The Pomp Podcast - Josh Stein, Harbor CEO: Tokenizing the World

Episode Date: December 5, 2018

Josh Stein is the CEO of Harbor. In this conversation, Stein and Anthony Pompliano discuss tokenized securities, the future of finance, and why they both believe every stock, bond, currency, and commodity will be digitized in the future. BlockFi BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. Draper University Draper University's Blockchain Hero Training is a 5 week fully residential, and immersive learning experience focused on solving the world's biggest problems using blockchain technology. The most ambitious entrepreneurs from around the world will build on their skill set, expand their network, and pitch their business to legendary venture capitalist, Tim Draper. For the executives out there, you'll be interested in Draper's blockchain intensive bootcamp, which has been designed to teach executives about the fundamentals of blockchain technology in order to understand its potential to create efficiencies in new business models. Visit DraperUniversity.com for more information. ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe.  BlockWorks Group hosts events for Family Offices, HNWI's, VC's, Hedge Funds, lawyers, and accountants that are already operating in or looking to learn more about blockchain. BlockWorks Group also hosts intimate, private dinners for projects in the blockchain space looking to raise capital. To learn more visit http://blockworksgroup.io/

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. Josh Stein is the CEO of Harbor. In this conversation, we talk about tokenized securities, the future of finance, and why both him and I believe that every stock, bond, currency, and commodity will be digitized in the future. This conversation is really illuminating about the things that are coming down the pipe in the financial industry. I enjoyed it, and I hope you do as much as I did. Before we get started, I want to talk about one of our sponsors, BlockFi. These guys are doing really interesting work in crypto lending. What they allow you to do is keep your crypto,

put it up as collateral, and receive a US dollar loan funded directly to your bank account. They do loans ranging from $2,000 to $10 million, and they're perfect for helping you reach your financial goals of all sizes. You should visit BlockFi.com slash Pomp. Again, that's BlockFi.com slash Pomp. Again, one more time, type it in, BlockFi.com slash Pomp, if you'd like to learn more about putting your crypto to work without having to sell it. Definitely do it. We all know legendary venture capitalist Tim Draper. He's one of the earliest supporters of Bitcoin and has done a ton of work to drive crypto adoption. Many people don't know about one of his newest endeavors though, Draper University. If you're an entrepreneur looking to launch your idea in crypto,

you can apply to attend their pre-accelerator program and learn how to build successful global companies from Tim. And for all you corporate executives out there, you don't need to feel left out either. Draper University also has a week-long intensive program that will get you educated on all things blockchain and crypto. As we know, knowledge is power, so don't get left behind. You can check out draperuniversity.com. Again, that's draperuniversity.com and let me know what you think. If it's good enough for Tim, it will probably be good enough for you. And as Nike says, just do it. 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. 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. All right, guys, we are here with Josh Stein from Harbor. However, Josh is one of the first companies that we invested in over at Morgan Creek. So thank you very much for coming on.

Thanks for having me, Pomp, and thanks for investing in us. Yeah. We'll get to the big news that you guys announced recently here in a minute, but maybe let's just start with your personal background and kind of how you got all the way into blockchain, crypto, and tokenized securities. Sure. So I got pulled in from a bunch of folks that I knew from a prior startup I was at, Zenefits. At that time, I was the general counsel as a chief compliance officer. I also had strategy and biz dev for a while. I got really tight with David Sachs and Arisa Mono and Bob Ramica, who were the co-founders at Harbor.

And so I'd been at Zenefits for about three years and was ready to take the next step and reached out to David Sachs and asked him, you know, what he thought about next steps. And then that's when he brought up Harbor and said, you know, I should really kick the tires on it. So I knew the team and it was folks I really admired and respected. And when I asked what Harbor was about, he said, oh, it's about blockchain and it's about crypto. And at that time, all I knew was the hype I'd read in the press and I had an immediate and very strong negative reaction. Very strong. I just blurted out, that's a Ponzi scheme. Everything's going to zero.

It's much ado about nothing. And my background is for I'm a attorney by training like you guys in the army before I did that. And I was a federal prosecutor for a while. So that was the mindset that I was coming through on was this mindset of being concerned about money laundering, about pseudonymity, and just not really understanding the true application. But, you know, when David Sacks says you should dig in on something, you dig in on it. So I did, and I had the utmost respect for Bob and Arisa and some of the other folks from Zenefits who started out very early at Harbor. And as soon as I started kicking the tires and understanding the technology and what

they were trying to do, I did a 180, got incredibly excited, and started diving in. Got it. And so what are you guys doing right now at a high level? So Harbor was founded to tokenize traditional private securities. You can think an LP interest in a fund, a share in a private REIT, which is our current deal share in a private company, like the shares that you tokenized. It goes back to the origin story of Harbor. David was raising his first VC fund a little bit over a year ago, and he wanted to tokenize it. He was really into blockchain and wanted to give his LPs some liquidity.

And when he started diving in, he realized there was no compliant way to tokenize those LP interests and that people that had tokenized it before were probably going to run into compliance problems. Because when a regulator asks you who your LPs are, you can't just shrug your shoulders and say, I've got a list of alphanumeric addresses on a blockchain. So he had an aha moment. He said, hey, there's a business here. And then he pulled in Bob and Arisa. And a few months later, they pulled me in and we're off to the races. And there's been a lot of building and prepping to come to this day where yesterday, as you know, we publicly announced the launch of our platform and the launch of our first deal,

our first tokenized private securities on the platform. So before we get into the deal specifically, let's talk a little bit about when we talk about tokenizing the asset. Right. What exactly does that mean from a an execution or a engineering side? So we'll talk about engineering or how we do it. But first, I think let's talk about what it is we're actually tokenizing. So we're tokenizing shares in a private REIT. So you're not tokenizing the actual building. People say, oh, we're going to tokenize the building. I'll say that. It's shorthand. It's convenient shorthand to say that you're tokenizing an interest in the entity that owns the building.

To tokenize an actual building means you're tokenizing the title, which is something that the county recorder's office would have to do. And there's already experiments there. The Cook County Recorder's Office was early in experimenting with it. But what you're tokenizing is a member interest in the LLC that owns it, an LP interest in the partnership that owns it, a share in the private REIT that owns it. Got it. And how do you do that? We do it with a platform plus a protocol. We're a software platform to onboard and vet the investor to manage the legal documents and to manage the flow of funds into the initial placement. Then we're also a blockchain protocol that controls how that security token trades throughout its entire life. Those two things have to work together. Our fundamental thesis is that you

always have to know in real time, the real world identity of buyer and seller, or else you cannot control for the compliance things you need to control for. And if you don't mind, I'll do a little bit of an extended overview of how the platform works. I'm going to start with the end, which is how this trades with the secondary liquidity, and then loop back to the beginning and run you through how it works A to Z. So essentially, every time the security token goes to trade, it pings Harbor. Harbor is the all-knowing trade compliance oracle in the cloud. and we check all these complicated private placement compliance rules. And you can boil them down into the who, what, and where. Rules around who the buyer and seller are. Rules around

what the trade can be or what the cap table has to look like. And then finally, rules on where it can trade. And the baseline are rules around the securities laws, tax rules that are necessary to maintain tax treatment, and then of rules that the issuer may impose in addition to that for corporate governance or other prudential reasons. So every time this token goes to trade at Ping's Harbor, Harbor checks the who, what, where. If those all check out, trade goes through, no one knows Harbor was ever involved. These don't trade on Harbor. These trade on exchanges. They trade on OTC desks. They trade on marketplaces or bulletin boards. And if any of those don't check out, Harbor throws an error and the trade never happens. The best analogy for a variety of

things we're going to talk about is the transition from email to snail mail. And you can imagine us throwing an error is like an email message bouncing back. And so we throw an error and we'll say error would result in too many investors or error would result in too few. And if you look at the investment structure of our first deal, it's a private REIT. A private REIT has a very complicated rule set. It has to maintain a minimum of 100 investors for tax purposes, not more than $19.99 per class of equity or else it has to go public. Non-U.S. persons have to own less than 50% for tax purposes. Top five shareholders have to own less than 50% for tax purposes. There are holding periods, special rules for affiliates and control

persons, et cetera. I mean, just an endless list of complicated requirements. And any private security, any private placement has that. If you want to be exempt from having to register, from having to do an S-1 and go public, there are these complicated rules. And it's those complicated rules and the paper-bound system that we're in are why private securities today are fundamentally illiquid. And so we think our technology unlocks the potential for liquidity. Things will never be as liquid as the public markets, but they'll be far more liquid than they are today, we think. Let's go a little bit deeper on this idea of automated compliance or compliance written into code right the law written into the code because what you're talking about is

basically taking the existing laws rules regulations and kind of criteria and you're simply you taking the english language and how they're supposed to be applied in every situation and you're writing it into that code that then will execute without a without human oversight meaning on each individual trade no one's looking at the trade etc the code has been designed in such a way that it is going to govern these trades and there's audits and kind of periodic checking and make sure the code still works and all that but really the code's governing right it's doing it in real time and it's allowing the lawmakers or the regulators to go from being reactive right allowing if somebody does a non-compliant trade then they have to come in and enforce and spend all this time on your resources

to now you're turning them into more proactive right that that rejection of of a non-compliant trade right through those errors etc is this just happening in the securities market like just kind of mind dump on me in terms of where that's going and why it's important and how regulators look at it and all that. Sure. So you can think of us as an automated transfer agent. Transfer agents today impose these rules in a world in which you fax and you email and you're only open during bankers hours and when you're not in the Hamptons and everything's very difficult. You're correct. These securities rules around private placements are often honored only in the breach today. In other words, it happens that people sell to non-accredited

or they have too many investors on the cap table or they're not held for the proper holding periods. And no one really has insight into it. No one's really enforcing it, especially if they're not using a transfer agent and lots of folks don't. And what ends up happening is the only time a regulator hears about it is when there's a big lawsuit or an enforcement action down the road. And what happens is you're years later, you're subpoenaing a bunch of different, you're subpoenaing 20, 50 different people. You got banker boxes of documents and you're that poor government worker on a weekend trying to put it all together. And I've been there. I was a federal prosecutor in a formal life. Instead, what we do is we can't enforce all the rules ex ante from the beginning, but we can enforce a lot of them.

And so a lot of these rules get enforced before the trade ever happens and it prevents improper trades. And if you do have a problem down the road on the things we can't enforce, the regulator and that issuer who bears so much responsibility for this, they have a perfect record of who owned what, when. What is the regulator's current position on this stuff, right? Meaning that, you know, I think we're publicly on record. I wrote a media post that said, I think the SEC will mandate the use of, I said security tokens, but really just this idea of automated compliance and kind of law written into code, et cetera. In your conversations today, both in the U.S. and internationally, are regulators, you know, one, aware of this stuff? Two, are they open to it? And three, do you think they'll eventually kind of embrace it?

Do you think they have concerns? Where are they kind of sitting on this right now? Yes, yes, yes, and yes. So, yeah, I mean, look, we've had conversations with a number of regulators in the U.S. and several abroad, everything from sort of informal half-hour chats to more in-depth sit-downs with large numbers of high-level folks. Fundamentally, I think what's important to know is there is no regulatory ambiguity in what Harbor is going after. These are things that are traditional private securities. There's no question of, is this a protocol token or is this a cryptocurrency. These are securities. These are shares. These are limited partner interests.

So the rules are clear. And our application, the technology to enforce those rules, we've worked with the best outside counsel and the best minds. And we don't think there's any ambiguity or need for changes in the rules. And like I said, we think what we're doing is pro-regulatory. A lot of rules that don't get honored or forced today, we enforce ex ante. And then we've got these great records for the regulators ex post if it does turn out to be a down the road um and um we have designed our systems we use um institutional grade a lot we use that catchphrase because i think it goes to the depth and care of what we're doing and what we were building it felt like we were peeling the world's largest onion every step of the way there

was another layer to go um to figure it out because of these rules and then how do they apply with the new technology and where you're trying to allow for trading where on a practical level, it couldn't occur before. So people didn't deal with these situations. How does that work out? And we used really good people, both externally, we hired up to compliance personnel, each of them has more than 20 years of experience at institutions like Citigroup and JP Morgan. And so we feel that the use of the blockchain to record and transfer the ownership of these security interests works really well. Got it. What are the risks in, let's say all of this happens, right? All the law gets written into code and there's automation around compliance,

et cetera. What risk do you foresee or where's like the downside to doing this? I think we can talk short-term and long-term. So short-term, I think people are rightfully concerned about, okay, where's the liquidity going to be? Technology does not provide liquidity. Buyers and sellers create liquidity. The technology removes the frictions of trading. And we should probably spend some time talking about what those are and why it does this. But we think it enables liquidity and that there's a desire for liquidity that once it's enabled will happen. But this is all new. So, folks, there's a concern that, well, when's the liquidity going to be there and is it going to be there? And that's a fair concern. We feel good it's going

to be there, but it's going to take a critical mass of investment opportunities and investors and market makers and other participants. We're excited about this whole ecosystem that's gotten built out to enable this. All these different companies and protocols and important players from qualified custodians like BitGo to Prime Trust to important protocol layers like DYDX or Dharma, and 0x, and license exchanges getting built on that. All of that enables and helps to create participants to help create this liquidity down the road. But that's what, if I was valuing this as an investor, I would evaluate the fundamentals of the investment and think of the potential liquidity as an upside. So today you invest in private securities that

exist on paper. There's almost no liquidity in them. So if you would invest in this investment anyway, then any potential liquidity, the value of tokenization is nothing but potential upside. And the other thing is the use of tokenization, the use particularly of modern software platforms to onboard and vet investors and process the private placement that today is usually done with faxes and emails and it's very painful. The ability to do that efficiently and cost effectively means you can syndicate more widely. In other words, you lower the check size. People can get into investments they couldn't get into before. So, for example, we deal with a lot of real estate asset owners. And let me give you an example using a building in my hometown,

San Francisco. So, let's say, I'm not talking to people in the Ferry Building, but let's say I did. That building's worth roughly $300 million. If you as the asset owner want to raise capital on that asset, you have three choices today, and all three can be unpalatable. You can sell the ferry building, but you don't want to do that. You're a real estate person. You love gorgeous property like that. You can raise debt on the asset. You can lever up, but you may be as levered up as you want to be, particularly at this point in the economic cycle. You can sell a minority interest, but if you sell that $100 million minority interest, there's not a lot of people that can cut a $100 million check. Pension funds, sovereign wealth funds. Cut a $100 million check

and only one minority interest is even smaller group. Yeah. And so what happens is, and you just put your finger on it. One is they squeeze you on valuation, limit the number of bidders. The other is they negotiate onerous control provisions, which when I'm talking to these asset owners, they actually, more than the valuation, that's what they don't like. They don't want to lose control of the asset that way. So now, using the power of modern software tools and tokenization and this infrastructure on crypto, you can take that $100 million, put it in a single asset private read, a tokenized read, or what we call a T-read, and syndicate it more widely. I'm just going to round off the numbers for easy math. $100 million, 2,000 max investors, that's $50,000 a year

investor, $50,000 per token or share. How many investors worldwide would want to be invested alongside quality owner-operators and quality real estate at that check size where they've got liquidity on the back end, where they can access that and borrow against it or sell it and raise money on it anywhere they've got access to a computer around the world. Because as we know, and as almost all the listeners of this podcast know, the wonders of the blockchain are with the infrastructure that's getting built out, you can trade 24-7, 365 around the globe with near instantaneous settlement and no counterparty risk, and that's a real revolution.

What is the asset classes or the types of assets you think this works for best today? So I completely agree with the technology is not going to bring the liquidity. The liquidity is driven by do buyers and sellers want to transact in it? And that's really driven by the attractiveness of the asset itself, right? But are there types of assets that are more susceptible to finding benefit with this? Or do you think it's every asset that is attractive? I think certain assets benefit from it more and are going to be more willing to go early. Eventually, everything tokenizes. Essentially, today, we record ownership on Excel spreadsheets.

A lot of startups in Silicon Valley, their cap table is an Excel spreadsheet with a law firm. Ethereum is the giant Excel spreadsheet in the sky, that distributed ledger that has all these wonderful programmable properties. And eventually, everything will tokenize. But short term, I think tokenization brings the most value to those asset classes that consume a lot of capital, are sensitive to the cost of capital and are relatively indifferent to the identity of the investor because then that opens up the potential for this liquidity that brings value. So from the asset owner's point of view, they can tap more capital from more people from more places more quickly at a lower cost of capital. And for the investor, they can get into investments they

couldn't otherwise because it's syndicated more widely. They can get liquidity that's important to them. And I've even talked to sovereign wealth funds who are looking for more liquidity in their private investments. And then what becomes really interesting is a world in which you start to tokenize a lot of these assets. You can now create investments that just aren't possible before. So, if you take all those parameters, real estate is one of the best first use cases. And you just see so many of the startups going into this. I'd say our sales pipeline is all inbound interest. I'd say it's 75% real estate, 25% other asset classes. Because real estate it consumes a lot of capital. It's very sensitive to the cost of capital. Most real estate operators

will take capital from anyone that's legal around the world. Why start with a property in South Carolina? Actually, let me back up. So first, just describe the property, and then let's talk about why. Sure. So the first deal that we're offering, it's the Hub at Columbia REIT. It's tokenizing approximately 49% of an ownership interest in the entity that owns the Hub at columbia it's luxury uh student housing in south carolina just it's about three blocks off the university of south carolina campus and luxury by the way this thing's like decked out looks like mtv cribs of uh of student housing it does it's um i did not live that way in college i i got envy i've got big envy and it's got like a pool it's got this big room right it's got all kinds of

crazy stuff it does it's um i mean college students are living they're living well well some of them are at least. And so, it's owned by Convexity Properties. That's the real estate arm of DRW, which was founded by Don Wilson. I think what's really interesting is I'd love to talk a little about the background of Don Wilson, who people probably know from the crypto space, because I think this deal and what we're doing with tokenizing securities really brings together all the different strands of his background. And it's part of the reason why we were so eager to partner with him for our first deal. So, Don started out trading currencies and derivatives around currencies, like Eurodollar options in the open pits in Chicago 25 years ago.

Did very well. And then in the crash of 2008, shortly thereafter, he got into real estate with convexity properties. So, he went from something incredibly liquid, which is the FX markets are enormous to something that's incredibly illiquid, commercial real estate, and did very well there. Then, as you know, in 2014, he founded Cumberland, which started trading in crypto assets, particularly Bitcoin. So, that is, again, a highly liquid asset. It's an alternative currency and lined up with his FX background. So, up until, say, this deal a year ago, deep experience in markets and trading, deep experience in crypto, and a deep experience in real estate. Now we're combining all those things with this first deal with him, right? We are taking

commercial real estate, which today is incredibly illiquid. We're putting it into using the crypto technology, the blockchain technology to make it in a more liquid format that ultimately will allow for trading and investments and derivatives and trading based off those investments that just aren't possible today. Got it. And then this building specifically, right? What was so attractive about it from a, I think, you know, the first time you mentioned to me, like student housing, for example, is like very recession proof. Yeah. Right. Like what, what is some of the elements of, um, the types of real estate you think will be attractive for tokenized securities first? Um, or do you think it's just all real estate in general? Yeah. So let me not talk about

this particular deal for that. I'd have one of our registered reps talk about it, but I think just real estate as an asset class generally fair um so most real estate is privately held not publicly held in the public reads um what's nice about these tokenized private read structures is allows investors in a smaller check size and more liquid format to get into private commercial real estate um the uh now let me push you on something right i think a lot of people's rebuttal would be this sounds like crowdfunding, right? And there's plenty of quote unquote crowdfunding type platforms that have popped up in and around real estate. So there's ones around equity, there's ones around debt, et cetera. In your eyes, is it the compliance, the automation,

the true technology that's managing the capital stack and the trading that separates it? Or are there other components that separate from that fundraising around crowdfunding, et cetera? I think there are other components as well, but liquidity is the most important. And The liquidity then ties into the legal structures that are used and how you structure the investment. So, a lot of the crowdfunding sites, you're investing in their funds. So, I am an Acme crowdfunding site. So, what you are buying is an LP interest in Acme's fund and Acme is going out there. Acme, in other words, has intermediated you between you and the owner-operator.

Some of the crowdfunding sites match you up directly. um the the way the structures work is um often they're very there are a lot smaller deals they're they tend to be less institutional quality not always there's some some have some really quality deals but historically at least they've been um smaller and less institutional quality um not having the ability to get alongside and um not having that liquidity and a lot of them are very time limited deals or three four year deals um what this does is these tokenized private REIT structures. You can syndicate far more widely. You can have a maximum of 2,000 investors per class of equity. You could even do a preferred and a common or

a couple of different types of preferred and have 4,000 or 6,000 investors. That means you can have a bigger investment. You can do bigger deals, institutional quality deals, where people are looking for 20, 50, 100, 200 million, and yet still syndicate them down to a level that looks like a crowdfunding check size. And then you've got liquidity on the back end. And what's important is using the blockchain technology like ethereum is it ties you into this whole ecosystem so you know if you're a crowdfunding site you say well i'll just develop my own sass software solution i'll just allow people to trade on my site that's like having an email solution where you can only email to people in your organization and i can remember in college we had an email

system you can only email people on the college campus no one used it but then i distinctly remember that moment where um suddenly everything could interoperate gmail and yahoo and outlook and could talk to email systems around the world because there were open protocol internet protocol standards that interoperated um and suddenly you had all these companies springing up and developing around it and then everybody's emailing everybody you no longer um sent snail mail you only send email um and so it's similar here if you think of all the different layers what has to happen to create a liquid market commercial real estate. There is an issuing platform. Think of it as the technical version of underwriting. That's got to happen. That's

what Harvard does. There is a custody layer. That's what BitGo does. There is an investment banking layer, which is not necessarily technologically oriented. There is the exchange layer, which can have multiple layers. And for each layer, there's different stacks you got to develop. There's a tech stack. You got to develop a lot of tech. There's a regulatory stack. You got to get licensed. You got to do reporting and hire the right people. There's a business stack. You got to hire people and create an organization and processes. And then there's a relationship stack. You got to create relationships with investors or with issuers or with exchanges or whomever. And so to develop all those different layers and each stack in each

one, and then to duplicate that in every jurisdiction around the world is never going to happen. And that's why it doesn't happen today, right? It's the internet wouldn't have worked if it was just one centralized solution owned by one company. It worked because there were these interoperable standards. And so, that's why, for instance, our first issuances are ERC-20 standard tokens, because it ties into this whole ecosystem of important players. It ties into qualified custodians like BitGo. It ties into protocol layers like 0x and the exchanges being built on top of it. You can think of places like the ocean. You can think of other exchanges that accept ERC-20 standard tokens like SharesPost and OpenFinance, you can think about

these important protocol layers that allow you to create these investments and products that very efficiently that are tough to do in a paper world. So for example, using DYDX, you can create a levered long or short on any ERC-20 standard token. With SET, you can take any arbitrary groups of ERC-20 standard tokens and essentially create a token that wraps them all up. It's an ETF on the fly, a custom ETF at a single share or single token level. You can talk about Dharma that allows you to efficiently do debt, et cetera, et cetera, et cetera. And what becomes really interesting is, let me paint a picture of where we end up and how powerful that is. And then we can talk about how we get from here to there. So imagine a world in which we

start doing a lot of these single asset tokenized REITs. And we start to tokenize a lot of the class a here around new york where we are now i can now take a token from each class a building in downtown wrap it up with set i now have a downtown class a etf that's just not possible to do today you cannot make that sort of micro bet you can do the same for uh midtown for the upper east side for brooklyn for queens um using dydx i can go long downtown i can go short midtown i can go long manhattan i can go short the boroughs now this starts to spread nationwide Imagine a world in which people wanted to try and make investments or developments or bets ahead of the announcement by Amazon of where they were putting in their HQ. Suddenly now you could.

You could decide, you know what, I'm going to start doing development plans in Denver, but I want to hedge my exposure. Or instead, I'm going to start buying up pieces of logistics buildings or office buildings in Queens or what have you. If you are a developer, you can hedge your exposure. If you are a tenant, you can have a piece of equity in a building that you're driving value to because you're a large tenant. There are a lot of different ways in which people can make very specific and concrete investment theses in ways they can't today. The public REITs, highly liquid, highly fractionated ownership, well run, but huge baskets of properties, huge baskets of properties. You're just betting on an entire sector or maybe a huge region. Private REITs or private funds can be more targeted.

They usually are not at the private REITs or usually not at the single asset level. And again, just a very illiquid marketplace. They don't syndicate out as widely as they can. And I think it's worth stepping back and asking, well, why liquidity or why fraction? Why is that important? And it wasn't, this is going to sound like a sales shtick, and it is, but I believe it. Which is modern capitalism got kicked off and transformed 400 years ago when a bunch Dutchman and a few Englishmen started meeting at the corner in coffee houses, the corners of Broad

and Wall and in Amsterdam and near the Thames, where they trade these newfangled things called stocks and these newfangled things called joint stock companies. And so, they combined two magical ingredients, fractional ownership and secondary trading or liquidity. You put those two things together and amazing things happen. And they weren't done before. You had small partnerships, i.e. not widely syndicated ownership, and those weren't liquid. So, highly fractionated ownership with liquidity does amazing things. Today, private capital formation exceeds public capital formation, not just in the US, but around the world. And the reason why is going public is an expensive, onerous, long process. It has a lot of advantages. Ownership is highly fractionated,

right? These companies have hundreds of millions or billions of shares. Liquidity is deep. Hundreds of millions of shares trading a day, billions of shares on the New York Stock Exchange. But, that going public does not work for a $20 million raise or a $50 million raise or the kinds of private commercial real estate deals that we want to tokenize. But now, what you can do is you can retain the advantages of private capital formation, which is it's faster, cheaper, and easier. But you can bring some of the liquidity in the public markets to private capital formation. We think it's going to do two things. It's going to increase private capital formation, and it's going to explode a secondary market that is almost non-existent today. What are the types of assets that this technology will empower that don't exist today?

So these kind of digitally native assets that people want to trade, create, benefit from, etc. What do those look like? So I think some of the interesting ones I've seen are, you know, originally people were creating protocols or dApps on Ethereum. and the monetization model was create your own protocol token. And what you're talking about there, just sorry to interrupt, but is I create a protocol, a DAP, whatever it is, there's a token associated with it, and the way that both I make money and you as an investor or user

is through the appreciation of the price of the token. That's correct. People call these utility tokens. Some of them actually have some utility programming in it. Most of them just simply had to do with it was a payment mechanism for that application. But the monetization model really depended on it being not just using that application, but being used as a store of value more widely,

becoming an alternative currency. And the problem with that is in a world in which you start to get widespread use of blockchain-based applications, consumers and businesses are not going to be high-speed currency traders with 2,000 currencies. Nobody can do that. So what happens now is you can have models where you're on Ethereum where you're just charging an ETH. You're providing this service. You're using this world computer to provide this great decentralized service of decentralized Uber, whatever it is. And instead of charging in your own currency that requires your consumers to be the next Don Wilson of currency trading, instead, they're just paying in that one universal payment mechanism, Ether. But now you can create securities that get a

portion of those revenues that are equity in your application, that drive a lot of the same incentives that you wanted to when you were using utility tokens. And these would be native digital so you could create that uber decentralized app and you could create a security token that programmatically got 10 of the gross revenues that went through the app okay now i got it i can see the activity on the app it's programmatically automatically giving me my dividends um it is you know of course you're going to use the harbor platform because you want to be compliant and um and the functionality that we provide and the services we provide and then you can see what's going on and you can create people who are incentivized in the success of that. In other

words, if I love that Uber app, I can now buy that security that gives me a portion of those revenues and have an ownership interest in this application that I'm using. All right. Before we continue with this conversation, I want to mention our sponsor again, BlockFi. Remember, they do crypto lending. So you posted your crypto as collateral, they give you a US dollar loan, and you can use the US dollars to do whatever you want. you should visit blockfi.com slash pomp and then tweet at me that you went if you tweet at me after you went to blockfi.com slash pomp maybe i'll throw you a like a smiley face or the fire emoji the fire emoji is the best remember go to blockfi.com slash pomp and i'll see you on twitter

it seems to me like the digitally native asset is um there's an example and i actually forget who uh i can't remember it may be a lawson baker i think um is the one in lawson if i'm wrong i apologize but um basically said look a lot of people are talking about tokenized securities they want to take the existing equity in the you know whatever company etc and they want to basically put it on a blockchain right they want to quote unquote tokenize it but that would be like taking the newspaper and saying okay well we're gonna run it through a copy machine and then we're just gonna pdf it and we're going to put it on the internet and there'd be value right you could get more distribution people could read on the internet all this stuff um but you would lose the value of

you know ab testing the headlines uh being able to edit in real time comment sections right you know user generated content um the ability to uh to distribute right kind of press one button and it goes to all these different platforms etc the way that newspapers ended up on the internet was the ones that won were the organizations that understood the full power of the technology and began to use it right i think was the tokenized securities that i saw in the beginning right when we're really talking about this a bunch and kind of out there was the pdf version right if people just saying oh i have an equity i want to just kind of stamp it over right and then all the processes and services that were that were still needed to make it compliant were you know

relatively bureaucratic slow and efficient etc so it wasn't that big of an improvement It feels like to me, the step you guys just took with this single asset REIT, private REIT, et cetera, is one of, if not the first full use of the technology and understand the power of it. And then that's going to get supercharged with these kind of on-chain or digitally native assets that are created from the genesis of the security. It's all on-chain, right? It's not a representation. It's not kind of moved from analog to digital. what's your take on how this evolution happens right so so we're seeing kind of the first shots across the bow people are starting to tokenize stuff and they're trying different things

maybe what i just said is completely wrong maybe it's right you know who knows but how do we get from 99.9 of the world not tokenized securities to more than 50 tokenized securities right like what's that big leap or how do we get there um so we have hypotheses we've got theories we've got game plans but no one really knows just as completely fair yeah just like in 1995 1996 if you'd said how is it that everything's going to happen on the internet sass wasn't invented yet you didn't have amazon web services um you know amazon just started going um you know maybe there's jeff bezos out there who already can see far into the future knows exactly how this is going to roll out but i think um i think what happens is you start where that liquidity offers the most value

Real estate's a good one. I think there's some great examples to use with sports teams. There are some other great examples of traditional companies like medical device companies where they're very sensitive. They raise a lot of capital. They consume a lot of capital. And this could be useful for them. And it starts there and then expands out. This is going to look like a normal tech adoption curve. It's a bell-shaped curve. If you've ever read Crossing the chasms a b school favorite um i lived at zenefits it's a true that book is accurate and so is it the assets that lead the evolution or is there other things like like let me give you two examples is it an asset owner comes in with whether it's a trophy asset or just an

attractive asset and says i want to tokenize this and and that's another kind of milestone moment we kind of walk our way towards the evolution of eventually everything's tokenized or is the more powerful thing that a huge investor comes in and says it or is it actually not binary it's it's you kind of need both at the same time to build the liquid market it's a ratchet you're ratcheting up on okay and this is fundamentally harbor is we don't do investments on balance sheets so it's not we're a technology provider we're like the salesforce.com um and uh and so you need to have both there's a classic marketplace problem ebay needs both buyers and sellers we need both buyers and sellers exchanges need both buyers and sellers so um our we are focused relentlessly

it relentlessly on what we call the three Qs, quality owner operators with quality assets or funds that are quality investments. Because our thesis is you get those first few quality investments, that'll bring in quality investors. Quality investors will attract more quality investments, which will then attract more quality investors and on and on you go. And it's not just us, it's other folks in the space because all of us, our biggest competitor is not the other platforms out there. Our biggest competitor is inertia from doing this in paper for 400 years. what do you if we come back five years from now right we do another podcast and we say you know what tokenized securities didn't work right we actually this entire thesis was wrong what would

be the number one reason why you would guess right now that would be true like what's the biggest threat to this happening i don't i think the threat is being too early i don't think i don't think it doesn't happen um this but i mean you can look i mean you look in the crash of of 99 2000 with internet stocks. Every single one of those business models is a success today. Even Pets.com, the old sock puppet that got relentlessly parodied.

I'm blanking on the name right now as we speak, but there was a company that recreated the Pets.com model exactly and had a huge exit a year ago. Every single one. Web van, all of them. Yeah, all of them did. So it's not, it is going to happen.

When I paint that vision of, when I talk to people of how hard it is to get liquidity and private securities today, what the blockchain does what happens once you have that critical mass of opportunities and investors everybody i talk to not crypto enthusiasts everybody i talk to in the traditional financial world they look at me and they say that is going to happen and we love it and the constant what we constantly hear is we don't want to be first we want to be early i can't tell you how many big large financial institutions want to talk to us after we've done our third deal after

there's a critical mass of trading or whatever and that's why it takes people who are pioneers like, you know, like with Don Wilson, he was a pioneer in crypto, he was a pioneer in trading, and he was a pioneer in security tokens, that you always need those early pioneers that are crossing the prairie and going into the unknown. It's funny because I've joked with a couple of friends before, it's like a Venn diagram, right? Usually those quote unquote pioneers are folks who are entrepreneurial or built their wealth in, you know, entrepreneurial endeavors. They also have the validation sophistication reputation kind of all the things that you need to when they say i'm going to do this people pay attention but they have to lack the surroundings of a bureaucratic

organization right so i i talk a lot about um you know take a fidelity for example like abigail johnson and that entire family is like pretty entrepreneurial they've got this huge innovation lab they've done all stuff they launched you know fidelity digital assets all everything there's only so much they can do though within the confines of fidelity right i think it's like seven trillion dollar asset manager all this stuff take somebody like don wilson who again i'm not comparing him personally to fidelity but what i'm saying is you have an entrepreneurial person who's got a bunch of experience who's got capital who's got assets and it's got enough of a reputation that when they stick the flag in the ground people pay attention right and i think we've

gone through this exercise of let's say there's 10 15 20 of those people how do you go find them Right. And sometimes it's, you actually don't go looking for the people, you go looking for the right type of asset, maybe in tokenized securities, or you go looking for the right type of fund or, you know, whatever it is. And those people just happen to be the ones who own it. But if you can find those kind of champions within certain asset classes or niches of the industry, that's what we've really honed in on. We need more of them, right? But there's not enough of them there today. And I don't know how to go get them. So, there's a number of ways you do it. Some of it is retail communication. We take lots and lots of meetings. And you have to be careful about getting too sucked in because there's a lot of folks that just want to use you as a free one-on-one graduate seminar on blockchain. The other is by focusing on quality owner-operators, quality assets, getting those first few that are people like Don Wilson and DRW and convexity properties. And some of it is getting the word out, like appearing on quality podcasts and getting the word out.

And then finally, I think it's being part of an ecosystem. So, you know, I've gotten impressed by investors in Harbor and others like, well, you guys should do an exchange. There's a lot of value there. And you should do a stable coin. There's a lot of value there. It's like, well, yes, but there's a number of problems with that. One is, okay, that's a whole nother lift of a tech stack, relationship stack, regulatory stack. And what we're doing is complex and hard enough. The other thing is, there's a reason why DTCC, State Street, Goldman Sachs, New York Stock Exchange, and high-speed trading firms are not all one company today. And the reason why is all of them depend on relationships at each level. And those relationships become competitive when you put it all under one roof.

I don't want to compete with exchanges. I want to partner with them. I don't want to compete with 0x and DYDX and SET. I want to create the security tokens that make what they do so valuable. I don't want to recreate the wheel on custody. I want to partner with people who are best in class, like Mike Belshi at BitGo. And I want to become a – I don't want to compete at being an investment banker. You know, our registered reps working through our partner broker, GCS, they're performing investment banking function on their first few deals because we have to to prove it out.

But long term, I don't want to compete with Goldman Sachs. I want to be that compliance platform that services them, that services JP Morgan, that services others. And I think, you know, when you're asking who are going to be the innovators, there's two kinds of people that adopt tech early. One is people who are tech enthusiasts. That's your Don Wilsons. Some of it are people for whom it gives them a competitive advantage. It solves a critical need that nothing else will, and that gets them over the hump. And so, I think that is, who are the Don Wilsons, the Sam Zells, the Barry Sternlicks?

Who aren't yet them, right? Who is the Don Wilson from 20 years ago? Who's the Sam Zell from 30 years ago? People who have good track records, they're quality folks, but they're not yet at that level for whom this can differentiate them. When we think about distribution, we're talking to potential broker-dealer partners across Asia and Europe. It's not going to be the bulge bracket banks that jump to do it initially. It's going to be those boutique banks that, to your point, are not bureaucratically bound, who are nimble, who can see this for what it is, and can see a real differentiation, right? What's the next Goldman Sachs?

What's that boutique investment bank of 20 or 30 really good guys who want to become the next Goldman Sachs? Those are the people that are going to jump on this early, but who have the skills, the background, and the connections to really legitimate this and really push it forward in the right way. Absolutely. All right. Before I wrap up, I'll just do a rapid fire set of questions. Other than Harbor, what's the most important company in crypto? BitGo. Why?

Institutional custody. You need the institutions. I know that in the crypto community, there's a little bit of a sort of negative reaction, short the bankers. But I mean, that's been said by wiser folks than me. But fundamentally, for what we're doing, tokenized securities, the institutions have the vast majority of the assets and the money to invest. And so you have to provide the institutions they need to get involved. And that's even true with crypto. You've talked about for Bitcoin.

Of course. institution of course um if you could wave a magic wand and change or improve one regulation what would it be uh the limitations on maximum ownership in private companies there's that that 12g limitation of 1999 i would raise it significantly what would you raise it to and why i'd start by raising probably the 10 000 and see how it goes and then incrementally raise it i don't think there necessarily need to be limitations like that it's particularly in a digital world a tokenized world in which you can track this all really well yeah um those limitations made sense where in a paper world it would be hard to track who the owners were we're not in that world

anymore okay thanks for uh most important book you've ever read angle of repose oh what is that i've never heard of that wallace stegner okay what is that um So, Angle of Repose is a story about a miner. He's a geologist. Not like a crypto miner. Not a crypto miner, no. Like an OG miner. Yeah, like an OG miner.

He's a geologist that works with mining companies. It's set turn of the century. And it's the story of his relationship with his wife and his family. And angle of repose is a mining term. When you pile material like a pile of dirt or stone or gravel and you pile it up, eventually the angles of the sides become stable. They will not either increase or decrease, and it's different for each type of material. And so he was using angle of repose as an analogy to over time as you build up a relationship, your relationship becomes stable and there's that angle of repose and what it means to have that kind of a long-term relationship with somebody. Ah, I like that a lot.

It was a Pulitzer Prize winner. It's a phenomenal book. Okay. It's a phenomenal book. I'll have to read that. I've never even heard of it. I'll let you finish up by asking me one question. But before I do that, I ask one non-crypto question.

you have to just accept that aliens exist. We always see them depicted as human-like aliens, right? They're comparable as a human. Do you think that there are alien animals or alien pets? I wish people could see the reaction, the facial expression when I ask this question. People are going to be like, I am absolutely nuts. No, I'm thinking. So I would say that, yes, so if aliens exist, I would say that mathematically it's a high likelihood.

I mean, if you read some of the papers, they're really interesting and you extrapolate out statistically. You would have pets. You'd have livestock. You would have sets of species or beings who have more powers than others that would exploit them for food or companionship or labor or some sort of value. one of the craziest stories of 2018 that like i don't even think people talk about let alone talked about for a very short period of time uh do you see this harvard astrophysicist i think it is who uh came out and said there was a uh i'll call it a ufo it's not the proper terminology but something entered into the solar system and moved in a really weird way and then accelerated

out and he's like a lot of conspiracy theorists he's never said like you know aliens are real or anything he's like i think that was a spaceship yeah i did see that i mean he didn't say like that's the more likely than not scenario he said it's a possibility it fits the data we have fair fair um and part of it was this long cylindrical form and it looked like something out of like star trek the original star trek absolutely which is the good one i i'm not a next gen guy but yeah it could have been like i mean like i was looking at thinking maybe there are triples on it or something i i literally when i read that i like read it four or five i was like wait what happened? Right. And then we should go back and look actually, if the professor then got

fired from Harvard for, for saying the crazy stuff or if people actually believe it. But to me, that's the one story that no one's really talked about. All right. What one question do you have for me? So, I mean, you are known as being an eloquent and thoughtful advocate for Bitcoin. I'll take the question you gave me to your circumstance. If Bitcoin or cryptocurrencies generally don't succeed in five years, why not? So all cryptos is probably more complex. So let me just stick with Bitcoin. I think, first of all, it can go to zero, right?

I think there's a lot of people who say like it can't go to zero. I think we need to separate price from it will still run somewhere on a computer, right? So, you know, it's as long as somebody's running the Bitcoin software to still run, but the price could go to zero or it could be worthless. I think that there's a couple of different things. So one, obviously, software bug would be crippling. Right. And I don't know if it's fatal, but it would be damn near fatal. I think that there would definitely be issues if people lost confidence in the idea of decentralization. So there's a bunch of questions around. Is it actually decentralized? How decentralized is it? Who controls what, etc.

But I think for the majority of people, they say it's decentralized. No one person or organization has control. If that became irrefutably provable that one person controlled it or the U.S. government created it or something like that, I think that could be really a big shock to the system. Along those lines, the what I call immaculate conception story of Satoshi Nakamoto is a person, a group. Who is it? We don't know if that was somehow debunked or we found out the facts behind it. I think that would hurt the story. And so there's the technical software bug stuff.

There's actually like the story I think is really, really important. It's probably more important than most people will admit. And then the third thing is I actually think if the government or some other regulatory body came in and banned it, it would actually drive adoption. So I don't think that's a risk. The risk that I think actually occurs is we saw it today. I think it was today. There's two Bitcoin addresses that was added to the OFAC list. Yeah.

And that's not going to be a shock to Bitcoin, et cetera. But what that started me thinking about was this idea, well, what if there becomes a very simple way to take away the pseudonymity to introduce real identity? and then you basically get introduced all of the sanctions and kind of all the things that we have in the traditional banking system, you almost are, like it takes away the idea of it being an alternate currency or an alternative financial system, and it just becomes an exact mirror image. And so maybe you get away with like, oh, there's no rehypothecation or maybe there is or that type of stuff.

But if there's all of the governmental oversight, I think it would lose some of its luster and usage. and that's not to say that it's used to sidestep regulation i i'm of the belief that there's a lot of things that aren't other people's business but doesn't mean you're doing bad things right and so there's a fine line there and you know it's um uh zuko said this to me one time that i thought was a really interesting thing um he said uh everyone is talking about the privacy coins like why do you need to use a privacy coin you must be doing something wrong right moneros you catch all stuff that was the exact same argument that a large percentage of people

used and also the government against encryption i think in the 80s or 90s yes and the rebuttal was no no no this is actually about security and safety and all this stuff and there was this big hearing and you know there's a speech online that you can go let's do um but it's now industry practice right if you don't have an encrypted website that's a weird thing right and all stuff and so if you look at that from the privacy coin standpoint does that mean like every token is going to have encryption and privacy and all stuff probably there will be elements of that but also does that carry over into other aspects of the use case right like does that actually mean we get comfortable with the idea that i'm going to transact with pseudonymous people or organizations

or wallets i don't even know who you are i just need to know that you're you know quote unquote legal right you're compliant you're legal etc i actually don't want to know your name So, which is for currencies, maybe that works. For securities, you have to know the name. Securities, defaulting rankings. Yeah, I'm talking about Bitcoin specifically. But I even sort of take it back, you know, so I take it back even you're using synonymity now and taking that back to encryption. I take it back several hundred years before that.

If you're not doing anything wrong, why do you need to be protected against unreasonable search and seizure? No, seriously, if you're not doing anything wrong, why can't you be forced to testify? There are reasons why our lives are not open books, and there are reasons why all of us in our lives have had people who make their lives an open book, and we find those people toxic and we stay away from them. I mean, it is a hallmark of a mature person in a civilized society that we have layers of access to our private selves. I couldn't agree more. I think it's a super fascinating thing. And, you know, look, I'm very bullish on a lot of this stuff, but in the back of my head, it could all go to zero. And I think one piece of this that has precluded a lot of people from publicly stating how bullish they are.

I talked to a lot of people in private. They're like, oh, they're so bullish. I'm like, why don't you talk about this publicly? They're not comfortable being wrong in public. Right. So they're actually very bullish. But if they're wrong, they're hedging. But if you're not willing to be wrong in public, you're never willing to be right in public.

And you're not really informing a conversation debate. And so their response, I think, would be, well, the upside of, quote, unquote, being right in public isn't anywhere close to the downside of being wrong in public. It's probably true. So a completely fair argument, the part that I've just kind of accepted on a personal level is the authenticity of this is what I believe. I could be right. I could be wrong. Here's why I think I'm right. And actually failing and being open about that and just that authentic approach to it will overcome being wrong.

I mean, it is. If you do a spreadsheet and you calculate all the probabilities, you reduce it down to a net present value, then yes, they probably are right that there's more downside. But those aren't the people that start valuable industries and valuable companies and new technologies and new ways of doing things. Those are people who take risks even when they don't necessarily pencil out because the uncertainties are so great. At the moment in which you can pencil it out and arb it and know exactly what your ROI is on it is the moment in which it's an old established industry. They end up working for the people who are willing to be wrong in public. One can only hope. All right, man. Thank you so much for this. This is awesome. I'll have to do it again as you guys talk about some more assets. Thank you, Pomp. Really appreciate being on. Absolutely.

All right. You reached the end of the podcast. Congratulations. I appreciate you listening all the way to the end. You deserve a trophy. But before I hand out the virtual trophies, remember to go visit BlockFi.com slash Pomp. They're the crypto lending leader in the US. They do it in 45 states, interest rates as low as 8%. And you can use the US dollars funded directly to your bank account to do whatever you want. You should definitely go visit BlockFi.com slash Pomp. You know you want to do it. So just do it. BlockFi.com. slash Pomp. Before I let you go, though, I wanted to mention Draper University one more time. Remember, Tim Draper is one of the most legendary venture capitalists in the world. He's funded many of the biggest companies that you've heard of. Today, they have two separate programs around blockchain at Draper University. The first is for entrepreneurs looking to get their idea off the ground who can attend their pre-accelerator program. And the second is a week-long intensive program for corporate executives looking to learn about blockchain and crypto. You can check out draperuniversity.com and apply there. The deadline is approaching fast

because the programs are in January and February. So definitely check out draperuniversity.com. Again, that's draperuniversity.com. And one more time, draperuniversity.com to make sure that you can apply. Thanks so much, and I'll see you next time. 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