CoinList's Andy Bromberg: The Future of Crypto Fundraising

Andy Bromberg is the CEO of CoinList, a trusted platform for running compliant token sales. In this conversation we cover the Stanford Bitcoin Club, airdrops, security tokens, accreditation laws, and why some companies in crypto are doomed to fail.

• 0:01Speaker 00

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off.

• 0:15Speaker 00

  Andy Bromberg is the CEO of Coinlist, the trusted platform for running compliant token sales. In this conversation, we cover the Stanford Bitcoin Club, airdrops, security tokens, accreditation laws, and why some companies in crypto are doomed to fail. I learned a lot from this one, so I hope you enjoy it as much as I did. This podcast is presented by Blockworks Group, the only blockchain event and media production company I trust. If you're an investor, lawyer, accountant, or entrepreneur, and want to attend exclusive events and dinners, visit them at blockworksgroup.io. I promise you won't be disappointed.

• 0:51Speaker 00

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 1:19Speaker 00

  Before we get started, I wanted to tell you about our sponsor, BlockEstate, a security token project in the $200 trillion industry of real estate. They've partnered with Polymath and Coinlist's Comply API to create one of the first tokenized real estate funds, and they have a unique buyback and burn model. To learn more, visit blockestate.com.

• 1:39Speaker 00

  Alright guys, I'm here with Andy from Coinlist. Thank you so much for coming.

• 1:43Speaker 01

  Thanks for having me.

• 1:43Speaker 00

  Absolutely. Alright, let's go real quick through your background, kind of pre-Coinlist.

• 1:48Speaker 01

  Yeah, so I grew up in Massachusetts outside of Boston, came out here to the west coast, rather, to go to Stanford, studied math and computer science there. That was actually when I first got into cryptocurrencies. So in 2012, 2013, I started the Stanford Bitcoin Group with a bunch of other folks there, including Paul Jesus Navasan, who's now the CTO of Coinbase, formerly the CEO of Earn.com, and he convinced all of us to... To get into Bitcoin at that point and start paying attention to it. So when I was there, we did a bunch of cool advocacy. We built some cool projects, did some research, spent a lot of time on it then. I ended up leaving, started a company not in the crypto space called Sidewire in the media space. And then wound that down last summer as Coinlist was being formed. The brief backstory on Coinlist is that it was originally a collaboration between AngelList and Protocol Labs,

• 2:33Speaker 01

  who builds Filecoin.

• 2:34Speaker 00

  Okay.

• 2:35Speaker 01

  And they built Coinlist basically to support the Filecoin token sale. Look, we're gonna have this big sale, we need a platform to support it. And so they built Coinlist together. And midway through the process, we realized, wow, this is really hard. It's costing us a lot of money for product and legal. And every single token sales go and need to do this. So this should be an independent company serving all of these token issuers. And so we spun out of AngelList last summer, last fall, to do exactly that, to provide the future financial services for the digital asset economy. And I've been running for about a year since then.

• 3:03Speaker 00

  Awesome. So let's go back to Stanford, Rick. It's really interesting. There's a whole bunch of people that were in and around this Bitcoin club that I think people know today. What were you guys doing?

• 3:16Speaker 01

  Yeah, we were doing a bunch of different things at that point. This was so early, 2012, people were just starting to get into Bitcoin. And it was really just Bitcoin at that point. There were a couple others, like Namecoin and Litecoin was starting to get going, but very few, very few cryptocurrencies. And so we really did three things. One, we did a bunch of advocacy. So we ran up and down Sand Hill Road and pitched VCs, not on investing in us in any way, but just investing in or looking at Bitcoin and cryptocurrencies, and trying to convince some of the bull case for why this might be valuable.

• 3:47Speaker 00

  And what was the response?

• 3:48Speaker 01

  It was mixed. It was mixed. There are some people that still come back to us and say, you know, thank God you told us to invest in Bitcoin because it's worked out really well for us. There are others that come back and say, wow, we were wrong and you told us to do this. We said this was silly and we should have said yes. So really mixed response. I would say at that point, it was mostly in the category of, sure, this might be interesting, but there is nothing investable for us at this point, which I don't fault them for. Because at that point, there were very few businesses and frankly, very few of those businesses survived to today from that first wave of Bitcoin companies. And it's tough for them at that point to invest directly in the token itself.

• 4:29Speaker 01

  But there was a small set of really enthusiastic firms and a small set of really dismissive firms. But the majority said, this is interesting, we just can't invest in anything right now.

• 4:37Speaker 00

  Is there anyone who's gone on record that you know of that bought based on a conversation with you? Who was like really excited either firm or an individual?

• 4:47Speaker 01

  That's an interesting question. I don't think on record.

• 4:50Speaker 00

  Okay, we won't broach it if they haven't done it themselves.

• 4:53Speaker 01

  Yeah.

• 4:54Speaker 00

  All right. So you're running up and down Sun Hill Road and I'm assuming other people as well talking, you know, talking to others about, hey, there's a thing Bitcoin. What's the pitch at that point? Is it like this is going to become the global reserve currency? Is it something else?

• 5:05Speaker 01

  Yeah. So at that point in 2012, it really was focused around global reserve currency. And even if not global reserve currency, at least powerful global currency. This was generally right after the fallout in Cyprus, when the banks were bailed out. And that was a really big talking point for folks in the Bitcoin space then was, look at this, a currency failing. As this new digital currency is getting started up, what if there was something that wasn't controlled by a centralized government? That we could look at as a currency, as a substitute. And a lot of the argument at that point was centered around, we don't expect this to fully displace other hard currencies. But we are looking at it and saying, what if everyone puts some fraction of their wealth in this currency?

• 5:49Speaker 01

  As a backstop against governments failing or currencies failing. And actually, you know, yesterday, the day before, CFTC Commissioner Giancarlo was talking about this and saying, you know, there's so many currencies out there in the world, hard currencies. Bitcoin and other cryptocurrencies could be really valuable for providing a backstop for people with weaker currencies. And so I think that that thesis still exists. It is not the only thesis in the crypto space anymore. But at that point, it was a really powerful one and something we focused on.

• 6:17Speaker 00

  And we're still seeing it today, right? Like, I think that this narrative continues to pop up whenever there is, you know, kind of economic chaos and especially a developing world country. And so Venezuela, if I remember the numbers correctly, it's like November 16, of 16 is when they go into hyperinflation and, you know, local Bitcoins trading volumes like $215,000 or something. Fast forward to, you know, what are we in October of 18 now, right? So almost two years and it's over $3 million in monthly volume and. Each week now, we're setting new highs in that trading volume. And so it's, is that because of the currency problems? Probably, right? Are there other factors? I'm sure, right? So it's really hard to kind of quantitatively measure why.

• 7:03Speaker 01

  Right.

• 7:03Speaker 00

  But it's pretty hard to ignore what's actually happening.

• 7:05Speaker 01

  Yeah, certainly currency problems, and I think also just general awareness increasing. The one thing I would push back on as a little bit of a contrarian thesis in the space is a lot of people suggest that in times of, that Bitcoin and other cryptocurrencies are going to be anti-correlated with the markets, that with kind of economic downturns, even in established, developed countries, we're going to see a downturn result in an increase in the price of Bitcoin, that it's kind of anti-establishment, and so it'll run anti-correlated. I'm not convinced that that's the case right now, because I think that most large holders do see it as speculative today. And when there's an economic downturn, the first thing that people divest from is highly speculative assets, and they retreat back to what's safe.

• 7:49Speaker 01

  So I think that in countries where there's massive instability, there's a really strong case for, as instability is increasing, so will Bitcoin investments and holdings. But I think that in the developed world, when there is economic instability, it is not on the same scale, and people see it as more of a temporary cyclical thing. And that results in a divestment as opposed to an investment. And I think that that argument's made a lot, and we have not yet seen evidence that for the developed world and for really high, high-growth economies, that in times of dips, that Bitcoin investment increase.

• 8:19Speaker 00

  Yeah, I think the data that I've seen, and I'm sure there's people have done even more than I've seen, but it's uncorrelated on a global basis. What you're basically with the argument is if you separate that out into developed and undeveloped populations, the developed populations actually may have a much higher correlation than the underdeveloped. Yeah, that's a super interesting thesis. I'm sure somebody will tweet at us and say, here's the study. Okay, so let's talk about, you're going out, you're pitching, you're kind of ringing the Bitcoin bell. At this point, were people even able to actually purchase Bitcoin? Coin on like, I don't even think Coinbase had an established product then?

• 9:01Speaker 01

  Coinbase was just getting up and running towards especially, so we were doing this for for two years from 2012 to 2014. And in the middle of that Coinbase was really getting up and running and that's what we started recommending to people to use. And so that that worked out really well. And that was effective. The other things we were doing at that time, one was building some things.

• 9:22Speaker 00

  Okay.

• 9:22Speaker 01

  And a couple of those have actually developed into products that still exist or did well. So one of them, a couple of the guys, Pat and Matt from the Stanford Bitcoin Group, built this thing called TryBTC, which was like the easiest onboarding for Bitcoin because at that point, to your point, people had no idea how to start using this. And so it was really simple, you know, we're going to send you a few satoshis. You're going to send them to a charity that accepts Bitcoin. We're going to onboard you. That ended up getting acquired by Coinbase and the guys worked there for a little bit and and helped them build kind of their onboarding flow and growth flows, which was cool. There was another project, Alan Meyer and John Backus, who now run a project called Bloom, decentralized credit scoring product called BlockScore at that point. And that was an identity verification platform originally built for crypto businesses, providing your customer anti-money laundering services.

• 10:07Speaker 01

  So there was a lot of building happening in that group to provide early infrastructure. And then the last thing was research, academic research, things like economic effects of what if Bitcoin had been more present during the Cyprus collapse? And and starting to look at some of the market dynamics of Bitcoin because very little had been looked at at that point. How is this, you know, constrained supply of 21 million Bitcoin going to affect the economics in the long run? When is that going to happen? You know, how are we going to to see these changes play out as Bitcoin evolves? And so those are kind of the three areas we focused on advocacy, building and then research.

• 10:39Speaker 00

  Got it. That's super interesting. And so, you know, let's flip to Coinlist itself, right? So the Bitcoin world goes from Bitcoin only or Bitcoin, you know, plus a couple to now there's, you know, like 2,000 plus tokens and just, you know, gangbusters.

• 10:58Speaker 00

  What is Coinlist and how are you guys interfacing with this, you know, kind of bonanza of tokens?

• 11:04Speaker 01

  Yeah. So Coinlist, we describe as the platform where the best digital asset companies manage. Their token sales practically that means that we do three things today. The first is that for certain token sales, we put the sale publicly on the platform. And then we handle the logistics of the sale process itself. So that means things like doing compliance due diligence on investors. So know your customer, anti-money laundering, investor accreditation. That means doing things like facilitating the issuer accepting payments for the tokens. It means things like handling document signing and execution, all of that. So really kind of start to finish helping them manage from a technological perspective, their token sale and then putting it up publicly on the coinless platform. We've done that so far for five deals.

• 11:45Speaker 01

  And to give you a sense for who we work with, five deals out of more than 2,500 inbound.

• 11:50Speaker 00

  Wow.

• 11:51Speaker 01

  Yeah, so that Filecoin, Blockstack, Props, Origin and Trust Token are the five that we've put on our platform publicly. And yeah, 2,500 inbound now. It is a staggering, to your point, a staggering number of token projects out there and a lot of work to filter through them.

• 12:05Speaker 00

  How do you pick those five out of such a big pool?

• 12:09Speaker 01

  Yeah, there's, taking a step back from even that specific question. I think talking about how to evaluate token sales is really interesting because it's such a nascent industry. If you think about it, sure, the first, very first ICOs were 2013, 2014. But ICOs and their popular forum and really this explosion of tokens is a year and a half old, something like that. And so figuring out how to diligence these and evaluate them as anyone, as an investor in the space or anyone else, is really hard because there's not a lot of data points so far and what's going to be successful and what won't. But the basic framework I'd use when evaluating these is first, look at it like you would any startup as a venture investor. And this is a step a lot of people skip, but evaluate the team, evaluate the product. Is it a compelling use case that they're building? Evaluate the market.

• 12:54Speaker 01

  How big is their addressable market that they're reaching? And then evaluate the deal. How are the economic terms that you're getting? So those are very standard venture capital evaluation metrics. And you got to look at each of those. Then I tack on two more for tokens in particular. One is the legal model. When you invest in a startup, sure, everyone's legal docs are a little bit different, but it's pretty standardized. You don't need to make sure that they're doing something legal and it's not a wonky structure. It's not during the token world. So you've really got to diligence their legal structure or if someone else do it to make sure that you're investing in something that's going to be sustainable.

• 13:26Speaker 00

  Yep.

• 13:26Speaker 01

  And then the last piece is the token economic model. And this matters more for specific types of tokens than others, but will this token actually accrue value in the long term? You can have a great decentralized product that people want to use that has an associated token with no reason to have value in the long term. And diligencing whether or not you think that that token will be able to accrue value and build up a real market cap in the long run is really important. So startup valuation and then legal structure and token economics, those are the categories that look at evaluating early on for these token projects.

• 13:58Speaker 00

  Got it. And is that what you guys are using in terms of your diligence of those 2,500 applicants?

• 14:04Speaker 01

  Yeah. So when we're, when we're looking at putting a token publicly on the platform, it is important to us that we're putting something up that we have faith in. It's not to say that it's going to gain value or anything else. These things are investments in very early stage things. They may gain or lose value. There's no way to know. But it is important for us to look at some of these components and make sure that we're working with good customers because that's what we want to represent to the market is that we work with effective customers.

• 14:30Speaker 00

  Because essentially you're not underwriting the financial performance, economic performance, what you're underwriting is the quality.

• 14:35Speaker 01

  Yeah. And not even that so much as, you know, we want to make no promises about the quality of the tokens on the platform. Again, these are early stage things, but when we work with customers, we want to work with good customers, just like any business does. And looking at, you know, that number five out of 2,500, I think speaks to how intensely we look at the quality of our customers. But it's not about, you know, any sort of underwriting or anything like that.

• 14:58Speaker 00

  Got it. What, if you could say, what's like the number one mistake people make that immediately disqualifies them from even being looked at further?

• 15:04Speaker 01

  Yeah. Well, the number one mistake people make is that a massive percentage of these are clearly either scams or just really low quality. But outside of that, when you start to look at things that are built by, you know, well-intentioned people that have some sort of experience.

• 15:19Speaker 01

  This is maybe not the first mistake, but it's the one that I see most often that's the most frustrating is failure in that token economic category. You'll see something with a compelling product, a good team with operational experience, a market that seems big, all these pieces, and then you get down to the token economic model, and it just doesn't work. It's just hard to see how it's going to gain value in the long term, aside from just speculation in the token. And that's the most frustrating piece. When I look at something and I say, you're good people, you're building a good product, and your token is just not going to be worth anything in 10 years. That's really tough. And I think it speaks to this idea that not every decentralized service needs a token associated with it. Tokens are really powerful for a lot of them. But for certain cases, it just doesn't matter,

• 16:02Speaker 01

  and it's tough to design a token that will gain value.

• 16:05Speaker 00

  Absolutely. All right. And one of the things that you guys have really kind of pushed the forefront on is airdrops.

• 16:11Speaker 01

  Yeah.

• 16:12Speaker 00

  Right? And so let's kind of go through like an airdrop 101, if you will. What is an airdrop and how are people using them today?

• 16:17Speaker 01

  Right. So an airdrop is the term for giving away tokens to a set of potential users to bootstrap network effects and start to build the platform. I like to reference PayPal. Obviously not a token, but PayPal in the early days was effectively one of the first airdrops, where they said, when you sign up for PayPal, we're going to give you $10 of PayPal credits, and you can use it and spend it at merchants that accept PayPal, or send it to a friend and start to use the network. And that was something where people said, wow, that's a good reason to sign up. I'm going to sign up and get $10 or $20 at one point, and I'm going to send it. And then that experience was so good that they said, I should keep using PayPal. And they started to put their own money into the platform to use it as a payment method. That's effectively what an airdrop does. It says, you're going to use a decentralized file storage service,

• 17:02Speaker 01

  or a decentralized content payment service, or a decentralized whatever service you want to talk about. And by giving away some tokens to early users of that platform, they're incentivized to go and use a little bit, and then put their own capital in to use it even more. So that's what an airdrop is.

• 17:18Speaker 01

  One thing that people have really run into is last year, there was a lot of excitement about airdrops. This is going to be amazing. We're going to use it when all these networks are live. And then it felt like early this year, everyone pumped the brakes because their lawyers told them, hey, you may not be allowed to give away these tokens to people. And the reason that that is, is has to do with securities law. And basically in the dot com bubble, a bunch of companies tried to give away stock to people. Just give it away as kind of an incentive mechanism. And the SEC said, you can't do that. We don't care that you're not making people invest for it. You can't give away securities. Why? Their view was that the people were still giving up something. They were giving away their own information, maybe their mailing address or information about themselves.

• 18:03Speaker 01

  And that was consideration. So that resulted in it being an offering of securities, even if there was no actual capital exchanged for the securities. And so everyone's lawyers said, you know, right now, and we can talk more about this, there's uncertainty around the security status of these tokens that you're working with. And so even if you're giving it away for free in an airdrop, you may not be able to do that. Yeah. And so everyone kind of stopped this, was still interested in the idea, but couldn't make it happen. And so we sat back and said, hey, is there some way where we can use our regulatory and legal knowledge to try and solve this problem? And have developed a flow where investors or users can participate in an airdrop of something that may or may not be a security, compliantly in the US and abroad.

• 18:45Speaker 01

  And that's done with, and it doesn't require people to be accredited investors. It's done with a combination of focusing on certain international securities, laws and jurisdictions that don't require, that don't have that issue, that say you can give away securities to people, as well as using crowdfunding in the United States to offer securities to unaccredited users and investors that, you know, in a compliant way, so you can airdrop to anyone you want without running into these legal issues.

• 19:11Speaker 00

  And it sounds like that's your strategy here is, you know, before we have clarity around are tokens a security or not, essentially if you act in a, you know, compliant regulatory manner, then you don't have to worry about that. Right. Because you kind of sidestep the issue because whether there's a security later on or not, you're complying either way. And so you're off the races.

• 19:30Speaker 01

  Right. You're basically taking the more conservative stance of I'm going to assume that this is a security. If it's not fantastic, I've done a little bit of extra work and I've made sure that I'm safe. If it is, then I have done the work that I need to do to make sure that this is compliant either way. So yeah, our stance generally is while there's a lack of clarity, let's take a conservative stance and see if we can use product and legal expertise to solve the problems that exist with those conservative stances and make them workable for token issuers. And then allow them to move forward without needing to worry about these regulatory issues.

• 20:01Speaker 00

  Got it. And then you guys have actually done an airdrop on the platform?

• 20:06Speaker 01

  Yes, we did. We helped with the Definity airdrop. They gave away about $35 million worth of tokens to tens of thousands of users. And we helped to facilitate that offering.

• 20:16Speaker 00

  And why did they do that? To bootstrap a network?

• 20:18Speaker 01

  Yeah, to bootstrap a network, theirs was largely targeted at rewarding their existing communities. This is another piece is airdrops can be used for a bunch of different purposes. It can be used to reward an existing community. It can be used to bring a new community in. They can be used in targeted ways to bring specific people onto the platform. But Definities was largely targeted towards rewarding the massive community that they had built for supporting them over the last couple of years.

• 20:39Speaker 00

  Got it. And so this targeted approach, could you say, I only want to airdrop to, it sounds like definitely existing or new users, but could you actually subset it even more and go after people based on activities they've taken or interests or something like that?

• 20:58Speaker 01

  Yeah, so we're working on building all of this out for a couple of potential customers right now. You could either target based on attributes about someone. So something like, we want to airdrop only to data scientists or software engineers or open source contributors. And build kind of targeting that way, or you can do it based on having done something. So, you know, did you tweet about the project? Did you join the Telegram group? Did you, you know, publish something and reward tokens based on those? That's people kind of call that proof of care usually, these projects that are rewarding based on people caring about the project. But those are, yeah, two different types of targeting. One targeted towards people's attributes and things about them, then another about things that they've done.

• 21:39Speaker 00

  Got it. And so do you think more people will start using the airdrop methodology as opposed to just doing the traditional token sales? Or do you think it'll always be kind of a coexistence of the two?

• 21:49Speaker 01

  Yeah, I think there will generally be a coexistence. Something we think about a lot is that in the early days of ICOs, they really had two goals. One was fundraising and one was distribution of the tokens. There's no reason that those two things need to be coupled together. And it may turn out that people that invest in token sales are very different people that want to use the the end tokens. And so coupling investment and distribution is not necessarily an intuitive thing for every single project. And one way to separate that out is to focus on sales where people are investing for financial upside. And then separately, airdrops or something similar where people are receiving tokens without needing to invest and decoupling the investment from the distribution. And so that's a really

• 22:33Speaker 01

  interesting concept, and I think something we'll see a lot more of. The reason I think we haven't seen as much of it yet is that airdrops are really mostly valuable when the token is actually live. There's not a great reason to give it away too far in advance of a network being live, because you're trying to get people to use the product. And if they can't use the product, then it's not really that interesting. And relatively few token networks have gone live yet. So if you look at all the ones that ran sales in 2017, especially towards the end of the year, they're just starting to go live now and over the next six or nine months. And then I think we'll see a lot more airdrops as these networks are live, people can actually use them.

• 23:08Speaker 00

  Are you worried that there aren't enough products that have actually kind of been built and launched from all those ICOs? Or do you think that we're still in that zone where it's okay that people are still building?

• 23:21Speaker 01

  Yeah, I worried, I'm not worried. I would like to see more things that are live. And of course, I think we're all anxious to see some of these projects launch and gain usage and see what wins and what loses. But I do, I definitely fall into that latter camp of these things are really hard to build. They're way harder to build than a traditional centralized technology startup. Building these decentralized products is incredibly hard. And if they ran an ICO last year, it's been 12 months.

• 23:46Speaker 00

  Yep.

• 23:47Speaker 01

  And that's a pretty standard time to build a difficult centralized technology solution, let alone a decentralized one. So let's give them some more time and make sure they can get across the finish line and and build these products. But I would love to see more live. And the last thing I would mention there is that The tooling around building decentralized networks is really bad right now. There's not a lot of developer tooling that makes it easy to reuse components and build these things in a sustainable way and repeatable way. And a ton of developer tooling exists for centralized products. That makes it a lot easier to build these centralized products. And so I think as tooling gets built out better, standards get built, people have some experience building and actually shipping these products, the development cycles will be a lot faster. But I forgive right now that that some of these products haven't launched yet.

• 24:32Speaker 00

  Absolutely. Let's switch to security tokens. So where are we kind of state of security tokens?

• 24:39Speaker 01

  Early. Early is, I think, the answer across the board in this industry.

• 24:42Speaker 00

  That's an understatement.

• 24:43Speaker 01

  Yeah. You know, I think a lot of us were hoping that we would see by the end of this year a wave of really high-quality securities tokens. Most of what we have seen so far, at least inbound at Coinlist, is relatively low-quality securities tokens. And when I say low-quality securities tokens, they generally fall in one of two categories. Either they are, and when we say securities tokens here, I'm mostly talking about asset-backed tokens. So tokens that, you know, have some sort of asset that they're representing, whether that's real estate or company equity or something else. Almost all of them either are really low-quality distressed assets that are clearly turning to tokens as a, you know, method of last resort for fundraising because they can't fundraise through traditional means.

• 25:28Speaker 01

  That is not an appealing project for anyone to invest in, I think. The other category that we've seen a lot of, and this is frustrating for us, is relatively high-quality assets, assets that are investable assets, but priced at some absurd premium, where people are clearly saying, you know, here's, this is maybe an extreme example, but here's a bar of gold, and when we tokenize it, we're going to sell it for four times the price of the bar of gold. And that just seems silly to us to, you know, there certainly may be some sort of premium for tokenized assets, but not in the range that we have been seeing. And so I think that most securities tokens we've seen have fallen into one of those categories. I'm optimistic that, and we're starting to see signs of this, that there are some good

• 26:10Speaker 01

  projects coming out that are recognizing the benefits of being a tokenized security and are pricing themselves reasonably and are actually good underlying assets. So I'm optimistic that the next year we'll see a lot more of that.

• 26:23Speaker 00

  Absolutely. I think that makes sense. And really, part of it is you've got to get better quality assets. There's got to be better infrastructure, right? And I think once you get some of that, that the liquidity and the interest from investors shows up.

• 26:36Speaker 01

  Yeah. And I think, to your point, two things that are also a little bit of chicken and egg issues here are, one, infrastructure, and two, liquidity. There is very limited infrastructure for securities tokens right now in terms of secondary trading venues, ways to support it, ways to build them. And a lot of people are working on that, which is great. So that's going to happen again, I think, kind of early, mid next year, we'll see a lot more infrastructure develop, which will make it much easier to justify the case for a good asset to tokenize when that infrastructure is there. So that's important. The second piece is liquidity. I don't think that the pool of people who have been investing in ICOs is exactly the same as people who will be investing in securities tokens. They are very different risk reward profiles. And there will certainly be some overlap and some diversification for people that have been investing in ICOs. But I'm also looking

• 27:20Speaker 01

  towards external capital sources that have different risk tolerances than ICO investors for coming in and investing in these securities tokens.

• 27:28Speaker 00

  Absolutely. What do you think about the accreditation laws?

• 27:32Speaker 01

  I think the accreditation laws, well, so the SEC's mandate is to protect investors.

• 27:38Speaker 00

  And that's a huge piece of the security token thesis, is that they're going to continue to do that.

• 27:44Speaker 01

  Exactly. Yeah. The SEC's mandate is protect investors. And what they've said is that they want only sophisticated, informed investors to be able to invest in speculative securities. What they have done is carved out a bunch of ways to ensure that people are either sufficiently sophisticated or sufficiently informed. And one of those, and the most prominent one for a private placement of securities, is a Reg D offering in the US where investors are required to be accredited investors to invest. And that is a pretty straightforward way to say that someone is sophisticated. They've got a certain amount of wealth or income. And presumably, they're not investing all of that. They're investing

• 28:27Speaker 01

  some amount in a speculative asset. And that's a very kind of safe way to define it. I don't like that it doesn't enable the full democratization of this asset class and opening it up to everyone to be able to invest. But I also do see the reason that you don't want grandma and grandpa on Main Street to get scammed out of their money because someone was marketing really aggressively the speculative security to them. And so it's always a tough balance between I understand why that exists, but it's also frustrating to see it stop people from being able to invest in these assets. And I think the important thing to recognize that that is not the only way to sell a security to someone. There are other ways, like through Reg S, which is a way to sell to international investors

• 29:11Speaker 01

  under their own country's securities laws and not the US securities laws. There's Reg CF crowdfunding offerings where you can sell to unaccredited investors in limited amounts and get them involved and make sure that they're properly informed. There's Reg A offerings where you can do what's called a mini IPO and make sure people are sufficiently informed and then allow anyone to invest in it as well. So I think accreditation laws are the easiest and safest way, and it's nice to have that as a backstop for projects. And that may be sufficient for certain projects, but it does exclude a lot of people from investing and that is a bummer. So for securities tokens, I think it's more reasonable to use Reg D than it is for non-securities

• 29:54Speaker 01

  tokens where you actually want usage in a broad set of people. But if you're selling an asset-backed token that represents this building or something else, it doesn't necessarily make sense to sell to a bunch of unaccredited investors. And frankly, they won't be able to contribute that much money anyway to it. So you might as well go and look for those larger investors in the first place. So I see it as less of an issue for securities tokens than I do for non-securities tokens.

• 30:17Speaker 00

  Before we move on, I wanted to tell you about our sponsor, BlockEstate, a new security token project in the $200 trillion real estate market. They've partnered with Polymath and Coinlist Comply API to create one of the world's first tokenized real estate funds. Tokenization is the process of creating a digital token that represents ownership in a real-world asset. You've heard me say it before, but a clear use case for this is real estate. BlockEstate aims to bring increased liquidity to this massive market. We're really, really thankful to the BlockEstate team for their support, so we'd appreciate if you checked out their website at blockestate.com to learn more. If you're intrigued by what they're doing, feel free to reach out to them or give them a tweet on Twitter. Thanks so much.

• 30:57Speaker 00

  I think part of, I mean, look, everyone who listens to this knows my take on it, but the accreditation law, it's not even that the accreditation laws are the problem, it's how we measure it, right? Or how do we quantify the bar, right? And so it's if we can figure out a better way to do that, that allows more access, but also provides us protections, kind of a win-win for both the regulators and the investor. And, you know, look, I'm not, I'm not in a position to be able to figure that out, so hopefully they can do that.

• 31:23Speaker 01

  Yep, you and me both.

• 31:24Speaker 00

  Yeah, for sure. All right, so let's continue down the regulation rabbit hole. I think what we're starting to see is, early on in crypto, we saw no regulation. Then we saw like, you know, let's go enforce on people who are doing absolute fraudulent or obvious scams. And those are usually easy to pick out, pretty, you know, non-controversial in terms of should the regulators be addressing this or not? Now I think we're starting to get into the zone of maybe they're not like blatant scams, or like black and white fraudulent actors, but there's enforcement going on. How do you think about that? And is this just kind of an evolution of regulation in like a nascent market? Or where does that end up?

• 32:05Speaker 01

  Yeah, I think that's exactly the pattern that we see in every new market. At the end of the day, it's a spectrum between obvious fraudulent scammers and, you know, the people who are absolutely perfect and do everything precisely by the book. And it's not black and white. Like you said, it's a spectrum going between. I think a very common pattern for regulators entering a new market is, first, notice the market, and it often takes a few months for them to really internalize that, which I think we saw. There were several months of ICOs before the SEC did anything. And then go and take down some obvious scammers that are causing real issues for people and are clearly doing something illegal. And those are often the easiest to find because they're, it's not even anything crypto-specific, it's just people being scammy and doing things they can't do.

• 32:49Speaker 00

  They come with a guaranteed 20x.

• 32:51Speaker 01

  Exactly, yeah. There was a whole slew of those, obviously, last year. And they enforce those, but the, a bad pattern for the regulators is to keep enforcing only those people and go up the spectrum. Because what that encourages people to do is, issuers to do is stay in that middle gray zone. If there's seemingly no threat to them as someone who's doing something that might not be okay, but isn't clearly scammy, then they'll keep doing it. And so what the regulators do is they take out a bunch of these bad people when they're learning about the space while they're collecting more information. And then they go and they enforce on people that are doing illegal things, but aren't necessarily in that crazy bad actor camp. And what that does, it puts a stake in the ground and says, we now understand this space and we're willing to enforce on people that are doing illegal things, even if they aren't the worst people in the world.

• 33:36Speaker 01

  And that's then, that then sets the mindset for issuers going forward that while we do actually have to stay on the really good side of this spectrum, because if we stay in the middle, we might get in trouble. And that's, I think, where we're getting to now is some of these recent enforcements, and I think a lot of stuff that will go on in the next few months, will be against people that, again, might not be bad actors, might not be scammers or fraudsters, but are doing something illegal and, and setting kind of the mindset that you need to be on the really good side of the spectrum. So I think it's, it's very normal and we're just now getting to that point where in the last even six or eight weeks, that started to happen and it will continue going forward.

• 34:09Speaker 00

  Would it be fair to say the people that are getting enforced on now thought they were doing the right thing, but ended up doing the wrong thing? Or do you think we're still kind of in the enforcement zone of these people knew what they were doing, they're fully aware they're breaking the law?

• 34:19Speaker 01

  Yeah, I think it's a real mix of people. I think there's certainly some people that, you know, are, said, we know this is probably not okay, but we think we can push the boundary here and still be safe and are now getting in trouble. And I think there are some people that either for lack of good counsel or lack of understanding, thought they were doing something okay and really weren't. What I will say is that I don't think we've seen any enforcements yet that are, have anything in particular to do with crypto. It's, enforcement's a very standard securities law violations that happen to be against companies that are, you know, creating tokens or doing something in crypto, but, you know, claiming that something is a non-security when it is in fact a security, maybe more

• 35:02Speaker 01

  common in the crypto space than it is in other spaces, but it's happened before in the non-crypto space as well. So I think we're, we're in this phase where It's not, the enforcements aren't happening against things that are like brand new crazy crypto ideas. They're happening against things that if you had good counsel, you would have known not to do in the first place because there's plenty of case law and precedent on avoiding those issues.

• 35:22Speaker 00

  Yeah, it's interesting because what you're arguing is that the things that people are being enforced on for, if a non-crypto company did the exact same thing, they'd also be enforced on.

• 35:33Speaker 01

  Exactly.

• 35:33Speaker 00

  Right? And so, does that mean then regulators haven't even kind of, you know, broken the seal on enforcement for crypto-specific actions or activities?

• 35:45Speaker 01

  Yeah, well, I actually think there's relatively few new things in crypto. I think we, we put these new labels on them and we call these things utility tokens and security tokens. And these things all have new names and new nomenclature for the crypto industry, but they're all pretty standard securities law issues. And, and if you put different labels on them, you would have seen case law and precedent for them in the past. I think there's a few things where there are differences and it's worth understanding some of the nuances of the crypto space. But for the most part, it feels like most of the issues people are running into are pretty standard securities law issues. And that's going to continue for a long time.

• 36:21Speaker 00

  Yeah, we've got a running joke that there's been a lot of bad people doing bad things for like the last 90, 100 years in the securities world and regulators have seen it all.

• 36:29Speaker 01

  They have seen it all, guaranteed.

• 36:30Speaker 00

  Absolutely. All right, let's go through kind of a case study of a project that wants to do a token sale, right? Used Coinlist and kind of how the whole thing works, right? So what company you want to talk about?

• 36:46Speaker 01

  Yeah, let's talk about, let's talk about Origin, Origin Protocol, which we helped with their sale a few months ago.

• 36:52Speaker 00

  Okay.

• 36:53Speaker 01

  Origin Protocol is a decentralized platform for the sharing economy, so enabling the future decentralized Airbnbs and Ubers of the world on their, on their protocol and on their platform. Really strong team, thoughtful product, really great community. And if you look at kind of those, those evaluation criteria I was talking about before, you know, like I said, team is really strong, the product is strong, big addressable market, obviously. Look at the deal itself and the deal terms, and then looking at the token economics legal structure, all things that I think a lot of investors looked at and said this was a really interesting project. And so what happened with Origin is they went out and said, we really want to grow

• 37:34Speaker 01

  our community and allow people across the world to invest and have a stake in Origin going forward. And so they had already raised money in strategic rounds previously from smaller numbers of private investors and raised the capital they needed to grow and build their business. So what they said was, we just want broad distribution for this project, which is a really interesting goal. And I think this speaks to kind of the airdrop idea, too, that sometimes the goal of an ICO is not necessarily just fundraising and raise as much capital as you can. It's let's distribute this to people and get more incentivized aligned users on our network. So they set out to do that. And certainly, spoiler alert, successfully did so. And what happened with the Origin deal is that, you know, it was

• 38:16Speaker 01

  on the CoinList platform and users went and it was a Reg D offering. So they went through know your customer and anti-money laundering steps of verifying their identity. They were checked against watch lists to make sure that they were allowed to invest in this deal. And they went through an accreditation process, so proving that they had a certain income or net worth, or if they're companies or trusts, there are different rules for different types of entities investing. And they went through this flow and then they could send Ethereum or Bitcoin to Origin, or they could pay into an escrow account with US dollars, wiring money in. Origin did a really interesting thing here. So they capped the sale at $6.6 million and said, we're not trying to raise a lot of money. We're not going to do more than that. But we want wide distribution. So they capped

• 39:00Speaker 01

  the investors initially at $25,000 investments. So there couldn't be any whales that took up two of that $6.6 million. And they could get as many people as possible into the sale. They were massively oversubscribed on this deal. And this speaks to kind of the quality of the project and how much people were interested in it massively oversubscribed.

• 39:20Speaker 00

  And they went and they did a lot of work, if I remember correctly, right? I mean, they went around the world and held events and met with, you know, users or potential users and really kind of put in the groundwork of building that community.

• 39:31Speaker 01

  Yeah, and this speaks to the operating team. There are a lot of teams that we talk to that are really compelling. Technical projects have built some really interesting infrastructure, but have done very little work on the community side. And I think that's an absolutely underrated part of building one of these businesses. They are the purest form of network businesses, these protocols and token networks. And you need users, you need a community to build that successfully. People that don't put time and effort into building that community and have kind of a build it and they will come mentality. That's going to be a really tough hole to dig out of. So I have a lot of respect for the origin team going out and exactly like you said, all around the world, hosting meetups, doing as much as they could, really managing their community effectively, even on online channels.

• 40:15Speaker 01

  And building that up, knowing that that was going to be a huge asset for them, not only for fundraising, but also just for the growth of the protocol as they launch and go live. And so they did an amazing job of that. And then, you know, a testament to them, again, they, they went and said, we're going to run a sale, not trying to raise as much money as we can, but instead trying to reach as many people as we can and actually cap investors at a relatively low number. And so they capped investors, investors came, they went through the process, they sent the money however they wanted to, they signed documents, documents were distributed. And ultimately the sale closed and at the end of the day, they had more than 500 investors from more than 50 countries around the world, which to me is such a staggering number. And we can talk more about this, it really speaks to, I think, what the ICO model, the token sale model has done for the democratization of investments.

• 41:01Speaker 01

  The fact that they got people from 50 countries, more than 50 countries, to invest in a token sale for a project that's based in the United States is incredible. Yes, all of those investors were accredited investors under the US legal definition, but they still got just a staggering number of people to invest in the sale.

• 41:18Speaker 00

  It's the number one thing that irks me about people, right? Especially it happens on Twitter all the time, right? So a company comes out and they do a Reg D offering. And everyone's like, this, you know, this isn't, this isn't fair. And we always say, you're right, it's not, but we also don't want to go to jail. And so we're going to follow the rules. We wish that the rules would change. Until they do, we can't do anything else. But to your point, what we've seen is before Reg D, it was Not available, right? And so Reg D was actually a deregulation, right? In terms of it gave greater access to some subset of the population. And then Reg A plus gave even more.

• 41:59Speaker 00

  And so I think what we're seeing through all these securities laws is actually deregulation over time. It just takes a long time.

• 42:06Speaker 01

  Right. And, and you know, none of these are explicit in the initial definition of what a security is and who you're allowed to sell it to. They're all carve outs for something the SEC has gotten comfortable with as fitting that sophisticated or informed investor definition. And there's more and more of those over time and more and more explicit carve outs. To your point, Reg D 506B, Reg D 506C, Reg S, Reg A, all of these Reg CF are explicit carve outs. The SEC has said, okay, here's one more way that we can get comfortable with now, or the SEC or the legislature. One more way that we can get comfortable with people selling securities to in private placements of some sort. And yeah, to your point, I think that there's really two components to that opening up. And the reason that someone like Origin is able to raise from so many people and so many investors.

• 42:51Speaker 01

  The first is a regulatory one. So exactly right. The advent of Reg D 506C and general solicitation, meaning that you can kind of publicly talk about a securities offering, was a massive step forward for opening up access to deals. Previously, if you're doing a private placement, you could only sell to people that you had a preexisting relationship with. So that narrows the field massively. 506C meant that you can now generally solicit, you can now publicly talk about a deal to people that you don't have a preexisting relationship with. So that's one step that was really important. And then the second step that enables someone like Origin to do this is not actually a legal change. It's a social change. And this is something that I think ICOs, token sales have done that nothing else has done before,

• 43:33Speaker 01

  is open up access and have this social movement of allowing people to invest. Previously, even if it was legal to do a 506C generally solicited offer.

• 43:44Speaker 01

  No one really did that on massive scales. And if there was a hot deal in Silicon Valley or in New York, a good venture deal, only people that had existing relationships or were one degree away from the founders of that company would be able to get access to that deal to invest. Either you're a prominent venture capital firm, you're an angel that has a relationship to the company, you have a friend that has a relationship to the company. That's how you got into these deals is by personally getting to know the founders and investing in their company. What happened with this token sale model is it flipped that on its head and said, put these out there for the world to invest. Because these token networks are successful when they have as many distributed stakeholders as possible and allow anyone to invest in this deal that meets the relevant regulatory criteria. And so even if that was possible before, what token sales brought to the table was

• 44:29Speaker 01

  this idea, this social movement of allow as many people to invest as possible. And that's the reason why someone like Origin can get 500 plus people from more than 50 countries is because, one, the law has changed in the last decade to make it legal for them to do so. And then, two, the paradigm shifted towards allow more people to invest in these deals because that will help make you successful.

• 44:48Speaker 00

  Absolutely. No, it makes complete sense. All right, let's do a rapid fire. What's the one thing you believe in crypto that you think the greatest number of other people would disagree with?

• 44:59Speaker 01

  Ooh, that's an interesting one. I, I think that there is, I think there are more categories of tokens that will be valueless than many people in crypto believe. And I, I think this speaks to a paradigm that is just starting to evolve of, and sorry, I know you said this is rapid fire, but I think there's more categories of tokens out there. At a base level, there's more categories of tokens that people are willing to recognize. Right now, most people I talk to say there's utility tokens and there's securities tokens, and that's it. Those are the two categories we have. That's a regulatory definition, whether something's a security or not. Within each of those, there's going to be a taxonomy of different types of tokens. And there may be whole categories that don't work. You think about internet businesses. You know, there are all sorts of businesses built on the internet.

• 45:42Speaker 01

  There are some categories of businesses that just aren't successful. If you look at, and they may not be successful initially and then eventually succeed. But if you look at grocery delivery startups in the dot com bubble, not successful businesses. They didn't have any value in the long run. And so that same thing may happen in the token industry. There may be whole categories that end up not being able to accrue value and are not investable projects.

• 46:01Speaker 00

  Yeah, I'd agree with that for sure. And I think your point about timing is really important there, right? Of it may not work today, but 10 years from now it'll work. But as we know, being early is just the same as being wrong.

• 46:12Speaker 01

  That's exactly right.

• 46:14Speaker 00

  All right, so other than coinless, what do you think is the most important company in crypto?

• 46:18Speaker 01

  I think Coinbase today is a massive company that is doing great things for the space, for legitimization of crypto in general. And they obviously have just driven massive volumes. So really successful company and managed to survive the, being in the first wave of crypto companies all the way to today.

• 46:34Speaker 00

  Yeah, mine are Coinbase or Facebook. Coinbase because of what they've done and Facebook because of the potential. If they do anything where they expose 2 billion people to crypto.

• 46:45Speaker 01

  Fingers crossed.

• 46:46Speaker 00

  Yeah, we will see. All right, so you got a magic wand, you can wave it and change any one regulation. What do you change?

• 46:54Speaker 01

  I think today I change the rules around airdrops. And I think if I was being totally honest, I would say, if really had a magic wand, I would say, we make all these tokens, non-securities for the purpose of usage on networks and.

• 47:11Speaker 00

  Like clearly define what that means and then say, okay, if you fall within this definition, you're okay.

• 47:16Speaker 01

  If there was some magical way to say, I'm using it on the network, it's not a security. If I want to buy it, it is a security.

• 47:22Speaker 00

  Yep.

• 47:22Speaker 01

  That would be great. I think that's really unlikely. In the pragmatic realm, I would say airdropping things to people, even if they might be securities. If it's a small enough amount, it should just be, you know, be able to be given to people.

• 47:34Speaker 00

  Absolutely. No, I think that makes sense. All right, so my one fun question for everyone is, we just have to accept that aliens are real. But one thing that people never think about is, do aliens have pets? So we always think of aliens the, as like a human-like creature. But do they have, are there alien animals?

• 47:56Speaker 01

  I mean, what if we are the animals?

• 47:58Speaker 00

  Oh, man. You're not the first to suggest this, but that doesn't change if aliens show up. Or is there one form of alien? Or are there multiple forms that that kind of get off the spaceship and where our minds are blown?

• 48:14Speaker 01

  I have to imagine there's multiple forms. It doesn't really make sense. Because inevitably, the only way you get to a single form is if they cut out all the other life forms. It's not like a single form develops on an ecosystem by itself. A bunch of different things develop in ecosystems together and then sure, maybe they destroy all other forms of life, but that seems unlikely. I will say, though, it's possible that one form steps off the spaceship and there's more back home and they just don't bring them along. We wouldn't bring our dogs along with us if we're going to space necessarily, so.

• 48:49Speaker 00

  It's not like a Noah's Ark spaceship where they two of every kind get on and let's roll?

• 48:53Speaker 01

  It's a very specific case of like, they're trying to escape their place and need to resettle. But yeah, maybe they don't even bring everyone along then. I think there's multiple forms. I think they've got pets.

• 49:02Speaker 00

  Absolutely. All right. So I let everyone ask me one question before we go. Any question you want to ask?

• 49:08Speaker 01

  Ooh, that's a good one. I would say you're sitting here in this now kind of institutional seat of power in crypto. When is this promised institutional wave of capital coming and what's going to cause it?

• 49:22Speaker 00

  So we've got some already. I think that there's more on the way. In this conversation around just like, when does the institutional capital come? I think it's really important to break it down into, you know, there's different quote unquote asset classes in crypto, right? Or different kind of investment strategies. So you've got venture capital, you've got kind of the hedge funder, active liquid management. You've got the actual digital assets themselves, right? And then you can get into all the security tokens, et cetera. Venture, I think we've already seen institutions kind of jump in there. I think that there'll be more announcements over the next two, three weeks that will kind of solidify some of that stuff. And, okay, you know, pretty well established institutions are in on the venture. It's easy, right? They understand the asset class, they're used to it, it's risky.

• 50:07Speaker 00

  They can say that they're in blockchain. Crypto, but kind of not really, right? And so that's pretty simple. When it comes to the active liquid stuff, I think that's like the next frontier, if you will. There's a couple that have dipped their toe and they're kind of playing around. But I think when you get one or two really large, well-known institutions that come in and say, "Okay, I'm in active managed hedge fund-like structures in crypto." I think that'll kind of open the gates and we'll see some pretty big capital inflow. The big one, though, is the digital assets, right? And so at what point do we see the sovereign wells, the pensions, the endowments just start buying Bitcoin itself? I'm probably more pessimistic than most in that I think we're like 12-plus months away from that.

• 50:51Speaker 00

  There's probably a couple that have started, again, a couple million dollars here and there. But we're talking about institutions. There's an institution that we know and spoken with. Look, they've got over $100 billion in assets. One of the managers manages 40 billion of it, right? He's got his whole team, all the stuff. And so you go and you have this conversation about like everything from Bitcoin to venture to hedge funds, you know, the whole nine yards. And he's attracted to the asset itself, right? Low fees, all the things that are attractive about that. But what he can't get over is not only does he have to jump over the hoop of, "Why would I do this? Why is this a good investment?" But he's got to convince all of his colleagues and peers. And then he's got to go to a board of trustees and get all of them on board as well.

• 51:34Speaker 00

  That's a pretty tall task to kind of jump through multiple hoops like that just to buy a single asset. And then he's talking about doing, again, for him, we're talking basis points, right? So like under 100 basis points. Could be anywhere from 10 to, call it 90. It's like a $100 million check. Like, it's like a lot of money, right? And so if you look at the latest joke I have is one bank...

• 51:59Speaker 00

  One branch at one bank in Estonia, the Dons Bank or whatever, laundered more money than the entire market cap of crypto. So they laundered $235 billion and the crypto market cap today is like 215, 220, right? And so we're still so early, right? And it's still so small that when an institution comes in and writes a $100 million check, a $500 million check, like it's pretty meaningful, right? It might not go and move a market or, you know, whatever, but like, that's a big check for a market that's really, you know, 200 billion, give or take. And so I think that, um, like, we haven't even seen the capital inflow there. Um, and when it happens, I don't think it's like the wall, like you're with it, like it's not, all happens on one day. But there's probably like a 12

• 52:44Speaker 00

  month timeframe where like, it's obvious it's come in and, and I think that we'll see a very different landscape at the end of that. I think we're all excited for that. Yeah, well, I'll send them over to Coinlist. Awesome. Please do. All right, man. Thank you so much for coming. This is awesome. Yeah, thanks for having me.

• 52:58Speaker 00

  Thanks again to our sponsor, BlockEstate. To check out their tokenized real estate fund, you can check out www.blokestate.com. Hey, everyone, Pop here. If you like this episode of Off the Chain and want to help us take crypto to the top of the Apple, Spotify and other podcast charts, please do us a favor and rate, review and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.