Hey Gari, this is Tim Macrae from Muirfield.
Hey Tim, how are you?
I’m great, how are you?
Pretty good, not too bad. I’m up in Montreal for the Linux Foundation Hyperledger Hackfest event.
That’s awesome, I saw an article yesterday about Hyperledger and the Enterprise Ethereum Alliance working towards interoperable solutions for their blockchains. Sounds like you guys have some big things in the works.
As you know, I’ve got a few questions here for us to talk about blockchain/Muirfield, so, to get started, can you talk about your role at IBM and the blockchain projects that you’ve been working on?
Yeah sure, so right now I’m the CTO for the blockchain platform at IBM. Our strategy is broken up into a few pieces. On the technology side, we were the initial contributors and continue to maintain a product called Hyperledger Fabric – it’s under the Hyperledger Organization umbrella started by the Linux Foundation, fully open source. The organization includes a wide range of members – from financial institutions to startups etc. Our focus at IBM has been on what we’re calling ‘enterprise blockchain’, so not necessarily the typical sort of Bitcoin and Ethereum space, but more on private blockchain implementations.
We also run our ‘blockchain-as-a-service’ product and build several solutions on top of that. Probably the biggest ones that you’ve heard of are things like IBM Food Trust, a food provenance use-case with Wal-Mart and its suppliers; another is TradeLens, a tracking and security solution that we’ve been working on with the global shipping company, Maersk; and we’re also working on a few different trade finance solutions – probably the most notable being a clearing/settlement solution for a consortium of big banks (Citi, Barclays, and a few others) that we’ve partnered with CLS to create. So, those use-cases have all been great.
As the space continues to advance, I think there will be more and more people actually looking at regulation and rules etc. – like what Muirfield is doing with its EVER offering and clearly defining it within the context of securities laws.
Right now, the space is starting to see the possibilities for the trading of non-financial assets and actually settling them out. To that end, we’re starting to look at doing more work with tokens, both within our own platform as well as with the other standards that are already out there. Currently, there are a number of standards that are defined as ERCs or as EIPs, (Ethereum Improvement Proposals). There’s ERC20 and there are a few others that are coming down the road. So, for us, it’s starting to make sense to look at how we can get all this stuff working together.
If we’re going to have multiple chains, multiple exchanges, etc., there’s always going to be a common protocol or at least a common spec that you could implement or that people can strive to implement. Part of the EEA, the Enterprise Ethereum Alliance, is trying to do that with Ethereum based solutions. So, it makes sense for us to keep an eye on that and track towards that with them, so that’s the interesting part about the Hyperledger EEA announcement. We’ve already had, for example, integration with Ethereum in Hyperledger Fabric itself. We can run the virtual machine. So that was a starting point.
That’s great, sounds like you’ve been busy with a lot of interesting projects.
As you know, Muirfield will be using the Ethereum blockchain and issuing an ERC20 token using AlphaPoint’s RABT framework. Can you give us a little more context around the Ethereum blockchain and what advantages that has for Muirfield?
One of the major motivating factors for doing EVER, as a token, is to figure out a way to increase liquidity for private equity investors and improve the way investment managers can manage real estate assets. So, using a blockchain is the best approach for that. Currently, Ethereum, or the Ethereum mainnet, is pretty much the de facto/most popular platform for actually issuing tokens, and it’s important for Muirfield’s token to be accessible to a wide range of people and exchanges.
ERC20 is a standard mechanism for defining a token on the Ethereum network, and it allows you to include rules for transfer, initial issuance, etc., and there are a whole bunch of other features that are already built into that. The AlphaPoint RABT framework was built to ensure that tokens adhere to US securities laws, so the logic for that will be coded into EVER itself.
And, more importantly, almost every exchange out there has a way to interface with ERC20 tokens on the Ethereum blockchain. So, once you decide what exchanges you want to make your token available to, depending on the rules, jurisdictions, etc., you have the ability to publish this thing out to a wide array of crypto exchanges without much of a problem.
Absolutely, a lot of the top 100 traded cryptos are running on the Ethereum blockchain as ERC20s, and I know that some of the larger companies, such as Amazon, are working on tools to enable enterprise integration for applications on top of Ethereum (AWS example).
Moving on, smart contracts are a term that are widely used, yet often misunderstood when people talk about blockchain. Can you talk a little bit about smart contracts and what they mean in the context of Muirfield’s EVER token?
So smart contracts — I guess on the most technical side, the easiest way to describe them would be within code, right; rather than having people be responsible for following the right processes, etc., specific to certain assets, smart contracts are self-executing code that enforce the terms and conditions of agreements between one or more parties. Smart contracts have kind of been around for a while. As I said, they’re self-executing code. However, they’re really important when it comes to blockchain, and this is what is really allowing the space to expand beyond bitcoin – in the sense that they allow you to add distributed logic that’s going to be required to validate specific kinds of transactions.
In the case of the EVER token, for example, you wouldn’t just want a simple rule that says, “if I own this token, I can transfer it to somebody else”. Right, that’s a simple rule that’s pretty easy to build, and you don’t really need a smart contract for that. But, if I also need to have rules such as; poll the number of other investors of a certain class; are you buying within a certain period; what’s the pricing; are you on the white list; all the things required in terms of regulation – smart contracts are the way that that logic is actually going to be implemented and enforced on the blockchain, and in this case, on the Ethereum mainnet.
Thank you for explaining that. Let’s keep rolling through; in the blockchain space, there’s been a lot of discussion around defining ‘security tokens’ vs. ‘utility tokens’. In the case of EVER, it’s going to be clearly defined as a digital security that’s compliant with SEC regulations.
You’ve already touched on this a bit in your answers so far, but any other points to add on coding SEC compliance?
Yeah, and by the way this is one of the things that actually excites me about EVER as opposed to a lot of the ICOs that are out there, is that I actually think that this is a great market for it. The nice thing about smart contracts in this particular case is that there’s very clear, or at least defined, regulations for achieving SEC compliance. Especially if you’re looking at Regulation D and Regulation S of the Securities Act. So critical things include, as I mentioned earlier, white listing – who’s allowed to invest, potentially maintaining internal capitalization tables to prove that you have the right mix of investors – foreign vs. accredited U.S. investors, etc. It’s really important to make sure that if you’re going to be compliant with SEC regulations, you can actually transform those rules from the SEC into executable logic. And the nice thing is that they, generally-speaking, fit into the flow of the ERC20 token standard, and then you just have to implement this logic at the right interception points – which is what AlphaPoint is working on with their RABT framework. So, it’s actually really exciting to be able to do this. And I think the emerging field of ERC20s and moving those into security token offerings or STOs, is going to be a game changer.
Do you have anything to add about the ability for users or investors to actually hold the tokens themselves with their own private keys? Or about the ability for third-parties to custody EVER?
Yeah, definitely. So, I think that’s another interesting thing that’s happening out there. In a number of cases, while some people are kind of using blockchain, they’re still going through a lot of middlemen anyways. And that’s not always a bad thing, and a lot of places still don’t want to break that part out. In the case of EVER, it is absolutely possible for an individual to hold their own tokens, and in fact, I highly recommend it, at least when you’re not on the trading front.
So, from the technical perspective, we white-list accounts and addresses, and transactions can happen peer-to-peer between those accounts – subject to the rules coded into the smart contracts, and Muirfield, as the manager, has the ability to pull that information down and see how the tokens are being distributed. You can absolutely have your own private key and wallet, and trading off exchange might be a bit harder, but from the technical perspective, it’s definitely possible.
When it comes down to the point of exchange, we’re going to see the emergence of more decentralized exchanges where individuals hold on to their own keys. Things like Open Finance are all here for now, and even in the short term, if you had to make an exchange you could transfer only a small amount of assets to the custody of one of the exchanges. But generally speaking, on a day to day basis you would be holding the asset yourself. You have the ability to hold the assets and your own private key. Nobody else has custody. And that is the whole power of the decentralized exchanges and token offerings.
So, in terms of the way that traditional securities are traded and transacted, that’s usually done through the Nasdaq or the New York Stock Exchange, and there’s a cost associated with brokering those trades, right?
So now, with the tokenization of securities and the emergence of security tokens, what will that do to the securities market, and what will it do to the cost for an individual to transfer or exchange a security? And what about on the speed and security side as well?
Yeah, no problem. So, there’s two interesting things that happen in stocks that people typically trade. Traditionally, most people are not direct investors, and most people don’t have direct access to initial offerings – even for things that are issued on normal trading platforms.
Almost everybody has to go through some sort of brokerage to invest. Even if you’re picking stocks yourself, you’re transferring money into your account, you’re managing your accounts, you’re executing trades, you’re waiting for those trades to go through – technically those brokerages are beneath the scenes trying to batch all those trades optimized in a way for them to make money. If you’re lucky, your trades get cleared and you buy and sell at the price that you wanted to, but sometimes you don’t, and there are usually fees involved along the way. If you’re a really high-end investor, and the cost associated with exchanging is marginal, maybe this works and everything’s okay. But, it’s tough for your average person to get in and trade efficiently.
When we move securities to a blockchain, we’ve essentially created a way to remove the middlemen. We no longer have to have somebody who can buffer and broker both sides of the trade. Meaning, I can guarantee that if I give you X you’re going to give me Y. What you really want is to make sure that I can actually make that action instantaneous and what I would call ‘atomic’, meaning, ‘you only get Y if I give you X’. The blockchain and smart contracts actually enable this to happen, so, it’s going to increase both the potential for what investors can get to this and how fast they can get to it. As for speed, trades can happen in near real time. The finality on the blockchain may in some situations be a little bit slower, depending on which one you use, but again, it has the potential to be much more efficient for the individual than what we have today with traditional brokerages.
I think there’s still some time before we move away from brokerages, but what’s important to highlight here is that in the case of EVER and private equity, there hasn’t historically been a good way to trade this type of security to begin with. Using the right terms, investments in private equity typically needs to be held to maturity, right? Whether it’s a 5, 7, or 10-year term, being able to do any kind of trading in the midst of that is pretty restrictive, — I actually don’t know the specific details about how that works today, but I know it isn’t easy, and I imagine there’s a lot of paperwork or resources expended — they’ve historically been very illiquid assets. It’s not easy to trade or get out of them. You’re vested in the term.
Now, if we move to this system to the blockchain, where we can actually tokenize the asset, and we no longer have to wait through maturity cycles to get into or out of an investment in private equity. If things are going great, people can now realize parts of their investment earlier and on their own timeline by selling tokens, and new people could potentially have the opportunity to buy in. So, from that perspective you’re looking at something where someone sees a return before the typical 7-year cycle and maybe someone even gets a chance to buy in after two years, instead of having to wait for the next opportunity. And this can happen almost instantaneously, right — if things are going in one direction or another, I now have this more or less real time liquidity for that asset.
And then on the security side, clearly the blockchain itself provides the ability to no longer have middlemen. As for the cost of a transaction, you’re essentially paying for the effort it takes for the blockchain to process and validate the transaction. It’s essentially just the fuel for processing a transaction, which over time we’ll generally see going down. But you’re not looking at losing seven dollars per trade or whatever, it’s much less than that, and especially when it comes to off-cycle private equity transactions that can lose up to 25 percent in today’s processes. So, from that perspective, the overall cost of doing exchanges is fractional.
Great. That was good to bring this back to the private equity use-case from the broader securities markets. Thank you.
What is the most exciting feature of the Muirfield offering to you?
First, from the technology perspective, the mere fact that you are actually issuing a security token is in-and-of itself exciting. Doing one that’s SEC compliant, asset backed, etc. is very powerful. From the Muirfield side, getting to know the team and bringing together the ecosystem of players, and to actually get all of this working, seeing that it’s fully possible, from a certified and qualified team, to create a security token offering, that’s actually very exciting and game changing and proves that it can be done. There will always be naysayers who’ll tell you that you can’t do something – that it’s going to be too hard if we have regulation. And this proves that one, it can be done, if you have the will to do it, and two, that it’s the perfect use of the technology.
I like anything that can actually change an industry. I think if you look more broadly at like regular stocks, I’m not sure that that’s going to have as great of a change. And it’s a more complicated problem. But when I look at some of these longer-term assets, private equity in particular, that haven’t historically been liquid, this is the right market for it. Tokenizing these assets not only makes a lot of sense for the people that are already invested, but it also helps bring this market to more people than it would have ever been available to before. And that’s a great thing – using technology to innovate in business and actually drive more economic power and spending going forward.
If you’ve got time for one more, would love to hear your thoughts on blockchain education. I’ve been reading, and recently got a call from a student at Middlebury, about increased academic interest in the topic. It seems like the idea of ‘blockchain’, or learning about blockchain technology, is becoming more and more prevalent. Anything to add on the importance of blockchain education, and if you were to give advice to someone interested in learning more about blockchain today, what advice would you give them?
Yeah, haha, sounds like a loaded question… Yes, you know recently there definitely seems to be more demand out there for people who understand blockchain. I think there’s some interesting things going on. I’ve heard that people are looking for MBAs that potentially have some knowledge of blockchain, which I think is an interesting combination. And then I think from the computer science perspective, distributed computing has kind of been a topic for a while, but probably not studied in mass by a lot of people. But now, I think ‘blockchain’ gives some sort of tangible aspect to the broader topic of distributed computing. I think it makes sense to give students some practical examples or some way to put everything together. And obviously, hopefully, it should be relevant to things that are emerging in the world, and blockchain certainly fits into that.
My advice to people is sort of twofold – my advice to technical people is to try and learn something about business, unless you just want to write code all your life; and my advice to non-technical people is to learn something, or at least try to understand how the technology actually works, how the code processed, so that you can understand what is possible.
I spoke at one university, a club that was meeting there, and my advice to people was that if you want to fundamentally understand the power and use-cases of blockchain — all of the stuff about liquidity and how financial markets work etc., then you fundamentally should understand how money works. Start with understanding basic economic theory, understanding the velocity of money etc., because if you don’t understand those things, then you’re not going to understand how to apply and innovate with this technology. And then the reverse is true too, if you do understand those things but don’t understand how the systems work and how things interconnect, you’re never really going to understand what optimizations and efficiencies can be gained, or what’s even possible to begin with.
So, I think this is one of those interesting cases that gels well for actually understanding both the business and the tech side. Those that can do both, will probably be the most successful.
Alright Gari thank you so much for taking the time. If you’ve got anything to…
That’s why I get paid the big bucks! hahaha. No, I’m just kidding.
That’s great, thank you Gari, any last words?
No, I think we covered everything and I’m pretty psyched. I’m psyched for you guys. I think this is good, and there’s a lot of stuff happening right now. I think this whole market is just starting.
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