Security Token Insight: Expert Interview with Joshua Stein, CEO of Harbor


Adam Chapnick: Welcome to Security Token Insight
brought to you by the Security Token Academy. The security token industry is here and it
will provide a key foundation for the evolving financial internet. Amy Wan: The Security Token Academy provides
insights about this new era for security token enthusiasts, investors, and issuers. The security token industry is here and you
can get involved. Adam Chapnick: Hi, I’m Adam Chapnick. Amy Wan: And I’m Amy Wan coming up on today’s
episode of Security Token Insight, in your Security Token Investing News, the European
union passes the US in the security token industry growth. Plus, we’ve got an expert interview with Joshua
Stein, CEO of Harbor, and more one-on-one interviews with our New York City meetup panelists. That and more is coming up on this episode
of Security Token Insight. Adam Chapnick: Now it’s time for your Security
Token Investing News. Up first a new study by the Frankfurt School
Blockchain Center. It finds that the EU leads the United States
in security token innovation as well as in several other fields. The study shows that 88 companies in the European
Union are now participating in the security token industry. Germany is at the front of the pack with 20
companies involved in STOs with Switzerland coming in second at 15 the United States has
only 83 companies engaged in the STO market. In other news, Tokyo based lead real estate
has unveiled plans to develop condominiums and hotels in Tokyo’s popular areas such as
Ginza, Shibuya, and other areas by using funds raised through security tokens. The STO is being launched in a partnership
with Securitize. By the way, Securitize is a gold corporate
member of the Security Token Academy. To learn more, go to our website securitytokenacademy.com,
click on the directory tab and then corporate member. Adam Chapnick: And finally digital investment
bank Equisafe unveiled plans to launch 15 security token offerings over the next nine
months. The new STOs will include everything from
tokenized debt equities to real estate. This is not Equisafe’s first venture into
tokenized real estate as they were the first firm to launch a real estate STO in France
for the Anna mansion. Adam Chapnick: The security token Academy
is proud to present an expert interview with Joshua Stein, CEO of Harbor. I sat down with Josh to discuss Harbor’s recent
announcement with ICAP equity and more in this expert interview. Take a look. Adam Chapnick: Let’s talk about your recent
announcement with ICAP equity. I know they’ve raised over a hundred million
dollars across four different funds with 1100 investors. Can you tell us more about the business challenges
ICAP was looking to solve with you guys at Harbor? Joshua Stein: Sure. So ICAP is really interesting and I think
I would call them a reference implementation. They really show what Harbor can do and how
we changed. So ICAP came to us, they did not recently
raise 100 million. They’d raised that 100 million in the past
over time. And so they had 1100 investors in four different
funds that had come in to them through 17 different broker dealers and other placement
agents. And so they were already seeing a demand for
liquidity. Their real estate manager in the Pacific Northwest,
they had extended the maturity of their funds, and so most of their investors were very satisfied
with the return that they were getting and wanting to stay in the funds. Joshua Stein: But some of their investors
wanted to get out. And so this was a world in which all the investors
had signed, everything was on paper. Their investors had no right to transfer. There was no easy way to find other people
might be interested in buying. And so they came to us and they were looking
for a compliant way to enable better liquidity. And so we’ve implemented the platform with
them and their investors. And so there’s three components to it and
I’ll end with the component that really enables the liquidity. Joshua Stein: So one component of the Harbor
platform is a fundraising platform, a way to manage the fundraising process more compliantly,
more quickly, and more easily. A way to get investors through the necessary
vetting checks, seeing and signing the documents and funding. The second component is investor relations
management piece. And so these individual investors and their
broker dealers and placement agents have logins where they can see the PPM where they originally
invested, they can see their latest financial statements. And the sponsor ICAP can communicate with
those investors. Joshua Stein: And then the liquidity piece,
powered by ERC-20 standard tokens, by the Ethereum Blockchain is a private bulletin
board or private marketplace system. So these investors and their broker dealers
and advisors can indicate if they want to buy more of these existing funds or if they
need to get out. And before what would happen is these investors
didn’t have the legal right to get out if they wanted to get out anyway, they would
contact their broker dealer, they’d contact ICAP and someone would literally write down
on a sticky and put it up on their computer monitor and if someone later said they wanted
to buy, they’d match them up by email. Joshua Stein: And so instead there’s an internal
bulletin board. Individual investors can indicate whether
they want to buy more of one of these funds or they want to sell what they have. It gets routed through their broker dealer
RIA who posts to this bulletin board. People match, just like in any bulletin board
system, manually. They find somebody who they’re interested
in on the other side of the trade. They arrive at terms with the trade and then
the trade goes through and it’s all electronic. It’s all powered by the Blockchain to ensure
that every trade is compliant every time. But you’re aggregating interest and you’re
doing it in a controlled fashion that’s not only compliant but meets the needs of that
fund manager. Adam Chapnick: Well, that’s a ton right there
that you guys just figured out how to solve. I know that for a long time that’s been sort
of an obvious expectation that funds were going to need to handle all of those friction
points that you mentioned. And I mean, other than the fact that you’re
putting the sticky note industry out of business, which I think is maybe the only downside here,
do you see all of these sort of private funds like this in the world eventually going to
this? I can’t, I mean, it doesn’t it seem like there’s
no reason not to? Joshua Stein: I think that’s correct. I don’t think there’s a downside. Some of the nuances of why we’re offering
this and why this is attractive I think are interesting to the audience is going to be
watching this video. So this is on a private bulletin board systems. So this is not on an exchange where you have
an order book. Where you have a bid and an ask and what’s
called a depth. You can see all the orders. These things are going to trade relatively
thinly. They’re not like a public security or reggae
and this is not a fund manager that wants to publish their financials out to the world. What they want to do is enable more liquidity
than they have today, and I would call these things semi-liquid. So we are aggregating the interest to help
enable liquidity and we are automating. We’re taking something that used to take weeks
now down to days and we think eventually same day. Joshua Stein: So we’re taking a lot of the
friction out, that happens administratively, but we’re not, these are not public securities
and a fund manager is not going to want their LP interests or their debentures trading in
an open market with a bid-ask and a potential bid-ask spread. In other words, they want to enable liquidity
but not public price discovery. They want to enable liquidity amongst investors
that they know and trust. So in this case, ICAP is letting their 1100
plus existing investors trade amongst themselves. They’re allowing those BDs and RAAs to bring
in new buyers, but they’re not throwing it open to the public. They don’t want to deal with people that they
don’t know and if new people try to come in, they have to come in through one of the broker
dealers or RIAs that are already in there, or new broker dealers or RAs that want to
become part of their private marketplace. Joshua Stein: In other words, we’re providing
a technology platform, but it’s their marketplace. It’s not Harbor’s marketplace, and I think
that’s what’s really important. I think eventually we’ll get to what the original
vision of the industry was, which is this vast sea of alternative private investments
being a semi-liquid and find-able easily and there sort of being one large pool of liquidity,
but I think it’s going to take a very long time to get there and I think the intermediate
steps are for people to be able to have liquidity in a controlled fashion amongst a group of
people that they can trust and they can open up who has access to it over time. But I think what you’ll see is early adopters,
for the most part, are going to want to have that control. Adam Chapnick: That is so interesting and
it’s something that only someone who’s dug in and sort of gotten into the nitty gritty
of execution would really understand like you guys, I mean we talk about that a lot
here in big picture, but you guys have been on the ground and are seeing sort of what
the rate of adoption is going to be. To that point do you think that these funds
are going to end up opening themselves in a white label environment that you’ve created
to public or are they going to end up listing, in some future a situation? Are they going to end up listing on third
party exchanges so that people have access to these investment opportunities? Joshua Stein: I think it’s going to vary by
fund manager. It’s going to vary by the structure of the
investment in the asset class. LP interest in a private fund will always
trade very thinly and that is because of the due diligence or the informational requirements
to really understand the investment to get in. Those are always going to be really high. Those are generally long-term hold investments,
so people want some liquidity but they’re not going to be trading in or out. Joshua Stein: Also there are tax consequences
depending on the structure. ICAP structure is, they raised money from
investors as debt notes, so an investor investing in an ICAP fund has a debenture paying a set
interest rate. Those don’t have the same tax and structuring
implications that limit the liquidity, so those can trade as often as you want. There’s no limit on the number of investors. If you think of an LP interest in a private
fund in the US there’s what’s called The Publicly Traded Partnership Rules. Joshua Stein: That can put some real limitations
on how often this can turnover and what venues it’s in. So listing it on exchange is problematic. I think of debt as a great asset class just
in general on a macro level that can trade far more often. That debt I think will tend to list on exchanges
over time as this builds up. I think that certain types of REITS like private
REITS and others, and these funds, they will just tend to trade in these private marketplaces
amongst limited groups of parties. Because there are sound business reasons why
these fund managers do not want to open it up to the public at large. Whereas with debt you don’t have those same
concerns. Adam Chapnick: We have the full interview
with Josh Stein on our website. Be sure to check it out. Harbor is a gold corporate member of the Security
Token Academy. To learn more, go to our website securitytokenacademy.com. Click on the directory tab and then corporate
members. Amy Wan: Did you know that you can get the
latest industry updates in our free weekly newsletter? The Security Token Edge. The newsletter is packed full of insightful
information about the security token industry. To subscribe and get your free weekly copy,
go to our website securitytokenacademy.com. Amy Wan: We also invite you to check out the
Digital Wrapper on Medium. It’s our new behind the scenes series with
the teams building out the security token industry. These are in-depth interviews covering a wide
variety of topics. You can view these when you follow us on Medium. You can find out more information on our website
security tokenacademy.com. Amy Wan: The Security Token Academy held another
successful meetup, this time, in New York City and we want to thank everyone who attended. We had a big crowd inside the Sunset Terrace
at Chelsea Piers. Security Token experts and financial services
professionals were on hand for an evening of informative discussions, networking, food
and drinks. I had the opportunity to speak to our panelists
one-on-one to get their insights on the security token industry. Let’s first take a look at what Rika Khurdayan
partner at Dilendorf Khurdayan had to say. Rika Khurdayan: It’s been a difficult year. I think for security token industry. There is a lot of interest and a lot of benefits
to tokenization and issue in digital securities. I am a huge, huge fan, yet we haven’t seen
a lot of projects actually closing their rounds and reaching those hard caps, or soft caps. There’s definitely a lot of interests. I feel like market is picking up. We have a few projects in the pipeline that
are ready to launch in the next month or so, so that’s good news. Definitely we need some more activity I think
on the marketing, on the broker dealer side, we started moving on those broker dealer applications,
so we’re thinking that’s going to boost the market quite a bit. Rika Khurdayan: Another trend that I’m seeing
that’s very, very interesting, especially in terms of providing future liquidity for
this market and for digital securities is that companies and funds actually tokenizing
their existing cap tables and existing LP interests and I find it very interesting. Definitely very exciting to tokenize existing
private securities and then put them on secondary market for trading. Rika Khurdayan: Surprisingly, what we’ve seen
in the past three months is that the network and platform tokens are having some sort of
a comeback. And while we’ve been focusing on digital securities,
and we’ve been doing it for the past two years. That’s how we initially got into the space
in 2017 at the height of ICOs who looked at this instruments who said, “Well, they’re
probably going to be treated as securities in US law, so what we’ll do is we’ll work
with issues on structuring it in a compliant way.” And I’m a lawyer, I love digital securities. I understand this product. If we are tokenizing equity, if we’re tokenizing
income streams, if you’re tokenizing LP interests, there’s a really clear and straight forward
framework for doing that in the US. And then it’s projects like platform tokens
and network tokens where you are now looking at hybrid instruments. Rika Khurdayan: On one hand, these projects
are raising funds where security token and they’re selling these instruments in securities. On the other hand, these are hybrid instruments. They’re not traditional securities. They’re meant to be used on the platform. They’re meant to be used to tokenize development
teams, to further develop the network. What do you do with this hybrid instruments? And I those have very complex projects to
be honest, I love them. That’s when my kind of like, nerd side, kicks
in. You really need to understand the technology,
how the platform and the project is functioning. We haven’t seen many of those projects peaking
interest from the investors side in 2018 and I see that trend is changing now. We’ve seen quite a few of the network projects
that we’re focusing on building the product and the network and really decentralized products
in the past year, year and a half, two years. They’re now picking up interest from the users
and investors side. So this is going to be very interesting. Rika Khurdayan: There are a lot of projects,
very interesting projects, that are raising funds, and hoping from Asia that are hoping
to raise funds in the US and there are a lot of projects here in the US that are hoping
to raise funds in Asia. And I think once we figure out how to bridge
these two markets and have a very good infrastructure in place, where we’re on the same page in
terms of regulations, in terms of how regulators and governments treat these instruments and
securities. In terms of broker dealer teams being able
to work with these digital securities both here and in Asia, ATS and secondary trading
platforms being available on both sides of the world. That’s what really will push the market forward. Rika Khurdayan: Well, there are a few things
to keep in mind here, right? So one is obviously the promise of liquidity,
right? And the fact that they can now give this option
to the investors. Another thing is the companies that are looking
at tokenization of existing cap tables and products are larger companies or institutions
that don’t necessarily need to raise money, but they do need to provide additional benefits
to their existing clients. And that’s when tokenization comes in. And the more projects like that we’ll see,
I think the more it will help develop and push the industry forward. Rika Khurdayan: There are so many I wouldn’t
know where to start, so I have a few favorites. Obviously the LP interest in private funds
like venture funds, right? Highly illiquid instrument, very hard and
expensive to transfer. Very long exit. You’re looking at seven to 10 years, right,
to exit the position. That’s very interesting for tokenization and
that’s actually the project that we’ve seen being tokenized. Those were one of the first projects that
when on secondary market in the US, right, on platforms like Open Finance. And Securitize has done a lot of those issuances
and they’re really the pioneers, right, in this space. Rika Khurdayan: I’m also personally very excited
about the private security space. If you look at private issuances in the US
I think in 2017 the Reg D placements were one point 8 trillion dollars. That’s a huge market. And those are securities issued in a traditional
way, right? If you can potentially tokenize that space,
those are highly illiquid and obscure instrument. If you can add, ease of transfer. Let’s not even talk about liquidity at this
point, right, because we’re a few years away, but ease of transfer is of cap table management,
ease of dividend distributions and transparency of ownership. That’s just an amazing product. Amy Wan: I also had the opportunity to speak
with Rika’s partner at Dilendorf Khurdayan, Max Dilendorf. Let’s take a look. Max Dilendorf: There was a lot of activity
in this space, both in the US and Asia. We finally see that SEC and FINRA started
issuing broker dealer licenses. They’re already two licensed broker dealers
in the US that can sell digital securities. We expect that the trend will follow in Asia. And in fact we see that Asia is waking up
Southeast Asia, Hong Kong, Singapore, and we speak to all the partners out there on
the progress of their broker deal applications and ATS licenses. Max Dilendorf: So for, for the industry to
really move on and develop, we need more players in the space through to market, sell, digital
securities. So that’s what we see. On the issuing side. We see interest from both US issuers and non
US issuers, product types, we’re talking about real estate, we’re talking about fund tokens. What I’m personally really excited about is
for the company to tokenize a big real estate project in New York and for the company to
go out there and raise successfully, close the offering in Asia. Max Dilendorf: But for that we need broker
dealers. So we need broker dealers on the ground, marketing,
selling, educating investors and that’s when we’ll see this industry growing and succeeding. And my personal sort of modest projection
that this will happen sometime, like the first project raising in Asia will happen sometime
in 2020s Max Dilendorf: Okay, so let’s, let’s first
talk about China and we actually were in China in November of 2018 when the Central Bank
of China came out and then said that we are placing a permanent ban on digital security
offerings and STOs and no Chinese citizen can participate in them. So I think it’s very tricky with China. Max Dilendorf: It’s first of all hard to tokenize
assets that belong to Chinese companies and it’s hard to work with Chinese investors. So very, very, difficult market. I guess the same, I’m actually not an expert
in Korea to comment on them, but they are much more flexible jurisdictions in Southeast
Asia that are much more open to working and developing frameworks for digital security
offering such as Thailand. That’s my personal favorite. From the visual security perspective and food
and in Asia. I think Singapore and Hong Kong are pretty
open to sort of getting the business through the door, establishing and developing this
infrastructure and environment. So yep, that’s, that’s my sort of five cents
on Asia. Amy Wan: Be sure to check out more interviews
from our New York City meetup on our website, securitytokenacademy.com. Click on the Interviews Tab and select the
video you’d like to watch. Adam Chapnick: I want to remind our viewers
that if you have any questions about security tokens, be sure to email us and we could answer
them right here on a future episode of Security Token Insight, the address is [email protected] Be sure to include your name with your question. One more time, the address is [email protected] Amy Wan: All right, that’s it for today’s
episode. Be sure to follow us on Twitter, Facebook,
Telegram, and Medium. And don’t forget to subscribe to our YouTube
page so you don’t miss out on any of our videos and expert interviews. Amy Wan: And a big thank you to our platinum
corporate member, Merrill Lynch, and all of our gold corporate members as well. We invite you to learn more about our corporate
members by clicking on the Directory Tab and click Corporate Member. I’m Amy Wan. Adam Chapnick: And I’m Adam Chapnick for everyone
here at Security Token Academy. Thanks so much for watching.

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