A Conversation with Carlos Domingo, CEO and Founder, Securitize

The following transcript is taken from episode six of The Scoop, The Block's new podcast. Listen below and subscribe to The Scoop on Apple, Spotify, Google Play, Stitcher, or wherever you listen to podcasts. Email feedback to [email protected]. This transcript has been edited for clarity and length.

[related id="1"]Frank Chaparro and Teo Leibowitz interview Carlos Domingo, CEO and Founder of Securitize in this episode of The Scoop. In this episode of The Scoop, Frank Chaparro and Teo Leibowitz interview Carlos Domingo, CEO and Co-founder of Securitize. Carlos talks about what securities have to gain from being tokenized, the future of the tokenized security platform landscape and the advantage of taking tokenized security route vs. traditional finance. Carlos also touches on what separates Securitize from their competitors.


Frank Chaparro Hi guys, my name is Frank Chaparro senior correspondent at The Block. You might know me as Frankie Scoops or Fintech Frank but hopefully now you'll get to know me as the host of The Block's new podcast called The Scoop made especially for decision makers and thrill seekers in the crypto market. Each week I along with one of my cohorts here at The Block will talk with CEO's, innovators and builders across the crypto market. I'd like to take a minute to thank our sponsor Cash App, Cash App has been the number one finance app in the App Store for almost two years. It was also the first major peer to peer payments app to start supporting bitcoin and it's still the fastest and easiest way to onramp fiat. No more waiting five days for your ACH payments to come through. With Cash App, you can buy Bitcoin instantly. It's also a favorite of The Block analyst Steven Zhang -- he uses Cash App when he goes to Chipotle and gets money back. He saves every time he eats a burrito, that keeps Stephen happy that keeps The Block happy and that keeps the crypto world informed with the best news and research in the entire market. You can also use it at Lyft, Whole Foods, Chipotle as I said, Chick-fil-A, Starbucks and Dunkin Donuts. Download Cash App today from the App Store or Google Play. I hope you enjoy the episode. Ladies and gentlemen thanks for tuning into The Scoop, The Block's podcast for crypto decision makers and thrill seekers. We have a very special episode for you today. We are joined by my colleague Matteo Liebowitz and the CEO of Securitize -- the tokenization platform that's done eight deals, here we are with Carlos Domingo. We're very excited Carlos thanks for joining us.

Carlos Domingo Thank you for the invite, I'm excited to be here as well.

Frank Chaparro No worries you're welcome for the invitation. You're welcome for the beer and I apologize in advance...

Carlos Domingo It's 8PM that is why we're drinking beer. [laughs]

Frank Chaparro Exactly, it is not 130PM at all. I promise you listeners it is well within the reasonable hours to drink. But any respect we have tons of interesting things we're going to be diving into, we're going to be diving into tokenization, the murky regulatory environment that surrounds it. Why Carlos thinks he's doing a better job than the what, 15000 competitors you guys have? It seems like every day there's a new startup announcement in the tokenization security token space and just generally there's a misunderstanding about what these different companies do and what these different companies are. Sometimes when I talk to a tokenization company they say oh we're not a security token platform we're a token sail platform or a token issuance platform. Let's just start with what exactly Securitize is trying to do and what has been your success at this point?

Carlos Domingo OK. Yes I agree with you that there is a lot of people in the space and it's difficult to understand what everyone does so let me see if I can manage to explain the value chain and what we do and what we don't do. So within the value chain of issuing a security on the blockchain someone has to raise the money first and that is typically the issuer of the security that has the fund raising themselves like I did the fundraising for my startup or sometimes they use a broker dealer or an underwriter that does the fundraising for that. Then someone has to actually onboard the investors. So make sure you do KYC, AML you do a [...] and you determine whether that particular investor from the jurisdiction where he belongs which could be anywhere in the world, actually is allowed to purchase that security depending on....

Frank Chaparro Sure. They're not someone in North Korea or...

Carlos Domingo Someone in North Korea or in Crimea or that is not a retail investor in the US if it's an unregistered security, it depends. It does not depend on where the security is being issued but where the investor is and that's one of the things that make it complicated if you want to do a global security offering is that for every country you have to take into account different regulations depending on the nature of the security. Once you've got the investors and they've sent you the money and they have to sign subscription agreements saying to purchase the security and what are the terms of the security and then you have to issue the digital version of the security as a token on the blockchain and that's why they're called security tokens because the technical tool that you use to you issue is a token like the utility tokens before but in this case they represent the security.

Frank Chaparro And you guys are doing that last part?

Carlos Domingo We're doing the onboarding of the investors and the KYC AML and accreditation as well as the issuance of the tokens. OK? Now once you shoot the tokens into wallets this is a security, right? So it has a bunch of like restrictions in terms of how people can move it freely from wallet to wallet so it's not like bitcoin or like you know ether or any any other token that I can just send it to your wallet peer to peer. Because their security is they usually have restrictions in terms of who you can sell it to, when, how many shareholders can have an entire cap table without triggering like registration with the regulator or some things like that. So these tokens are issued with a particular type of smart contracts that basically control the transfer restrictions. That's what people refer to as the security token protocols which they're probably more protocols out there than actual security tokens issue. Which is something if you want we can talk about it. And then once you've issued that then this is a security. So it has to be managed, right? So there has to be you know, you might have to pay a dividend. You might get divorced and then you have to splt your securities with your former wife or your company gets acquired or the company issues more security and things like that. So those are like corporate actions that you have to do on the security so it has to again be managed post issuance as opposed to a utility token that just sits out there and you don't have to worry about it. And then the third piece is when you want these securities to become liquid and be trading on marketplaces.

Frank Chaparro Okay. That's the the thing that I don't think anyone has broached yet which is once you issue those tokens, raise the money for those tokens, then when do we get them on exchanges or a different alternative trading system? Has that happened? I don't think...

Frank Chaparro So these few companies in the U.S. that have a license for eight years and there is only three that I'm aware of that have actually launched and are trading security tokens today. Open Finance was the first one that launched in November and they are currently trading for tokens for them issued with our compliance protocol. So they are all coming from Securitize customers. Then SharesPost. That has been doing an [...] idea for a long time for private securities and then they are now moving to a security tokens that have been trading only one token, blockchain capital token, Cap token which is again issued with Securitize. And then the third one is [...] which launch I think it's January/February this year...

Frank Chaparro That's been a failure, right?

Carlos Domingo Only with their own token. I wouldn't comment on that. [laughs]

Matteo Liebowitz No comment.

Frank Chaparro Why don't you have a comment?

Matteo Liebowitz No investment advice on this podcast.

Frank Chaparro That's not investment advice to say that...

Carlos Domingo Subjective comment. If you want to...

Frank Chaparro And there's huge problems, we can even talk about that, like how there's been tons of articles about why large tech companies are waiting so long to go public and the problems with going public in the United States. I don't know if these different types of services improve it or make it any better?

Carlos Domingo Well they make it cheaper and easier but it's also not all companies who actually provide liquid to their shareholders because if you're an early stage company and a startup on your numbers are not fully disclosed and people don't know how to value your company and your business is still immature and your valuation is changing, exposing yourself to the public to trade it is probably not a good idea. So I think that security tokens...

Frank Chaparro Does that apply to security tokens as well?

Carlos Domingo I think so, because in some sense you're doing an IPO right? Because you're basically listing a security that can be traded by almost anyone and that the price is listed by the price of what the token is trading. So you're becoming like probably a good trade to some extent.

Frank Chaparro What's the framework though that they're, under the regulatory framework, is it a regulation A plus is it something else? When you issue one of these tokens and then they start trading on a secondary marketplace, they have to follow certain rules that you're alluding to. Is it a one size fits all that that falls under Reg A or Reg D or something else?

Carlos Domingo Reg D is an exemption for not registering the security with the regulator. So there's two types of securities -- registered securities and unregistered securities. And then if you register a security means the regulator needs to approve the security offering and that's what typically an IPO is. So you file with the regulator, you have to disclose a ton of things about like financials for the last few years, audited numbers like compensation of the board and executives, like a lot of things.

Frank Chaparro So when I do a token, when I do a security token through Securitize do I have to disclose all that?

Carlos Domingo No, that's a registered security. All security tokens that have been done are unregistered

Frank Chaparro How interesting is that? We talk about security tokens being the registered version or the regulated version.

Carlos Domingo They are regulated but unregistered. They're two different things, they are regulated in the sense that they follow the regulation but they're unregistered with a regulator meaning the regulator has not approved those tokens. Now In the US an unregistered security has a restriction that can only be purchased by credit investors. The main reason is that regulators at the end of the day, their mission in life is is to defend the little guy, right? The retail investor, they don't care about people with money. Because if you have money and you want to piss it off and buy something stupid then that's your problem.

Frank Chaparro And security tokens are pretty stupid.

Carlos Domingo Well it depends on the security right. So there might be stupid ones and there might be good ones like any other type of security. The fact that it is a token has nothing to do with with the quality of the underline investment but because they're not approved by the regulator, then you know they can only sell to [...] investors in the US

Matteo Liebowitz [...] investment grade bracket. Is that correct?

Carlos Domingo Well they're all investment grade in the sense that they're investable. But they're not, investment grade typical in finance means that some rating agency has, rate your company has a certain investment grade depending on the quality of the balance sheet of the company. All these companies are too small to even get graded by anyone so these are mainly startups or midsize and real estate and some funds, small funds and things like that. That's what the space of security tokens today sell alternative assets primarily.

Matteo Liebowitz As far as the initial issuance of these tokens go. And the fund raising itself what kind of currency is using these fund raisers denominated in. Is it fiat is it about Stable coins or do you still see some ETC...

Carlos Domingo It's both crypto and fiat. IBM uses stable coins for the investment process. Yet even though we announced recently that we had to integrate with USDC from [...] Coinbase. But so far most of our issuers if they want to get fiat they get fiat instead of getting a stable coin. And if they want to get crypto they get crypto. So we usually take, we'll take both to the platform, I mean actually we do not take the money because we can't hold money on behalf of someone because we don't have a trust license but we will integrate with an escrow provider to take fiat or with a crypto custodian like Coinbase or someone like that to take the crypto.

Frank Chaparro Makes sense. Let's take a step back real quick and look at what exactly the benefits are to the folks that are coming onto your platform for issuance and then possibly one day having their token traded somewhere else. What is the reason they would do that?

Carlos Domingo So there is a number of reasons. It depends on the company and objective one is capital formation right. They perceive that by being able to do a digital offering of their securities and promote it online and then offer it worldwide, well pretty much worldwide because we keep all of onboarding investments from multiple jurisdictions. They can reach out to investors that traditionally they will not be able to actually invest in that particular security. So if you look at Blockchain Capital when they did the BigUp token, if I remember correctly they had investors from 80 different countries including someone on the North Pole that actually invested. So that if you are raising funds for a V.C. typically you will do it very privately just to some family offices to some pension funds and [...] and things like that and the normal investors would not get access to those type of assets. Capital formation is one of the things that is perceived as an advantage. The other one is automation of the process. At the end of the day even if you have just a normal startup you have to manage the securities somehow. Most people, they do it with an Excel spreadsheet on the lawyers office. This creates a problem when you want to sell them later down the road because if you want to like say buy some Uber shares on a secondary market before the IPO it's a very complex process because you have to see which share classes you're buying, what type of rights they have whether they have rights or fair refusal with someone else, what is the lockup period whether that investor can actually buy, purchase that share accidental. All these capital management and regulatory compliance can be coded in smart contracts on the blockchain and pretty much be executed automatically which is a huge advantage. And then that leads to the fact that then you can then integrate with automated exchanges that do this trading automatically and provide liquidity for private placements that are [...] and illiquid.

Matteo Liebowitz As far as capital formation goes. Obviously we already have rather liquid capital markets both public and private. Do you think that the types of companies that are pursuing the tokenized security route, do you think those deals are perhaps more dubious and that's why they can't necessarily tap into existing capital markets?

Carlos Domingo So first, most of the companies that are doing security tokens today, they're not ready to access the public capital markets because they're not large enough to do an IPO...

Matteo Liebowitz We have very kind of deep pockets in the private market.

Carlos Domingo So the private [...] market is actually bigger than the public capital markets and has been growing more. I think that those companies they probably see, this as a better way of raising capital than trying to go the route of like meeting VC's and meeting 50 VC's until you get one that says yes except that then they just kind of like crowdfund the process of fundraising. It's true that there's a lot of companies like in our case that we get approached by a lot of projects that they want to do a security token because there's no way they're going to raise money from traditional sources and we usually reject those projects because that's a bad reason for doing a security token. If those projects don't successfully raise money and issue security there's no business for us because the insurance part is not where the business is the business is about managing the security and then charging fees on a monthly basis for life security that you need to manage and that's how you build recurring revenue and increase the value of your company. Last year we got like a thousand thirty leads on the website, the people that just contacted us because they wanted to do a security token and we only took 23.

Frank Chaparro How do you go about deciding which ones you're going to accept?

Carlos Domingo Some of them are pretty obvious that they're not good deals. So we do have a form online...

Frank Chaparro What's the red flag?

Very small deals we don't take them because we don't think that the advantages of security tokens are going to apply to those and they're never going to get listed on exchanges for liquidity. You know sometimes people without experience of fundraising or their business plans don't make any sense. You know, so we have like a list of filters on the form of the website that we discard some deals automatically, send them a nice thank you very much e-mail, saying we are at capacity we can't take these deals and then try to be selective with the amount of deals we take because if we take bad deals which we have taken some in the past when we started. That experience proves that actually you'll end up spending a lot of time with the deal and not making money. So it's not worth you know just taking deals for the sake of taking deals. Keep in mind that in our platform as opposed to others it's not a self serve that you can just go in and click click click and issue a token but you actually have a contractual relationship with us, we put a person managing the process, we customize the platform, the contracts and everything for that particular issue so there's work involved. So unless the company has the money and is going to be on business long enough to be able to pay us fees it's just not profitable.

Matteo Liebowitz And again going back to this capital formation process, so do you think projects taking the tokenized security route, do you think perhaps are doing that for ideological purposes in that they would like a busier cap table in a sense? Or do you think it really just comes down to avoiding the traditional fund raising route?

Carlos Domingo I think it's both. So it depends on some tokens, some companies we've talked to, some of our customers that really do it as you said because they really want to give access to the company, to the general public as opposed to just play with VC's that have access to those deals and some companies they also do it because they kind of structure deals in a different way like maybe a revenue share for a product line versus like giving out equity so they can maybe avoid dilution except I think that the same happens with the ICOs that there were good legit projects on the ICOs space and there was a lot of garbage. I think the same thing happens in security token space.

Frank Chaparro Something that I've noticed and we've written about it extensively at the block is the shift that's happening with some of your competitors and I remember it must've been two months ago, three months ago we came to you and a few other firms because we had heard that there were subpoenas issued and you said there weren't. No subpoenas for Securitize and other people corroborated that. So I think that you were being truthful because I spoke to other people who said that that was also not the case but regardless of whether or not there were subpoenas issued to I had heard Coinless, Harbor and you guys. There are certainly some activities in this market that firms like your firm and others are moving away from. Dealing directly with investors as one example, charging investors on a transactional basis, providing capital markets advice to certain clients. All these things that traditionally would fall under either broker dealer or register advisor. How do you make sure... Well just stepping back quickly, so as a result a lot of these other firms have gone on to basically white label their solution and say here we're providing you this technology to do on your own and then issue a token. How does Securitize view this sort of complicated regulatory landscape and then operate in a business that doesn't necessarily take away from what the benefits are to issuing a security token.

Carlos Domingo First, we've been white labels since the beginning. So if you go to any of our issuers through the website you're not even going to see the Securitized logo or anything. So our business model from the very beginning has been we attack pro either we white label the platform, we give you all the tools of what [...] they issue or your broker dealer needs to do to basically you know from the capital onboard the investors and then we'll give you all the tools for you to manage the security once he's been issued on the blockchain. So we've never been a broker dealer. We've never fundraise for customers. We don't take transactional based compensation and things like that. So we've been very careful from the beginning to just stay you know in a very narrow thing and just doing only one thing very well...

Doesn't that leave a gap though, right? If I'm an issuer let's say a big real estate project and I want to secure, tokenize my building which we've seen elsewhere in the market and I want that capital markets advice, I want to understand it. Who should my investors be, where do I go to to secure investments? If it's not Securitized who am I talking to then? So first my view is that if Securitized let's say becomes a broker dealer like some of our competitors are doing and tried to provide that advice, its very difficult that you're a good broker dealer for every type of issuer. Because we get issuers that do real estate, we get issuers that are startups, we get all the issuers that are geographically in different parts of the world [...] So for me it's hard to think that a company, a startup like [...] Or like some of our competitors can actually become a good enough broker dealer for all those type of deals because you would need an army of people with different skills and different contacts and a different Rolodex so our approach has always been we partner with people and then we try to partner with people that complement us, they either have broker dealer or you know investment banking licenses and experience so they can help our issuers and people that have trading platforms and ATS licenses to be able to provide liquidity. We just sit them between us if you want a transfer agent on the blockchain that controls the compliance with the security or the corporate actions and provides the integration with with the spaces. I know that some of those companies might have people then change what they were doing...

Frank Chaparro It's interesting. So one company basically had folks who worked for a registered investment advisor working in the building with Harbor or geeze, there we go [laughs] So basically Harbor's setup was such that you had the registered investment advisors who worked for a separate entity within their same building. And so the money that would be paid for those services would kick up into that different entity that was affiliated with or either owned by by Harbor. But there are folks out there that are getting creative maybe with the way that the regulatory structures in the U.S. works but regardless what I think...

Carlos Domingo Getting creative is asking for trouble especially in the U.S.

Frank Chaparro I think many people would probably argue that. What about, there are some folks that might be, might look at you guys and say that you're not conservative enough like Templum we were talking about before. They're opting to issue their security tokens on a private blockchain with Symbiont because they're worried about the potentiality of, what was it? Basically that Ethereum miners are broker dealers and dealers and so I honestly I'd like for you to dissect that argument with us because maybe Matteo's familiar, I'm not a thousand percent clear on it. Explain what their argument might be and then we can...

Carlos Domingo First before we go into the argument we can then debate if you want the pricing coins of doing securities and then the second one is whether the argument of the miner has been broker dealers is actually a problem with the [...].

Frank Chaparro Let's focus on what the argument is for them being broker dealers.

Carlos Domingo Their argument is that because they...

Frank Chaparro To be clear it's not just Templum that's saying this is.

Carlos Domingo Probably Templum has actually filed a petition to the SEC to reply to them which obviously the SEC is not obliged in any way to reply and I don't think they're going to reply about clarifying whether Ethereum miners from the public Ethereum blockchain. Our broker dealer...

Matteo Liebowitz They've been saying the same things about miners being money transmitters as...

Carlos Domingo Yeah. So I just mean it might be a different story but the broker dealers, so clearly broker dealers actually one of the things that determines a person being a broker dealer is that it takes a transactional based compensation. So I send you a hundred dollars of securities and I take a 2 percent or 1 percent or 5 percent or whatever. And then if you think about what Ethereum is it's basically a world distributed computer that's what it is. It processes computing cycles that execute algorithms on top of their Ethereum virtual machine. When those miners that take a fee for mining the blocks and approving transactions they actually have no idea about what they're doing in the sense that they actually don't understand the content of the transaction and the value of what they receive is irrespective of the monetary value of what potentially has been transacted there. So a miner in Ethereum is going to get compensated equally for approving a transfer of one token to you. And whether this token represents a million dollars or a billion dollars is completely irrespective of the actual value of the of the token. Because they're just approved a transaction. This is why there's a lot of people that get fascinated when they say oh they transfer 150 million dollar for bitcoin for only one dollar. Well if you transfer just one bitcoin its also charged one dollar because the transaction is about updating the ledger irrespective of how many things you're transacting and that's one of the arguments against this being broker dealers. If anyone that is processing transactions in a computer that are transactions related to securities will have to be a broker dealer then you'll probably have to have IBM mainframes being broker dealers and AWS servers be broker dealers versus transactions being broker dealers. I don't think that that is going to fly. I think that there is much better arguments why some companies don't want to do securities on the public blockchain which are very legitimate.

Frank Chaparro And some are coming to you and saying the same thing.

Carlos Domingo Yeah but they're not saying that, I haven't talked to anyone that actually agrees with that argument yet. But maybe there is one out there besides Templum but basically the pushback we get about the public blockchain is the following. First is performance which is a very legitimate one because we actually have issued tokens on the public blockchain and we've actually issued millions of tokens with a complex smart contract infrastructure. It could take us like a day and a half literally to issue all the tokens people are not aware of that. And then the second thing is that the cost is completely random so you never know how much it's gonna cost you to do things on Ethereum because the fees keep changing, it's not predictable from a cost perspective of how much you have to pay today because it's very cheap. You know it's not concerned but the moment this goes up in volume you're gonna have the performance problem and you're gonna have potentially the unpredictability of the cost. That's the thing. The third argument which is also a very valid one is that the public blockchain are so anonymous right. So I see a wallet that receives tokens. I actually don't know who the wallet is but I can actually infer things about what happened. If you do a securities reissue on the blockchain you can actually go to ether scan we actually work with them on tagging them as security tokens, you can look for B cap or for SPiCE VC on your security and you can actually see how many securities were issued to, which wallets, how many wallets transacted and the whole history of how the security moved right. And even though you don't know the individuals you actually can figure out the structure of their security and obviously some banks don't want this to be out there in the public because if someone can then figure out who the wallet owner is then you can trace back all the history of the trailings with them. The lack of anonymity on the public blockchain is another problem. And then the final one I think is governance. Like if today there is a problem with Ethereum who do you call? [...] go to Twitter and try to get them to answer or you call the Ethereum foundation so a lot of these banks want to have someone there that can actually provide some support or if something breaks etc.

Matteo Liebowitz I think that kind of atleast a broader question which is why blockchain in the first place for these assets? Just a tiny bit of context for our audience. The primary value proposition when it comes to crypto currencies like Bitcoin, Ether is their censorship resistant nature. That obviously doesn't apply to a securities offering tokenized security. What are the advantages of issuing the security on a blockchain?

Carlos Domingo A blockchain at the end of the day is a distributed ledger that people can trust that the content hasn't been tampered with and then if you think about the process of issuing securities there's a lot of people in between that participate right. They participate to be able to guarantee that the process happens flawlessly. You have the broker dealer obviously which probably isn't gonna disappear because someone has to fundraise the money but then you have people like issuing and pay agents that basically set up payments of securities, you have custodians, you have transfer agents you have a bunch of people that are, the system has been built to make sure all these things have transaction finality and that nothing breaks and then you can actually implement everything on this distributed ledger in a way that you can probably eliminate a lot of these players that they exist to guarantee that the system works, that you could guarantee that the system works because it's on a blockchain and distributed ledger. There's no control by any one entity. I think there is an argument about blockchain probably being a very good digitization platform for certain type of assets that require multiple stakeholder collaboration. As opposed to doing it on a centralized database that someone will have to go there and control and manage like today happens, we did see for instance that they actually have a central database where everything gets settled, right?

Matteo Liebowitz But as you said there are perhaps scenarios where something goes wrong with the Ethereum Blockchain so that could be some kind of contentious fork or that could be a reorganization in the traditional capital markets we have recourse and that's what's nice about these these traditional markets is that if something goes wrong you can kind of roll it back and and make everyone whole. We could find ourselves in a situation where miners purposely target transactions related to security tokens and perhaps sense those transactions or extort users who are interacting with those kinds of assets with a higher fee. You're not going to run into those problems with a centralized ledger.

Carlos Domingo Correct. But if the miners can collude to modify the blockchain that's probably not for security tokens but for bitcoin, Ethereum, for any cryptocurrency because they will suffer the same problem. So the whole idea is that the big public blockchains-- the likelihood of this happening is very low precisely because of the size of a network. Right. I think that the public blockchain versus the permission based blockchain or centralized it obviously if you want is a very similar situation of what happens with cloud computing. When cloud computing started around 2004 2005 and AWS launched I was actually living in Seattle at the time, I was the CEO of a startup and for us it was like wow this is very cool.

Frank Chaparro What was the startup that you were doing?

Carlos Domingo I t was called Laser Tech. I was a CEO of a company called Laser Tech that was acquired by a company I was working for. So I was living in Seattle and so I knew the guys from from AWS. And then for a startup actually being able to put your servers on the cloud and just have someone providing you computing and storage and paper usage it was great. So we were real involved with the I.T. staff and all the data center costs and things like that. But then after that they moved to our company called Telefonica which is a Fortune 500 and then for a Fortune 500 company that was running a telecommunication network with 200 million customers. They couldn't put the service on the cloud unless they have certain guarantees of performance so they need to have an SLA to start with which Amazon people don't remember, but at the beginning AWS didn't have an SLA so you put your computing there and they would not guarantee you what's the uptime, period. So you have to live with the uncertainty of whether tomorrow or your Website is going to work or not. Today obviously this has been fixed. You also didn't have any way to guarantee that the bandwidth from your place to the data center because at the beginning, the cloud infrastructure was very primitive and today all these things have been fixed and there's all this modern stuff to make sure that the connectivity that comes forth from the cloud data centers is very good. You didn't have visibility of all the security measures too or you know data retention policies and things that large companies need to know right. So large companies built private clouds which a lot of people are like a private cloud is a stupid thing right because the public cloud is the one that really gives you all these advantages of shared resources such you know elasticity and things like that. and to some extent they were true. But at the same time you needed to fix all the problems, private cloud was a good compromise for people to be able to benefit to some extent about this technology without embracing something that was too far out there for them to use it. So if you think about today the situation on the blockchain is very similar right. I think people see the advantages of blockchain but many companies are for for very good reasons they're not ready to go to public blockchain. Eventually I hope the public blockchain's will get fixed either Ethereum or someone else that comes and then people will be able to move their...

Frank Chaparro What does the deal flow look like moving into the next half the year? How does that play what is that pipeline?

Carlos Domingo We have a big pipeline and it's actually growing but as I said we're trying to be very selective for who we take as customers because for us taking a customer that doesn't have a good product that is going to show security that you know like some of them that have been issued out there that have zero wallets registered because there's no tokens being issued...

Frank Chaparro How many do you think by the end of the year? When I was reporting on the New York Stock Exchange and Nasdaq I would ask the same questions, how many IPO's in the next six months and they would never answer the question or be very vague.

Carlos Domingo We have 26 now. I can think of by the end of the year being you know somewhere between 50-100 at the pace that we're growing.

Frank Chaparro Interesting, with the resurgence of bitcoin has that played into more folks getting interested in doing this or are the two things completely uncorrelated?

Carlos Domingo There are still to some extent correlated because we still get a lot of people coming from the crypto space that understand that an ICO is probably illegal or has legal risks and then they would prefer to a security token offering and that their audience is actually crypto people and therefore the fact that crypto is up makes it easier for them to raise money.

Frank Chaparro Have you ever had someone that was thinking about working with you and then decided to go to Binance to do an IEO or...

Carlos Domingo Actually we do have now some people that say okay I was going to do an SDO because it's legal but now I can do something illegal somewhere else and it seems to be okay so yeah this is definitely happening.

Frank Chaparro What do you make of these IEO's?

Carlos Domingo Well I think that the SEC has already said but you know these guys are acting as broker dealers because they are raising money on behalf of other people. So in certain jurisdictions that's certainly prohibited...

Frank Chaparro Just break out your VPN.

Matteo Liebowitz I find it interesting that that you mentioned that there's this overlap between kind of the audience or the market for tokenized securities and crypto assets, really because you would think that they have very different upside opportunities and risk profiles as well. Do you expect to see that relationship continue over time or do you expect that to be kind of an emergence of an entirely separate market for tokenized securities?

Carlos Domingo I think that eventually, so I think that SDOs are the legal version of ICOs is how that kind of industry has started and what everyone talks about. But I think for for SDOs or detailed securities to be meaningful they have to move from let's say alternative assets where they are today into more institutional assets and those assets have nothing to do with with crypto. These will be people that we talked to that they actually see the value on digitizing the process of issuing securities and then as you said there's many ways you can digitize things. You can digitize things with the central database or you can digitize things with a distributed ledger and some people find the option of doing it with a distributed ledger given that everyone plays in a different part of the value chain a very good alternative if you want a collaboration platform.

Frank Chaparro Just real quick, what would be the best comparison just out of my own curiosity in your mind of Securitized to traditional capital markets like what type of company, business or transfer agency...?

Carlos Domingo Computershares. I used Computershares when I was working at Telefonica as an executive I got shares from the company. So Computershares basically holds the record of who has the shares for the ones they know because like if a broker dealer like Fidelity Bank where someone has a trading securities you actually don't get to see who holds those securities you only see the street name of the record but the transfer agent is basically the one that provides the compliance of the securities. There are proofs of transfers that does the corporate actions like conducting boards and paying dividends and things like that. Now Computershares from my own personal experience would say you sir could take weeks for you to actually transfer securities but when I left my company I wanted to transfer securities out of Computershares account and to my own broker dealer to sell them and then it took me literally weeks to do it while actually one of our customers they were working with computershares alongside us and then computershares would ask for request at least two weeks to approve the transfer of a security because they do it manually. They'll go and look at the contract and what you've bought when you bought it and things like that. Well with digital securities you can actually do it programmatically using smart contracts that basically have quoted all the compliance rules. So therefore the transfer checking, whether the transfer can happen or not is immediate so...

Frank Chaparro Interesting, well I finished my beer so I want to get into some more lighter stuff about the founding of Securitized. People tell me...

Matteo Liebowitz You could have done that at the beginning

Frank Chaparro I know but I always people say this to me, they reach out about the podcast which they like it but they go Frankie like dive straight into the deep end of the pool before like you know let's have some foreplay first before we get into it.

Matteo Liebowitz So again when you consider the buy side in the market for these tokenized securities being blockchain based tokens you have to custody these tokens in a particular manner. And again being Bara assets barra-ish assets because I imagine there is recourse in the real world if things go wrong but being these blockchain base assets they have to be [...] and taken away. That is complicated and that is expensive and really there aren't that many institutional grade qualified custodians on the market today. So why would a let's say a hedge fund that is in the market for securities bother buying tokenized securities rather than just going and you know dipping their hands into the equities market bond market and buying through that?

Carlos Domingo So. So first if you're a hedge fund or you know an investment bank or whatever and you hold securities you still need to use a custodian. Right. So. So they will use state street or you know BNY Mellon or whatever. So of course those guys are not qualified custodians for these assets today. And they the existing ones are you know like Coinbase and you know Kingdom trust and people that you know are more startup type companies but there exist qualified custodians that can do they hold securities in the form of wallets. So that already exists and it's not necessarily much more expensive than what the other custodians custodians do. So I think that they're the pros. You know you need to make it simple for people to hold security tokenized right. So if there is if security Dawkins have certain advantages but they have certain disadvantages people are not going to adopt them. Right. So so you're absolutely right that the infrastructure needs to be there to make it easier to hold these dot securities as you hold traditional securities and then once you're there then you can benefit from the other advantages there. You know the automation the digitization of the process the automated compliance liquidity and things like that but until those problems are solved you know for institutional investors entering the space is going to be a problem which by the way is the same problem happens with crypto currencies for institutional investors and as these you know custodians they can trust that they will actually know when to buy bitcoin.

Matteo Liebowitz Absolutely. And then when you consider this idea of funds themselves. Tokenized. And we've seen that with blockchain capital as well. Usually when you see funds trading on public markets they actually trade below net asset value. So again why why oh why do you see this this trend of merging of funds and investment vehicles tokenized themselves.

Carlos Domingo If you think about venture capital even though it is a huge industry is actually a very tiny asset class right as opposed to many other asset class and the number one reason why you know we seem to use a small asset class is first because very risky and second because it's very liquid so that makes it that when people allocate their portfolios into different asset classes you know this is always going to be like the smallest one for those reasons. Because basically on a busy year it's a blind pool where you give money to someone for the next five years you have to be paying them every year and you don't get to see anything what they do you know what they do. You know they're investing in very risky assets that have a very long return period etc. And you know if you're lucky seven to 10 years after you're gonna get some money back. And I think that that makes B.S. except for like the tier one obviously is that people assume that going to be making money for everyone else makes it actually complicated to raise money. So if you can actually eliminate at least one of the problems which is the fact that there is no liquidity then you can then probably improve capital formation from venture capital firms. So I was the whole the whole idea around BCE tokenized. So I think that eventually when that really happens the ones that are not tokenized and don't have liquidity will actually be it will be at the disadvantage right. Because if I have two voices and you're too busy managers and you can't like equally good. You know why would I give it to you if you have. Does it really create the options versus Frank if Frank has you know liquidity options. Of course liquidity is still not there. So we're talking a bit you know futuristic scenario but it could happen right. And these actually are going to be like INEC market for LP interest or funds where you are trying to get rid of the LP interest because they've been there for five years and whatever their financial situation has changed and they need to sell it or the fund because companies now take very long time to go public. The fund is not returning any money to anyone for a very very long time. So this secondary market for a pay interest over the excess money is extremely inefficient because precisely all the complaints have all how can I buy them.

Frank Chaparro Do you think near-term opportunity for for security tokens.

Carlos Domingo I think that's a good one because also it gives option to people to invest in a venture capital firm which typically is very difficult to access as an investment real estate obviously something a lot of people talk to. We've done some real estate deals you know I think that you know we'll see more real estate coming because that's you know fractional ownership and some of the characteristics of security doesn't fit well with with real estate. But I think that they they're the best target is probably midsize companies that are you know 250 to 500 million dollars that doing an IPO. It's too expensive for them and they've been around for like 5 7 years. They want to price some liquidity to their employees and shareholders and then they say to tokenized I think that's probably a very good target. It's still not happening but you know the one we saw seen the step of companies coming out that could be a very good thing for their market.

Frank Chaparro Interesting. Well now that we both have finished their beer within the hour take the next 10 minutes just to go through how you got to this point right. How did you decide you were going to start this company. What was that process like. You were you were you were coming from Dubai.

Carlos Domingo I was living in Dubai when I just started. You know in 2017 I'll be working until going to see for close to 10 years first and Telefonica and then I was working at that time at Duke which is the local telco operator and.

Frank Chaparro I was looking at you linked and you've had like a thousand jobs in the past.

Carlos Domingo That's not true. I spent eight years in telephony Gulf War using my fuel company maybe it was before or maybe you advised. So so we had actual jobs are very few. But yeah I'd been at them very many boards catching things like that but they're going to get on a board of a company. Keep in mine I was working out for a very large company that we invested in other companies so I became chairman of this company and I wasn't doing my property deal join the board of securities have you this podcast here really. So I was I was in Dubai and I had you know done some work around blockchain as part of a project for smart cities with a Dubai Goldman but I was like you know more enterprise type of blockchain applications we did like a trade finance or another one for these dot records in the blockchain and things like that. So it's really not that familiar with the crypto side of things and bitcoin and things like that. And then in February 2017 I am I told the Barcelona to go to Mobile World Congress which is like this big telco conference they do with hundred thousand people I've been going there this year was the first time we didn't go after it like twelve years of going every year. So and then I met with a friend of mine called Brendan Eich which now is very popular in the crypto scene because he's there they found their far brief and basic attention talking and when Brendan was CTO of Mozilla Brendan I run a project together called Firefox is where we were trying to build them while operating system based on estimated 5. To make it open for people to basically install applications and things like that. So Brendan I became friends. He left Mozilla I left Telefonica. We always think that I met him two years prior when brave was kind of starting at the beginning their wallet was using bitcoin for the payments and then in 2017 in February he told me oh you know I'm gonna. You know this new network called Ethereum has launched and you know that you can create your own currency and then I'm going to switch from Bitcoin to this one so I can control the monetary policy of my currency and I'm going to resell it to investors. So he was basically describing an ICOs to me when I've never heard of ICOs. So I went back to the buy and then I read this this new seller called Tech MIM. It's just like my first five minutes of the day after the block off. GROSS Is this the read that exists to give you like me a snapshot of whatever has happened if something big you're gonna see like all these links there and then. So I always read that. So he was actually there and he left on their races. And what I came away was thirty five million dollars in 30 seconds. I was like What. That's not what I understood from the conversation. I started texting him was like what happened and he's like oh well it talk to me I'm thinking. But he has no idea I have is still the message this I mean we're like you. I missed my contract. Tokenized that's where they narrations gonna happen. That's the next thing you have to quit your job and come to do something in this space blah blah blah. So so that was it got me excited so I started then at that time I said buy Bitcoin a theory I'm participating on ICOs and I just got excited about about this and I come in front of us was you know setting up together with his partner. They were setting up space be seen as a traditional like venture capital firm nothing to do with blockchain nothing to do with tokenized except down then the idea was like well why don't we do an ICOs for fun. That could be a good way to raise money because they had been trying to raise money and they didn't raise money. And guess what. When you want to do an ICOs fund the first thing you come across is like this is a security. So if we do it the way like Brendan had done it we're going to go to jail for sure. So. So he got lawyers in the U.K. alone. Nobody instead of working with them. How do the 1 ICOs fund the concept of security duck into the human accessed. This is a term that kind of came a bit later and then you know we started looking at what does it mean to issue a security on the blockchain and what type of constraints from a regulatory perspective you have and what type of smart contracts you need to build to control the transfer restrictions and basically building securities for ourselves for a space we see. And then in September 2017 we and I was a project to the public eye winter conference in London and basically announced we're doing the first fully tokenized B.C. fund back then. Blockchain copy that had done it already and it had research in very very much detail about exactly how they did it like you know how it was built constructed that we have use and everything and had decided to basically build the stuff ourselves and then if you guys remember that summer day the Dow you know report from this came out. So people then started realizing you know a lot of the ICOs thought maybe unregistered securities and more importantly there were some people like Stephen McKeon which you guys probably know. I can't contact him like in September 2017 or something and then David Sykes before it was funded. Now they were like out there are saying you know tokenized ing real well assets and the blockchain makes a lot of sense he has a lot of advantages. And Stephen Paul is that article saying that the security talk I remember what the title was a thesis about why this is important except.

Frank Chaparro Possibly on I was out there saying well yeah that time is far worse than not in Bitcoin.

Carlos Domingo Why wasn't security dark games as well and tokenized the world. And so a lot of people are protests and told us like OK we want to tokenized things so how were you working with tokenized in space we see and we were like what's our own technology. So my co-founder Jamie Finn he had actually invested in space B.C. and you're sitting in San Francisco where you know a lot of their trends happened and he was saying look this is an opportunity what you guys are building there to offer it to other customers and I have like these guys lined up ready to use it. So we took the decision to spun it out and create securities.

Frank Chaparro And so what's next. Let's end on what's what's next what's the next six months going to look like. You mentioned you're doubling the team here in New York.

Matteo Liebowitz And not only next six months I'm interested in five 10 years. No six months of course.

Carlos Domingo So six months first is I think that my goal within the next six months is to do execute lock issuance of an asset that is very very very institutional and we have a pipeline of people that we can actually really meet someone coming from very traditional you know finance background you know or.

Frank Chaparro What would the asset.

Carlos Domingo We're working on a number of those. I think either we'll be real estate or fixed income and ending in fixed income. So those because that's it was gonna signal the market that this is not only early adopters t.

Frank Chaparro His technology coming to devise a fixed income asset.

Carlos Domingo Yeah we were working with some banks on doing that at the moment. So that's all I can say for the next six months. But this is probably you know one day the big project.

Matteo Liebowitz Well we've already seen some banks experiment and some banks have done something.

Carlos Domingo You want to take it one one level deeper.

Matteo Liebowitz Australian banks as well.

Carlos Domingo So what I think is gonna happen in five years is that first I don't think it's going to take five years I take five to 10 years and then the reason I think is that most people think that because every technology that comes to market gets adopted faster that blockchain will be adopted faster than like say the Internet because the Internet was adopted faster than the TV and the TV was up that faster than the radio. And I think this time is going to be the other way around. And Margaret is the following. So there are things you can break when you digitize music are very in material right. So if today I'm listening into you know Spotify and I remember Spotify being used to peer to peer streaming at the beginning when they started and that meant that a couple of times you could actually not listen to the song. And then of course they fixed it and now it works very well et cetera. But you know if you kind of listen to your song on your phone or you know if you put I don't know you know my don't out of business or whoever is producing there they were you know their record label that doesn't really impact they you know has a big impact on the society. Right. But today anything that touches financial services where there is you know you cannot go and pay your dinner because your Apple Pay doesn't work. That happens to be very often or you're your salary doesn't get the bank account because someone has done it with some sort of crypto technology and it has failed or you know or there's a settlement of securities of like billions of dollars and suddenly that fails and you know you lose a billion dollars and so I think all those things will take longer to get digitized just because of the nature of the assets that we digitize and so I think a lot of the people in the blockchain don't realize that these things are gonna happen but I'm going to take a lot longer than people expect. So I see the same thing with you know digital security. So I think that there is a lot of things that can go wrong. But do they for alternative assets as I mentioned is not really a big problem at the moment you start like moving into taking you know bonds that are trillion dollar markets and things like that and you try to digitize them you know a lot of the players that you're trying to displace there whether they are they're issuing paint agents or custodians or transfer agents or whatever they're there for a reason of course they bring in efficiency of course they bring middlemen of course they bring increased cost and you know a longer settlement times and things like that. But to be able to remove them without breaking anything it's going to take longer than people think.

Frank Chaparro So and hopefully the block will be there along the way to watch it and record is as good for you guys it means you've already read for a longer period of time.

Matteo Liebowitz How do you see kind of the the tokenized security issuance landscape developing. Do you see consolidation online. Do you see room for others got to be concerned. I think there are a thousand.

Carlos Domingo Many that I found that my 15000 companies that Frank said that last week announced that they are entering the secure space within the next 18 months. 99 percent of them are going to disappear. I'm 100 percent guaranteed first because you know I've seen enough deals. There's no deals to start with. Second there's very few. There's some companies in the space like say like Ares harbor or Apollo Matthew that we have different approaches or whatever but that we have you know raise enough money and have enough brand equity to be able to get to see most of the deals. And then there's the appetite from the seas to put more money on the space is limited at the moment because they've already place their bets right i you invest in us.

Matteo Liebowitz Well we're just we're just those standard tokenization protocol rates 8 0 0 7 or 8 million dollars.

Carlos Domingo Yes I mean it does not take you very long. So but I think that a lot of these companies that have raised a small amount of money and they're not driving any revenue they're going to have a problem to stay in business. And I don't think that consolidation will happen. I think you'll see more companies going out of business than consolidation because what are you going to consolidate the company and has a technology that scarf similar than you about less develop and doesn't have any customer base.

Matteo Liebowitz So yeah that makes sense. So if you don't see this this uterine consolidation primarily because no one has any real kind of competitive advantage. What aspects of of of particular businesses kind of separate themselves from from there.

Carlos Domingo I think that in our case I think that the main reason we windshields there for two reasons one is because we have the credibility. We have actually issued real securities are supposed to 99 percent of our competitors that have done a lot of press releases but very few actual deals that have been actually shown to blockchain. There's not first mover advantage is a fast mover advantage. But it's also an execution advantage because polymath started before us. So it's not a first mover. They were in the market before us and some companies you know that they come from the ICOs space some people to ICOs there where I was actually in the Polymath ICOs really don't tell anyone. You just told everyone thousands of people don't get me wrong I like I like Terra I was with him last week at consensus you know and I went to a med cabin north of which I like personally. I just think that the way they approach the market is not maybe the one that is going to win because if SLC returns with tokenized but that's their business model and my business model is different. And that's it. So there's no he's not black anything is actually a good relationship but I just think that and by the way do you have enough money to survive through through the security Doc and winter that may happen. I think the other thing that separates us apart is that the fact that we are integrated with those changes because ultimately people want not just this changed by the ecosystem like you to us. We integrate with stones like you know Coinbase or Kingdom ties to revolt or these guys we integrate with you know open finance which no one else integrated would open opening with just posit no one is integrated. We integrate with these zero now and give them their you know what they need to reach the the ecosystem right. So some not just like if you issue with a standalone protocol that no one is using is going to be very hard for you to get adopted by anyone else because it changes and are gonna adopt like 10. Will do one or two at most and that's it and move on.

Frank Chaparro Well thank you so much for coming on. We had fun. Thank you for the conversation. No worries. Safe travels your flight. Yeah. All right. Thank you so much. Thank you very much. We'd like to take a minute to thank our sponsor. Cash and cash up has been the number one in finance on the App Store for almost two years. It was the first major peer to peer payments app to support bitcoin and it's still the fastest easiest way to on ramp up. No more waiting five days for your HGH transfer to come through with cash app you can buy Bitcoin instantly when you're ready to take full ownership of your private keys just use cash F to scan an external wallet QR code. It's really that simple cash app also comes with standard banking features like direct deposits and others your bank would never even consider like cash card. A customizable debit card that lets you instantly save every time you use it at lift whole foods to play. Chick fil A Starbucks Dunkin local coffee shops and a whole lot more download cash up today from the App Store or Google Play. And thanks for lists.

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About Author

Frank Chaparro covers the intersection of financial markets and cryptocurrency as Editor-at-Large. Since joining the publication in 2018 as its first reporter, he has played a key role in building The Block into a leader in financial journalism and research. He leads special projects, including The Block's flagship podcast, The Scoop. Prior to The Block, he held roles at Business Insider, NPR, and Nasdaq. For inquiries or tips, email [email protected]

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