Security Tokens...The Future of Crypto? - Interview with Mario Pazos
What are your thoughts on security tokens vs utility tokens and the SEC in 2018? Mario Pazos is definitely an authority in this subject and I had the chance to dive deep into it during this video interview. Let me know what you guys think.
Here are the questions I asked Mario structured as hyperlinks to their respective sections on the video. I added the transcript after that in case you prefer to read!
- How did you get here?
- Do you only invest in ICOs or also post-launch token projects?
- How will security tokens affect institutional/retail traders & exchanges going forward?
- What is one of your standout projects in the crypto space?
- What potential issues will security tokens face due to SEC regulations?
- Final comments
Austin: How's it going everyone, its Austin, and I'm not at the Crypto Playhouse today! I'm actually over at the offices of Security Token Partners and I'll be sitting here with Mario Pazos, we're going to be talking about 2018, the state of the crypto space, and we'll be touching on security tokens, a really hot topic.
Austin: This is Mario Pazos, he's heading up the Security Token Partners group. Last week we did a video on security tokens, and I think it's something that's really going to be changing in the crypto space in 2018. Mario really has been a commanding figure in this transition over to the concentration on security tokens, and looking ahead of the game. So, anywho, Mario it's great to have you here! So we're just going to touch on some of the basics. Obviously, one of the questions I ask everyone in the crypto space: How did you end up here? What were you doing? What grabbed you, and brought you in?
Mario: So, long story long, I would say november 2016, more than a year ago I decided to become an angel investor. In my journey of figuring out which industries to invest, I initially decided to invest in cannabis, out of all the industries right? Because, you know, regulations changed. I saw an opportunity for the market to grow even faster and further. I started due diligence in terms of which companies to invest, and one of the biggest issues i encountered in the industry was the lack of ways of traditional forms of payment, when it comes to purchasing medicinal or recreational cannabis...in the states where it's actually legal. And I found one company that was trying to solve it using blockchain in order to circumvent the current traditional financial markets. Reason being, even though cannabis was legal at the state level, at the federal, as of today actually it's still not legal. Interestingly enough, My journey was supposed to be focused on, and pertaining to cannabis, but I found this company and I felt fascinated by blockchain. And how with the use of blockchain and cryptocurrency you can facilitate the transfer of payments.
Austin: Right.
Mario: That was the first company with which I actually placed my investment, and after that I completely dropped the cannabis industry and concentrated one hundred percent on blockchain. I started reading more about it, I kind of took the red pill, went through the rabbit hole, and after that, no more sleep. It was my world right? And I started out with a very small angel investing firm, it was one hundred and fifty thousand dollars, now it's over... it's worth over five million dollars, which is a great return. And I have a whole portfolio of twelve to fifteen companies that I hold equity, or tokens, or a combination of both. And that's kind of it in a nutshell.
Austin: Now, when you kind of "jumped in", were you actually jumping in on an ICO level or was that already post launch and you were investing in the project itself?
Mario: This was november 2016, the ICO market was not yet that hot, so I was lucky enough, to be honest with you, to invest in equity in the company.
Austin: So it was a direct investment, wow.
Mario: It was a direct investment, in terms of equity. And I was not even expecting to get tokens in return, but as the project progressed and you know, the project actually had a business model that justified a utility token with a real use case, the CEO was kind enough to actually grant the initial investors like myself, the same amount of money worth of investment in the form of tokens.
Austin: The dream days!
Mario: So, actually overnight I was able to double my investment even before the token hit the exchanges. And then of course when I got the liquidity I realized there was big opportunity, I had to take this more seriously. And honestly, that liquidity effect honestly was a gamechanger, and the reason why I actually decided to immerse myself in the industry.
Austin: And I think that, speaking to people that are coming at it from your perspective I think it important. Because as sort of "crypto-head" I get...Im a tech guy, I get stuck in the mode of the tech side of things. You see people talking about ICOs, you see talk about people buying coins, but the reality is, 10 years ago ICOs were clearly not a thing. Your main route of investment was through equity in a company, and I think that you know, as we come round robin that eventually that's going to kind of come back in. The security token thing is really emblematic of that.
But I think it's interesting to see people that got into the crypto space, not because of Bitcoin. Because you ask so many people, why did you get in? And you hear "oh I heard about bitcoin, and it was going to make me money" I think it's interesting to talk to people that are going in on the ground level because they care about the projects, the technology, more than the profits or returns. And you know for us, that's one of the big things we look for. I mean yeah, the profits are great, but the possibilities for growth in so many industries are just unreal. And as I mentioned before, the security token thing is going to change that space. Realistically more for institutional investors, but I do think there will be some filtering down on a consumer level.
But before we even get to the security side, just out of curiosity, do you find yourself strictly targeting icos for investments, or do you still find yourself, you know...you see a project down the line that you didn't know about pre launch, are you still buying in on tokens for projects that you still think have room for growth?
Mario: I still actually focus on projects that have the potential of disrupting certain industries. I have somehow changed my investment profile in a sense that initially i was investing in dapps, and now Im investing in protocols. I'm very focused on trying to figure out "what are the next Ethereum's or Bitcoins of the world? Im looking for products that actually have the potential to have bigger scale and faster transaction speed. That's one of the things that I think could help new use cases that at this point are actually limited with the current infrastructure we have.
Austin: Absolutely
Mario: So that's one of the things that I'm looking at. But I'm mostly focused on right now, in investing in projects in the blockchain space...or not, that are actually looking to raise capital in a "traditional way", but the biggest difference now being that with the issuance of this new instrument; security tokens, this investment can actually be liquid.
Going back to the story I shared with you before, when i started in this industry as an angel investor, my investment thesis was the one of a traditional angel investor. I was expecting liquidity in five to seven years of the moment i made the investment. And i became very spoiled as an investor, I experienced this liquidity and it became very hard for me to actually look at traditional investments and have the same time-price zone. So the merge between the traditional markets, and the capital markets, and the blockchain, its one that now that allows me to continue to do what I want to do, but at the same time get the liquidity. Its the liquidity that blockchain brings through these tokenized assets. And that's the reason why i think this new trend of security tokens is really going to disrupt the capital markets.
For the first time in history were going to be able to have private equity markets liquid, and that's a game changer. If I was I was excited about blockchain and protocols before, which I still am, I'm even more excited about what's going to come next with security tokens.
Austin: Well, one of the things for myself, Im a day trader; I go through altcoins all over the place. And it's...one of the big, funny things to me, is the liquidity. Because the markets are decentralized, there's exchanges all across the board; some projects have liquidity, some projects have none. It was an absolutely hilarious moment for me, I had actually opened up a trade on...I believe it was pac coin or something? But it was on Cryptopia, a smaller market. And it was hilarious because I put in a market order for about five thousand dollars….and it moved the market.
And I scratched my head, and said "you know, there's something wrong". Its funny because that project does have a significant amount of capital, it has a strong team behind it but who is going to go in and take part in a market trade when the liq uidity is just not available? I think a lot of people say "well you know, security tokens aren't going to be great for consumers, and this and that" and i think realistically when you have projects like t-zero that are coming about, when we do have these platforms to trade them...I think it's going to change the investment space but it's also going to change the trading space in a big way as well because it's going to open people up to a much more liquid market that simply was not there in the blockchain space.
As we mentioned, obviously liquidity in the traditional markets is much greater than what you see in cryptos, and security tokens will kind of help you bridge that gap. It's really interesting because on the institutional level you have liquidity that is immediately available, you have something that's going to be SEC compliant. And then on the retail/consumer level your also opening up a greater trading market, that really will appeal more to institutional traders that had trouble trading outside those top 10 market cap coins. And i think moving forward with security exchanges is going to be a big thing, because obviously the protocols are different when dealing with those.
So what are your thoughts on kind of how the security tokens are not going to affect the institutional guys, but also the exchanges, the consumer, the retail levels?
Mario: So in my point of view i think we're experiencing what i like to call wall street 2.0. Everything is, you know, in the process of being built. This market has at least three agents of change that are going to make it happen.
Number one, a new set of investors. That transition from retail crypto investors to big institutional ones that have been staying on the sidelines trying to figure out how to participate in this new ecosystem or market, and have decided not to participate yet because of the fact that they don't really understand the space. They don't know what tokens really are, if there's actually a use case or not, or if its just air with a big hat, speculation. These new offerings having real assets behind them are going to bring in a new set of investors. Agent number one.
Agent number two i think is the projects. Were going to start seeing projects that are going to be brining very interesting projects just by changing the way they raise capital. And they could be blockchain related or not, it doesn't really matter.
And then the third agent of changing is going to be changes in liquidity. And once that happens that's going to be the real game changer. The reason why securities are going to be so disruptive is not just because of the fact that you're digitizing or tokenizing an asset, which in itself is very interesting because you make it fungible and transferrable. But at the same time the fact that investors are going to be able to have liquidity correlated markets which at this point they don't really have. And in addition to that if we get it right and we incentivize these agents of change following regulation we will be able to have access to global markets 24/7/365, which is absolutely incredible. So i can't hold my level of excitement for what's going to come over the next couple of months. I think we're going to start seeing some real use cases and success stories within this year.
Austin: Well and i think one of the big interesting things with all of this is, your first point with institutional money coming in. It’s really been an opposing flow to the traditional...release you're used to in the market in that were actually moving from public to private. Which is almost a beautiful thing because normally you would have private companies working out the kinks, it's going to take a long time before the market is really settled and I think in this situation, moving in reverse it's been this beautiful thing of the public working out the kinks and now when the institutional money is ready to come in they have a much more solid framework than just coming into a brand new asset that really has no background, there's no history to it. And for once the institutions are jumping in with a history, that while spotted is at least built and ther, so there somewhere to jump off from. With launching these security tokens, obviously i know you've had a few projects that you've worked with. I know securitize is one of the big ones your going forward working with, now some of the past projects that you've done….what would you say is one that was a stand out for you, what drew you in on it? For us one of the things were interested in, obviously Ian Balina is a big name in the space….were interested in seeing your thought process on what made you say "this is something to go in on" beyond the usual crypto "oh its cool, its a great project".
Mario: I think I had the moment of awakening maybe eight or nine months ago, maybe a little more than that. It was when i actually read an article from the CEO and founder of SPiCE VC Carlos Domingo. He was talking about how tokenizing VC funds would actually disrupt VC forever, being that now people have the chance to stay long or actually short dependent on the performance of the fund. Its disruptive in itself because of the fact that usually you have big longer periods, and that was very interesting. But what really intrigued me was the fact that this particularly liquid vc actually had the capability to raise capital from all over the world and tokenize an asset that would be highly fungible and highly attractive because of the fact that people are really going to hold these fund managers accountable for the funds. So that awakening was that the platform that he created that was fully compliant to actually raise capital all over the world, was one that could be used and leveraged for any type of issuer out there. And that's where I realized there was a big opportunity to tokenize assets in a compliant fashion worldwide, which hasn't been done yet. That's when i had my moment of awakening, my aha moment.
Austin: And that's what so promising about spice, the concept's been on the table. People have realized the ability, but there have been few that have actually taken the steps to act on it. One of the things i see in the blockchain space so much now is, you have these projects that really started this space. Bitcoin, Ethereum, and they were an all in type thing, the market came afterwards. I think that nowadays we have people that, you know there's a stack of fifty cards on the table, and they say "look what were bringing to the table...we have fifty one cards". And I think it's a bit of a problem, and i think what SPiCE VC did is that they took what everyone was talking about and they were one of the first to actually step in and say "look were done talking, we're going to initiate this and we're not going to do it just as a fund-raise, we're not just going to start a project, were going to be compliant". And I think talking to guys like you, SPiCE VC, any of these people that are more forward thinking, I think is very important because the crypto boom has been exciting. A lot of people made very good money on it, great returns are nice but I'm in it for the techm, I'm in it for the longevity and i think targeting more people that are really going for that long term goal is going to be important. As the SEC comes in and knocks some of these newer ICO's off their high horse, as we look around I think more and more were going to see more ICO's disappear, disappear, disappear. And I don't think well have less ICO's per say, but were going to have more stringent requirements for them. So these people that are hitting the space saying "look we're already thinking about compliance" I think that's huge.
Mario: Right. So when we saw that, we realized that SPiCE VC was more than SPiCE VC. It was actually the platform behind the issuance of this tokenized fund. Carlos Domingo and his team decided to actually spin that off into Securitize, the platform that helps companies issue security tokens. When I saw that was a reality, i realized it was the right time for us to leverage that platform or others so that we can actually help projects start raising capital in a compliant fashion and issue these tokens. And that actually was the stepping stone for what was to come next. The moment that we had the first chance to actually leverage that and bring a company to a market with a security token it was Kairos. And I can talk about them if you want to but the point being is, these stepping stones are being built as we speak and it's just a matter of time for security tokens to actually start taking a big portion of the crypto market. And the years to come potentially even overcome the current utility token market.
Austin: Yeah, I agree completely. And just for those of you that dont know kairos is a very interesting project. I think it's going to be something very revolutionary. They do a lot with facial recognition, I'm not going to go too much into it; hopefully well actually have them over at some point but one of the big things with Kairos is that their initial soft cap for the raise was thirty million I believe?
Mario: Thirty million, right.
Austin: And they walked away with three hundred million?
Mario: Well actually they were raising thirty million dollars, and we had at some point more than one point five billion dollars. Registration was completely oversubscribed. And the reason why I think this is the case of course is, it's an established company, they have an amazing technology, the reputation is very strong, in addition to all those factors that are extremely important, they're fundamentals….Kairos has been one of the first issuers in the world issuing what we like to call a dual token offering. Which is a security token that grants investors access into equity in the company and a portion of stake in this company. And then the utility token that actually has a real use case with a value proposition to the retail market.
Austin: And I mean in the face of regulations in 2018, thats huge! I mean obviously for a traditional company wants to perhaps do a raise for a new project or something like that under the same umbrella, doing a security token and just doing it as a fund-raise obviously has appeals but this concept of that dual release...Being able to have liquid capital but also you have on the consumer level a utility token, you can have investors coming in for that security token, its being traded, there's liquid capital, but you're still appealing to that crypto market. And you're still providing a product that is leveraging blockchain and it's not just tokenization just for the purpose of tokenization. Because I do think we will walk a fine line in 2018 with security tokens. The only thing I've had in my head that's even slightly negative is the idea of "tokenization for the purpose of tokenization". That's a battle I think we're going to have to fight but i think that split concept is going to be huge, it's going to be groundbreaking.
Mario: And it was one that we didn't want to force, it just came naturally. What I'm seeing as well is a lot of companies just trying to push a utility token without a real use case, and as such really using it to raise capital. In this particular case we raise capital kind of in a "traditional way" it just happens to be now with a tokenized asset.
Austin: right
Mario: And that was the capital the money the company needed to run its business plan, but there's also a use case for a utility token, and thats kind of separate from the raise. And that's a good distinction between the security and that utility.
Austin: So obviously I can get spinning and we'll be going in circles forever...but before we finish up here...Going into 2018 obviously security tokens are the big concentration. Do you see any difficulties? Obviously i think that when the SEC does finally come and roll through and start going after some of these new ICO's and utility tokens I think they're probably going to flex pretty hard. They're going to make an example out of whoever they come to first. Do you see any issues with security tokens and the SEC?
Mario: It's very hard to navigate the compliance waters, especially in this space because we're really in the wild wild west.
Austin: We're still defining it!
Mario: It's about to be created, but what I can tell you is that when it comes to security tokens you can actually follow the current jobs act of 2012 and use those exemptions to actually issue securities.
Austin: Ahh, okay
Mario: So we're not trying to reinvent the wheel or waiting for the regulation of security tokens to be compliant; nonetheless I'm very curious, at this point it's very hard for me to determine where the SEC is going to go when it comes to these tokens. To me it's fifty fifty, they can either create a new framework to actually determine what a utility token really is...Kind of similar to how it is particularly for this asset class. And what it's not. And if they do that we might have a chance to have, still a set of investors that might be able to enjoy ICO's that are actual utilities. Or they could go the other way around and completely try to be true to the purpose of the SEC, which is to protect investors.
Austin: Right
Mario: Not letting them participate in these markets whether they are accredited investors or not, if these are actually considered securities. I'm not sure what we should rely upon, but what I am sure of is we have to see what happens with this utility token market right now, there's definitely going to be a shift toward securities and that's going to be a big major shift.
Austin: Yeah, it's going to be very exciting. I think that one of the big considerations obviously as a day trader is this looming question of the SEC. Because you know sometimes when you hear a news article or see something...and you're like "am I going to wake up and my tokens are gone?" And I think as an investor it's going to be huge to be in a place where you can say "okay, it's compliant, no worries" it's hands off, you don't have to concern yourself about that. And I think moving forward obviously to cement cryptocurrency and blockchain tech in the traditional world...you know we see blockchain world, we get tunnel vision eventually. But to normalize this for people I think that you know that's really going to be key...because you know how do you offer an asset class that….volatility is great for traders, but for investors its terrible. So I think that's going to be really important in bridging the gap and bringing it more mainstream. But as you said, it's all guesswork at this point until the SEC actually takes that step and jumps in. But I don't know, 2018 is going to be...it's going to be huge. You know we keep saying its been the wild west and i think a lot of people are saying that times over. I dont think its so much over as its changing how we have to look at things.
Mario: And you know I think if you see the testimony from the chairman of CFTC and the SEC with congress. I wouldn't say that we're friendly, or one hundred percent friendly but they were definitely not against cryptocurrency which is a great statement. Nonetheless they've been signaling some things that are contradictory, like sending subpoenas left and right. I guess they're trying to be...you know, potentially sending a message that regulation is coming. The question is how stringent that regulation will be. And I think at this point nobody really knows. But I do believe that they are conscious of the fact that if they go too hard they're going to generate regulation arbitration. Which means that they could be stifling the innovation in the us.
Austin: Forex Markets
Mario: Yeah exactly you know, what happened with the forex markets. And I think the reality is that the U.S. doesnt want that either. So I think there needs to be a balance and i think they're going to manage it well.
Austin: Yeah, I agree I think….you know I mention Russia a lot because they kind of...Russia and China were your two opposites. China shut down for a while to regulate, Russia said "you know what we're not even going to bother". If we can find that happy medium you know...The days of throwing $10 at an ICO and walking away with a thousand, i don't think they're here anymore, but I think realistically investing in the blockchain space is going to be even more exciting as we bring this in. You know a lot of the crypto heads say "the SEC, we don't want involvement, we don't want this, we don't want that". For me, you know i am a tech guy, that's kind of how I got my segue, through processing transactions with mining units and all that but the more I'm in the space the more I realize you know, there's this group of crypto people that are so centric to the idea that it has to be crypto, it has to be decentralized, it has to be separated from all this, and i don't think they realize they're limiting the scope of blockchains capabilities by doing that. Because if there's never a higher level of social integration….how far can blockchain grow if it's never integrated into your life? So i think this is going to be a significant step in kind of reaching that point:
Mario: Agreed
Austin: But yeah, we'll kind of wrap up here. Anything you want to throw in here at the end? Anything that you're excited about, any projects that have caught your eye or anything before we close up?
Mario: Yeah I just want to mention, maybe one very important thing for us. We as agents of change, us providing advisory investment services for companies that are actually trying to launch security tokens...we want to be very responsible in the space because were on the verge of creating something very revolutionary and disruptive. And we want to make it in such a way that we make it flourish and grow, and really make it what i just said before, wall street 2.0 instead of you know, a nice attempt to change the world and failing at it because we were irresponsible. So in our case in particular were trying to be very selective in terms of the the projects that we work with it because we want to make sure we're still true to the fundamentals of capital raising. Right, we need to be working with great entrepreneurs, real companies, with companies that have strong positions that are trying to solve a real problem, and that they're in this for the long run and not necessarily to just enrich themselves.
Austin: And you know, for us, everyone over here at the Crypto Playhouse, we can't count how many projects come knocking at our door that we turn away. And that's why it's so interesting to talk to people that are kind of on that same level. I won't mention any other names, but there's obviously some other big investors in the ICO space where it's clear that the target is profits. That is the end goal. We hear it all the time in the crypto space "when moon, when lambo" and all that stuff. And I think it's a very limited to scope to come at this with. So you know seeing more and more people enter the space with your mindset, doing what Security Token Partners is doing. And saying "this is a great space, but we have to legitimize it, we have to be compliant", no matter how many tech heads will argue until the end of days. But I think it's really important. I think it's really cool what you guys are doing and it's going to be great to see what comes out of 2018. The advent of security tokens is really going to change the environment.
Mario: And you know you're right i have a lot of friends in the crypto space and they're still looking back at what the space was last year. And trying to go against the current, looking for a way of making it last. But the reality is, in my point of view need to look forward and see what's ahead of us, and what's ahead of us is even more interesting
Austin: absolutely
Mario: Not many people share my point of view and that's fine, I just think its only a matter of time for this to materialize
Austin: Definitely and you know, I think one of the key things to remember is that the crypto space moves so fast. You know we say that in the crypto space, you go a week and you've gone a year in the traditional markets.
Mario: Right, right
Austin: So, you know I think because of that speed, like you said people get almost spoiled to the idea of "oh look, I can flip a switch and a week later I've made profits". But it's so key to keep that real goal in mind. So you know I think that hopefully as more projects like this enter the space well start to see more people that are centered on that long term goal rather than the profits. Because let's be real, profits are nice...It's the tech.
Mario: It's the tech, agreed. And it's interesting talking about speed you know. Maybe we can finish with this point, I was sharing with my wife my view of the future of cryptos and the markets maybe six or seven months ago when I had that rude awakening...and she said you know it's interesting, it will take maybe five to ten years for this to materialize. We're in march in 2018 and I cannot even keep up with all the players coming left and right trying to make this industry happen. From exchanges, to VC funds, people like us doing advisory investment services, issuers that are interested in trying to capitalize and tokenize they're cap tables by issuing security tokens. You know it's going even faster than I expected it to go. And as such it just creates further excitement and valuation that is something really disruptive. Maybe years from now were going to look at each other and say we created a completely whole industry which is crypto private equity.
Austin: Yeah, and well you know I hear people that use the bubble term alot, and I think its funny because from a monetary standpoint, sure there may be some kind of economic bubble that occurs, as we saw with the ICO boom. But to discount the technology and not to think it's the groundwork for something new is short sighted in my opinion.
Mario: Right
Austin: Anyways guys, this was Mario Pazos with Security Token Partners. And you know hopefully we'll actually be doing come follow ups at some point
Mario: Yes, I'd love to.
Austin: Keep your eyes out, there's going to be some big stuff coming out of these guys in 2018.
Mario: Thank you.