The Exchange for Entrepreneurs™ Podcast

Jai Waterman on Building Fair and Compliant Securities Markets with Blockchain | #HashtagFinance

April 22, 2019 Public Entrepreneur Episode 10
The Exchange for Entrepreneurs™ Podcast
Jai Waterman on Building Fair and Compliant Securities Markets with Blockchain | #HashtagFinance
Show Notes Transcript

Blockstation's Jai Waterman sat down with Barrington Miller to discuss the inherent flaws of initial coin offerings (ICOs) (3:30), how his team is working hard to evolve the capabilities of stock exchanges by introducing blockchain-enabled securities (8:45), and the promise of unparalleled security through security tokens (15:15). Listen until the end to hear Jai's thoughts on how traditionally illiquid assets (e.g. publishing rights) can achieve liquidity with the help of blockchain technology, and Blockstation's recent announcements with the Barbados and Jamaica Stock Exchanges.

Speaker 1:

I'm your host Barry to Miller. And welcome to another edition of Hashtag finance brought to you by public entrepreneur. Today I'm here with Jay Waterman from box station. Um, Jay Waterman is the chief enterprise architect of block station. What does that mean? What do you do?

Speaker 2:

All blocks station basically is a enterprise turnkey solution so that stock exchanges can basically offer digital assets. And our platform basically allows the entire ecosystem, so the stock exchange to depository the brokers, the investors, and as well as the regulators to all get into that system to have a fear of compliant marketplace for the future. Avoid securities will be.

Speaker 1:

So I rubbed out. You're the inventor and creator of Cross company automation. Uh, when I tried reading about whether it was, um, I think it's best to just have you explain what you invented.

Speaker 2:

Okay, cool. So I mean, I'm basically just because just imagine if I send you an invoice, you've got to go and have your bookkeeper and to that invoice has a bill. Right. And then, um, so what we did with cross company automation is we connect the different companies together. So if I invoice you, that can automatically be your bill, right? And when you make your payment, that automatically becomes my receive payment. And then we can also write all of these transactions to the blockchain so that everything becomes very transparent and everything is reconciled, not only internally with one company but across all companies. And so it makes auditing processes more efficient and it also reduces errors and time spent on bookkeeping.

Speaker 1:

So this was the, uh, the basis of bark station will,

Speaker 2:

that's actually, that's actually what Kinda got me into block station because I was on doing this automation process and we can automate the payments as well. Like in Canada, we have EFT in the use of Ach, but internationally there's no option, right? So when I learned about bitcoin in its abilities to transfer money, you know, internationally, I was like, Whoa, this is something that's going to actually allow this cross company automation to, to really work internationally. I just need to get this, uh, this blockchain thing, you know, mainstream. And that was kind of, we're blocked station came into the picture of starting to develop this for the stock exchanges, which is the center of the financial industry.

Speaker 1:

Wonderful. Wonderful. All of this start to come together and like how long has mark station been around? So

Speaker 2:

started a developing back in 2014. Um, and started with the idea of, you know, initially the idea just to help that cross company automation process as I dug in and got more into it, um, of course it turned into something a lot more what was expected and as we started to work with the stock exchange does and learn about how the depository and there, you know, how they have to keep custody of the assets in order to make sure to uh, mitigate the settlement risk. And uh, basically step by step, kind of building out all the different pieces of the ecosystem to make everything work together in a turnkey solution. Um, it's 10 turn out to be a lot more than one. I signed up for it, but a very, very happy with the results. And it's basically, you know, helping to move stock exchanges into the future.

Speaker 1:

Uh, speaking about moving stock exchangers into the future, there's a few few letters that are being thrown around I studios as trios. Uh, can you speak a little bit about it? For the people that may not know what an ICO or an Sto was? So

Speaker 2:

I see, oh, this is what we call an initial coin offering. And they were, uh, they were basically like kind of, you can say it's kind of like the idea of an IPO except for these are coins on the blockchain. Now the problem that happened with the ICO is, is that it was in a completely unregulated environment. Um, you know, people who are buying these coins didn't necessarily have any rights. So if you bought shares in a company, you have maybe some voting rights, you have ownership, you have these different things. But what the ICO, you didn't necessarily have anything at all. Um, and so this is a big problem as well as you had no regulation or oversight and it wasn't in safe environments. So you had people doing scams, some people getting ripped off. Um, and but what was great about it was what it demonstrated was the power of the blockchain essentially. And what it showed is that if you're raising capital using blockchain technology, suddenly you can open your doors and be very inclusive in terms of who can participate. For example, if a somebody in let's say India wanting to participate and uh, and uh, and uh, offering those happening in Canada and they wanted to do a bank transfer my custom $100 to send $100, right? But with the blockchain, if you are sending some bitcoin or ethereum, that hundred dollars might cost you 50 cents. So suddenly you open up the doors and companies are suddenly raising tens of millions, hundreds of millions of dollars. Now, if we take that and we put it in a proper regulated environment with the correct compliance, the right oversight in the, you know, with the stock exchanges, now we can create something we call the sto security token offering where people can have trust in what they're buying because they understand that the stock exchanges involved, they understand that there's security, cause the depository is, you know, holding on to the, to the assets they understand is regulatory oversight. They're making the deposits were broker dealers. And so everything changes when you put it in a, in Nice regulated environment. And, uh, another cool thing about the steels for example, is the power to mitigate risk for the regulators, for, uh, things like, uh, insider trading. Okay. So let's say Martha Stewart, one of the most famous insider trading situation,

Speaker 1:

and we're just using this as an example.

Speaker 2:

Yeah. So, uh, you know, unfortunately for the consumers who are not insiders, they're going to find out about these things three months, six months, a year later after they've already lost their value with the blockchain. Just imagine that we could put all insiders, uh, uh, tokens inside of a marked wallet. Okay. And once we see an insider or the regulators see an insight or move their tokens onto the exchange for trading, everybody knows in real time. So also gives the regulators a lot of power and a lot of risk mitigation as well as the, the end investors. It gives them protection because they can see what's going on. So there's all these things that are built into the blockchain that makes it a lot more powerful.

Speaker 1:

Uh, when I last saw you during our presentation or about you gave, um, you were using some props, you are using some ski masks and burgers entering and, um, and the like, which, uh, which we can't really get through on a, on a podcast. But if you, uh, if you, if you've got a chance to reenact with at some point, I'm sure the audience would appreciate it. Um, why are icefields dying and Stos are the future?

Speaker 2:

Well, I see you as a dying again because of that regulatory compliant. Uh, you know, compliance that was missing in it, right? You had companies that were spinning up putting out these ISOS, people were excited about it because of the technology, the blockchain behind it. So they kind of just rushed in, kind of like the Internet boom, right? People get excited and they do things without necessarily thinking. And so when people realize that, hey, I'm buying this coin and I don't have any rights, is not nothing behind this company, there's no protection. Then after a while this is going to eventually die off naturally as things come to the light. Uh, and what, but again, what that showed us that showed the traditional financial institutions and the stock exchanges that hey, this is a powerful mechanism for raising capital. Even though these ICO guys were bandits and masks and all that kind of stuff. Uh, the, it kind of opened up everybody's eyes into what the potential could be and for, you know, for issuers who want to raise capital issues, want to open their doors and raise capital from an, you know, have a bigger reach. Right. And one of the things the blockchain provides is that transparency. So if I'm a, if I'm an investor and I want to, you know, know a company's market cap and a traditional exchange, we have a quarterly reporting. So I might know what the, the market cap is three, four months in arrears, but with the blockchain as new tokens are issued, I can know that in real time. This is just an example of the transparency, right? Right. So as an investor, I like the transparency and so I'm more likely to invest in a company that provides that transparency. And so issuers like it because not only that transparency but it's efficient, it opens it up to the world where they can now, you know, um, taken funds from come from companies and people across the globe and of course stock exchanges want to support the issuers. So the stock exchanges now including, you know, I know the CSC

Speaker 1:

as shit,

Speaker 2:

you know, that's one thing I really admire is one, stock exchanges are actually taking the initiative to do something. It's, it's awesome.

Speaker 1:

What are the challenges? What are the challenges going to be of making this US tls mainstream?

Speaker 2:

I think the, the main challenges is the education part. Um, because what happens is when we go into a new region, the, uh, regulators generally have a misconception of what the blockchain is. They think that it's something where it's completely anonymous, but the reality is the blockchain gives us the most transparent, um, you know, ledger in the world. So we look at it in terms of there's three levels of transparency in terms of transaction. The lowest level, we call it opaque. Imagine a guy goes into the bank, he deposits his cash. Would you,

Speaker 1:

here it comes from ascot or from my uncle. We don't know where he got it from. Right, right.

Speaker 2:

And then you got translucent, right? This was like a bank wire. Okay. So why it comes in and the bank can clearly see it came from let's say China. Okay. Oh, we don't really know exactly where it came from. Beyond that without deep digging. And then you got the blockchain. What the blockchain in the right framework that you cannot just only see that it came from China or from China, came from the same Malaysia and from Malaysia came from North Korea, which was sanctioned. And so as an institution we can see that, hey, you know what, we're not necessarily comfortable with this transaction or not comfortable with this client. And then they can do something in terms of risk mitigation. And so when we demonstrate that, like actually on the software, we demonstrate that to the regulators and they're like, whoa. When they realize that they have better transparency, betters, mitigation, better, uh, ability to, uh, regulate and protect the consumers, then that blockage goes away. The, so this is, that's the number one thing is educating the regulators. I think the second thing is the legacy systems. So a lot of stock exchanges, uh, brokers, they already have their legacy systems. They spent a lot of time and money on it. So it's not so easy for them to just switch over. It's actually easier to go into a region, this, this, you know, less or, or, or nothing at all. And we can spend everything up in a couple of days. Uh, all the, all the processes and procedures kind of follow the same thing that the existing ecosystem follows. So the learning curve is, is low. And again, I think those are the two main challenges is that education part. And um, you know, having guys kind of let go of the legacy systems.

Speaker 1:

Now if I'm just sort of jumping around, if, how long would it take you or block station to set up, um, at a, at a stock exchange to, uh, so you had a system that's been in place for 50 years, 75 years, and then block station comes in, doesn't analysis, it doesn't matter. Does it depend? Is there, is there like a cookie cutter?

Speaker 2:

Our favorite thing to do is, is is this, there's this system already in place, keep that system running and set up a parallel system. So we actually did a case study in Barbados where we went and we trained the brokers to stock exchange the depository as well as presenting to the regulators to get their approval to go for it. And we did this all in five days where everybody was comfortable in terms of clearing settlement, trading, monitoring everything together. Again, this is because we modeled things after what's already existing, right? The differences. We added the blockchain into it to give the that extra boost per se. Um, so again, we could actually do it within five days. Uh, there is no issue from a technology perspective. It's more like, uh, how long is it going to take for everybody to come on board and how long is it going to take for the regulators to give that green light to move forward, let's say into a pilot stage

Speaker 1:

block. The block has been around for a lot longer than people realize. Um, but it's only seems recently that they're really catching arm for all the two says. I've been telling people that it's not necessarily there to make people money, but it's to save people money and to become more efficient. And uh, I think people are starting to really catch on about, um, will they replace conventional financial instruments or exist alongside sort of like how you build bark station parallel. We'll be other exchanges.

Speaker 2:

The way I look at it as Kinda like a, a newspaper or a magazine and you know, moving to having a website. So you know, you still going to have some newspapers and magazines that exist, but ultimately the majority of the content is on the web and there's obviously because of the web has more efficiency, is less cost of course. Right. So this is the exact same thing that I see with the blockchain is that we're going to have some securities. I will remain in paper, some will remained in its existing digital form and the majority of them will eventually move to the blockchain.

Speaker 1:

What about hacking purity? Those are, those are all buzzwords. Cyber, cyber security, cyber crime. Well, somebody hack the blockchain and take all my shares while it's in transit. I'm just using various examples, but, uh, I think you got what I'm trying to, sorry.

Speaker 2:

Question. So I mean with a security tokens, so I mean with let's say something like Bitcoin, right? Uh, with Bitcoin, if you lost your private keys, then unfortunately you're, you would be out of luck. Okay. Or if somebody hacked and got your private keys, you'd be out of luck. So with block station, what we do is we make sure it's impossible to hack, right?

Speaker 1:

Yeah.

Speaker 2:

And somebody hacked this piece of paper. It's not online. You can't have something that's online. So simply you keep it offline and it can't be hacked now it could be stolen. And so what you do to to, to prevent or mitigate that risk. As you distribute, you have a distributed key system. So you have five keys distributor across multiple entities. So for example, the broker might have a key, the stock exchange has a key. The depository has a key. We have a key. And so you need, for example, three out of five keys to sign. So even if you know, God forbid, one of those guys in the ski bass came in and said, give me all your private keys, or they're not going to get anything because they're going to have to do an ocean's 11 [inaudible] 12 situation, be in multiple places, multiple countries at the same time get the keys. It's extremely difficult. And so the processes that we put in place allows us to have 100% insurance against those digital assets, which is awesome. Uh, which is actually more than you have on your cash inside of trading accounts apparently, which is, I learned that recently. CDIC and FDAC, they don't, they don't, uh, insured cash and trading accounts, which was interesting. So, so in terms of security, you know, that's, that's locked down. And with security tokens we have the ability to burn the old tokens and issue new ones. So if you said, hey, my toe, you know, I lost my keys or somebody stole my keys or whatever the case is, we could silky, you know, what all the, all of your tokens and that address, we're going to burn them and we're going to reissue new ones.

Speaker 1:

How do you burn them? Just a lighter paper.

Speaker 2:

So there's, uh, there's, uh, basically it's, uh, there's a, I guess a method on the blockchain that, that, uh, on, uh, on our eight 84 protocols. So, for example, with the theory comes eight 84 protocol, we were able burn a burn the old ones and issue new ones. So just like you can issue them, you can put them back into the treasury per se.

Speaker 1:

Who benefits from a doctor? Stls,

Speaker 2:

I think the entire ecosystem. I think that basically, first of all, I think the, the issuers, number one, okay. Because they are trading their, uh, their, their company to be more transparent. Okay. They're opening themselves up to be able to raise more capital or add a better valuation because they have a bigger pool of capital that they can raise a, so that's more beneficial for them. Um, they have, um, the investors, it benefits them because again, they can have more transparency into what they're doing or what they're investing in. Also, they can invest in more opportunities. There's a whole bunch of illiquid assets that are now going to become very liquid with the blockchain. Things such as, you know, it could be, uh, properties. So just imagine you got a building that you bought it, it's going to be locked up for some period of time until it gets to a certain phase that could be trading on a daily basis where you can be going in and out and have the liquidity. You have, let's say publishing rates. Usually these kind of publishing rights contracts are worth huge amounts of money and they sit there until the new big buyer comes along. These could be trading on a regular basis. So there's a lot of different assets that are not liquid that will suddenly become liquid and these investors can now get in. It's makes it more inclusive. It's more beneficial to the stock exchange because again, it makes the clearing and settlement process a lot better and more transparent. And I believe it's more secure as well. Um, which is, you guys must have the same thought process, which is why you guys are going down that road. And so, um, it benefits the, you know, the Stock Exchange as well, uh, benefits. The regulators, again, they have stronger, uh, transparency in terms of transactions. They have the more ability to prevent insider trading. They have all these different tools that are available then to them through the blockchain, which they wouldn't have in a traditional, uh, traditional manner.

Speaker 1:

So block station has announced some new projects. I guess the big one was worth the Jamaicans starker strange. Would you care to or to tell us a little bit about that?

Speaker 2:

Oh, we've been working with the Jamaica Stock Exchange for probably about a year and a half now. Uh, and basically when I went through a number of phases from Beta to testing to, to actually alive live pilot and a, the stages yet we're moving into right now is a phase two of the life pilot, uh, where the broker dealers will start accepting retail clients to set up accounts and start trading bitcoin and ethereum on the stock exchange, which is really cool.

Speaker 1:

Wow. No, that's awesome. Um, when I was doing a little bit of background research, I came across a, an estimated valuation for block chain, which you promptly corrected me on. Um, so at the time it said it was about 41 million. And uh, can you tell us where you're at now?

Speaker 2:

So our valuation right now is around 50 million us. Um, so we're just completing a capital raise right now actually, uh, uh, two phases. We're doing an internal family and friends for 1 million and then we're going to do another capital Lori's for $4 million a and w and then after that we want to be uh, one of the first security token offerings on a national stock exchange, which was set up to do it because we're working with all these stock exchanges around the world.

Speaker 1:

Well I know one that might be interesting. Thank you Joe for taking the time to tell us a little bit about block station and STLs are [inaudible] and the entire like, um, this has been another episode of Hashtag Finance, I'm your host parents Miller and I was here with Jerry Waterman. Thank you.

Speaker 3:

Hi. It's grapes from the CFC reminding you to make sure to follow us on social media for the latest updates on our listed companies as well as new listing alerts. For more in depth content, be sure to pick up our free quarterly magazine, public entrepreneurial available online@thecsc.com.