Ampliv TV featured Sam Bankman-Fried, CEO of Alameda Research, discussing perspectives about the digital securities market at Binance Blockchain Week in Singapore in January 2019.
Hi everyone. We are at the Binance Blockchain Week and I’m with a CEO of Alameda research. Sam. Hi Sam. How are you?
Doing well. How are you? Yeah, so, uh, I was treating an ETFs for Wall Street quantitative trading before this and then about a year and a half ago I left and started up Alameda research. We are a cryptocurrency quantitative trading firm and liquidity provider.
The recent hype of digital security offering (DSO). Why?
I think a lot of it has to do with how much crypto is down over the last year. I think people see bitcoin’s down, you know, for $20,000 to, you know, 3,600, Ethereum down by a factor of 10 from its peak and, uh, are looking for tokenized assets, uh, that have some sort of real underlying a company or maybe real estate or currency or something like that that gives it value. And so, uh, you know, they’re looking at, you know, again, whether it’s, you know, token on some real estate portfolio work or something like that where the underlying asset itself is, you know, uh, just some, uh, asset completely untied to the cryptocurrency market. And so hopefully those prices would be less subject to the fluctuations and potentially massive decreases that we’ve seen in standard cryptocurrencies for the last year.
What is digital security?
It can mean different things in different contexts. In general, it’s taking some current asset, uh, often it means you know, security, although it’s a pretty similar concept. Honestly, if you talk about something like a stable coin, uh, which is, you know, maybe currencies that aren’t quite security, but you know, it’s basically taking some existing a tradable asset and creating a token that is effectively redeemable for that asset or is it some way tied to that asset and then treating that token, uh, you know, either on exchanges passing her on the blockchain, something like that. So you can effectively create a cryptocurrency whose value is tied to some existing security.
What is your view about the cryptocurrency bear market?
The downturn itself I think was, you know, unrelated to securities and things. I think things were down a lot because, you know, a lot of these, uh, ICOs were probably massively overvalued by any sort of, you know, economic fundamental model. A lot of them, there weren’t real companies with like really valuable profit streams underlying them. They’re just tokens. And when people decided those tokens weren’t the cool thing anymore, they just sold them and then the price went down a lot and there’s nothing keeping the price off because there was no company there are really backing it. And I think a lot of people serve, watch that play out and watched how much these things fell. And uh, you know, it felt like, oh wait, maybe, maybe we should have been treating tokens that had some company beneath them or, you know, I don’t know if it’s a company, maybe it’s a house, maybe it’s a building or maybe it’s a currency or something. But you know, I, and so think a lot of people are seeing security tokens as a way to sort of apply the, you know, speed and flexibility, uh, um, and, uh, you know, public nature of blockchain technology and cryptocurrencies in particular to existing valuable assets.
What is unique about digital security offering (DSO)?
Obviously security token could go down a lot. Uh, stocks could go down a lot sometimes. Uh, you know, it’s not like it’s a magical thing that only goes up, but uh, but you know, the security tokens, uh, pricing value would be tied to that if it’s an underlying asset. And so if you have, you know, a security token on an equity index, then it’s only going to go down. Basically, if that equity index goes down, it could go up when that goes up. And so it’ll mimic certain price movements of whatever underlying asset it represents as opposed to just sort of the, you know, whims of the cryptocurrency market.
Key differences between ICOs and DSOs?
So I think, I think the biggest difference is in some sense an ICO, a utility token offering is, it’s just a coin often just an ERC20 token with some branding. And there’s not really anything else. The token doesn’t even really give you equity in that company. It gives you something which may get some point in the future, maybe could be useful on some network that probably won’t ever do anything anyway. And so it really is just marketing an ERC20 token. Whereas if look at a security token, and the really, the core of it, is something completely unrelated to the blockchain. The core of a security token is security. It’s, you know, whatever apple stock S&P 500 index, uh, some portfolio skyscrapers, you know, a currency like whatever you want to, you want to wrap them around, you can. And uh, and that’s what it’s value will be tied to. That’s what its behaviour will look like. And its relationship to cryptocurrencies is just that it leverages blockchain technology to make it fast and easy to move the token around that is to transfer ownership of it, uh, fast and easy to trade it and uh, keeps a public record, um, of what’s happened to all of those tokens. And so it sort of combines the, you know, blockchain and exchange like nature of the cryptocurrency ecosystem with the price behaviour of, you know, typical equity markets.
What kind of practical value digital security offers?
I think that’s a really good question. And I think a lot of people haven’t thought very hard about that and it’s a big problem. A lot of people are getting very hyped about security token offering security tokens exchanges, security took your regulation, this whole thing without having first thought through, why were we doing this in the first place? Because fundamentally, you know, to take one example an S&P 500 index tracking security token. Well, they’re already ETFs and futures and options and swaps and every manner of thing that you could imagine tracking the S&P 500 index. And so I think it’s an important question, like why create a token on it? What value does that add? And I think there is potential value you, you look at blockchain technology and there are a lot of cool things about it, right?
You think about, you know, if you’re trying to send some asset across the world, what’s easiest to send a dollar a share of apple or a toolkit? It’s clearly a token, right?. Token takes half an hour to get it anywhere in the world. Sending a dollar is a huge hassle. It takes a day. Uh, your banks need to be able to talk to each other. And a share of apple, I don’t even know how, you know, one random citizen would attempt to like to transfer their share of apple to another. Like the only way you can do this basically is through a, you know, a few centralized, uh, US regulated exchanges. And so I think that you know, when you talk about security token offerings, I think the real value proposition here is that tokens are really easy to interface with. Um, and whereas, you know, a lot of our existing financial infrastructure was designed a long time ago and crucially designed before computers were nearly as important as they are now. And so a lot of this was designed with punch cards or you know, little index cards like handwritten notes in mind, um, or long legal documents. Not with like, you know, the Internet, which is an incredibly powerful piece of technology to actually back, you know, movement of these assets.
Blockchain as a tool for security tokenisation?
And I think that you know, when you talk about something like Apple stock, I think that’s less of value I think because US stocks are a pretty secure asset in terms of cybersecurity, things like that. But when you start talking about, you know, more assets, whether it’s like a some random set of plots of land or, or something else like that, uh, you know, way less built up infrastructure around them being able to leverage the current blockchain infrastructure to just keep a public record of all of, you know, the ownership of all of the assets I think is another value proposition that, uh, that blockchain technology has for securities.
Who are the right participants for DSOs?
Well, that’s an interesting question and the real answer is no one knows. Um, if the regulation on this has not been written yet and a lot of countries are, you know, currently trying to figure out what the right way to regulate these things are. Um, you know, they haven’t even figured out how to regulate bitcoin a lot of places and it makes sense. It’s a really hard thing to understand from a regulatory perspective. You know, is it a commodity, is it currencies or securities, is it a utility? Like what, what is it? Maybe it’s a question one. And then you know, even if you understand what it is, uh, understanding the full, you know, know your customer implications of cryptocurrencies is a really complex process and uh, so you know, as countries are trying to figure out how to regulate blockchain and crypto in the first place, then you get to the question of, well, what if it’s on a security? And that’s, you know, a whole Another, uh, a load of things that need to be worked out. And so I think that, uh, you know, we’re going to learn a lot over the next couple of years about regulatorily who is going to be able to participate in these things, what the process for that is going to look like. Um, and you know, right now I think it’s very much in the initial ideation stage and a lot of people are starting to build out the infrastructure for it, but it hasn’t become, you know, a really well-refined system yet.
What is the key consideration point?
A lot of it depends on where you are. Like it depends on which jurisdiction you’re in it and us, you know, to which lies your subject. And the first thing I would say is that seems like a good place to start. Um, and then the second thing is the jurisdiction of the underlying asset. So, you know, if you’re trying to buy a security token on US real estate, that’s going to give you a US regulatory footprint. You’re trying to buy one on Japanese stocks, that’s going to give you a Japanese regulatory footprint. Um, so that’s another thing to look into. Uh, you probably also going to have to understand the regulation of whatever jurisdiction. You know, if you’re buying this on an exchange, you’re probably going to have to understand the regulation of the country the exchange is in, um, and uh, you know, potentially also even the regulation of where your counterparty is if you’re buying it from someone else.
So, uh, and I think that this is a complicated process, especially from blockchain technology because one of the core components of blockchain technology is how easy it is to move these assets around in a semi-anonymous way. And I think that there’s gonna be a long process as all of the players in this upcoming industry figure out how that interplays with the need for these to be subject to regulation in all of the relevant, you know, relevant jurisdictions. And so you’re not just asking can you create, can an American create security to American asset. You’re then asking like, can that be sold to a foreigner and what regulation is up for or if they try to buy this asset from an American? And how does the US government, the SEC even know if this happens in the first place, given that blockchain makes that a difficult value of a proposition. So I think that like there’s a lot to be worked out in terms of the details here.
Is DSO primarily for institutional investors?
That’s certainly, I think how it’s going to start out at least a partially for regulatory reasons. Uh, there’s a lot more flexibility that you have when you’re dealing with like financial professionals than with real retail flow.
How could retail investors take part in?
Right now. It’s unknown. But if I had, you know, I don’t know, and they aren’t really answered by SEC. You know, if I had to sort of speculate on this one thing, I would look to is current equity markets. You know, how do retail investors get involved in equity markets? And the answer is they don’t buy from issuers. People don’t go to, uh, you know, Tim Cook and ask for apple stock. And they also don’t buy directly from exchanges. They don’t have a direct connection to the New York Stock Exchange. The answer is there are third party services. You will get something like, uh, you know, IB, you know, trade station fidelity, Charles Schwab, these all have platforms that themselves interface with the real financial infrastructure and then onboard retail customers to trade the assets through those platforms. And so, you know, if I had to guess, I guess, uh, both regulators and uh, you know, people building this technology are going to look to platforms like the Charles Schwab type, uh, for inspiration as to how to get retail involved in security tokens?
Any tips on how to get started with DSOs?
It’s a good question and I think that there isn’t one clear answer to that scene. There are a lot of things that need to happen before, uh, you know, security tokens could really take off. I think that first of all, regulations obviously a big area of this. So if that’s your strength, then I think working with governments to uh, understand and uh, you know, help work with, you know, regulations around security tokens is one obviously key area. Another area is, uh, understanding what the actual customer desire is going to be. Like, what do people want, what are people going to be interested in getting security tokens on? And so I think that there, there’s another area, like instead of just like throwing a lot of shit at the wall and seeing what sticks, you know, maybe saying like, these are a lot of demand for, you know, index, uh, you know, equity index type security tokens is the demand on real estates, like what do people want here? And then a third thing to obviously building the technology, not so much the blockchain technology. ERC 20 Tokens are pretty well understood technological concept, but understanding how you tie this asset to the underlying tie, this token to the underlying asset. Is it redeemable for that? Does it expire like a future to some cash price of it? Is there some third party who convert between them? Like what actually ties these together and you know, both legally and like infrastructurally. And then I think another thing is going to be liquidity. You know, they’re going to have to be liquidity providers who come in and, uh, you know, make markets in these products, you know, presumably least on the value of the underlying assets. Um, and, uh, they’re going to need to be platforms to distribute them, whether that’s, you know, an exchange or a broker.
And, uh, and I think all of those things need to have, basically right now, none of those is happening, at least not to the something need to security tokens. So I think there are a lot of different ways to involve right now. And the answer is just which of those, you know if this is the space you’re going to be involved in, which of those easier are the ones you can contribute to.
How would Alameda Research get involved with DSOs?
We are investigating this space. Um, and you know, to some extent, obviously we’re waiting to see how it unfolds. But you know, if I had to predict where we’d end up, I would, you know, I predict as a liquidity provider, I think that’s obviously the most natural area for us there. Um, where, you know, once these tokens are created, especially if they’re trading on something like an exchange, uh, we would be on that exchange, uh, you know, making two-sided markets in it so that, you know, if there’s a customer interested in this, uh, you know, hopefully we will provide pretty, uh, pretty tight pricing on these assets. And I think that’s something that we’re going to be well positioned to do. As a, you know, cryptocurrency and blockchain liquidity provider uh, you know, where a lot of our background came from traditional, uh, equity market making. And so this is sort of a natural union between those two.
You know, when it comes to security tokens, there’s a lot of excitement and I think some of that’s warranted. But you know, uh, trade cautiously and think carefully about what actually is your goal of security tokens. Don’t put the cart before the horse here and, you know, think about what’s the actual demand here, what’s the sustainable business model? What’re sustainable products that can be made that are also, you know, compliant on. And you know, I think there definitely are answers to that. But I think it’s not well thought out enough. Um, and I guess, you know, shameless plug for us is, you know, you can visit us online at alamedaresearch.com. Uh, and, uh, if you’re interested in over the counter trading, you can visit us at Alamedaotc.com.