Cannabis: An Emerging Market for RegA+

Despite remaining illegal at the federal level, the idea of legalizing cannabis is continuing to gain public acceptance, especially in recent years. As of April 2021, 35 states have made medical marijuana legal, with 18 of them legalizing it recreationally. This growth has been tremendous, raising the industry’s value to over $13 billion and directly supporting 340,000 jobs. As of 2019, 67% of Americans believe that regulators should legalize marijuana, an astounding 20% increase from a decade ago.

These factors have created an excellent opportunity for companies in this space. As public perceptions continue to rise, investments in cannabis companies may become more attractive to retail and accredited investors. In 2019, cannabis companies received nearly $117 billion in investments, displaying some of the investors’ significant interest in the space. Opportunities will only continue to increase as the industry progresses. Projections show that by 2028, cannabis will be an industry worth $70.8 billion globally. In the US alone, cannabis sales in the US in 2021 alone are predicted to reach $21 billion. 

The combination of investor interest and industry valuation could mean that raising capital through exemptions like Regulation A+ could prove to be an incredible opportunity for companies and investors alike. Already, many cannabis companies are seeing success through these opportunities. Early this year, Gage Cannabis closed their Regulation A+ offering after securing $50 million in funding and adding 1,000 shareholders to their cap table. This one success is not an outlier, as other issuers have been seeing success as well. 

It will be interesting to see how the industry and investment opportunities within cannabis will expand with the upward trend of public perception. Additionally, as more states continue to legalize, more businesses will emerge, jobs will form, and investors will invest in an emerging market.

Along with our partners, KoreConX hosted a webinar on why RegA+ may be the perfect fit for companies in the cannabis space. If you missed the live event or want to rewatch it, visit our YouTube channel to access the full recording of the event. If you would like to contact any of our speakers or view the full schedule, please visit our KoreSummit site.

Forbes interview with KoreConX founders

Do you know how to invest in the private capital market?  Not many people do.  It is complicated, requires a lot of paperwork, has low transaction volume, comes with risk and volatility, and not very liquid.

Could distributed ledger technology (DLT) be used to reduce back-office fees and expand the market for this asset class?

I interviewed Oscar Jofre, CEO and co-founder of KoreConX, who believes his platform and infrastructure can help.

KoreConX is a company working to change how businesses raise capital.  Mr. Jofre is an advocate for using DLT to bring transparency to a fractured process.  Mr. Jofre mentioned, “There are over 90,000 companies in our platform from around the globe who have raised more than $6.6 billion. Companies who use the KoreConX platform raised capital working with broker-dealers or direct offerings on their own. We are purely providing the technology to make sure they are fully compliant and to manage the entire process.”

What is the private capital market?  What are the problems?

The private capital market represents companies not publicly traded on stock exchanges. Private funds, venture capital investors, and some mutual funds are typically the main buyers.  Investments can be in new start-up enterprises, mature business, or sometimes struggling firms. This type of asset is considered to be highly risky.

One critical problem, the team at KoreConX explained, was the lack of market access for small firms. Dr. Kiran Garimella, KoreConX’s CSO and CTO, said, “The majority of participants in private capital markets are smaller entities who are closely connected with local companies and investors. They cannot afford huge expenses for integrated systems.”  KoreConX specializes in connecting all sizes of firms rather than limiting their scope to more mature enterprises.  Interestingly CEO Oscar Jofre’s background is crowdfunding, which is a driving influence in his business.

Jason Futko, CFO and co-founder, said, “It is often difficult for companies in the private capital markets to identify investors to present their opportunity. The fragmentation in this market can make it difficult to find investors or other professionals to help you grow your business.”

On June 26th, 2019, Broadridge bought from Northern Trust a similar blockchain platform.  There is competition in this space from many players. Mr. Jofre said, “There are companies like Carta, Capshares, ComputerShare, AST, and Link Group that offer some of the features KoreConX provides in our all-in-one platform. We have a much different view of the market. To truly transform it, we need to make sure all participants have all the tools they need. If they don’t, then we will never see any great change in the private capital markets.”

KoreConX launched on October 11th, 2019, their new blockchain ecosystem for fully compliant digital securities worldwide.  Their mission is to ensure compliance with securities regulation and corporate law.  The KoreConX platform includes securitized token issuance, trading, clearing, settlement, management, reporting, and corporate actions.

As explained to me by the management team, the lack of data integrity and regional knowledge of jurisdictional compliance can restrict investment opportunities offered to the public.  Mr. Futko continued, “Obviously part of the solution under KoreConX has to be around connecting document fragmentation, providing access to professionals and creating trust through our blockchain, which ensures both business and regulatory logic.”

Why can blockchain technology help now?

The KoreConX team stated that the private capital markets serve over 450 million private companies worldwide today.  They have a lack of document transparency and high fees. Compare this to public capital markets, which have established listing standards and rules.  Furthermore, open markets are used every day and can handle many transactions.  Dr. Garimella said, “Blockchain offers technology that provides solid mechanisms for trust through immutability and consensus among parties.”

I asked Mr. Jofre to explain why his work was different from larger companies, like Broadridge? He responded, “KoreConX is entering a market with many providers who have a single feature or application. For private capital markets to be as efficient, as public listed markets, it needs an infrastructure layer and an application layer.  KoreConX brings both.  We do not exclude anyone because of size or geography.”

The SEC proposes expanding the “accredited investor” definition

The SEC has proposed amending the definition of “accredited investors.” Accredited investors are currently defined as (huge generalization here) people who have net worth of $1 million (excluding principal residence) or income of $200,000 ($300,000 with spouse) or entities that have assets of $5 million. Here’s the full definition.

The whole point of the accreditation definition was that it was it was supposed to be a way to determine whether someone was able to “fend for themself” in making investment decisions, such that they didn’t need the protection that SEC registration provides. Those people may invest in private placements. The thinking at the time the definition was adopted was that a financial standard served as a proxy for determining whether an investor could hire a professional adviser. Financial standards have never been a particularly good proxy for investment sophistication, though, and some people who are clearly sophisticated but not rich yet have been excluded from being able to invest in the private markets.

The proposal would:

  • Extend the definition of accredited investor to natural persons (humans) who hold certain certifications or licenses, such as the FINRA Series 7 or 65 or who are “knowledgeable employees” of hedge funds;
  • Extend the definition of accredited investors to entities that are registered investment advisers, rural business investment companies, LLCs (who honestly we all assumed were already included), family offices, and other entities meeting an investments-owned test;
  • Do some “housekeeping” to allow “spousal equivalents” to be treated as spouses and tweak some other definitions; and
  • Create a process whereby other people or entities could be added to the definition by means of a clear process without additional rulemaking.

We are generally in favor of these proposals. However, we worry that the more attractive the SEC makes the private markets, the more that people of modest means will be excluded from the wealth engine that is the American economy. We also believe that the concerns raised about the integrity of the private markets by the two dissenting Commissioners, here and here, should be taken seriously. The real solution to all of this is to make the SEC registration process more attractive, and better-scaled to early-stage companies.

In the meantime, read the proposals and the comments, and make up your own minds. The comment period ends 60 days after publication in the Federal Register, which hasn’t happened yet.

FINRA BD Requirements for RegA+ & Digital Securities

FINRA BD Requirements for RegA+ & Digital Securities

The private markets are receiving a much updated revamp by the SEC which is having a major impact on registered FINRA Broker-dealer firms.  Here are two (2) of the most common activities for which FINRA Broker-dealers (BD) are approached by companies.  Most BD’s are not aware that in order to help companies raise capital utilizing these regulations, there is a registration they must first do with FINRA.

We went to the source that has been helping many FINRA Broker-dealers and put the responses in a simple way.  Ken Norensberg, Managing Director, Luxor Financial provides the answers to which all BDs need to pay extra attention to make sure you are fully compliant.

RegA+ (Regulation A)

Broker-dealers today have the ability to help companies that are using either Regulation D (RegD) or regulation A(RegA+).  Now what they are not aware of is that in order to allow them to help companies with RegA+ they do need to be registered with FINRA. If that registration isn’t done, they are not allowed to proceed in offering those services. This process can take anywhere from 60 to 90 days or it could happen sooner.  Most firms are not aware that when they take on a RegA+ client, they must apply to FINRA to represent them in the offering. This is done at the same time the company is filing their Form 1A with the SEC for their RegA+ offering.

Digital Securities

Digital Securities are now becoming main street language and most Broker-dealers want to offer this to investors. Unfortunately, if they do not have FINRA approval for digital securities, it’s not a product they can represent or offer to investors.  Digital Securities require registration. The process is like putting a full new member application, and it will take anywhere up to four (4) months.  Your firm must file with FINRA for each of the exemptions you want to use for Digital Securities (RegD and or RegA+.  Here is what your firm will be required to answer to FINRA in its application.

  • You will need a detail business plan
  • What entities are the holders of the “private keys” in the DLT network that would be required to gain access to the digital securities, cash-backed digital securities holdings or digital currency? 
  • Are multiple keys needed to gain access or is a single key sufficient?
  • Who controls or has access to the DLT network where the assets are held?
  • What happens in the event of a loss or destruction of assets (either due to fraud or technological malfunction) on the network?
  • If the broker-dealer was to fail and is liquidated in a proceeding under the Securities Investor Protection Act of 1970, as amended, how would customers’ securities and funds be treated, and how would customers access their assets?
  • In instances where firms have established partnerships with other firms to serve as their back-ups and to carry out critical functions in the event of emergencies, what type of access would those back-up firms have to the private keys?
  • How will customers or the Securities Investor Protection Corporation (SIPC) trustee access the customers’ assets in the event of a defaulted broker-dealer? What parties will be involved, and what are their roles and responsibilities?
  • How does the use or application of the DLT network affect the market risk, liquidity or other characteristics of the asset?
  • What information is maintained using the DLT network?
  • What will be deemed as the physical location of the firm’s records maintained on a node of a DLT network that may extend over multiple countries?
  • What parties have control or access to the firm’s records? What are their rights, obligations and responsibilities related to those records, and how are they governed?
  • What is the firm’s (and other participants’) level of access to the data, and in what format would it be able to view the data?
  • How does the DLT network interact with the firm’s own systems for recordkeeping purposes?
  • How would the records be made available to regulators?
  • How will the firm’s traditional exception reporting, used to supervise transactions, be generated from a DLT network?
  • How will the firm protect any required records from tampering, loss or damage?
  • Clearance & Settlement?
  • Anti-Money Laundering (AML) Procedures & Know Your Customer (KYC) Rules?
  • Customer Data and Privacy?
  • Trade & Order Reporting Requirements?
  • Supervision & Surveillance of Transactions?
  • Fees & Commissions?
  • Customer Confirmations & Account Statements?
  • Anticipated Customer Base?
  • Facilities, Hosting?
  • Licensed & Qualified Staff

As the market is evolving to provide more alternatives to companies and investors, FINRA Broker-dealers need to also make sure their licenses are up to date to be able to offer these updated alternatives.  It’s not enough that you are registered with FINRA.

Thank you to Ken Norensberg, Managing Director of Luxor Financial, who provided this valuable information to assist Broker-dealers to stay compliant.  Ken has been helping FINRA Broker-dealers manage these new registration requirements. 

About Ken Norensberg & Luxor

Luxor Financial Group, Inc. a NY based Broker-Dealer Consulting Firm that specializes in setting up Independent Broker-Dealers. We are experts in New Member Applications, Continuing Membership Applications, Expansion Filings, FINRA and SEC Audits, Anti Money Laundering Reviews, Business Development and general compliance and business development services. www.luxorbd.com

Ken is a former Member of the FINRA Board of Governors. FINRA oversees the regulatory activities and business practices of over 4,500 Broker-Dealers, 163,000 Branch offices, 630,000 registered representatives and 3,500 employees and consultants with annualized revenues and a budget of approximately $800,000,000 (Eight hundred million dollars.)

The Board contends with many complex issues that affect large organizations from generating revenues, managing expenses, personnel, legal, regulatory, political and operational issues.

Additionally, Ken was a Member of the following committees and subcommittees:

  • Regulatory Policy Committee
  • Emerging Regulatory Issues (Subcommittee)
  • Financial, Operations & Technology Committee
  • Pricing (Subcommittee)
  • Ex-Officio of the Small Firms Advisory Board (SFAB)

Why is my cap table so important for my company?

It’s never too early in the process of building a company to start managing your capitalization table (otherwise known as a cap table). As a detailed document recording all information regarding shareholders and the equity owned in the company, a well-managed cap table will become essential to long term success. Even if you’re thinking that your company does not need to keep such detailed records early on, understanding its importance may change your mind. 

At first, keeping track of equity might be a simple task. In the early stages, perhaps equity had only been distributed amongst cofounders. However, as the company grows, equity might be given out to key team members and employees, which all needs to be recorded accurately.  Without numbers correctly recorded, it will likely be hard to know exactly how much equity is remaining for the future. Also, with proper recording, it will allow founders to easily determine how certain deals may affect the equity distribution of the company. 

For potential investors, the cap table will be a key resource. Before investing in a company, investors will want to become familiar with current shareholders and the equity that each one possesses. The transparency a well-managed cap table allows will help avoid delays and increase investor confidence. During rounds of funding, the founder should also be concerned with how awarding investors with equity will affect their ownership in their company. For both parties during investor negotiations, the cap table will be essential. 

Once the company has received investments from investors, managing shareholders will also become an important task, which can be done in the cap table. The cap table will typically include investor information, such as who they are, their voting rights, and the number of shares that they own. With this information in one centralized place, if voting was to take place, the cap table ensures that all investors would be included as necessary.

One major benefit of starting to manage a cap table as soon as possible is that it will save time and resources in the long run. As the company begins to seek funding, the cap table would be already prepared and up to date. If the company did not already begin to keep records in their cap table, they would need to go back and create one, which could increase the chances for errors since it could be possible for them to have lost documents or records that they would need.

So what is the best way to manage your company’s cap table? Even though you can make a simple spreadsheet in Excel, using software such as KoreConX’s all-in-one platform might be more beneficial for long-term success. As deals occur, the cap table is automatically updated, eliminating errors that could result from manual changes. The platform also provides investors with the transparency they need to feel confident in their investments. Companies will benefit immensely from the increased transaction speeds and expedited due diligence that results from a properly managed cap table.

Wake up call, do you have the right chain for securities?

Polymath is the latest of the Ethereum fan club that has woken up to the fact that Ethereum isn’t the right blockchain platform for financial securities. The reasons include the permissionless and unverified participants, gas fees, unpredictable settlement, poor performance, and lack of scalability.

Vitalik himself was the first to point this out way back on May 9, 2016 (3.5 years ago—a lifetime in crypto-space) in a blog post on Settlement Finality: “This concept of finality is particularly important in the financial industry, where institutions need to maximally quickly have certainty over whether or not the certain assets are, in a legal sense, “theirs”, and if their assets are deemed to be theirs, then it should not be possible for a random blockchain glitch to suddenly decide that the operation that made those assets theirs is now reverted and so their ownership claim over those assets is lost.”

Independently, we (KoreConX) too came to the same conclusion when we first started looking for a good platform for our digital securities and our all-in-one applications that serve the market. This does not detract from the engineering prowess of the Ethereum team, who have taken on a monumental task in trying to create an open blockchain platform that is everything to everyone.

The real problem in the financial markets is that of investor safety. No amount of cryptography can guarantee the validity of participants and of transactions precisely because verification and validity is not in the technical domain. Rather, it’s in the social, economic, and regulatory domain. Blockchain will immutably commit all data regardless of its business validity, as long as it’s cryptographically valid. It is up to the blockchain applications and smart contracts to ensure business validity. This too is not a technical issue but a legal issue. Securities contracts should be authored by securities attorneys, not programmers. Indeed, smart contracts as conceived in Bitcoin and Ethereum are neither smart nor contracts. The word ‘contract’ is an obfuscation of ‘interface specification’ that is commonly referred to as a ‘contract’ between two applications in the software world. Unfortunately, 

To their credit, the thought-leaders of Ethereum were under no illusions about the supposed prowess of smart contracts, as defined within Ethereum. Vitalik Buterin, for example, tweeted back on October 13, 2018, “To be clear, at this point I quite regret adopting the term ‘smart contracts’. I should have called them something more boring and technical, perhaps something like ‘persistent scripts’.” Another Ethereum, Vlad Zamfir, preferred the term ‘stored procedures’.

The most important thing that the open blockchain community missed is that except for currency, financial securities are not bearer instruments. Creating fraudulent securities through shell companies is ridiculously easy with bearer instruments, which is why they are banned in responsible economies.

Besides the fact that securities are not bearer instruments, the public blockchain advocates seem to be coming to the realization that when securities are exchanged between two parties, independent and unverified miners have no business validating the transaction. Parties who have no fiduciary responsibilities, no regulatory mandate, or any skin in the game cannot perform business validation. Would you ask a stranger in New Zealand to approve the transfer of your shares in a private company to your friend when you, your friend, and the private company are all in the USA? As Polymath’s Dossa observers, “How ethereum settles transactions through mining also came into consideration for Polymath, Dossa said. Since miners, who process and sign-off on transactions for a fee, can operate anywhere in the world, institutions could face government scrutiny if fees are traced back to a sanctioned country.” More to the point, securities law does not recognize approvals from parties who are not associated with securities transactions.

Even as the public blockchain community tried to disintermediate regulators, when their assets were stolen from their wallets and exchanges, or the companies vanished outright, investors turned to those same regulators for recourse and recovery.

The other problematic aspect of Ethereum was the nature of finality, which in Ethereum, is statistical. This will not do in legal agreements. As we pointed out early last year in one of our KoreBriefings when evaluating Ethereum, “Finality [in Ethereum] if probabilistic and not guaranteed.” Would you sign an employment agreement where the fine print says there’s a one-in-ten chance that you would not be paid every two weeks. As Adam Dossa, Polymath’s head of blockchain, rightly observed, “At the center of contention is ethereum’s consensus mechanism, proof-of-work (PoW), which only offers a statistical guarantee of transaction finality.”

Incentives often have unintended consequences. We see this happen often with children and pets. Public blockchains are all about decentralization, but in fact miners’ incentives have all but centralized the blockchains. In contrast, consider that within KoreChain we have not left the question of decentralization to the vagaries of unknown miners. Instead, the KoreChain is engineered for decentralization. It is an implementation of the Infrastructure of Trust that currently runs in production in twenty-three countries; in barebones minimal cruising mode, it is capable of handling approximately 10 billion transactions per year (~318 tps) with consensus on business validity. KoreChain’s architecture also makes it massively scalable with very little effect on performance. However, as Vitalik rightly points out, finality can never be 100% even if the technology can achieve absolute finality, since the ultimate arbiter of finality is the legal system. For this reason, KoreChain includes KoreNodes independently are owned and operated independently by regulated entities and regulators worldwide..

If you hold fast to the idea that your powerful car is the only way to cross the ocean, you will be in for a continual hack of trying to make your car float on water. It is much better to recognize that a good ship is the right vehicle for the ocean. Many of the challenges of building a compliant securities application on Ethereum are actually unnecessary. Securities regulation in any one country is complicated enough. Multi-jurisdictional capital markets transactions compound that complexity by several orders of magnitude. Application designers should not be distracted by trying to create their own chains; instead, the real achievement lies in making securities transactions fully compliant in all jurisdictions, promoting innovation in financial markets, enabling flexibility, minimizing process costs, and providing an Infrastructure of Trust to which all regulated entities are welcome. 

The world’s capital markets are too dispersed, complex, and huge for any one participant to dominate. Revolutionizing the capital markets is only possible through collaboration. 

www.InfrastructureofTrust.com

Finality, Settlement, and Validation: The Place to Start

One of the most important concepts in capital market transactions is settlement and finality. Even though the payment infrastructure gets the majority of airtime, settlement finality is just as, if not even more, important in the securities markets. In the public markets, the structure of securities and the clearance and settlement process is quite standardized. In the private markets, a segment that is three orders of magnitude larger than the public markets, standardization does not exist. Rather than an issue, this is the strength of the private markets, since both private companies and their investors need flexibility in securities contracts. Regardless of all this, settlement finality is equally important in both markets.

The issue of settlement finality actually applies to all legal contracts in the sense that terms and conditions cannot be stated in probabilistic terms. Would you sign an employment agreement where the fine print says there is a one-in-ten chance that you would not be paid every two weeks?

In justifying Polymath’s latest move to abandon Ethereum as their platform of choice for security tokens, Adam Dossa, Polymath’s head of blockchain, rightly observed, “At the center of contention is ethereum’s consensus mechanism, proof-of-work (PoW), which only offers a statistical guarantee of transaction finality.” As we pointed out early last year in one of our KoreBriefings where we evaluated Ethereum, “Finality [in Ethereum] is probabilistic and not guaranteed.” Probabilistic or even statistical finality in legal agreements just will not do.

In “Principles of Market Infrastructure,” a publication of the Bank of International Settlements, Principle 8 (Settlement Finality) requires that “An FMI [Financial Markets Infrastructure] should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide  final settlement intraday or in real-time.”

Note the definitive language of “clear and certain final settlement.” This excludes probabilistic or statistical finality. Melvin Eisenberg, Professor of Law at the University of California, Berkeley, says, “The classical law approach to the certainty principle reflects the binary nature of classical contract law. Indeed, this approach is often referred to as the all-or-nothing rule.”1  Prof. Eisenberg goes on to provide examples of the “rejection of a probabilistic analysis.” While much of that treatment is related to damages due to non-performance of contracts, the concept of certain finality is quite relevant for securities transactions. This is a serious issue that has lately garnered a lot of attention.

Settlement finality is a statutory, regulatory, and contractual construct.2  Settlement is actually a two-step process: first is the operational settlement, which consists of all the steps using technology or otherwise to complete the process of trade, transfer, or corporate action. The second step is the legal settlement that happens when the regulatory framework provides the final approval, at which point a transaction is deemed to be fully settled. The problems due to the uncertain nature of operational settlement in Ethereum are well-known, even if generally ignored. The concept of legal settlement, on the other hand, simply does not even exist in the security token protocols based on Ethereum.

Blockchain technology must first achieve operational finality before the regulatory framework can certify legal finality. Public blockchains can only specify probabilistic and statistical finality. Smart contracts have to also provide for legal settlement. A permissioned blockchain such as Hyperledger Fabric is designed for guaranteed finality. The KoreProtocol of KoreChain, a blockchain application built on Fabric for managing the entire lifecycle of private securities, is designed to ensure legal finality also. One example of legal finality is that directors’ approval of private securities trades under certain conditions, as set forth in the shareholder agreement, is necessary before such trades are deemed to be final. The KoreProtocol is designed to capture this requirement and the KoreChain is designed to implement it.

While Polymath is the latest of the Ethereum advocates that has woken up to the fact that Ethereum isn’t the right blockchain platform for financial securities, they have not been the first. Several private companies, their securities attorneys, broker-dealers, and many other participants have noticed this deficiency and chosen to go with permissioned chains such as the KoreChain.

More significantly, Vitalik himself was the first to point this out way back in May of 2016 (over three years ago—a lifetime in crypto-space) in a blog post on Settlement Finality: “This concept of finality is particularly important in the financial industry, where institutions need to maximally quickly have certainty over whether or not the certain assets are, in a legal sense, “theirs”, and if their assets are deemed to be theirs, then it should not be possible for a random blockchain glitch to suddenly decide that the operation that made those assets theirs is now reverted and so their ownership claim over those assets is lost.”

Advocates of public blockchain also seem to be coming to the realization that when financial securities are exchanged between two parties, independent and unverified miners have no legal authority for validating the transaction. Parties who have no fiduciary responsibilities, no regulatory mandate, or any skin in the game cannot perform business validations. Would you ask a stranger in New Zealand to approve the transfer of your shares in a private company to your friend when you, your friend, and the private company are all domiciled in the USA? As Polymath’s Dossa observers, “How ethereum settles transactions through mining also came into consideration for Polymath. Since miners, who process and sign-off on transactions for a fee, can operate anywhere in the world, institutions could face government scrutiny if fees are traced back to a sanctioned country.” More to the point, securities law does not recognize approvals of securities transactions from parties who are not associated with or have any fiduciary responsibility for securities transactions.

Principles of settlement finality and authoritative validation of transactions remain some of the most important cornerstones of establishing trust in the financial markets infrastructure. It is up to the blockchain application designers to understand the spirit and intent of these principles and select technologies that facilitate the implementation of such principles rather than hinder them. It is up to the business participants (company management, securities attorneys, and broker-dealers) to recognize the importance of these principles and the limitations of some blockchain platforms.

Incentives often have unintended consequences. We see this happen often with children and pets. Public blockchains are all about decentralization, but in fact miners’ incentives have all but centralized the blockchains. In contrast, consider that within KoreChain we have not left the question of decentralization to the vagaries of unknown miners. Instead, the KoreChain is engineered for decentralization. It is an implementation of the Infrastructure of Trust that currently runs in production in twenty-three countries; in barebones minimal cruising mode, it is capable of handling approximately 10 billion transactions per year (~318 tps) with consensus on business validity. KoreChain’s architecture also makes it massively scalable with very little effect on performance. However, as Vitalik rightly points out, finality can never be 100% even if the technology can achieve absolute finality since the ultimate arbiter of finality is the legal system. For this reason, KoreChain includes KoreNodes that are owned and operated independently by regulated entities and regulators worldwide.

If you hold fast to the idea that your powerful car is the only way to cross the ocean, you will be in for a continual hack of trying to make your car float on water. It is much better to recognize that a good ship is the right vehicle for the ocean. Many of the challenges of building a compliant securities application on Ethereum are actually unnecessary. Securities regulation in any one country is complicated enough. Multi-jurisdictional capital markets transactions compound that complexity by several orders of magnitude. Application designers should not be distracted by trying to create their own chains; instead, the real achievement lies in making securities transactions fully compliant in all jurisdictions, promoting innovation in financial markets, enabling flexibility, minimizing process costs, and providing an Infrastructure of Trust to which all regulated entities are welcome. 

1 Foundational Principles of Contract Law, Melvin A. Eisenberg
2 http://yalejreg.com/nc/on-settlement-finality-and-distributed-ledger-technology-by-nancy-liao/

The world’s capital markets are too dispersed, complex, and huge for any one participant to dominate. Revolutionizing the capital markets is only possible through collaboration. 

www.InfrastructureofTrust.com

Global Crypto Twins one on one with Oscar Jofre co-founder of KoreConX

The Crypto Twins are well-recognized faces in the blockchain space and have been advocates and the voice for those who are supporting the global ecosystem of digital securities formation.

This was a great interview by the Crypto Twins to gain insight from a global leading authority on where the market is moving towards.  What is the private capital markets, this is one interview if you are looking for insight you want to make sure you watch.

Understanding Digital Assets

There has been a lot of talk in recent years about crypto, tokens, blockchain, ICOs, STOs, Digital Securities, etc.  What does it all mean and why should you care?  In order to navigate the new financial digital world, it is important to first understand the terminology.  Below, I have broken down the typical terms being used in this current digital environment.   In certain sections, I have provided the example of the USA, and its primary regulator, but this is globally applicable.

Distinguishing the types of secondary markets or exchanges where you can trade digital or traditional assets also seems to be confusing.  I have created the following chart to try to distinguish these.

Now, why should you care?  What does this mean to you?  Despite what some people say in the press, blockchain is here to stay.  So understanding the types of digital assets that it hosts is going to be important in making business and investment decisions.

As a co-founder of a company that is focused on revolutionizing the private capital markets, I am not going to get into cryptocurrencies as this is not my area of expertise.  This is for currency experts to discuss.  Similarly, while I know the public listed markets well and how they operate, there are plenty of people who know these markets far better than I.

My background is geared towards the issues faced by private companies. Thus, I will elaborate on the fragmented ecosystem of the private capital markets that sorely need solutions.

Since the SEC and other government regulators around the world started stepping in to ban ICO’s, other alternatives have evolved.  The security token offering or STO is one such term that got some wings in 2018. However, the institutional and traditional investment communities were still leary of the idea of a token or blockchain solution being provided by people without an appropriate understanding of the entire market they are trying to disrupt. Many people from the ICO space were just changing the name and using STO as a new hype to sell the same ideas.

Many of the players (intentional choice of word) in the ICO space were trying to circumvent securities regulations saying they know better how the ecosystem should work.  After decades of scams, the securities regulators know that the current system has built-in checks and balances for a reason.  We all understand there are issues and inefficiencies in the private capital markets, but in order to change securities rules you better have a big budget and strong case for it. As an example, the JOBS Act took well over five and likely closer to ten years to come into place.  The use of blockchain has valuable applications that can certainly provide more efficient and cost-effective solutions to current private capital markets, as long as you work within the existing securities regulations.

There is a lot of exciting stuff being built with blockchain technology. I believe that if you are looking at this as a solution to the private capital markets, you need to consider a few things if you are looking at public chains as a potential solution:

  1. Use of private wallets for sole custody of financial instruments will not work. Securities law requires the use of transfer agents in many situations and transfer agents need to have custody of assets in order to manage them. If the digital securities are being held by individuals in their own wallet, there is no way the transfer agents can have custody of them. Think of public markets: you do not hold the securities (share certificates) yourself, they are digitally represented in your brokerage account and held by transfer agents.
  2. Mining of securities: It is generally not acceptable for unknown miners to verify transactions; even known miners must be eligible to perform business validation of a transaction either because they are parties to the transaction, have fiduciary responsibility, or certified subject matter credentials or otherwise registered and regulated entities.

Gas prices are not acceptable when it comes to securities.  In order for a token to move on some blockchains, a gas price needs to be paid to miners. Transaction fees must be contractually fixed in advance and cannot be uncertain or subject to an auction style of payment (which leads to a form of ad-hoc discrimination). For individual investors, transaction prices need to be certain  and follow execution guarantees.