by Michael Hiles on April 24, 2019
10XTS was founded with the original mission of leveraging emerging technology to create more financial inclusion and help generate more wealth for the average person. We specifically believe that among other tech, blockchain can help disrupt inefficient segments of the capital markets.
Those in the financial services industry know there are actually a bunch of those inefficient segments of capital. Different asset classes experience levels of inefficiency with legacy processes and disconnected silos of information chipping away at investor’s returns.
We started with the idea of being the “regulatory compliant guys” in the blockchain world, which has made us a bit of a pariah in various “crypto” communities. Those markets were, and to a large degree still are, overrun with anarcho-capitalist radicals who seek to use the emerging technologies to usurp the banking systems and ultimately governments around the world.
As noble as that might be, I recall my history classes, and particularly learning about the bloody peasant revolts of the French Revolution – wherein after they chopped off everyone’s heads, the masses stood around for decades scratching their heads trying to figure out a reasonable structure to replace the economic and governance system they destroyed.
Securities are Still Securities
Securities have always been securities, and will always be securities.
We’ve watched the once anarchist crypto players realize many were headed towards a hot date with a federal judge at the behest of the SEC – especially with regard to initial coin offerings, and capitalizing startup companies through the illegal sale of blockchain tokens as an unregistered investment contract, the market re-branded itself and started pushing STOs – security token offerings.
This has now been even further corrupted with IEOs – or Initial Exchange Offerings, where tokens that are still ostensibly securities under US law, are now offered by offshore crypto exchanges as a means of capitalization. While this might be great for people like Changpeng Zhao, the CEO of Binance exchange, it’s still perpetuating the crypto industry’s effort to invent something new – wherein there isn’t anything new.
It is also perpetuating the illegality existing in the gaps between what the technology can accomplish vs. what the law permits.
From Early Stage Capital to Something Else
At the outset, we were pursuing the early stage investing and venture capital as our targeted asset class. Those close to us as a company know how passionate I personally am about funding innovation, and ultimately making the funding process easier, more efficient, and more available to the average person to put a few dollars into a startup. I refer back to that core hypothesis of economic inclusion and growing wealth for everyone.
Our flagship product development efforts were targeting the space, ultimately using blockchain technology underneath to be a better cap table management system – being prepared waiting until the regulatory environment stabilized with clarity in the future. This clarity will come, and will eventually recognize “tokenized shares” of a company – security asset backed tokens.
As simple as it might sound, there’s a whole lot more to this approach than just throwing some tokens out on a ledger and calling them Series A Preferred. In fact, the late comers rushing into the Security Token space are now realizing the challenges.
We even pursued a regulation crowdfunding round of capital raising as a case study to demonstrate this could be done legally and in a compliant fashion. Even though the process of “tokenizing shares” is an extra, unnecessary step in the current regulatory environment, the future proofing of the securities with a blockchain ledger is a worthy outcome for many companies wanting to take the steps with their investors.
But we realized a few things in the process:
- The inefficiencies of the early stage equity and venture capital markets are too small of a problem in the grand scheme of structured capital markets. While being a “better form of crowdfunding”, in all of the US crowdfunding projects since President Obama signed the Title III JOBS Act into law, only around 200,000 individual investors have participated in any form of equity crowdfunding. Crowdfunding is a minuscule marketplace.
- FINRA-approved Regulation Crowdfunding platforms own the exclusive channel to the entire market for US-based crowdfunding projects, which puts them in the position of creating their own back-end platforms for blockchain-based management of share data. To be effective in this space, 10XTS either has to become a crowdfunding platform, become a transfer agent (which was one of my preferred strategies), or we sell out prematurely to a platform or transfer agent.
- As a CEO, I made a big mistake in underestimating how fast the crypto-focused ICO platform token companies would try to douse themselves with cologne to cover the stench of their Telegram-fueled marketing schemes and chase a regulatory-compliant path.
While we were in the process of bootstrapping the product development of a regulatory-compliant financial asset issuance, management, trading, and reporting platform – better funded projects with their questionable ICO money decided they didn’t want to stand in front of federal judges to explain their flagrant rejection of securities laws.
I flippantly describe this market condition as waking up one morning and finding 10 greasy fat guys all trying to fit into the same inflatable kiddie pool.
Long haul? There are no less than 20 players in the space chasing far less than a billion per year in equity crowdfunding. Consolidation and shakeout in just that segment of the market like any other early stage tech. I also think there will be some major issues with STOs and securities tokens down the road – from shareholder lawsuits to other regulatory actions under FFIEC and OCIE requirements.
Time will tell.
Public Finance and Municipal Bonds
In December of 2018, I attended the Digital Asset Forum in D.C. at the St. Regis. It was there I was fortunate to spend time with SEC Commissioner Hester Pierce, and especially with Erik Feyen. Erik is Head of the Macro-Financial Unit in the Finance, Competitiveness, and Innovation Global Practice of the World Bank Group.
In this capacity, Erik leads the global monitoring and analysis of key macro-financial trends and their implications, including fintech and decentralized blockchains. Erik was one of the folks who led the $100m bond experiment last year in Australia in conjunction with Commonwealth Bank.
Erik Feyen, World Bank (left) & 10XTS CEO Michael Hiles (right)
Having previously been the president of my regional Economic Development Commission Board of Directors, I have hands-on experience in the complete nightmare state and local governments endure when conducting a bond offering. I’ll politely leave it at that.
Suffice it to say this was one of the turning points for 10XTS to shift focus from the early stage and VC equity market to the public finance market as a target asset class.
We built our initial architecture to accommodate literally any asset class, the tech doesn’t care about the underlying asset class. And like magic, we came out of the gate with a whole new, blue ocean marketplace as a front runner.
For stakeholders and fans who follow along closely, we’ve hinted at what we’ve been working on over the past 7 months – but never fully come out with it. That was because of the obvious – needed to structure the business and nail together the channels necessary to create a defensible lead in the space.
I think we’re there. Pivot nearly complete.
Now that I’ve spelled some of this out, we’ll be putting out more details about how we have aligned our vision to create economic inclusion with how we have launched solutions to bring transparency, immutability, and efficiency to the muni bond and other public finance-related markets.
- More Libra Partners Bail Out and Mnuchin Wants a Cookie. - October 18, 2019
- What is “Asset Tokenization”? - October 16, 2019
- What is “Blockchain Consensus”? - October 14, 2019
- Libra Me This, Libra Me That, Who’s Afraid of the Big Black Bat? - June 18, 2019
- Public Finance, the Next Fintech Frontier - April 24, 2019
- What is Market Liquidity? - March 24, 2019
- 18 Barriers to Enterprise Blockchain Adoption - November 5, 2018
- Why is Startup Capital Disappearing in the U.S.? - October 13, 2018
- It’s the transaction that matters, not the token - September 10, 2018
- What are some of the regulatory challenges for blockchain tokens in the Financial Services Industry? - September 3, 2018