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Syed started out as a skeptic of blockchain technology but turned into an evangelist very quickly when he first read Satoshi’s whitepaper on Bitcoin.
At that point, “blockchain technology revolution” was just a phrase that people used without giving a forethought.
Syed set out to make that revolution a reality through an actual use case, rather than empty words.
95% of utility tokens may be securities
The hype of blockchain technology may have helped more than 2000 crypto projects to proliferate in the market; however, the utility tokens issued by these 2000 odd projects may really be securities.
According to Syed, “Utility attached around most blockchain projects is BS, I am not claiming that there is no utility – it’s just that 95% (that’s being generous) of the utility token applications do not have a real utility and are a security issued under the guise of utility tokens. We wanted to put an end to that confusion by embedding regulations by using blockchain as and when needed to make the process of raising and administering private capital more efficient.”
One of the few revenue positive companies in the blockchain space
Less than a year old, Liquidity Digital also happens to be a rare find. It is a revenue positive company in the institutional blockchain space.
That means that in an industry where most companies are still struggling to identify use cases for blockchain, Liquidity has been able to monetize on them by showing the benefits to institutional clients.
While most companies are burning investor funds raised from the ICOs, Liquidity is defying the mold, and redefining the way the capital markets will work.
“While the companies in this space are struggling to identify one stream of revenue, we have been fortunate to maintain four streams of revenue. Our platform went live 4 weeks ago and already have issuances on the platform that are being viewed by global institutions.”
“From day one, our focus has been to be a revenue focused company. What that does is define our decision process. Yes, we are a technology company, but we are a company first and that means for us to be in business, we have to be profitable and a business plan must be executed to make that happen.”
It is easy to talk about how projects are going to change the world while burning through someone else’s money and then abandon the project, which only leaves shattered hopes and a bitter taste for investors, ultimately leaving the world much worse than it was before.
“We want to change the world in a practical and pragmatic manner while also making our investors a healthy return on their risk capital,” Syed said.
That approach seems to be working.
Inefficiencies result in exorbitant costs, Liquidity can solve this predicament
Because of the inefficiencies in the processes and number of intermediaries involved, the customer ends up footing the bill.
Blockchain technology can simplify the processes and do away with a lot of intermediaries to bring costs down. For instance, consider the picture below, it shows all the different pieces that are currently involved in the securities issuance and post issuance process. Each piece represents a separate vendor and costs associated for their services. With the Liquidity platform all of these processes can be managed through one simple platform without the intermediaries.
This technology will enable access to the global investor pool
Blockchain technology presents a unique opportunity to access regulatory compliant digital assets from a global investor pool.
Syed opined that, “we will see that regulated private capital markets are going to become more accessible to a global audience. We facilitate this through our technology platform that enables capital issuers access to a much larger global capital pool represented by broker dealers, family offices, and qualified purchasers. The manner by which we accomplish this task is by incentivizing institutional counterparties to collaborate through our platform which matches their client lists with quality issuers.”
“These counterparties have historically been very worried about sharing their information and being able to prove that they own their client list and their deals. Blockchain and the Liquidity Digital technology platform provide a practical solution for this that players in the marketplace are telling us meets their regulatory scrutiny and gets them very excited. This is how we improve capital markets and make some money while doing it.
Call it what it is, a security
Most companies in the blockchain space are racking their brains to circumvent SEC regulations by either going outside the US, or by arguing that they meet the Howey test. The reality is that they may not be compliant with the regulations and that comes to light a little too late.
What Liquidity is doing instead is complying with the traditional equity and debt securities regulations, which are already well established and battle-tested.
“What we are doing is leveraging the existing regulations for traditional securities for digital securities. We actually go to the broker / dealers who are registered and abide by all the rules and SEC regulations and then apply those standards and practices to our distribution platform and our digital security issuances,” Syed said.
Blockchain doesn’t transform a sh*tty idea into a viable one
“You cannot put a sh*tty idea on a blockchain to transform it into something it is not. There are a lot of platforms that facilitate that, but we are not that company,” Syed said, commenting about the companies that they have rejected partnering with, or representing as clients.
Lots of companies are cashing in on the blockchain frenzy and many have succeeded to raise millions of dollars during the ICO craze for rather stupid ideas but that is not a long-term sustainable business.
Then there were companies that simply changed their name to increase their reputation and stock prices.
Long Island Ice Tea company changed its name to Long Island Blockchain Co. and its stocks soared 200%. Such was the craziness but things have hopefully improved in the short time since the ICO craze ran its course and pulled back.
Companies like Liquidity Digital are the ones changing that rhetoric. They want to facilitate digitizing security tokens for quality companies, and when these companies succeed in their efforts by efficiently raising and administering their securities via the LD platform, it will bring authenticity to the space.
Bringing all aspects of securities issuance to one platform
The securities lifecycle comprises of a lot of moving parts. KYC, AML, compliance, securities issuance, investor communication, dividend distribution, etc.…. each of these attributes can be an offering on its own, and they are for certain aspects.
Liquidity’s technology integrates all of these seamlessly onto one platform.
“We think of ourselves as a car manufacturer. We don’t have to build all the parts, and if someone else has figured out to make the tires better than we do, we absolutely leverage that from them instead of manufacturing tires. Similarly, we have built a lot of capabilities into our platform, but if there is a company that is better at KYC and AML than us, we integrate them onto our platform,” said Syed, emphasizing the importance of simplifying the whole process of the securities lifecycle for a non-technical issuer.
Governments cannot wait around for too long
Syed talked about how the early adoption of the Internet disrupted the companies and then disrupted entire industries.
With blockchain technology, entire economies are going to be disrupted and while being cautious is warranted, governments cannot be too lethargic in moving with the times.
We have seen this recently with Facebook’s Libra rattling governments all over the world with its announcement of Libra tokens.
It is not just the financial industry that is impacted by this technology; it is the entire economic model that could be disrupted.
Syed commented, “This is technology that is coming and is being discussed in public settings at the highest levels, and we will eventually have the required framework. While this cautionary approach is great, there is not much time to wait around.”
Syed jokes about work-life balance saying, “I work and my wife balances my life, so that is how we balance work-life together.”
Eyes set on Series A issuance in 2020
Having completed its seed round earlier the team is now vetting the investment offers that are coming its way based on its progress in the recent past.
With the traction that the company is gaining in the market, they are looking to issue its own Series A in 2020.
The company’s goal is to be one of the first unicorns of Web 3.0.
Institutions are not coming, they are here already
“In 2018 we used to use the phrase ‘institutions are coming’, well now, the institutions are here. Anyone who thinks this technology is a decade out is clueless as to what’s going in the space.
Some of the brightest minds from the mainstream businesses are already working in the space. These institutions see the value this technology has to offer.
Problem is, most people are not able to articulate the value proposition because they are stuck in the discussions of technology for the sake of technology, instead of focusing on how this technology can help the businesses.
It is no longer just financial institutions, we are talking about renewable energy, infrastructure, project financing and beyond.
It will not come as a surprise to us if we see issuances in the billions in the next few years.”
CryptoTapas: Tell us about Liquidity Digital and how you got into the Blockchain technology. What pain points are you trying to solve with your project?
I am a serial entrepreneur, and I started my first company when I was a senior in high school, around the time of the dotcom boom.
Being an entrepreneur, I have always been cognizant about the idea of money and its impact on society; how you can make societal changes with it. That is where my passion for capital markets emerged. The dotcom boom was a perfect culmination of technology and money, and that peaked my interest.
Even during those times, most people were talking about technology for the sake of technology and on the what and the how of technology. I was always interested in the why of technology.
That has allowed me to think about technology from a value proposition perspective.
Fast-forward to where we are today. We are seeing the same sort of hype and volatility, all those things that existed during the early stages of the internet.
So, what got me into the technology space during the dotcom are the same things that brought me to the blockchain technology space.
I came to this space as a cynic.
When I heard about Bitcoin and cryptocurrency and how they were going to change the world and everything in it, I thought that as someone with understanding of technology and capital markets, if there was going to be anyone who was going to poke a hole in this theory, it was going to be me.
That’s what got me started on this blockchain technology journey.
You couldn’t ask anyone about it because in the beginning, there were only two types of people in the space: ardent believers or deniers.
I wanted to formulate my own opinions by going directly to the source, which at the time was Satoshi’s whitepaper.
What started out as a 15-minute read turned into 2.5 hours.
Every single concept was a ‘holy sh*t’ moment for me. Most people did not have any idea of what the implications of this technology were.
I immediately realized that most people were focused on the digital currency aspect of the technology but there are just so many implications of this technology.
My insights from the technology, the capital market’s space and my experience in financial markets made me realize that this technology would disrupt not just the capital markets but also everything that had to do with the notion of trust and incentivization.
This was a huge deal.
And if you marry the other concepts, like artificial intelligence and the Internet of things, with blockchain technology, it would completely change the way we operate and conduct businesses.
I got started in this space with the following thought:
The impact that the Internet has had on how we interact with each other will be the impact that blockchain is going to have on how we will transact with each other.
That realization immediately changed me from a skeptic to a believer to an evangelist and propelled me to think about the ways we could execute this technology to bring about the revolution that people were talking about.
However, these revolutions do not happen overnight. Execution fuels evolution into a revolution, something I like to call “Evolutions towards revolution”
I needed to come up with a mechanism that markets would adopt, which meant the solution had to be practical, pragmatic and something that was revolutionary once you achieved its goals but evolutionary in the path towards achieving it.
That is when I looked at the Initial Coin Offerings (ICOs). It was an interesting concept and a clear indication that the capital markets are not keeping up with the global capital formation’s needs.
I understood the problem very well because of my background in the capital markets.
ICOs made a lot of sense but lacked one major component: regulatory compliance.
Lots of projects were trying to get around this regulatory compliance aspect by giving the tokens a utility character; however, most of the utility attached to the tokens was BS. I am not claiming that there is no utility; it’s just that 95% (that’s being generous) of the utility token applications do not have a real utility and are a security token issued under the guise of utility tokens.
Although the regulations were not designed to keep pace with this technology, regulators did a good job in helping regulations catch up quickly.
That is when this whole notion of security tokens started to come into play.
Reading the bitcoin whitepaper converted me from a skeptic to a believer to an evangelist, and at that point I knew I wanted to be a blockchain entrepreneur.
I was going to launch a company focusing on tokenizing assets.
That is how I met with the founder and CEO of BankEx. Their concept was to tokenize real world assets. They asked me to come onboard to help with the project.
I joined them as the Chief Commercial Officer and then ended up becoming the CEO of the Americas.
The company was focusing on the retail side of things while I wanted to focus on the institutional side of things. I believe that we need to have institutional adoption to pave the way for retail adoption. This is especially true for financial technology.
That realization was the genesis behind Liquidity Digital, and what led me and my Co-founders, Jitin Jain and Marina Shostak to launch this new venture. And since then we have been making strides. I am humbled to say that we are one of the few companies in the blockchain technology space to actually be revenue positive.
CryptoTapas:That is quite different from most companies in the space who are burning investor funds raised from the ICOs.
From day one, our focus has been to be a revenue focused company. What that does is defines our decision process. Yes, we are a technology company, but we are a company first and that means for us to be in business, we have to be profitable and have a business plan that is executed to make that happen. Without such a plan and execution, you might as well call yourselves a technology non-profit.
That is also the biggest problem in the industry right now. Everyone is talking about pie-in-the-sky and how they are going to change the world, but no one is talking about the opportunities to make a ton of money while also changing the world.
That is where our focus is.
We want to change the world in a practical and pragmatic manner while making tons of money in the process.
CryptoTapas: Talking about revenue generating activities, what kind of services do you currently provide to your clients?
We are building an end-to-end ecosystem for digital security offerings.
Being the CEO gives me the liberty to make predictions and let time decide whether I was insane or a genius. I will make one such bold prediction: In the future, the largest source of capital will come from private markets, as opposed to public markets.
We will see that regulatory private capital markets are going to open up to the public. That is going to enable access to a much larger, global capital pool for institutions across the board.
I realize that this is a big statement to make and there is a lot of work to be done.
We will come to a point in the natural evolution of this technology turning into a revolutionary solution that will allow people to turn illiquid assets into liquid ones.
Going back to your question about how do we make money…what do you do during a gold rush? You invest in the picks and shovels, equipment for the plumbing and piping. That is essentially what we are doing, in preparation of this gold rush in the blockchain space. Our focus is “how do you make it seamless for investors, issuers and the connectors of the distribution channels?”
That is what our end-to-end ecosystem for digital security offerings does.
We cover issuance and post-issuance aspects on the platform. Right now, everything is happening in isolation in the market, but our technology connects everything together to provide a seamless experience to the clients and their investors.
We make money based on the issuance, distribution, and maintenance of the securities on the platform.
We currently have 4 separate revenue streams that provide different benefits for our clients:
1. We provide digital securities as a service where we are handling both the issuance and post issuance side of things. (DSaaS).
2. We connect issuers to a vast network of registered global broker / dealers to help distribute the issuance.
3. We provide advanced analytics and insights for broker / dealers and issuers to help them make informed decisions on offerings.
4. We provide a white-labeled enterprise solution for institutions to manage their onboarding process and to tap into a new revenue stream for post-issuance servicing of digital securities for their clients.
CryptoTapas: There is no definitive regulation out there. How are you able to provide services?
That is a good question, and one where a lot of education is needed in the space.
Many people are stuck on the notion that we need to have a “security token framework” in place, and that will come eventually. But this whole notion of tokens has become so toxic because of what people have seen and the ugly debate on utility vs. security tokens.
For me, it is very simple.
Call it what it is, and that is a digital security.
Whether it is a security for a company, a piece of an asset, an equity or a debt instrument – it is a digital security, and the same securities regulations will apply to them. Yes, there certainly are nuances when it comes to digital assets, but the regulators are already beginning to provide clarity around this.
Just this past July, the SEC issued a joint staff statement on the custody of digital assets for broker dealers.
What we are doing is leveraging the existing regulation for traditional securities to digital securities.
We actually go to the broker / dealers who are registered and abide by all the rules and SEC regulations for our digital security token issuance.
Remember that rules are jurisdiction specific, and if you can program these rules into a smart contract, all of a sudden, the magic of technology translates to significant cost savings across the board.
We have our ears and eyes close to the regulatory pulse, and we can update on our platform any rules that need to be updated.
For any issuance in the U.S., we follow SEC regulations for accredited investors, and for issuances outside the U.S., we follow the respective country’s regulations.
CryptoTapas: How do you choose clients you look to serve?
We have a legal team that vets the clients before we provide any services.
Digitizing the securities is icing on the cake – that is what it really is. However, the cake itself is the client that is looking to issue the digital securities. So, even though our icing is excellent, it cannot make a sh*tty cake taste good.
The problem with this space right now, and the reason why we see so many issues, is that people are focusing on the icing and not on the cake.
We focus on the quality of the clients that come our way. Do they have an understanding of the rules and regulations? Are they a quality company or just looking to cash in on this frenzy?
Based on our initial analysis, if we see quality in the company, we absolutely take them on. If not, we pass.
That is what the industry needs: a few good quality issuances using digital securities that can pave the way for future issuers. That is how adoption happens.
CryptoTapas: What was the most common issue that you noticed in the clients that you rejected?
That is an easy one. It is bull shi*t.
That is what this industry is full of: hype and bull sh*t.
We look at whether it is a viable idea: Is this just a pie-in-the-sky or an actual product? It is easy, because you can, with just a few simple questions, distinguish a real idea from BS.
For example, I ask a simple question: What’s your revenue plan? How are you looking to make money from this business? Who are your buyers and what are their pain points?
You will be amazed to see how many people fail to answer those basic questions.
You cannot put a sh*tty idea on a blockchain and transform it into something it is not. There are a lot of platforms that facilitate that, but we are not that company.
CryptoTapas: Talk to us about the post-issuance module.
We look at our solution holistically.
We don’t get to post-issuance before the issuance and you cannot think about issuance without pre-issuance review.
For the post issuance, we manage the investor communication, investor management, complying with the legal requirements of investor correspondence including shares registration. We also manage dividend distribution and securities life cycle management and everything it comprises of.
Each of the aspects of securities management including KYC, AML, Compliance, Securities issuance, investor communication, dividend distribution, etc. is itself a company service offering.
The beauty of this technology is that it can integrate all of these seamlessly onto one platform.
For example, if you have to call someone on WhatsApp, you don’t think about how that technology works, you simply press a button and the technology works, ultimately, that is what we want to do. We want to make blockchain technology so seamless and integral part of the technology that people actually use it, not just talk about it.
CryptoTapas: Which blockchain platform are you using?
We are agnostic to the blockchain technology platform. We are doing that very purposefully so that we can interact and leverage across all platforms so that we can utilize the best of everything from different platforms.
CryptoTapas: Do you think the US regulations are keeping up with the times in providing the required clarifications to move this space?
SEC has taken the position to not stand in the way of this evolution, however, they are weighing in all the aspects of this technology which is finding itself at the moment before they come up with the regulations. I think that is the right approach.
The US has a special responsibility in that it is regarded as the market leader and everyone is watching it. While the agility to act quick is lacking, it is not without a good reason.
We see that the general awareness and conversations are already underway. We saw this during the congressional testimony of the bankers, a senator asked the bankers “what is your blockchain strategy?”.
So, this is a technology that is coming and is being discussed in the public settings at the highest levels and we will eventually have the required framework.
While this cautionary approach is great, there is not much time to wait around.
During the emergence of internet 1.0, lot of companies waited on the sideline waiting and they were wiped out of business because they were too late to take advantage of the technology.
With Internet 2.0, it was the industries that took a similar stance of waiting around and they too were disrupted. Take Uber and Netflix for example.
With internet 3.0, we go from companies to industries to entire economies being disrupted. And there is an absolute need to stay ahead in the game.
CryptoTapas: What is your vision for Liquidity Digital for the coming 5 years?
Five years is a long time in this space.
I would not be surprised if in the next 3 years or less a much bigger player swoops in and takes us over, or maybe we take over them!
CryptoTapas: Thank you for this opportunity, it was a pleasure talking to you.
Thank you for reading the article.
Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.
We do not endorse or guarantee the accuracy of the information and claims made.
RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.