17 Sept 2020 — Continuing with the comprehensive series of interviews that focuses on the success stories of companies that have launched asset tokenization or digital securities, this week we are fortunate to have Eli Weir, CEO of Blockchain Labs Asia to join us.
Eli has over 25 years hands-on operational and leadership experience in various industries and locations, specialising in the application of disruptive technologies and paradigms to transform organisations and industries.
We checked in with him to learn more about asset tokenization and security token offering as the next frontiers of the financial market and get his advice on how to go about it. Here’s what he had to say.
Please tell us about your company and what inspires you to start the business?
Eli: In 2014, a group of us came together in Malaysia to establish Blockchain Labs Asia, a company that helps to apply emerging technologies such as blockchain, AI, big data, infrastructure, automation, etc, across various business sectors. However, as time went on, we found that we were concentrating a lot of work in the commodity trading, banking, and capital market space. We also started to see an increase in our own assets and therefore, Sonata capital was formed to manage those private assets as our business evolved.
We’re currently going through the process of registering with the Labuan Financial Services Authority (FSA) to be a regulated fund management company, so that we can start to manage funds and investments for our clients too. Although Sonata capital has tokenized all of its funds and the intent is for those tokens to be listed and traded on a regulated securities exchanges, this however has not happened yet.
After Blockchain Labs Asia had been running for about three years and because of the fact that we were doing so much in capital markets, we set up another company called DSX Global Ltd. Currently headquartered in Labuan, with its main office in Kuala Lumpur, DSX is a full service platform for the tokenisation of securities. From verifying and tokenising of assets to offering of digital assets on a primary marketplace, and providing liquidity through secondary market trading, such services are underpinned by all of the regulated services such as custodian and others.
The vision for DSX is to be a single market making and liquidity provider that has an ecosystem of domestically licensed entities across Asia, acting both as support for tokenization of assets and sales of those tokens, operating on a single backend technology.
How long has DSX been in operation and when will we see the launching of the exchange?
Eli: DSX has been operating for about three years, what we’ve done so far is mostly tokenization of assets, that includes different classes such as private equities, real estate, commodities etc. While the platform has been up for issuers to manage their tokens, we will only be launching the public facing side in October.
Most of the companies that we’ve worked with are existing companies rather than start-ups, particularly the ones that have tokenized their equity. We have done a number of private placements with those companies, and the first public offer of the securities will be taking place in October, immediately prior to the exchange launch.
“Tokenizing an asset doesn’t inherently change the value of the asset. So if it was a terrible asset to start with, and you’d tokenized it, it would still be a terrible asset.”
How do you provide custody service to your clients. Which custodian partner/partners are you currently working with?
Eli: At the moment we’re working with several parties. From our perspective, the need for a custodian is slightly different to digital currencies. While it’s very easy to lose digital currencies, for tokenized assets, the security tokens that we created are ‘impossible’ to lose.
In order to be regulatory compliant, we have to be able to reissue those digital securities on demand. If a token holder loses access to his wallet, it’s not really a big deal, because we can reissue the securities, and similarly if they are stolen, we can forcibly transfer back into the hands of the rightful owner. Therefore, the custody of the security tokens is not as vital as the custody of the underlying assets. Currently, we’ve mainly done that via a licenced Trust Company.
Moving forward, we’re actively exploring investment in the custodian space so that we can have a partner that we either own 100% or own a significant portion of.
What’s the difference between asset tokenization and security token offering? What are the actual benefits to the investors and investment market that you are seeing from these activities?
Eli: Tokenizing an asset and then conducting an offering with that security token are two completely different exercises. It annoys me when people get those two things mixed up. A lot of our clients have tokenized their assets but have not yet conducted an offering because the main reason for their tokenization was not to raise money.
Most could see the benefits of tokenization when it came to managing the diverse token holders’ base, with the reduction of costs in managing the stakeholders and buying or selling the assets.
Tokenization allows us to take a reasonably illiquid assets such as private equities, and making them liquid. Instead of trying to find someone who will buy your share of a company, and usually that will probably take a whole year, and most probably a domestic buyer, now you can sell tokens representing the fractionalized portion of your shareholding on the global market, 24/7.
How long does it take for the turnaround time in launching an asset tokenization from start to finish? And what are the general stages involved?
Eli: We’ve worked very closely with the Labuan Financial Services Authority, who regulates securities in Labuan, Malaysia to have our processes, legal templates, token subscription agreements, approved and verified by them. If someone comes to us, the tokenization will only take several days, while the use of the platform to create a token, is almost immediate as it takes only minutes.
The legal framework surrounding the tokenization however, will require us to do a couple of things and may take a longer period. They will either have to register an SPV in Labuan, or re-domicile their holding company to Labuan, before tokenization can be executed.
If it’s a simple equity tokenization, for example, after the company is created, we transfer all of the shares to a nominee shareholder, which is the licence Trust Company. The nominee holds those shares on behalf of the token holders, whoever they may be in the future. All of that process is basically cookie cutter templated because we’ve done it so many times before.
After the tokenization is completed, and if they then want to conduct an offering, the entire process may take anywhere from three to six months to get ready.
What do you think are the biggest challenges that you have to overcome when executing asset tokenization?
Eli: It’s a lot easier now because we’ve done it all before. When we first did asset tokenization, it was difficult because there was no regulatory or legal precedent. Now it’s a lot easier as those precedents have been established and we have the process templated. We don’t have to convince the regulator and get regulatory approval from them anymore.
Some of the biggest issues remain educating stakeholders such as regulators, banks and even our clients, that tokenized securities are digital forms of traditional securities and not cryptocurrencies, and nothing that the client or what we’re doing has got anything to do with Bitcoin, which is viewed as volatile and risky. Most of the securities that we issued are on the Ethereum network and educating people to understand that usage of the network, does not mean that we’re buying or selling cryptocurrencies.
To a certain extent, some of the biggest hurdles may have been overcome, although more efforts are needed especially in educating the market of which we’re creating digital securities for. For example, if we’re tokenizing Gold, then educating the market as to why this is better than holding physical gold will be crucial.
“The biggest strength is really the fact that we have tokenized $27 billion dollars’ worth of assets.”
Are there any learnings that you can share with companies who are interested to raise funds and would you recommend companies to raise funds through STO?
Eli: Yes, tokenizing an asset doesn’t inherently change the value of the asset. So if it was a terrible asset to start with, and you’d tokenized it, it would still be a terrible asset. While, if it was a good asset and you’d tokenized it, then this would still be a good asset, but it’s inherently more liquid.
So the advice that I would give to people is not to think they are going to raise billions of dollars by creating a token, but to instead ensure that they have something of value to tokenize in the first place, and to make sure that they’re tokenizing for the right reasons.
Whether is for bringing down the cost of private placement, reducing time it takes to have an offering, or easing the management of shareholder base, they need to be sure to work with people that have experience in the space.
Besides, running the company within Malaysia’s jurisdiction, what are the plans moving forward?
Eli: We’re essentially identifying strategic investments, custodians, investment banks and other key players in the ecosystem in each of the five key markets that we’re moving into by the end of the year. This includes Singapore, Vietnam, China, Indonesia, and Japan. Our intent is to obtain regulatory licences either through acquisition, investment, or partnerships with businesses across Asia Pacific, although we do prefer 100% acquisitions.
What do you think is the biggest strength of your company currently?
Eli: The biggest strength is really the fact that we have tokenized $27 billion dollars’ worth of assets. This includes all of the companies that we have invested money in. The sectors of industry are beyond the usual suspects of software or technology companies, ranging from construction, manufacturing and telecoms.
In both number of tokens, value of tokens, and number of token holders, I think we’re the largest single asset tokenization organisation globally. We’ve chosen to concentrate on finding good companies that want to tokenize assets for the past years, rather than starting up an exchange first, as what a lot of other people have done.
There’s no point to have a security token exchange, but with no security tokens to trade. Currently we have a stable of between 20 and 30 tokens, which are ready for DSX launch in October.
In addition, we have signed an exclusive licence agreement with Tokeny, where we have exclusive rights to use of their technologies, T-REX Standard with OnchainID and its web application, T-REX factory, for the next five years in Asia Pacific.
Will your company be looking into an IPO in the near future?
Eli: Most definitely not as it flies directly in the face of our philosophy. Why would we have an initial public offering, which is an old process using an old technology when our entire company is centred around doing the exact opposite of that.
If someone is operating in the security token space and then goes through an IPO, it’s like they don’t believe in what they’re selling. I think those people doing that are very hypocritical.
What we’re attempting to do here is to create or drive the evolution of capital markets. Tokenization is cheaper, faster and there’s less regulatory overhead. In addition, the tokens can be traded off and on market 24/7 to a global audience. But if you list on a traditional exchange, you generally trade eight hours a day to a domestic audience.
“If you build an empty exchange and say ‘Hey, come and buy stuff on my exchange’ but there’s nothing to buy, then what’s the point, so people lose interest very quickly.”
What’s your views on some experts saying that there are just not enough investors to ensure 100% liquidity?
Eli: I disagree with that statement, because anyone who can buy a share can also buy a security token. The fact is that if some companies have been unsuccessful in selling their tokenized securities, that doesn’t mean there’s anything inherently wrong with the tokenizing of securities. It just means those guys weren’t very good at selling.
The current secondary market is not active because there’s nothing to buy or sell. Like I said previously, I think the current exchanges have gone about this completely the wrong way. If you build an empty exchange and say “Hey, come and buy stuff on my exchange” but there’s nothing to buy, then what’s the point, so people lose interest very quickly.
We’ve to make sure that when we launch, we will have a lot of things [tokens] for people to buy and sell. We’ve also made sure that we’ve engaged with several market makers, so that there will be volume and liquidity from day one.
Any last words to companies that are considering to tokenize their assets or launch an STO?
Eli: I think they should consider their goals, options, target market, timelines, costs and weigh all that up. Most often the tokenization side of things wins, however, it’s not a good fit for necessarily every case. So my advice is to make sure that they are looking at this long term, and not with a short term view. If they’re looking at it with a short term view, they’re probably going to make the wrong decision.
Look at using a provider to create a security token that’s going to have the lowest barrier of entry, the least friction when it comes to engaging with a mass market. We believe that closed ecosystems are bad and we are big believer in open ecosystems. This is one of the reasons why we went with T-REX on top of Ethereum. It gives us security, linking an onchain identity to an individual or entity without necessitating a closed ecosystem or permissioned blockchain. So I think the more that people come together on an open platform like Ethereum, the better it is for everyone.
In this current pandemic, how has it affected your business?
Eli: It’s both been good and bad.
It’s accelerated the visibility of the space and the desire for a lot of people to tokenize as well as accelerated the timeline of some people who want to raise capital. A lot of investors are looking to invest more into digital assets, both cryptocurrencies and security.
On the flip side, it’s been disastrous for attempting to get anything done. We can’t travel, and can’t have face-to-face meetings. We can’t move money. We’ve had a number of large transactions that historically would have just taken weeks, that have taken months or haven’t happened yet because banks are operating at reduced capacity. Central banks have put monetary restrictions in place so that a lot of people have found it very difficult to change domestic currency into US dollars, and then send those US dollars abroad. We’ve had a number of cases where people pulled out from investments or the issuing companies struggled to close their private placement as it was very hard to transfer money across borders.
Disclaimer: This is not an advertisement making an offer or calling attention to an offer or intended offer.
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Originally published at https://www.linkedin.com.