As the digital securities industry heats up Securitize is well-positioned to drive its further growth.
President and cofounder Jamie Finn said at the beginning Securitize’s founding team thought they would strictly be technology service providers. Then in 2019 they decided to add transfer agent capability. While not required for digital securities and private placements at the time, Securitize, like many wise companies, decided it was good to over-regulate instead of waiting for regulators to catch up and add stipulations later.
Securitize also purchased a broker/dealer so they could provide services throughout the investment process, Mr. Finn said. It was part of a larger strategy to improve liquidity options, especially in the United States, where investors weren’t exactly flocking to trade digital securities.
The key was to develop better solutions which made the entire process easier, he explained, because even in DeFi there were too many steps.
“We really wanted to make an experience for investors that made sense to them and that they would be able to engage with easily,” Mr. Finn said.
Instead of developing their own capability, Securitize purchased Velocity Platform, which had spent years getting the appropriate approvals. The purchase was approved in a few weeks and the reasoning provides a lesson to companies about how to grow responsibly and proactively.
“To be honest it happens because they (regulators) know us,” Mr. Finn explained. “We’re not some random unknown company; we have an existing relationship… They know we’re good actors and we have good actors in the company and that’s important.
“That blew my mind. The regulators actually build a relationship with you, and they want to understand your company and the way you operate and what you do. As they get a better feeling for that things get easier or harder.”
Many companies push the envelope and deal with regulation down the road. Sometimes they get lucky and get away with it, while other times they have to rewind a bit.
I asked Mr. Finn how regulators look at new technologies – what they understand, and what they don’t. It helps if the industry understands the technology’s place in the overall market themselves, never mind regulators. Not everyone who should know actually does. Yes, while blockchain records can be used as a receipt, a permanent record should also be kept off-chain. Not everyone sees that.
“That’s one of the things I don’t think is very well understood thus far is that the blockchain is just a communication layer… to enable a transaction to be processed,” Mr. Finn said. “But it’s not the storage layer. And to be honest that makes a lot of sense because a blockchain is not really good at storage to begin with.”
Still, digital adoption is growing, and the fear of Bitcoin’s volatility will subside as more financial institutions begin to invest in cryptocurrency. Mr. Finn sees that knowledge growing in another way, as his sales teams have shaved 60 per cent off the time it takes to close a deal, time which was in the past spent on explaining the technology and negotiating price.
He’s heard this song before. Mr. Finn was there when music streaming services had to explain how an MP3 was better than a CD and he was there when the VOIP industry had to prove they were more than just a way to bypass international calling rates.
“The antiquated processes of the market infrastructure are irrelevant and don’t work any more,” Mr. Finn said. “It has to change. How quickly is the only question.”
Securitize has those transformation discussions with custodians, and a few issues need to be solved. A major one is how to account for what’s in a private placement, who was it sold to and how many one may have. Mostly it has been on pieces of paper in vault storage but optical character recognition can solve that issue, with Securitize ingesting that data and producing digital assets.
“It’s a simple process,” Mr. Finn said. “We do it every day.”
That client knowledge level will help adoption, but ultimately the market will determine the pace of adoption, not regulators, noo industry.
“The only way it happens is the same way it happened with VOIP and the same way it happened with music,” Mr. Finn said. “The end consumer has to demand it. It will not be driven by a bank, it will not be driven by a music label. It will not be driven by a telco. It will be driven by consumers demanding a better solution.”
The innovation is needed even more when you consider how the current one began, Mr. Finn said. Nobody wanted a central repository fo securities trading and settlement, they just couldn’t figure out a better way to do it.
“I think we’ll come back these interconnected hubs of information which is what people wanted in the first place,” Mr. Finn said.
Regulatory regimes are not set up for the current DeFi wave, Mr. Finn said. A global regulatory list of who’s in charge doesn’t exist. While the United States has decent tech infrastructure Europe is struggling to catch up. Up until very recently in Germany one still needed a physical stamp to transfer a security. Japan is working as a group to improve, while Singapore could become a third power center behind New York and London, as many local issuers are being joined by foreign companies setting up there. Hong Kong has its issues while Switzerland has the burden of multiple EU voices to contend with.
“Many still need a stamp and that prevents many private securities from trading,” Mr. Finn said. “The reason it exists is there is a natural level of distrust among parties making a trade. The thing about it is in a blockchain world that is irrelevant. You have an atomic swap so if I want to trade something with you we can do the swap at exactly the same moment in time. There’s no way the transaction gets processed and you don’t get paid.
“Blockchain eliminates that entirely so it’s a concept you don’t need any more.”