3 Tips on Choosing STO Issuance PlatformBy Apr 02, 2019 10 Min Read
We spoke with Aly Madhavji, the Managing Partner of Blockchain Founder Fund (Blockchain FF) with a focus on emerging technologies including blockchain and crypto companies. He outlines the investment philosophy of Blockchain FF as well as the three criteria of a successful platform for security token offerings (STO). As an award-winning author in millennial development, Aly also shares with us the socio-economic impact of blockchain in the developing countries.
What are the criteria of crypto inclusion in your investment portfolio?
The investments of Blockchain Founders Fund runs typically into two areas. So one we invest quite often on blockchain companies that do not have a cryptocurrency or we are investing at times in just the equity component. Besides, we are also open to emerging technology companies such as machine learning, AI and IoT.
There's a number of things that we look at, and we judge it similarly to a venture capital investment.
1) Very clear product market fit
Do they understand their market? Are they getting adoption in their market?
2) Best in class teams
What we are also interested though, is looking at things like talent and expertise in their industry, which a lot of people miss oftentimes.
3) Coding language used and the developer’s ecosystem
What is the coding language used? Does it have enough developers related to that ecosystem or not? If you're using coding language that doesn't have much talents towards it, how do other companies leverage with what you're doing if they need developers for an ecosystem with very limited amount of talents. This is a really important one for us when we think about network effects and how to actually grow protocol.
Besides, we do check GitHub. We review the activity and progress, and we want to see that the community tries to be transparent, and there's clear communication with the market.
4) Token economics
We want to make sure that if there's an actual economy, and then it's got real users and real use cases, not just everything is going to be transacted on an exchange. This is a pretty clear criteria for us that we need to have real economic factors that you would find similar to if you were to study how banking and monetary economics work. And this is an important aspect if you look at crypto currencies, because we find a lot of them don't actually have real use cases, and they are fully relied on exchanges to always be in the middle of transactions. And that tends to be a big problem in our belief of how economy should work, and how to maximize things like velocity of token as well as network effect.
On top of that, can you share with us about the recent addition of your crypto portfolio?
From an investment perspective, an interesting addition is a company called Cryptyk. Cryptyk is a Silicon Valley based project and we believe it is one of the best cyber security solutions that's we've seen out there. Whether it's blockchain or not, we actually think that they are competing with the best cyber security solutions in the world. Cryptyk has consumer and enterprise versions of the secure storage drive. For the enterprise version, it's particularly interesting to us because IBM has made it an embedded solution partner, which means is IBM is going to sell this technology to enterprises and this is extremely rare. We think that Cryptyk will have a very strong adoption in the enterprise space, as well as on the consumer space for cyber security and cloud storage.
Any notable changes in investor composition since the bear market last year?
We have seen a large change in terms of the types of investors and how sophisticated they are, especially since 2017. Back in 2017, there was a lot of hype and very little due diligence, even on our side, we did very little due diligence when the markets were just going up. As we got into later 2017 and 2018, we have dramatically shifted into doing more due diligence and very thorough in terms of looking at companies and making sure that they're a fit for us, and understanding how they're managing on the financial side, understanding their actual growth plans and how they're going to spend their money and also leveraging our expertise in terms of building companies from an early stage, and making sure that it aligns with how these companies are operating. This industry has gotten a lot more sophisticated over the last couple of years, and you're seeing many of these types of projects get funded and don't have strong fundamentals from a team perspective or from a business perspective.
The STO industry is very large, we're talking about a trillion dollar plus securities market. To be honest, I think it's really too early to say there's competitors. In reality, everyone's working towards the same goal, the market is more than big enough for all of the players right now. And even for more to join. And as Polymath clearly shown now ,a number of partnerships with different players, including tZERO and STOGlobalX.
The way that we're looking at is how do we move forward in this space on security tokens to help bring down the cost of regulated fundraising to help create and have more potential security token holders. Some of the benefits also include fractional ownership and the ability to have morel liquidity on potentially the illiquid or inaccessible security.This is where a lot of the excitement is and I think that this entire industry is still in its early stage. Polymath is still working and improving on ST-20, which is our security token protocol and with the types of tokens that we're building, this is going to be a pretty exciting time.
What are the key components in your opinion, is most crucial for successful STO platform going forward?
There are 3 crucial components for a successful STO platform:
1) The ability to have very scalable fundraising across different jurisdictions
When the security token is designed and programmed properly, this can greatly mitigate the costs of fundraising. Legislative requirements such as KYC, AML, and Counter-Financing of Terrorism need to be incorporated into the design of security token. Companies that seek fundraising right now still have a lot of pioneering work to do in a lot of the jurisdictions that they're trying to raise. Just bear in mind that the STO market is still at the early stage, which requires a lot of work in making security token to become more efficient.
2) The ability to explain security tokens to investors
Investors need to know the structure of security tokens. Whether this is an equity related security token, or is it related to dividends, revenue, assets or liabilities. In reality, we can relate to all sorts of things and making sure that investors are understanding this. This is still a challenge where the market is still learning more about digitizing securities and what that looks like. Many investors all around the world are very interested in this space, and they are increasing investments into companies that are doing security tokens or promising to do security tokens.
3) Operation of the exchange
This is very critical to a successful security token. How a security token works in the exchange is still a work-in-progress, and we're still seeing the creation of more interesting security tokens and having funds and family offices from all around the world open to these types of investments, which will create more liquidity.
Currently the blockchain adoption among millennials remain low. What is the reason behind such low adoption? As an award-winning author in millennial development, what are your suggestions for engaging millennial to learn and adopt blockchain?
I think it definitely depends on the data set, and what region they are looking at, first in terms of who is buying cryptocurrency? Or who's buying different types of digital currencies? I know we've got another data set as well that shows between the ages of 25 to 34, it's about 40.4% of them have used Bitcoin, but I believed it was US based data published by CoinDesk, there's definitely a lot of different things. It depends on the country, and how tech savvy they are, etc. We also do work with the United Nations on blockchain and crypto currency as well as other emerging technologies. And you see challenges for countries that have low digital penetration and access to mobile and internet, but in terms of getting more millennials to adopt it, I think a big part of the equation is going to be just having better use cases that make the lives of millennials and everyone in general better. And I think we're not there yet, in terms of super decentralized applications (dApps), or even other blockchain based applications that may not have decentralized voting in terms of having real strong use cases for day to day use. I think this is a big challenge right now when we talk about adoption.
In reality, the best use case for cryptocurrency has been payments but not payments for goods, but payments between individuals for specific services such as moving money across borders. And we're not there yet in terms of having great applications across the board for cryptocurrency for day to day use. On the other hand, for blockchain itself, it's very interesting why we're seeing tremendous use cases and very successful pilots happening on the blockchain side for businesses. And I'm sure there'll be more blockchain applications that also benefit consumers that aren’t using cryptocurrency so I think that side is probably going to move ahead quicker in terms of adoption than the cryptocurrency side.
I noticed that you are working as a consultant in the United Nations. What are the current blockchain initiatives by the United Nations?
We're writing the flagship report for the United Nations on emerging technologies. It's what they call an impact report. It's very cutting edge and it's meant to elicit very quick actions from governments, central banks and finance administrators as well as other key decision makers, which is the group that we're working with, and trying to leverage the use of blockchain cryptocurrency to other emerging technologies to help achieve the UN Sustainable Development Goals. This can be things like bringing remittance costs down to below 3%, which is one of the goals by 2030. And how can we do that? How do we leverage cryptocurrency? Specifically, how can we deal with anti-money laundering, Counter terrorism financing challenges that come along with that? We're looking at how to create ID systems in countries that don't issue IDs?
There's lots of countries where their governments don't provide IDs for their citizens or for only a fraction of their citizens. And if you don't get an ID in this day and age, you don't have access to banking, you don't have access to travel. We are trying to leverage blockchain technology with other potential technologies, maybe facial recognition on creating systems that allow us to capture and support the individuals. There's a lot of exciting areas, some of these are consumers basing, some of these solutions are within the financial institution layer themselves, but very exciting to help the drive for financial inclusion.
To what extent do you think the use of blockchain can alleviate poverty and facilitate financial inclusion? Especially in the developing regions?
There are tremendous use cases, we're looking at currencies that can be put on a blockchain layer. Separately, there's a cryptocurrency they're attached to, but talking about the blockchain layer, and some of the benefits of this can be tremendous such as eliminating corruption, or be able to track this. To be able to eliminate terrorism financing as well as drug financing, because you'll be able to map the actual currency and where it's going, this is an interesting aspect. There's other aspects in terms of identities, and I think this is a really big one, and how do we help create unique identities to reach people from physical world to a digital world, or only having a digital identity that allows them to do everything that they need to do. And this is very important when you talk about how do you help banked and unbanked population or to get underbanked populations to become banks. And these are very key challenges right now that are on that front.
One of the biggest problems for financial inclusion in the world is called de-risking, which happens when global banks don't want to work with developing country banks, because they don't have enough transparency into their processes and where money is coming from and going to. By having a blockchain layer over here, we think that it can create a lot more transparency for global banks. So they have less risk and more insights into what developing country banks are doing. This increases their ability to work together, which is going to tremendously impact developing country banks to provide better financial services for citizens in the developing world.
I have read your recent article titled “How Blockchain is Revolutionizing Food Supply Chains”. I know that IBM Food Trust Initiative is a pioneer in leveraging blockchain into food supply chains. How would you evaluate their performance in terms of food traceability?
We write a column for the Crypto Investment Times Magazine, and the last two columns, I believe it's about eight pages in the magazine that covers food supply chain (Part 1 and Part 2) Rethinking the food supply chain aspects for food traceability could go incredibly well. Certain examples would be IBM, Tsinghua university and Walmart together had partnered up, they also opened a food safety and Innovation Center in Beijing exploring the use of blockchain. Walmart further expanded those trials now to put mangoes on the blockchain, an example being the mangoes are transported between South America and North America. The results are astounding, Walmart came out and said, it used to take them seven days to trace mangoes and audit them all the way back to the farm. Think about the amount of time and labor that is. But now it takes 2.2 seconds.
Disclaimer: The views and opinions expressed in this article are those of the interviewee and do not necessarily reflect the view of Blockchain.News.
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