets actually work today. Now this this introduces uh you know complexity because you know then you have to follow a price that has been set somewhere else etc. So if you think about how crypto works, crypto doesn't work that way, right? So in crypto, you have Coinbase trading in Bitcoin and Binance trading in Bitcoin and they don't talk to each other. And then when you buy the price the Bitcoin in in 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? Uh why? Because market makers eliminate the spread. So if it is anytime Bitcoin trades higher on uh on NASDAQ then people are going to buy it on Coinbase and sell it on Binance and it's going to adjust the the price. So that's how crypto works but that's not how you know traditional markets for for equities work. Okay. So 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 and it doesn't have the problem of things trading at different prices. So, so the SEC recently um has published a um 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 like do this convoluted process what we do of fetching from with an oracle the SIP data send it on chain forcing market maker to trade a particular price etc. And then then 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 so I think that um we're in a kind of an interesting uh point in the industry because the the

SEC is trying to eliminate a rule for traditional markets that can actually have a very important implication for for crypto markets when equities start trading there. So, >> okay. Okay. Yeah. It's funny because I realized that initially when I asked 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 the um 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.

>> No. No. So once market close >> when the market close then this rule reg rules do not apply then you trade at whatever price market trades that your market let's say the onchain market >> okay but but that's what I was asking about earlier so then when the equities market opens if the price >> start trading at whatever price it opens on equity markets >> wait I'm sorry say that again >> you you have to then start trading at the at the price that everybody else is trading >> oh okay Right. So that's what I meant like if you own the stock you can kind of get screwed, right?

>> Well, no. No. So, but that happens as well. Let's say if you're in Japan >> and then you trade uh 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 24/7, but 245. Um, and then outside of market hours, they don't have to follow regs. 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 uh closing price was. That's exactly how >> I guess. No, but I guess what I'm trying to say is that so like let's say that

something happens where onchain suddenly the price 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 um I'm just going to make it up like between midnight and 8:00 a.m. suddenly like you cannot sell and something happens at 4:00 a.m. and you you know you would like to act on it but you can't do you see what I'm saying?

>> Yeah. Yeah. What I'm So you're trying to to trade and there's no liquidity you cannot trade and then >> Yeah. So the 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 >> right but the people who own the tokenized stock they can act because it's open. That's what I'm talking about. >> 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. Um, and then the same experience you're going to

have on chain that when you trade of market hours, there's less liquidity in general both onchain and offchain and 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. So, >> 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. >> Yeah, >> that makes a lot of sense. Um, 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 you know what the rights are that different investors have and sort of like what the spectrum is that is available now. >> Yeah. So largely there's kind of like three models if you want uh the the one we use the one that uh 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? Uh

so so in that case you're buying the same instrument is the same QIP, the same rights, you get access to dividends, you get access to voting rights, splits are done, etc. So you're basically buying essentially the same security. Okay. And that's what most people refer at uh IST or issuer uh sponsored uh you know tokenization where the issuer basically works alongside their transfer agent to make sure that uh you know there's some shares that are tokenized uh properly. So the transfer agents are computer share. Um you know equinity computer has partnered with us.

Equinity has is in the process of being acquired by bullies as you know. Continental is also partner with us which is the one we use for our own uh equity and there's like a lot of other small ones uh out there but those three represent like the large majority for publicly trade uh equities in the US and then you have to go through the transfer agent uh to make this uh this happen. Now the second model is kind of like the the DTCC model which is you tokenize the entitlement. Um what does that mean? It's so as I mentioned when you have shares on Robin Hood you actually don't have the shares on under your name. What Robin Hood 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 general only sees it's called CDN co which is a company that TTC 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 the DTCC model uh where they are tokenizing their entitlements etc. Now the 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 cannot take the shares on your self- custody wallet I cannot move them outside to trade them somewhere else I cannot go and post them as collateral for DeFi etc. So the the shares have the tokenized shares have or tokenized entitlements have less utility. It's more like an efficiency for the existing kind of market participants and that's not allowed to create a new ecosystem as we're trying to create that is fully on chain. Okay. 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 one to one back or is regulated blah blah blah but the person if you wanted to do one to one then there's a way to do it natively in the US and regulated. So those are I think most of the structures are structures as a debt. So where you know you are somebody is you know buying shares on the open market is holding them somewhere uh at an SPV or a broker dealer and you get like a debt instrument against that uh you know SPV and that's how most of these uh 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 um because they're also offering 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. Um they're misled because the they are showing this as tokenized equities, but it's not a tokenized equity. You're getting a debt instrument, right? So you're getting a different instrument that has, you know, a price tracker against the 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 offag issues because they can go into sanction wallets. Uh they're being distributed by unlicensed exchanges that do you have no protection as an investor when you're buying because you're not

buying from a from a regulated broker dealer. Um uh they I remember one of the issuers without mentioning anybody uh but they actually issued this tokenized uh equity for I I believe it was for Netflix and then Netflix did an split and then the the the onchain version did not do the split and they were trading at five times different price because the token does not really does not really represent the shares, right? So there's nobody that actually took care of uh doing the the split. So, these are the kind of problems you're going to be facing when you buy this uh this 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 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're held under their their SPVS and some cases not bankruptcy remote etc. Okay. >> 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 um you know saying to the SEC that they think that um tokenized securities should be authorized by the underlying issuer. >> Correct. And um it sounds like you're on that side.

>> We're on the board of the on association. >> Well, we are very well aligned with that view. >> Can you um just give a sense of why the other side wants to, you know, not have them be issued by the underlying um or yeah, not be authorized by the underlying issuer. 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 Robin Hood, but there is five different versions of derivatives of Robin Hood equity or or Coinbase equity that have been issued completely without Coinbase

permission, completely with a Robin Hood permission. Then those things are actually different because they're you're taking they're not the same instrument. They're all different derivatives issued by different companies. They're uh they're using the name of the company without their permission. In some cases, they list the QIP like if this was like a real security. QIP is this legal number that every security has. Um they they're 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 uh Tom Farley, the CEO of Bullish posted the other day something very interesting. He said look I'm I'm the sea 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 co I can actually my CFO let's say can go there and buy or sell those 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 you're an insider and you're not allowed to trade before earning announcements because you know what's going to happen or you you can know whether the results are good or bad and how the stock is going to is going to move. So so as an issuer you just opening up for a lot of issues internally. Your own employees can get in trouble like some uh affiliates etc.

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 uh you know opening to off rules etc. So I think that the reason they're doing it is obviously because it's 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 do that than you have to go to every issuer and convince them to do it and work with the transfer agent uh etc. 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 QIPS and they need to authorize

what you do the same way that I authorized that our shares trade on New York Stock Exchange and it's not that NASA can go and take my shares and trade them there right has to be done with my authorization so so it's the same situation here which by the way it just feels to me like a very normal fair ask right because they're your securities and is your company name and and your company reputation that is going to be exposed to all these potential problems happening there. >> Okay. Yeah. I mean, I think um you know, it's it seems like I I understand and that makes a lot of sense and yet at the same time there's something about it like just um coming from the crypto perspective where

there's you know this notion of permissionlessness and censorship resistance. Um but I agree maybe >> by the way the the this notion of permissionless and censorship resistant this 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 uh and they're also allowing Chinese people through VPNs to connect there to trade use derivatives or US stocks etc. So I I don't think it's because of the ethos of the industry is to be permissionless and decentralized. I think it's because you know playing regulatory arbitrar simplifies your business model. There's less friction, there's less cost, there's you know wider distribution

because of course you can use unlicensed venues to distribute etc. So I don't think that this is a you know you know crypto has moved. I think I don't think a lot of people uh 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. Yeah. Yeah. No, I I um I see what you're saying and it makes a lot of sense, I guess. Um just one question. So, if people were still to try to pursue the uh derivatives in other jurisdictions, uh 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? >> That's a good question. So since we printed the problem because we show our own equity uh we don't have that problem as other companies uh have it. Um 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 jurisdiction sometimes in places like Jersey or places like that that are are hard to to reach. Um I guess we you can always ask them not to use your company name without your permission I guess. So um but >> okay so let's now just talk generally about tokenization because you know 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? >> I think that you know large let's say asset managers um 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 with the regulator that can affect their

brother business which is obviously much bigger than whatever the tokenized portion of their business is which is today is very nent right uh so obviously their concern is make sure it's all legal that there's regulated entities that are involved that those entities comply with the uh with the law that people are not doing kind of like weird things etc because that can get them in in trouble And then the other thing is reputational concerns, right? Like you know 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 etc.

Well that while it will not imply the asset manager doing anything wrong it has a reputational impact uh in their brand. if somebody you know is out there and says that oh this you know somebody in North Korea is buying uh you know some particular asset or is lending against it etc. So, so I think it's a combination of regulatory and um and and reputational uh 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 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 uh wrongly I I do remember in 2021 when we raised our

CSB we actually had a deal with a very large US bank, one of the top three just without saying which one and then you know then FDX and Celsius and BlockFi and all these you know 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 securityize 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. Uh 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 to their brands. So, and by the way, it's much better now than it used to be. But still, uh, 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, etc. So, something can actually go wrong. The same thing that Celsius went wrong or block 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 and it's much harder for a bank to go out of business than for one of the those companies because you know those companies were not transparent on what they were doing. So this is the same situation today where there's this lack of transparency about what 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 will plot. So, you were in the thick of building this new collaboration with the New York Stock Exchange to help create uh 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's so many different

problems that need to be solved and you've probably alluded to to different one of them um right now but you know how do you see the road to you know just having announced this a few months ago to getting to the point where you can launch something. >> So this project is very interesting because the the entity that is going to operate the trading the onchain 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 onchain trading where you have you know 247 where you have instant settlement etc. It's uh it's very interesting because it somehow validates the thesis that there is value there otherwise they would not be doing it right. um of course is a complex project because they need to stand up um an ATS in their case. um is is they call

it a digital ATS which is an ATS that trades this uh um tokenized uh native issue tokenized securities but they're also going to trade uh tokenized entitlements which as I mentioned they are kind of uh regulatory equivalent even though they're not done by the issuer but they're done by by an intermediary but they're kind of a different uh story and then we have been working with them for a few months as you saw in in the announcement we did they chose us as the as the design partner to help you know, figure out how this works. We're also the first transfer agent has been approved to basically send tokenize equities and ETFs there for trading. Uh, let's say the same thing that we did with Continental for for sex, we will be

doing there with with for other securities, but we're also a broker dealer. So, the the New York Stock Exchange won't take subscriptions directly from retail people. They will only allow broker dealers to subscribe to the ATS to see what the price is and what the trades are. And then retail investors will have to come through broker dealers. So securityize markets which is the broker dealer that securityize 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. Uh they've announced that they're launching in in in Q4. uh we're working towards that uh 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 uh exchange

uh etc and I think that's going to that's going to be an step change in terms of adoption of uh you know tokeniz equities >> and do you have a sense of how many you'll launch with >> well we've been talking to tons of people as you can imagine I will hope that we launch so first there They're also going to uh you know do entitlements right which as I mentioned these are kind of like the DTCC's type approach not the offshore derivatives and and those they can actually have more at launch because those are not issuer sponsor they're also going to have issuer sponsor so so probably they'll have you know you know tens of uh of different uh instruments that you can trade there >> well let's also talk about the elephant

in the room DTCC because they are also entering this base but from what I understand they're taking a different approach. So explain uh what their approach is compared to securitizes. >> 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. Um and then that's uh that token can only go to wallets that have been created by the the cleaning market participants. These are like the broker dealers that are connected to DTCC. So today, let's say if you're Robin Hood, you have um you

know a database, let's say that the TCC gives you that says, you know, you have 1 million shares of Apple and the Robin Hood and then Robin Hood has another database that says of these million shares, you know, Carlos has 100, Lara has 200 and then John has 300. So that's how these are layered thing, right? So um so then drawing in this case is instead of getting an entry on a database is going to get a token um that represents this how many entitlements this broker dealer controls but that is not going to flow back to to the end user that's at least the way it is structured for time being I don't know whether they are going to evolve this in the future or not but so so it just keeps things within the the DTC confines and they approve market participants so

and then the cleaning the the clearing still goes to DTCC C. So it's going to clear the plus one. So it's not going to do like uh instant clearing, instant settlement or or 247. So So it's just more of a a if you efficiency thing of you know broker dealers there are able to move shares across themselves uh in a in a much more efficient way than they do today. I think it solves for a different problem. I think it's it's great that uh that the DCC 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 Bitco I think which is one of the custodians to get a wallet to get this tokenized entitlements and that can lead to them

doing more things on chain besides that um um 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 uh limited. But you know, look, kudos for somebody like DDTC for getting into the space. I think it's helping get the word tokenization uh out there and as I mentioned, getting people to start thinking about wallets and uh and tokens, etc., but it's a completely different uh you know, model than than the one that we're doing.

So, one other uh competitor that we've mentioned a few times in this episode is Robin Hood. And I'm sure you were watching what happened with Robin Hood chain. And it seems like, you know, originally they were thinking about this for RWAs, at least if we're judging by CEO Vlad Tennv's initial remarks about it. But, you know, very quickly we saw that actually memecoins really started taking off there. And I wondered if you had thoughts on why that happened and if that phenomenon changed your outlook on, you know, how big the tokenized real world asset sector could grow.

>> So, so first I don't see Dood as a competitor. We talk to them all the time. I I think that they're more focused on distribution. They have a great distribution because they have a ton of like uh retail users and and that I think this is why the Robin Hood chain has been a very successful launch, right? because they have a lot of users they can bring quickly on chain and what they're doing of bringing people on chain is is great and it benefits everybody. Um so I think that we're more focused on the kind of one step behind the scenes infrastructure of like uh you know tokenization working with asset managers or with issuers to issue tokens etc and and that those could actually be very well issued on the rocket chain as well as we issue it's actually based on the arbitron technology which we support

um and they could be distributed by by Robin Hood. From that perspective, I don't see that ourselves kind of operating exactly on the on the same space, even though we might overlap a little bit here and there. Um, and in terms of, you know, memes, you know, meme coins taking off versus RWS, well, what can I say? This is crypto, right? So, people 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 you 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 memecoin, you're just purely speculating without even thinking about what you're buying or not. But I think that their their intention of making Robin Hood chain

kind of like the preferred chain for RWAS. I think it's great because they bring distribution there which is something that's required in this space for this space uh to grow. Uh so so I was particularly very excited about you know the success of of their launch and look forward to you know do things with them uh there as well. >> And to go back um you know once more to why it is that you launched Salana sorry why you launched your your um tokenized stock on Salana and Avalanche. I just wanted to ask, you know, because Robin Hood, you may remember, had um there was a little bit of discussion about their choice of launching an L2 on Ethereum rather than launching on Salana. And

there even had been some talk that they had initially chosen Salana. And you obviously you you work with Ethereum. Um but you for your own stock, you chose Salana and Avalanche. And I wondered like if there was a reason you didn't choose to issue the stock on Ethereum or or another L2. >> So the Solana was first we've worked with many chains as you know we've issue some assets first on Ethereum like like Bidd and we obviously like Ethereum and we started there. That's how our company started when there was nothing else. So so we are originally like a pure 100% Ethereum shop and over the years we've kind of diversify and support other chains. I think every chain has its own kind of you know pecularities in terms

of infrastructure they have different ecosystems etc. Um the reason we chose you know those two obviously we have a long-standing relationship with Avalanche. We launched our first tokenized um you know 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 is pretty good. We also use them for getting our license in in Europe. they have deterministic settlement which is actually an interesting characteristics that you know the L2s don't have um 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 uh on avalancher or on Solana and

then the Solana portion was besides us also working very actively with with Solana and the Solana Foundation that you know the the the prop technology from JAM that we wanted to together with jump as a market maker. It was actually developed originally in Solana. So, so the tech was already there. Um, as I mentioned, we started with those two, but we don't want to necessarily only uh, you know, support those 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 on Solana and we will continue you know supporting a variety of ecosystems.

>> All right. Well, last quick question. you uh have said before that Securitize plans to go shopping um and make some acquisitions and I wondered if you had any thoughts on you know how to add to your current operations. >> So 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 dayto day uh as opposed to so so we we're gonna have you know excess cash as well as liquid stock that should be able to do things. So the things we're looking at are things that

are complimentary to the business that we already do. Uh 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 you might remember we acquired MJ Stober 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 fund admin is very you know adjacent to tokenized funds and and then now by having the two assets then we can actually serve customers much better because they only have to deal with with one entity. So we're kind of looking at those type of things. But what else is complimentary to what we do in the tokenization of funds as well as tokenization of equities? what other

building blocks that that is worth for us owning to simplify the life of our customers at the end of the day. Um and then the second uh portion is like international expansion. So what jurisdictions we we don't have licenses or presence that you know we think are are worth exploring options there. Um, as I mentioned in in interviews, I don't think buying like a direct competitor is really what we're looking at after because, you know, I think we have what we need to have from that perspective from a tokenization perspective. We're already the market leader. So, um, I think it's more interesting for us to figure out how to expand the the the product offering and the capabilities uh, and and doing it through inorganic, which is faster and and if you buy a

company that has established company and that has already revenues and tech etc., you the risk the process versus building it yourself and take uh you know a few years to do it. The the other area we rang is DeFi. Um we haven't touched about this a lot but I think that there is a there's going to be a convergence of you know RWAS and DeFi. Today DeFi uses you know digital assets as collateral. As you know they've had a lot of problems precisely because of the the bad quality of collateral that gets hacked and stuff like that. And I think that there is a a convergence that is happening on on you know RWS and DeFi that is particularly interesting and we work with a lot of D5 companies with a Camino uh and others but there's kind of like stuff there that uh is is closer to

let's say the the the RW origination um that we've been looking at as well. >> All right well Carlos it has been great catching up with you. Thanks so much for coming on Unchained. >> Well thanks for having me again. It's my pleasure >> 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 forformational and entertainment purposes only and my guest and I may hold assets discussed on the show. For more disclosures, visit unchainedcrypto.com.