The Pomp Podcast - Ken Nguyen: Tokenizing the World One Startup at a Time

Episode Date: November 28, 2018

Ken Nguyen is the founder and CEO of Republic. In this conversation, Nguyen and Anthony Pompliano discuss working at AngelList, the variations of securities law, building a startup in a highly regulated market, and why tokenization could eradicate global poverty.

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. Ken Wynn is the founder and CEO of Republic. This conversation covered a lot, including him working at AngelList, the variations of securities law, building a startup in a highly regulated market, and why tokenization could eradicate global poverty, according to Ken. This conversation was a lot of fun, and I hope you enjoyed it nearly as much as I did. This podcast is presented by BlockWorks Group, the only blockchain event and media production company I trust. If you're an investor, lawyer, accountant, or entrepreneur and want to attend

exclusive events and dinners, visit them at blockworksgroup.io. I promise you won't be disappointed. 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 i'm super excited i've got ken here um we've got a lot to get through but uh our goal today is uh we want to create the single source of truth for all things tokenization so

whenever somebody asks you uh what is tokenization why is it important you can send them this one podcast episode so uh tall task no pressure ken thank you so much anthony for having me absolutely all right so real quick just so people have uh perspective uh how did you get into crypto what's your background let's go through all that and then we can jump into the tokenization stuff Definitely started out as a securities lawyer, worked in finance, went back to academia and then joined AngelList as their general counsel back in 2014. And then so I spun out an affiliated entity called Republic to allow retail investors to invest in stock, common stock, prefer stock, early stage companies. And then from then on in 2017, AngelList set up CoinList. and in the course of that seeing very well that these tokens a lot of them are going to be deemed

to be securities meaning you gotta find a compliant way for everyday people to participate in own tokens and that's why we launched republic crypto got it and so um let's talk about the securities uh law stuff first right so um what were you doing there kind of what was the things that interested you on the security side kind of pre-crypto right because now a lot of stuff super applicable um but what were you doing the way that i view fin fintech um it's basically half legal and half business and then if you deal with silicon valley in a component of engineering when you deal with investment there's an 80 years you know of securities law to deal with crypto navigates at the forefront at the very edges of financial technology which means the

legal component is probably going to be 70% or so. And so it's about navigating the murky landscape, going far enough to be ahead of the game, but not overstepping so that you end up in federal prison. It's a delicate dance. So I think law is always going to be a key part of fintech, but in crypto, it has already been a major, major component. Absolutely. That makes complete sense. And so you go from securities law into the finance side, right so maybe talk a little bit about kind of what type of financial organizations there you mean uh yeah so uh when i left uh goodwin proctor um i joined a massive asset management firm straight up front of funds our counterparties was like lehman's and bearstone and whatnot

and it was just structuring fun products you know a lot of r.i.p to those exactly lpgp dish out you know tracks into billions into you know traditional assets oh it got boring very quick right it wasn't a whole lot of creativity. So I went back into academia and then AngelList itself is a fund manager, the syndication model. And so we applied the same thing. We nudged the boundary a little bit there on broker dealer investment advisory law. And then we left when the law changed to allow retail investor to invest in early stage companies. Very cool. And so when you go to spin out Republic, we'll get to that in a second, right? But let's talk about AngelList kind of pre you spinning Republic out. Right. Cause I think a lot of people don't really know

what AngelList is, what the benefits are, but it's changed the way that people look at, uh, financing private companies. Right. So maybe talk about kind of what AngelList does and why it's important. Soon of all, Nivi started, uh, AngelList back in 2011, mainly to provide more information to entrepreneurs, venture financing, which is, you know this black box you're either lucky enough to get uh to someone and get rejected without knowing why this was i mean very little information at the time so it started out just as a literally a block of a venture hack and then over time i think they saw an opportunity that once you build an ecosystem of entrepreneurs and investor then you can facilitate investment

The moment that you do that, the moment that you monetize on investment activities, then regulations kick in. And so they hired me as their first general counsel when they first launched the syndicate product matching investors to underlying startups. Absolutely. And so what's been the impact of AngelList, right? Because it really did open up information, access, etc. But how do you look at that impact in non-crypto or non-tokenized world, but in still private startups? I would say before AngelList, you got to be very lucky to know one of three dozen extremely well-connected individuals in Silicon Valley in order to get financing. So even if you're a very high net worth person here in Wall Street or in Alaska, you didn't have access to deals and you didn't really care or know how to vet early stage startups. So by establishing a platform that a lot more high net worth individuals now can finance projects, it increased the pool of capital.

And it necessarily led to a much wider field of entrepreneurs who got funded since, you know, 2013, 14. Absolutely. All right. So you end up seeing the change in the law that allows retail investors to participate in this and really unaccredited investors. Right. Is what we're talking about. And you go to spend Republic out. Let's start with just what is tokenization. Right. So in your mind, that term gets thrown around all over the place. What does it mean to you? For me, it's basically employing this new technology, blockchain technology, that would bring a level of fractionalization unprecedented because it's so cheap. The simplicity of fractionalizing something and the automated impact of basically remove the administrative costs out of it. So I would say liquidity and fractionalization are two elements that you add on to traditional financing. And those two key elements alone, in my opinion, would generate, I don't even know how many hundreds of billions, if not trillions of value once you disintermediate the middlemen that are permeating throughout the banking system.

Absolutely. And so as you're doing this, what type of regulatory environment is there? So the technology is one piece, and we can talk about that in a second, but the regulations make this possible. Right. And so let's go through kind of each one of the regulations that exist and then the exemptions themselves. Right. So if you don't use an exemption, what are your options as an entrepreneur to to to fundraise? You know, if you allow me, Anthony, to just backtrack a one little bit, because the reason why Congress passed this law to allow everyone to invest doesn't matter if you're a millionaire or not. they didn't consider crypto of course at the time but the purpose behind that was actually realized by the wave of ico unbeknownst to congress so the reason why they open up they changed the law to allow everyone to invest was that the number or the type of entrepreneurs they got funded by

venture capitalists fit a very particular mold they gotta be massive massive or companies with massive potential mostly people young males from stanford harvard and the like and traditional venture capital mold that we think of correct of so basically it's a very narrow lens and the other side of the coin was that pretty much everyone else 99.9 percent of the population didn't get to participate in what has been the biggest wealth generation event until crypto So we lobbied Congress and then they changed the law to allow for minimal small participation so that even a teacher in Alaska can invest $50 in the next Uber. And that $50, if Uber does really well, can be more than a million dollars worth in value. And this regulation was called what?

The JOBS Act, Title III, or Regulation Crowdfunding. so uh ico of course at the time and there were already icos being done in 2015 16 in asia you have people anywhere everywhere funding financing businesses projects in a way that was much further than what the law even contemplated i hope it could be uh so now it's just basically in the u.s is using an existing legal framework to try to make what has already been an industry practice more compliant and possible. So really what people are doing is they're taking a law that exists on the books and they're interpreting it in a new way based on technology that was not available when

the law actually passed. Or another way to look at it is that now there's a framework, there's a legal framework that does allow for everyone to participate, does allow for open participation, but you have to operate within this legal framework because otherwise the legal risk, not just from the sec you know cramming down is from potential investor uh lawsuit it's just too high so the current legal framework does actually work it does come with a cost but it does work no it makes sense let's start a business a hypothetical business right now right so you and i want to start a construction company kind of just a traditional mainstream company that does not

have the multi-billion dollar potential right so we're talking about a traditional business um and to get started we need to go buy some uh equipment right we need to hire some people kind of get get operations off the ground uh and so we need to raise some capital yep what are our options today so first you got to form a company okay either a limited liability company or a true corporation it's essentially just a legal entity and pretty cheap pretty fast pretty cheap pretty fast an loc can be formed in like less than 48 hours a couple hundred bucks same thing for a corporation. What you do with that entity, how you're going to fundraise, how you're going to capitalize it. Now that's a range of option. You can go to a bank and say, I have great credit

score. Please lend me a million dollars. That's probably going to be a hard sell unless you already have a lot of assets. And it's a hard sell because they don't have a lot of collateral at the business. It's new. There's no history. They would have to reach back to your personal asset to do it so for you know someone who's under 30 for most people that's not a reality yep the second one is to convince friends family that hey i'm building this business it's going to be really profitable why don't you lend me some money and i'll pay you back another way lending money and paying you back it's just fixed income right so over a period of time you get back 10 percent 12 percent interest every single year not super interesting or you can tell and it's and

And it's hard to do because most friends and family aren't used to lending to businesses. Correct. And they may not have the capital to lend. For example, if you lend someone $10,000, that means 10% out of that every single year you're going to get $1,000 back. Convincing people to lend you $10,000 so that every single year they get a bit of return, that's a hard sell. Absolutely. Or you can go to 20 friends and say, hey guys, this is going to be a big business and I'm going to sell it one day for a lot of money. Why don't you each buy in 500 bucks? So altogether I get $10,000. I'm not going to pay you back anything until the company makes it big. And then your 500 bucks is now going to be 50,000. That's the equity sales for people to participate. Got it. VC essentially fits into the latter, you know, the latter framework.

And so if I don't get a bank or my friends to lend me capital, right, non non dilutive capital, then I've got to go and raise equity capital, right, to fund the company. The options there would be I can go to professional investors, right, venture capital funds, etc. I can go to friends and family. They can buy some of that, like you described. But then there is this new regulation that has come out where these exemptions under the JOBS Act allow me to raise equity capital. So I sell a piece of my business to people I might not know. So not friends and family, and they're not professional investors. What's my range of options there on the regulation side?

Since the Great Depression until about two and a half years ago, if you are raising from people who you don't know and don't know well, You can only raise from so-called accredited investors. That means institutions. That means loosely defined people who are millionaires. Okay. So pre-Jobs Act, you can only raise money from accredited investors. And this is something that is across the United States, across the world. Does everyone use this accreditation?

Talk me through kind of how this applies on a global scale. In much of the developed world, there's a limit or there's a minimum requirement on anyone seeking to invest in an early stage company. These legal frameworks really to protect investors. You don't want, you know, grandmas and teachers, quote unquote, loosely defined by the law, unsophisticated, financially unsophisticated to get duped into investment opportunities. The law assumed that if you're rich enough, that you know enough in order to protect yourself. So wealth is used as a proxy for sophistication or intelligence. Unfortunately, in the U.S., that's the case. Okay.

And obviously, in practice, that's not the case. I've said it before. There's a lot of dumb rich people, right? In fact, the United States is the only country among the developed world that doesn't have a sophistication standard based on how much you know rather than how much your net worth is. Oh, so interesting. So other countries have both a wealth criteria and a sophistication criteria. Correct.

So in the UK or Canada, if you have spent a year working for a financial institution in an investment capacity, then you deem to be an accredited investor. Their definition of accredited investor. And so really it's an either or, right? You can have a million dollars or meet some wealth criteria, or you could have worked for a year at a Goldman Sachs, wherever. Correct. And the standard in the U.S. is that you got to make at least $200,000 in salary the past two years or have a net worth of a million dollars or more.

Got it. Okay. And so today, if you and I have that construction company, we want to go raise capital. We've got Reg D, right? Regulation D, which is an exemption under the Jobs Act. Reg S, Reg A+, and Reg CF. So those are the four? A REC A-plus and REC CF, a new legal framework since 2016, of course.

But those are the four main ones. And so what a lot of people don't understand is when we talk about these regulations, these are exemptions to securities law. So this was part of a deregulation of the industry, right? To make it easier for people to raise capital without going through the steps required by legacy securities law. Real quick, just touch on what were those steps? Why was it so hard to leverage securities law to raise capital before the regulation exemptions came in? So, after the Great Depression, securities law in the U.S. basically draw a red line. In order for a company to raise money from retail public, non-accredited investor, or to raise money at all, you got to be a registered company, meaning a public company, meaning going IPO.

The cost of being a public company just to file the form is a couple million dollars at least and a few more million dollars per year just to maintain it. And where does that money go? So everyone hears that registering or becoming public company is very expensive. But what are you paying money for? Legal fees, of course. the gap accounting that is required by law and just the fleet of accountants and lawyers to comply with all of that is extremely expensive internally you have to have a record-keeping system just the operational framework to be a public company is excessively high okay so

either you have to be a public company or you're exempted by the law from the registration requirement. So you can raise money from a non-accredited investor if you're one public company that is expensive and requires a lot of kind of a higher degree difficulty, things to remain public and compliant, et cetera. Or you can leverage an exemption from being public to raise capital. And that's what we're talking about with Reg D, Reg S, A plus. Correct. So it's not just a retail non-accredited. If you want to raise money from the public, either you have to be fully register or you have to fit one of the exemptions. Reg D, the first exemption says that if you just raising from accredited investors only, again, millionaires, then that's one exemption. But if

you take in a single non-accredited investor, you lose the exemption. Okay. So let's go deep on Reg D for a second. If I and you have the construction company and we want to raise money through Reg D, we can only take accredited investors money. Correct. Can we raise as much as we want? you can raise an unlimited amount okay and how can we market to those individuals so so we have to know they're accredited but can i just go on television and say hey i'm raising money do you you know call my cell phone if you want to put money in or how do i actually market to them no we're getting to a deeper level of legal nuances uh that's why you're here if you go on tv yes you can put on a billboard in the subway you know watch your children go on tv and publicly

announced to the world that you're fundraising, but you have to verify that everyone you are taking in to the route, taking money is truly accredited. So you have to look at their tax return or you have to get an attorney to verify it. You know, the verification of accreditation is a complicated threshold. If you don't publicly announce it and you just go to people that you know and they're friends then you can rely reasonably rely on people's accreditation representation without having to verify so this is an important nuance if i want to do billboards television commercials go on the news kind of publicly solicit funds for people i don't know yeah i have to verify that they're accredited yes but if i actually rely on personal

relationships and it's from people that i know i can simply ask in a kind of predetermined way are you accredited and if they tell me yes that that meets the barrier or that meets the criteria that i can rely on their self-accreditation yes so and the threshold is pretty easy and this is a loose threshold not a legal threshold you if you go online you google someone's fundraising round and it doesn't come up, the person is technically not publicly fundraising. You can still do a billboard ad and somehow doesn't make it on the internet,

but nowadays that's unlikely. Got it. Okay, so that's Reg D. Reg S is what? So Reg S is if you fundraise from non-US investors outside of the US, then the SEC, Securities Exchange Commission, takes the view that it's not our business. But you have to take a few steps to make sure that your offering is not accessible by U.S. investors and that you don't, in fact, have a U.S. resident somehow investing in the route.

So our construction company, we say, actually, we don't want U.S. investors. We want to raise money from international investors. We're allowed to go do that without having to comply with U.S. accreditation law. Correct. If we ensure that U.S. investors won't invest in the offering. But you do have to comply with the local laws that may apply to the round, right? Okay. See how I asked that question that way? So if we want to raise capital internationally, and let's say that we have interest in, I don't know, Singapore, India, and the U.K., right? we don't have to worry about the u.s accreditation criteria as long as we're ensuring no u.s

investors are participating but we do have to make sure that we're compliant in the uk or say india and singapore correct okay you have to take that into account okay because you won't be in violation of u.s securities law but you would be in violation of uk india singapore's absolutely if you're out in singapore pitching your your offering to singaporean resident uh singapore laws would apply okay so in recap reg d accredited investors in the u.s pretty cut and dry well understood uh cheap to do yeah cheap to do and uh this is a little bit of the rich get richer because you can only raise money from rich people correct right reg s says a lot of the same stuff but you just won't take money from u.s investors you'll take money from

international investors and you'll and you'll go through the steps to make sure u.s investors don't participate. All right. So that's all fairly well understood. Let's get into the fun stuff now. So we've got Reg A plus and we've got Reg CF. We'll start with Reg A plus because I think more people understand that. What exactly is Reg A plus and what are the things that I can do with that that maybe I can't do with the other exemptions? So Reg CF, Reg A plus going IPO are three ways that you can accept non-accredited money in the US. Okay. So IPO, Reg A plus and REG CF. Correct. And I would, the way that you should look at it is in terms of complexity and cost. So IPO probably a year or more to prepare for it. And the cost is a couple million dollars

all the way to like 15, $20 million to do just to do an IPO and then maintenance cost. So an IPO really is time consuming and expensive and likely only done by large companies that are well-capitalized, et cetera. Correct. Okay. And then everyone anywhere can just openly buy. I mean, Google, Apple, Facebook of the world. Got it.

Reg A plus is a couple notches below that in terms of cost and timing as well. Okay. So law firms now quote about $1 million or so to $2 million to do the cost of a Reg A filing. That's just the legal fee. In crypto space, the time that it would take for the SEC

to approve a Reg A-plus application can be six months or eight months or more. In fact, today, there hasn't been a single approval by the SEC for a Reg A-plus campaign. So a Reg A-plus is a little bit less expensive, a little bit shorter timeframe, but it's still not the creation of an LLC, which is a couple hundred bucks in 48 hours.

We're talking six plus months and still hundreds of thousands, if not a million plus dollars. Correct. And there's a limit on how much you can raise. Okay, so let's talk about that. And that limit is currently at $50 million and soon will be $75 million. If you do an IPO, you can raise whatever money that people are willing to invest in the billions.

So an IPO, I can raise as much money as I want from unaccredited investors. With A+, I can only raise up to $50. Correct. But they can be unaccredited. Yep. Accredited or unaccredited or accredited. Okay, so it can be either. Is there a limit on the number or on the check size they write?

Yeah. So generally, no, that is the, now in reality, the people, the type of people would invest, you know, millions are generally all accredited. Yep. So you can go raise, I could raise up to $50 million from unaccredited investors using Reg A plus and everyone could put in $10. Correct. Got it. How can I find these people? Can I go on television and, you know, promote it and billboards and put all over the internet? Absolutely. Absolutely. You can launch, you know your own website you can then you know do facebook ask to the extent to the extent that they accept you anything public promotion advertisement as long as you disclose it got it so that's reg a plus cf almost nobody knows about it's probably the most misunderstood

unknown regulation exemption that's what you guys are focused on correct and full disclosure that's what republic's been doing since summer of 2016 and it's a big drop off in terms of everything it takes about two weeks to launch a campaign it can be as cheap as three four thousand dollars but there's a limit it's a pretty low limit no company can raise more than a million dollars 1.07 to be precise a per year okay so if we got our construction company and we need a couple hundred thousand dollars or a million dollars to get started we can go it takes us a couple of weeks i'll say you know a month or less we can spend less than five thousand dollars we can raise money from accredited or unaccredited investors they can write as little as ten dollars up to whatever

size check they want but we can't raise more than 1.07 million dollars into a 12-month period correct uh they actually each investor there's a cap no one can put in more than a hundred thousand dollars in a rec cf campaign oh interesting okay that's the maximum uh anyone even a student even if you're greatly in debt uh the law deems that anyone can invest at least 2200 bucks no question ask okay above 2200 is a fraction of your income or net worth so if you're a teacher making a hundred thousand dollars a year at a private school you cannot invest more than ten thousand dollars in a rec cf campaign so you can only do up to ten percent of your income into a single investment Correct. And even you or Tim Draper cannot invest more than $100,000 per year in Reg CF opportunities.

Oh, so me as an investor, total, even if I like 15 different Reg CFs, I can only put $100,000 into Reg CF offerings in totality for the year. Exactly. And the SEC and the Infinite Wisdom saying that, hey, if Anthony wants to invest more money in startups, he should go to Reg D or Reg A. But Reg CF is about a small amount of money, lots of people. We want to keep it that way. Got it. That's super interesting. I'm not sure, but... Okay. And so why are you guys using RegCF? Is it because it's more of a democratic way? You get more people and smaller check sizes

and you think that there's advantages there? Explain to me, why are you so focused on that specific exemption? You know, whether it's about what is traditional finance or crypto, it's about access. For crypto, it's even that much more important because you really do need to get these tokens into the hand of developers in college

to start working and building so if it's gonna cost a project or a company a million dollars just to do the legal filing that's not providing access that's why it hasn't been practical at all and ipos that's something only for like the biggest the most mature type of companies so there's nothing else in between it's just either rec cf or accredited only or outside of the u.s So we think that is a key component to bringing open access to capital and to blockchain in general. Got it. And so let's walk through what you guys have built today. How big is the company? And then we can talk through how somebody works with you. Right now, we have two offices. The headquarters in New York with a side office in San Francisco.

Not very many people come here and say side office in San Francisco. Approximately 40 of us. And we have a pretty balanced team. You know, a lot of people from our team came from AngelList. In fact, we deem AngelList to be an institutional co-founder. We're strong on technical and business. But one unique differentiator is that there are, I think, seven former attorneys turned crypto enthusiasts working in-house at Republic to navigate, you know, that murky area at the forefront of fintech and securities law. Got it. And so when somebody comes to work with you, can they sell just regular private illiquid equity or do they have to sell tokens?

We launched in 2016 to deal with just equity. That is the first 50 companies we launched, which is traditional startups, selling convertible notes, selling preferred shares. Now, since 2017 until now, given that most new tokens are deemed by the SEC to be securities, we opened up the framework to allow people to either do a SAF, pre-sale, actual token distribution, even airdrops and bounty programs as securities offerings that have to meet one of these exemptions. And so the CF framework at Republic really accommodates all types of securities. Got it. And so if I come in, I want to actually raise using a tokenized security. So it's equity in my business, right? In that construction company, but it's tokenized. Can it trade on an exchange? Absolutely. So today there hasn't been yet an exchange in the US that has been approved to do tokenized securities trading, but I have no doubt it will come by Q1. What does the regulation say? Is there a 12-month lockup, a one-month lockup, three years? What does that lock look like until you can get to liquidity?

Let me go back to your REC-D and REC-CF distinction and just focus on those two being the most relevant one for projects in the U.S. If you issue securities, token or equity through a REC-D campaign, then for one year, they deem to be restricted, meaning under very limited circumstances, would you be able to trade and sell publicly? OK. For RECCF, immediately anyone can sell RECCF securities to accredited investor and after one year to non-accredited. So there's still that lockup period for one year. Got it. And let's go deeper on tokenized securities. Right. Everyone's talking about this and they're saying, oh, you know, the cryptocurrencies, the bitcoins of the world. Right. there's huge potential if it replaces you know the us dollars global reserve currency right we've had maraud on and just there's huge potential there then there's the icos and utility tokens

which are kind of more access like tokens right so it gets you onto a network it gets you some sort of um you know value there but these tokenized securities there's hundreds of trillions of dollars of assets in the world and so if in fact everything becomes tokenized or digitized What does that world look like? I would say what some deem to be somewhat controversial, but I think that a mature tokenized security world will effectively eradicate poverty around the world once and for all. And there's a reason why I'm saying that. 1.4 billion people have been lifted out of extreme poverty in the past 30 years. It hasn't been due to government policy.

It hasn't been due to philanthropy. It's been entrepreneurship. businesses like ubers and microsoft creating jobs around the world those companies today have been financed predominantly exclusively by investment funds and by ultra ultra high net worth bank professional investors so those professional investors for the past 30 years have picked a few that they that fit their liking if you open it up for everyone imagine energy money is basically energy. If a mom, stay-at-home mom in China or Argentina can invest $50 on a tokenized basis in a project in Canada or the US, if you can imagine everyone participate in early stage

investing in the same way that they buy products, in the same way that they buy lottery tickets, that much more capital will be fueled into entrepreneurship. And the outcome of that is within a decade or two i really think that the world will be so prosperous that we won't see extreme poverty anymore so highly controversial right what has to happen though from where we are today to get to what you just described and i'll i'll use the pinpoints of republic in the first two years before crypto as a basis as for my projection okay so when we launched republic in 2016 allowing everyone quote-unquote to invest based on that same vision but if you're sitting in china or korea or argentina and you want to make a 50 investment in a project on republic before

the tokenized world well why fee is alone 50 bucks 35 dollars at the very least possibly 50 dollars or more that makes it wholly unrealistic for someone to invest 50 dollars right after you get it what do you do how do you transfer if you want to your interest your investment to your neighbor you have to go through a very complex complicated administrative process those two components are already being solved if things if the whole process of fundraising is tokenized if you invest you know using ETH the transaction fee is so low compared to traditional finance making it possible. You can also circumvent jurisdictional cross-border limitations that exist with traditional banking system. And then, so where we are today with crypto, there's a

major hurdle for adoption. The reason why you don't see more, you know, stay-at-home moms participate in crypto is that they don't understand what block stack means, what file coin means, hack what blockchain means. But if you tokenize a traditional business, a real estate portfolio, a construction company, they get it. They don't need to know how it's done. All they need to know is that now I own a piece in this real estate portfolio and my piece is actually only $200 rather than $200,000 minimum requirement of yesteryear. It's so funny because the everyday consumer actually can know that something will be valuable before professional investors right because it solves their problem and so they're on the ground in terms of um you know you talk

to these investors a lot of times like oh i saw somebody was using something and therefore i became interested in it right or even you know take tim for example tim draper why did he start looking at digital assets and digital currency because his son asked him for money to buy something on a video game. That story is told so many times where the actual investor or the capital allocator is not the target market for the company. They learn about it solving a pain point for somebody else and then decide to invest. But if we can empower the person who has the problem solved for themselves to actually be able to invest, all of a sudden you start to really change the dynamics of fundraising. Absolutely. And it is one other element,

which is professional investors are only interested in business or projects that have extreme potential return, huge market size, then probably wouldn't be investing in a local restaurant that, you know, providing dividends and benefits in a robust company, but never yield a 10x return. On the other hand, a lot of community people would want to do that, and they may not be accredited. They want to invest $100 in that restaurant and be able to go to it and get a discount and call themselves an owner. So by opening up, by making it easier for everyone to invest, it necessarily funds a much greater range of businesses and not just the ones that, you know, venture backable. Got it. Let's switch around.

I want to play devil's advocate with you, right? So the arguments against tokenization, right? One is that this actually isn't that important. All it is is securitization, and we've seen this before. The technology is really not that interesting or that revolutionary. What do you say to that? Coming from the fund asset management background, most people aren't aware that, well, most people are aware of credit card companies taking just a transaction fee, being that middleman and building, you know, billion dollar industry or trillion dollar

industry, fund administration, the same thing, accounting, pretty much anything that requires someone to validate and be the trusted party in the middle. I think that that trusted party has permeated every single aspect of our life and certainly in business. I think I can't think of more than one or two aspects of businesses that doesn't involve a middleman. If you remove that, if you make you're going to make it that much cheaper and if you can help people transact at smaller dollar amounts you're going to increase the flow of capital that combination an increased pool of liquidity along with less cost and less inefficiency naturally give rise to will be such a boost to the economy and to the world in a way that no other technology

in my opinion, has been able to deliver. Take the internet as an example. What does it do? Communication, right? The ease of communication, of exchange of information. Now you're going to have that taken to the next level in terms of the ease of asset transfer and the ease of, yeah, in short,

one is communication facilitation. The other one is liquidity facilitation. For sure. So, what do you say to the people who argue that tokenization doesn't actually increase liquidity, right? It doesn't change what asset it is. And so, is it true that it actually changes liquidity? It doesn't change the money supply right off the bat. But net net, when you make it possible for people to participate in small amounts, over time, you're going to have a lot more engagement. It's kind of like voting. You can't just expect one day that you're like, hey, everyone can vote now that everyone goes to the ballot. But over the years, people now feel encouraged, feel that they have a voice. And then all of a sudden, 10 years out, and you have a highly engaged democracy. So same thing with money. If you now enable everyone to participate, both through regulations and through technology, and then by making it possible and relatable for them, you will have improved liquidity at a great scale over time. Okay. What about people who say that none of the infrastructure exists, right? So there's no exchange right now. There's none of the things that we actually need in terms of empowering this to happen on a global scale. we're six minutes into this new new day so uh you know there are a lot of good people but there's

also a lot of money being deployed in building that foundation um as i mentioned before today the easing an active securities exchange in the u.s that can facilitate crypto three more months that may very well be different so uh you know hopefully an hour in rather than six minutes and we can have you know a lot of the tools necessary to to justify my optimistic projection okay now this isn't a knock against it i think it's just more of your opinion if this happens right and all these assets do become digital right so personally my perspective is that a hundred percent of assets in the world will become digital every currency stock bond commodity everything will become digital in terms of the way that you interact with it if that happens

do we get away from the siloed financial world right so the stock exchanges today are very western centric if you will do we actually reach this like one global financial system that is more inclusive or do you think that it'll still be fragmented in terms of you know there's a certain exchange for real estate there's another exchange for oil and gas and there's an exchange for just north america and that fragmentation persists or do we actually get to that global financial system I really hope that we will get to a point where it's a global system in terms of regulations and framework. In terms of market segments, I imagine that it will always be a separate niche exchange for real estate or commodities like, you know, tomatoes and onions and whatnot. And one for, you know, startups and maybe one for restaurants, one for real estate.

So there will be market segmentations, but the hope of a globalized framework, I certainly would like to see that happen, you know, within a decade. Got it. What's your biggest fear when it comes to tokenization? What keeps you up at night? Once a ill-informed piece of law is enacted, it's very difficult to undo it. It takes a lot of time. So I would say what keeps me up at night would be hasty decisions or actions by regulators. That may be New York regulators or the SEC or FinCEN. You know, the bid license set of law is one example. But I do think with respect to the SEC, they've been very pragmatic, very thoughtful in their approach.

So it's encouraging. But that concern applies in all major jurisdictions, may it be Japan, which effectively now has such a high hurdle for ICO that it's not possible to do ICO in Japan because of a reaction to, obviously, that exchange security's concern over the summer. But yeah, I would say regulatory risk, not risk to the underlying projects, but risk of ill-informed, overly restrictive regulations. I think that's completely fair. And I would echo your sentiment that I think U.S. regulators have done a very good job of being patient and measured and really spending the time to learn before acting. Whereas maybe we haven't seen that in other jurisdictions. So I think that's completely fair. And their view right now, which is the current legal framework does work if you apply it to crypto. It's just that each player got to assess for themselves, are they complying and what the ultimate legal risk would be if they don't. But yeah, I highly doubt there will be any drastic change to U.S. securities law as applied to crypto anytime soon. I mean, look, I've said this before. We wrote up a whole thing around. I actually think the SEC or regulators in general are going to, in some form or fashion, mandate the tokenization or digitization of assets.

And it's for one reason that goes unspoken of in many of these circles. Today, regulators spend a bunch of time, money and resources to identify bad actors, to identify things that they did that actually broke the law or violated regulation. and then they have to build a case can usually take you know a year two years it's very expensive and then they enforce right and actually go after the people who did something wrong the promise of tokenization if it actually happens is that you are able to kyc aml investor verify myself and my digital wallet right also either an issuer or another participant in the market You can KYC, AML, Investor Verify, and then the actual token in which the security is held can have all of the information. It can have who issued it, when did they issue it, what regulation, all this kind of stuff.

And so now if you write the code into the law – or I'm sorry, the law into the code, the code can actually prevent noncompliant trades from occurring. And so you take regulators from being reactive and put them in a proactive position that saves them time, money, and resources. So to them, this is like a dream come true. Now, it will take some time for our many legislators and regulators to fully understand the underlying technical know-how and take a view of combining law and technology. but yes our legal system is highly outdated um and i have no doubt that i actually agree completely that blockchain will benefit um regulations over time in a into a great extent yeah look people fear what they don't understand right but in this one case it actually is technology that will make the regulators better at their job right right um okay so before we wrap

up i do a whole bunch of uh kind of fire round questions um first is what company do you believe is the most important in cryptocurrency and blockchain today that is not your own so you can't say republic but what's the most important company out there well one of our lead investors is binance and uh i love just how long term of an approach they that they've been at you know adopting um i would say binance what why are they important though right so i agree that they've done a bunch of stuff right that they've taken this very particular view but why do you think they're important to the overall ecosystem to have um that pool of capital and deploying it not for near-term further wealth generation or near-term return but instead

They're reinvesting it into incubating companies that are clearly not going to issue a token and be 100x so that they can sell tomorrow, but that are addressing problems in the underdeveloped or the developing world. I think the Binance Lab team, the Binance incubation program, I haven't seen anyone else in the industry with this level of influence that are playing that long game, that long of a game. And because of that, I think that over time, the net influence of what they're doing today, we're going to see in years to come. i am uh i'm long cz i think a lot of people don't understand uh how kind of critical he is and the way he thinks um so we'll see what what happens there all right next question uh if you had a magic wand and you could wave it and change any regulation or improve any regulation what would it be i would take away the one million dollar limit on xcf and make it much more you know pragmatic and appealing for for larger projects what would you put the limit at

20 million dollars i think would be a reasonable limit so reg cf would go from a million 1.07 million to 20 million dollar limit correct and we submitted a letter to the chairman of the sec and hope that that uh he can use his discretion to uh to lift the cap could they actually do that So in my opinion, he certainly has the authority to do so. And so he could actually just decide this should be a higher limit and we're going to go ahead and change it. Got it. Well, maybe we'll tweet at him a couple of times and get him to do that. All right.

What's the one thing you believe in crypto that you think a high majority of other people would disagree with you on? that the fully tokenized world will probably come sooner than most people think i would say in less than 10 years and that within a decade i still think that we're going to get rid of extreme poverty around the world because we're going to see that level of adoption of crypto technology of crypto assets in general do you think that more people in that 10-year period will adopt bitcoin or tokenized securities um they will use bitcoin to invest into tokenized assets that is it may be a tokenized money and now they're able to acquire a tiny bit of it or you know one one billionth of the ritz-carlton down in in tribaca um and so the tokenized um traditional assets

will bring forth relatability and encourage people who are now standing on the sideline interested, but haven't, you know, haven't dived in to actually take that step to be engaged. Got it. All right.

One more question before I end everyone, let you ask me one question. So you can think of a question, but completely non-related to crypto. We're just going to admit that aliens exist, right? So aliens are out there somewhere. We always think of aliens as comparative to humans. right do you in movies and the way they're depicted in sci-fi it's always some sort of

human-like creature do they have pets like do you think that there's alien animals and alien human type creatures or do you think that they're just one homogenous creature my bet would be that they do have pets why um pets you know just fills a human need for comfort and security you know to be more and so i imagine that a highly evolved uh species probably would also very have high highly evolved eq emotion uh and if that species has emotion then it will have things like pets that's right okay i think nobody's ever answered it with an eq focused answer but i think that you're probably more right than wrong What's the most common answer to that question?

The funniest one is that we're the pets, right? I think the most common is, yes, there are pets, and everyone's got kind of a different reason as to why. You're one of the most prolific crypto investors out there. out of the world of like sto securities uh tokenized um assets what excites you the most in in the past month that didn't come on your radar until literally the past 30 days in terms of a sector a project okay um so i'm gonna cheat a little bit it's probably not the last 30 days but i think it's something that is uh not very well understood and and um but it's exciting to me,

and I don't think we're there yet, but people are building it. I've seen a couple of companies pop up. I won't mention who yet because I don't think that they're public with it. I'm really interested in this idea of on-chain cash flow or on-chain debt, right?

And the idea being that it really doesn't have that much to do with blockchain. It has everything to do with automation, right? And so I'm on record as saying blockchain is simply the foundational technology that will empower or unlock the true value of automation right so if you think about in an automated world most assets will not comply with that world because they're not digital so they're paper-based or they're electronic based right kind of like dtcc today etc if we can use this technology to actually create digital assets

native digital assets not oh this is a representation of a share in a company but it is the share in the company right now what you've done is you've laid the foundation for every stock bond currency commodity to be digitized and now automation is unleashed so the example that i use is if you're an employee at a company and you own a house normally what happens is you go and you apply for a loan right and when you apply for that loan the lender Underwrites you And the asset They say okay

How's she buying How much does it cost How much money Do you have to put down What's your ability to pay back Your credit score All that kind of stuff You then

Take out the loan You put some money down You get paid Every two weeks From your employer That money goes into Your bank account You then take some of that money

And you pay your mortgage payment Every month Well My bet Is that at some point In the future Your employer Is going to make two payments

They're going to pay you Your salary net of that mortgage payment because the bank or the lender is going to say, I'll underwrite you as the borrower and I'll underwrite the asset, but I'm more likely to give you the loan and also at a lower interest rate if I can underwrite the corporation rather than the borrower, right? And so now, today that might be possible. It'd be pretty complex and inefficient to do and and you know accountants at companies would hate it right but if we can actually get into a truly digital world these micro payments and the ability to start to automate

this stuff unlocks huge value but also it changes the way that humans interact with money because what would that do it would give you as an individual consumer cheaper capital yep and we know that cheaper capital unleashes innovation and we know that innovation actually changes inequality right and so that's a really long threaded thing that's uh relying on a lot of ifs but i think that this digitization of assets is the key to building that future a projects like dharma uh the early the early uh phase of that evolution you think so so dharma for those that don't know is it's a protocol in which anyone can go on and build debt like instruments right or or debt-like services on this protocol. It's based on blockchain, right? I think that they are

absolutely one of the fundamental layers. And if they don't win, somebody will win in terms of a protocol for debt-like instruments. The part that may not be as popular with the crypto community is I actually don't know if blockchain is the right technology, right? We think a lot about asset management for our business in the digital age, not in the blockchain age, in the digital age. Now, today, blockchain is actually the best technology, right, in majority of cases. And so what blockchain is heavily reliant on in many of those cases is that we will move to a decentralized world. But if we just move to a digital centralized world, so not for money, for Bitcoin, et cetera, but just for debt or whatever, does blockchain have to be the right

technology? I don't know yet. And I think that's the work that we're trying to do to figure that out but if we do move to a truly decentralized blockchain world the ability to not only get access to this and unleash automation but then do it without central authorities we could sit here all day and talk about possibilities right i mean it would be absolutely incredible in terms of the economic benefit for both individuals and society that that would unleash so that's the hope right I mean, today, there isn't truly any example of a truly decentralized initiative project network, but hopefully that one day we'll see some manifestation of that. Look, I'll leave you one last thing. I actually wrote about it today. Bitcoin, in my opinion, is going to do more to solve the income inequality gap than anything else in the world. And people, that's an insane statement from somebody who's just talking their book, right? I went back and in 1998, the IMF issued this paper that describes the impact of inflation

on income inequality. And the things that it talks about is things like there's insiders and outsiders. They put people in two camps. The insiders are people who can get inflation adjusted wage contracts. So every year my income goes up X percent to accommodate for inflation and prevent impact of inflation. Real asset ownership. So when I get paid my salary, I take my money and I put it in something other than an inflation currency, things like that.

Bitcoin completely removes the dynamic inflationary rate or the ability for a central bank to influence that. And so if you believe the IMF's work that shows inflation has driven more income inequality in the last 50 years than most things, if you move to a disinflationary model and a decentralized model where there's no influence on a day-to-day, month-to-month, quarter-to-quarter basis of inflation, interest rates, etc., all of a sudden you start to close that inequality gap. And so to your point, that's just Bitcoin. You're talking about even bigger, just all assets in general. but i do truly believe that this is the type of stuff that um you know it's it's the gandhi quote right first they ignore you then they laugh then they fight and then you win we're probably past the laughing stage fights are coming right so you start to see central bank saying ah this is stupid it's dangerous it's we'll see how bad the fight is right no apparently jimmy diamond doesn't give

a shit the uh the jimmy diamond and i are gonna end up friends at some point mark my words uh but But I think that's the stuff that I get excited about. And so I think we're just getting started here. And the entrepreneurs who are really kind of understanding the technology, understanding the law, are going to build things we can't imagine. And that's really where we want to invest. I think you guys obviously are operating. And so that's the stuff that gets exciting. I'm definitely a fellow believer.

Absolutely. All right, man. Thank you so much for coming. This is super fun. And we'll have to do it again as you guys keep progressing. Thank you so much for having me. Hey, everyone. Pop here.

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