Continuing NexChange Interview Series with Hong Kong Blockchain Week 2020 pre-event coverage, NexChange’s Olga Yaroshevsky sits down with Sam Lee, founder and CEO of Coinstreet Partners. In addition to being one of the most renowned proponents of «tokenised economy» and asset tokenisation in the whole blockchain and fintech industry, Coinstreet also enjoys a status of co-organiser of TADS Awards, the world’s first annual international award for the asset tokenisation and digital securities sectors. It celebrates these industries by recognising and honouring significant contributions and distinguished achievements in the areas of tokens issuance, compliance, digital asset management – overall 5 awards in 2 categories.
Tune in to learn more about what Sam thinks will happen to the digital asset space in 2021, would he prefer a licensed STO exchange to a popular DEX, and which companies can participate in major TADS Awards.
OY: I’m joined today by a very old friend of NexChange, Samson Lee. Sam is the Founder & CEO of Coinstreet Partners, Founding Chairman of Belt & Road TechFin Association, Co-Founder of the Blockchain Centre of Hong Kong, Co-Founder of Ethereum south China community, Co-Founder of STGX (STO Global Exchange), Chief Crypto-Economic Advisor of Gibraltar Blockchain Exchange, and Honorary Guest Lecturer & Fintech and Blockchain Committee of Hang Seng University of Hong Kong (EDC).
SL: Thanks for the introduction, Olga. I just realised I’m quite busy, more than 24 hours a day.
OY: As we can see from your virtual background, your main venture is Coinstreet.
SL: Yes, absolutely. Apart from all titles that you mentioned, and roles that I’m involved in based on my passionate interest, a lot of this is based on volunteering, as I’m trying to build an ecosystem and education. My main focus is Coinstreet Partners. I’m the founder and CEO of Coinstreet. We are an award winning, AI powered, robot and decentralised investment banking group. We are also a professional consulting firm in fintech and digital asset space. Our main focus are digital assets. Coinstreet provide a bridge to help professional investors invest in digital assets globally. On the other hand, we are also enabling facilitation to digital asset issuer, to issue assets and do a robo private placement and corporate financing.
OY: Sam, yours and Coinstreet’s main focus is Asset Tokenization and various opportunities it brings to the market and industries related to finance and tech. You’ve been a pioneer, and one of the major proponents of driving innovation in this sector and telling the world about the benefits of so-called token economy. Now as 2020 is coming to an end, and no doubt this has been a crazy year for everyone – can we try to look back on the past 9 months and figure out what has happened to the digital assets market? Which is the main positive outcome of the past 9 months, and which is the worst?
SL: It’s definitely a very challenging year for many people in different aspect, in different part of the world. We just lost time. I just remember the New Year. And then all of a sudden COVID is here. But one good thing happened this year and this is a development of all online activities. We are online everyday of our lives now, conferences, events, it’s a big part of our life. The positive aspect on a digital asset space, because of this online involvement, it gets a lot of people doing business online and taking it very seriously.
Particularly for digital asset space I think doing business online brings out the advantages of tokenisation. For the whole concept of tokenisation, first of all we tokenise the assets, making it in digitised format on the blockchain. It can facilitate a lot of transactions, even settlement, through the blockchain with minimum intermediates in the middle. It creates a perfect scenario for online transactions. On the other hand, on the investor side, it is easier to do due diligence on the ownership aspect of the asset as everything is proven and has a record on the blockchain. Tokenisation actually functions really well in online environment, in this 2020 situation.
OY: So, tokenisation has seen a bit of an upcoming trend, understandably so. And what has changed, drastically? Other than the overall volume of transactions.
SL: The overall industry has evolved in the past 1-2 years. First of all we see a regulatory framework has become more mature. Now in almost all the major financial and economic centres will have some sort of framework to regulate digitised securities or tokenised assets. Often it is evolved from a traditional security law as fundamentally it’s about dealing with securities. It created a good for serious institutional player to come in, whether it’s from an issuer side, or an investor side. On top of that, we have seen sandbox programmes being operated and launched in different countries. And we are talking about major financial centres. If you remember 2017 and ICO days, back then a project would go as far as they can before it’s too late. They’d go to Estonia, Mauritius, Malta – trying to get around the regulation, as those areas had a less of a legacy of security law regulation. But for STO, or tokenised assets, or digitised securities, it’s about the capital market. It anchors on major financial centres. Sandbox projects being launched in Asia, in Hong Kong, in Singapore, in Tokyo. In Europe – UK, Germany, also US. They’re all moving forward in positive ways. And after 1-2 years we will see more companies graduating and finally getting their license. We have seen two live STO exchanges coming online in Singapore, I’m sure there will be more. In Hong Kong, we have the first conditional approval being granted by the regulator.
OY: The variety of assets that are being tokenised or can be tokenised is quite impressive. To tell the truth, over the past 3-4 years I think many companies have picked up a weird trend of tokenising their business just for the sake of it, and for hype. People have been tokenising anything, even something that wasn’t supposed to be tokenised in the first place. From your point of view, what are the main assets that really have bright tokenised future? What is the situation with TRUE digital assets and FAKE ones?
SL: When tokenisation first came into the spotlight they were a lot of myths. And it’s a learning curve. First of all forget all those sexy words about tokenisation and digitisation and STOs. If we lift a hook and look underneath all these products are financial and very often investment products. There are some fundamentals on the investment underneath whether an underlying asset is a real estate, or a company, or a commodity. With tokenising an asset I like to make an example of making a steak. The steak can be good, but sizzling just makes it better. We have to start with good materials, good underlying investment opportunity. If there’s a real estate property in a weird area that nobody will be interested in tokenising doesn’t make it better. If it’s a bad investment to begin with, if a company is losing money tokenising shares wouldn’t make it a better company. We see tokenisation as a catalyst to make things better. In the traditional capital market there is still a lot of inefficiency. Despite all the good things about IPOs and market stock. For example, a stock market IPO is more efficient for large corporations, and may not be a good way for small and medium companies. This is where tokenisation can also add value. It can add value to cross border investment. In any local stock market are efficient on a local level. But with settlement and cross border it’ll be difficult for someone from one country to come to another and buy stock. Tokenisation can solve a lot of these problems and make it easy.
OY: Now to future trends, everyone loves when a prominent expert gives a forecast for the nearest future. Here I have a suggestion for you: let’s try to observe three aspects of digital assets industry and name a trend that will take over in 2021 and further. You just touched some regulation issues answering my first question. What do you think will happen in the next several years, will that be more polarised regulation, with the US or other countries’ position? Or will people go to Malta or Estonia to hold a safe and successful STO, within a good, nicely developed regulatory framework? Or will this be more strict towards tokenised economy?
SL: Well, I love predicting the future, but that doesn’t mean I’m always right. Happy to share my personal view. I think for tokenisation we’ll see more secondary trading venues are coming online. It completes the loop, from initial offering and private placement to listing and secondary trading. This will bring more attention and even participation from institutional investors. When they invest, they have to have a clarity on exit path, or possible future liquidity. Having the tokens already traded on a listed exchange is a big plus. It’s also an added level of vetting and due diligence.
OY: If we’re not talking about decentralised exchanges?
SL: I’m not sure about them, is it grey area? It’s almost like a DeFi token. It’s getting a lot of traction and interest, but it’s not fully regulated. Regulation is a two-side plate. It of course mean higher costs, more compliance, issuers need to follow the rules. On the other hand, being regulated means investor protection, better governance, better risk management. That will tap in more investors. Institutional investors, funds, family offices, they have their own mending and sometimes can only invest in things. DEXs are very interesting, I’m sure regulators around the world will be more innovative to come up with some sort of a framework. I’d like to see first a centralised licensed STO exchange gaining traction and building up liquidity. We’ll then see how DEXs can add value to that.
OY: We’ve passed a very long way since 2017 and ICOs, to new different abbreviations. What about the token offerings in the next several years? Tokenized Asset Offerings (TAO), Digitized Securities Offerings (DSO) or Security Token Offerings (STO) – which offerings will be trending?
SL: That’s a lot of confusion here. Here’s an example: if you look at blockchain as a piece of paper. It’s very powerful. It can be used to print a coupon, to print money, or a securities share certificate, or a bind paper. Let me tokenise something to create a token on a smart contract on blockchain. It could be a utility token which we’ve seen back in 2017. To me, utility tokens are almost like coupons. It’s non-security, it’s supposed to be a future entitlement to some good-end service, or a right, or some sort of non-security related right. On the other hand, digitised assets are also a form of ownership and you can also look at it as securities. I think they will co-exist. For enterprise they might even have a due strategy where they can have utility tokens out there serving their customer, their supply chain, the business community in the ecosystem. They can then put in some loyalty program, or token economics model that is anchored to the usage of the service or the velocity of the business. On the other hand they can issue security tokens or digitised securities to the investment community. This product would be regulated as a security, and it’s all about the return on investment. It can structured as a bond, an equity token, even a tokenised investment fund, pure revenue or dividend sharing kind of tokens. Both will co-exist.
OY: And what about people actually using those tokenised assets? I’m leading toward the mass adoption question. What do you see as the main indicator of this?
SL: That is certainly something we’re looking forward to. Most of the jurisdictions are more restricted to this kind of investment product for a professional or accredited investor. Most regulators see this as what they call a complex financial product. Almost like derivative. In a way, it’s very similar to derivative. There’s an underlying asset, and we issue a derivative on top, representing economic benefits of the asset. When regulators see better governance, best practices in the market they might consider opening up to retail investors. We already see it happening in the US. The US SEC regulator is very against the utility tokens, they’re going after and suing people who have done wrong ICOs before. But for security tokens they are a lot more open. As of today over a half of security tokens being issued are filed in the US. If we consider the US a global leader of the capital market they are smart enough to know the future, that’s why they’re leading the game. They already have initial cases of successful issuing of Reg A filing which is a filing made to make token available to retail investors. It is the same filing companies do when they do IPO. This is definitely a trend that will lead to mass adoption. Currently being available only to accredited investors – a very small circle of professional investors, funds and family offices, we can see more tokens being structured for being offered to the retail sector.
OY: But SEC also pays a lot of attention to determining what a security is.
SL: Yes, they use what they call a Howey Test. Being recognised as a security is a good thing. It will receive the right regulation and the right attention. Funds sometimes can only invest in securities and are not allowed to invest in so-called cryptocurrencies, or utility tokens.
OY: Speaking of recognition. We’re all looking forward to Hong Kong Blockchain Week, which is about to take place just several weeks from now. Coinstreet holds a major online ceremony of the world’s first international TADS Awards 2020 on November 18th. Please tell us more about the awards, and who are the nominees and the jury board.
SL: It is our great honour to be one of co-organisers of TADS awards. TADS stand for tokenised assets and digitised assets. These are different things. With tokenised assets there is an underlying asset, and even stable coins are backed by cash and can be also called tokenised assets. Digitised securities are more about investment, bonds, equities. Bringing two together makes it complete. TADS is the first international awards for this area. We are honoured to work with other major industry players including IBM, Microsoft, Hong Kong Cyberport, Morning Start, the top and rating agency in Chicago, and also top investment banks in Hong Kong such as Somerley Capital, investment bank in the US West Park Capital, and of course NexChange. The award will honour and recognise the great contribution and achievement for companies participating in this space. We also work with key industry players to establish the best practice and even a measuring standard of hoe to recognise high quality tokenised asset and digitised security. There are tons of regulation and assessment model for traditional stocks, like bonds, but we are lacking those tools for digitised securities and tokenised assets. By having an award we’ll work out some judging criteria and hopefully start process. It’ll take some time to perfect such model, but we like to work together to make this done.
OY: You’re receiving applications throughout October, right?
SL: Yes, the nomination period just started, on October 1st. It runs to the end of October. Altogether we have 10 awards in total. Separated in 2 categories, so 5 awards per category. One category is for different types of STO, and these 5 awards go yo different issuers. It includes asset backed tokens, equity backed tokens, bonds, income sharing tokens, and social impact tokens. The second category is called «Ecosystem excellence». These awards go to solution providers along the value chain. The five awards in this category includes KYC compliance solution, token issuing solution, STO exchange, digital asset management, and digital custodian solution. These are the key areas. The industry is still very new, but there is a handful of good players projects out here. We want to recognise their effort, help to build ecosystem and promote to a bigger community and hopefully can expedite the time to reach mass adoption.
Source: “Sam Lee, founder and CEO of Coinstreet Partners: «When regulators see better governance in the tokenised asset space they might consider opening up to retail investors»” Nexchange Now. http://www.nexchangenow.com/news/blockchain/73224/sam-lee-founder-and-ceo-of-coinstreet-partners-when-regulators-see-better-governance-in-the-tokenised-asset-space-they-might-consider-opening-up-to-retail-investors/