This article is written by one of our contributor Stefan Perlebach.
Benjamin Hauser is the CEO of HyperLink Technology, a tech-driven company building its own open source protocol allowing for the issuance, governance, and trading of Security Tokens on the Ethereum Blockchain.
We are pleased having Benjamin as our interview guest.
Tell us about HyperLink Technology. What is your vision and what drives you to work on Security Tokens?
At our heart we’re a group of technophiles and critical thinkers. We’re a lean startup, young and motivated, united by our common interest in blockchain, tokenization, and all the things it entails.
Together we’ve been travelling down the rabbit hole that is decentralization for a few years now and along the way we’ve learned some things. We were in the trenches in 2017 for the ICO bubble. I saw first hand what an unregulated market looks like. I watch every day as countless people who’ve lost everything complain “why did you let me do this?” in public telegram groups, as faded youtube influencers cannibalize one another in futile attempts to remain relevant, as ICO founders distance themselves from their community while flaunting their wealth on instagram.
It feels like we’re at an intersection. Cryptocurrency started as this libertarian movement of sorts, a bunch of young and idealistic cypherpunks who were going to topple the banks. First the powers that be ignored and dismissed us, but we didn’t go away. Then they vilified us, but our numbers only grew. And now here we are, licking our wounds and unsure if we’ve learned a lesson, asking “Why did I give all my money to that obvious scam?” The cryptocurrency world is starting to understand that maybe the SEC isn’t entirely evil, maybe some of those rules about investor protection are actually there to protect investors and not only to hold the little guy down.
For me, when I look at the way things work now and compare the status quo to what’s offered by this new love in my life, all I can see are glaring inefficiencies. Siloed legacy systems built during the cold war, governed by laws written in response to the great depression. Conservatism is prudent when the GDP of nations is at stake, and so the mantra of “if it ain’t broke don’t fix it” seems to make sense. But the growth rate of technology is increasing exponentially. Change is inevitable. To quote Anais Nin, “the time came when the risk to remain tight in a bud was more painful than the risk it took to blossom”.
So HyperLink’s vision? We see an opportunity for disruption on a grand scale. We see a chance not to have a seat at the table, but to play a part in building a new seat and a new table. We’re here because we think that this crazy decentralization stuff might actually reinvent modern finance, and we want to be a part of that.
What is the role of your company within the Security Token Ecosystem? What makes you special?
Our primary focus right now is on the issuance of digital securities, specifically on building the technology to enable it. An important first step in this grand vision is actually having some security tokens to trade, right?
In looking at what others are doing we see areas that we feel are lacking in the industry. All too often we see companies building walled gardens where tokens can only be issued, maintained, and traded within the confines of a single platform. This is the antithesis of interoperability, using blockchain as a marketing ploy without utilizing any of it’s actual benefits. This approach does nothing to advance the industry, and when presented as groundbreaking it has the potential to distract or confuse newcomers who haven’t yet grokked the full potential of what blockchain provides.
Our protocol is open sourced and does not necessitate a utility token. We’re looking to remove gatekeepers and middlemen and foster the growth of an entire ecosystem. Competitors building on our technology stack are welcomed because greater interoperability between projects is a win for the entire industry. The sum is greater than the parts.
Can you name one thing you believe in regard to Security Tokens that most other experts within the industry would disagree with?
Liquidity. Increased liquidity is often touted as a huge benefit of tokenization, but let’s face it: public markets are already highly liquid, and most private companies absolutely do not want their shares trading very often. Especially with a book entry approach there are massive legal implications for issuers when each token transfer is modifying their shareholder registry. We can build the infrastructure to enable it, and impose heavy transfer permissioning requirements in an attempt to ease those concerns, but we’re in such uncharted territory here that no competent legal counsel is going to advise allowing a transfer of ownership based purely on a smart contract deeming the transfer to be OK.
As the industry grows, policy makers gain a deeper understanding of what we’re doing and a body of case law develops in tandem with established rules and guidelines — this may change. But the idea that we’ll flip a switch and trillions of dollars will flow into private equity markets is a wild fantasy.
Please describe a benefit Security Tokens are generating by walking us through a process (step by step) before and after Tokenization/Blockchain came along?
Tokenization implies using a blockchain token as a kind of abstract financial instrument that represents interests or ownership rights relating to the underlying asset. Past that, a security token is still a security with all the rights and limitations contained. Security tokens in no way change the rules of the game, they just upgrade the technology.
When talking about security tokens it is important to differentiate between public and private markets, and I think that for newcomers to the space this isn’t often made clear enough. In my mind the benefits of tokenization are far greater in the public markets, so let’s do an example there.
In the US, publicly traded corporations typically have only one record shareholder, Cede and Company (or just “Cede”). This is a company with no economic rights to the shares it technically owns, formed to more efficiently process stock certificates on behalf of another intermediary with no economic or governance rights, the Depository Trust Company (“DTC”). The DTC sits at the top of a matrix of custodian banks and broker dealers who act as transfer agents for investors to trade security entitlements — rights to and an interest in the securities ultimately held by Cede.
This network of intermediaries grew out of a need to facilitate the timely transfer of securities on a global scale. And it works, but it is far from perfect. Each middleman in the process must be compensated and there are a multitude of opportunities for error due to maliciousness, negligence, or technical difficulty. The term T+2 refers to the number of business days required for a stock trade to be settled. If you are coming from crypto, just imagine the outrage if every time you made a trade on an exchange it took two days for the coin that you bought to arrive in your balance! In the stock market this is the norm.
So the benefit of blockchain in public markets is massive. When we refer to disintermediation, we’re talking about removing all of the middlemen in between the moment you hit “buy” and the time you take possession of your purchase. The use of a shared, immutable ledger makes the vast majority of these agents obsolete, which results in lower costs and quicker trade times.
Of course this is a very simplified picture — it’s not as easy as insert blockchain, press play. The existing institutions that dominate public markets are very well funded and possess strong lobbying power, to say the least. Early iterations of security tokens are largely going to be focused on private equity so this disruption isn’t likely to happen tomorrow. But long term, I think it’s one of the most exciting aspects of what we can accomplish via tokenization. And for HyperLink, private issuance is just the first step. We’re here for the long game and excited to see how it plays out.
What are the biggest challenges to democratize access to capital markets for companies and investors alike? How can Security Tokens help to overcome them?
If we’re talking about public markets the barrier to entry is already fairly low. Almost anyone can buy a share of Apple or Amazon via a broker. Blockchain has the potential to disintermediate that process, make it cheaper and more efficient, but it won’t do much to affect the access.
In the case of privately traded companies, the exemptions laid out by the SEC and other governing bodies severely limit solicitation options and typically restrict access to accredited investors. While blockchain can reduce costs and automate aspects of complying with these regulations, the legal barriers to entry will not be magically relaxed with new technology. Despite what ICOs may have led you believe, becoming accredited isn’t as easy as clicking a checkbox on an online form. Ultimately the same people will be buying and selling — but now with reduced costs and quicker settlement times.
So to answer your question, how can security tokens help overcome barriers to access? Frankly, they can’t. But that doesn’t mean that they won’t some day. Let’s start by building the tech and replacing the archaic legacy systems. Then we can begin to talk in earnest with regulators, and work to update the rules once we have a foot in the door.
At HyperLink, this is more or less what we’re trying to do.
How does the investor protection look like when it comes to Security Tokens? For instance, what do I do if I lose my private key?
This problem already existed long before blockchain, and there are established procedures in place for an investor that loses a stock certificate. Typically it involves contacting the issuer, proving their identity and sometimes placing an indemnity bond. The issuer then places a stop payment on the old certificate and provides the investor with a new one.
Tokenization is no different. An investor who loses a private key simply contacts the issuer and informs them of the loss, and after verifying their identity the issuer either transfers the lost tokens to a new address, or locks them and issues new ones.
If you’re wondering “how can it be that the issuer is able to move the investor’s tokens without controlling their private keys?” — security tokens have an element of centralization baked in. The issuer is not some fly-by-night anonymous developer, it’s a very real company that’s known to its investors and that can be taken to court if it acts in bad faith. There are legal situations that could occur where an issuer is obligated to seize or repossess an investor’s asset. No judge is going to accept “sorry, the smart contract doesn’t allow it ¯_(ツ)_/¯ ” when an issuer is asked to seize the tokens of an investor who has been sanctioned. If a platform cannot do this it should serve as a huge red flag for potential investors.
What is the most exciting happening you are waiting to see in the Security Token Ecosystem within 2019?
I’m fascinated by all the legislative efforts happening in Wyoming. I’d imagined the USA as the last place on earth to allow blockchain native securities, but here we are with Wyoming leading the charge globally. In particular the bill relating to certificated shares as tokens is of huge interest to HyperLink. It’s very exciting.
When will we see Security Tokens hitting a market cap of 1 trillion?
It could happen this year but I don’t know that we’ll hear about it. There’s a disproportionately high level of noise right now, projects that are obviously non-compliant (and often outright scams) where IC was replaced by ST and investing is so simple. Meanwhile most legitimate raises are happening via a 506(b) exemption which forbids general solicitation. I don’t think we’ll have a resource like CoinMarketCap giving an accurate grand total for tokenized assets any time soon.
What’s next for Hyperlink?
We’re almost done building the SFT protocol, at which point we’ll be announcing our business model for it and I’ll personally shift from coding to smiling in photos and shaking hands at conferences. I will be speaking at several events in March, including the BTA Protocol Summit in Bermuda. We’ve got a few announcements coming up — partnerships with companies that share our ethos, new team members and advisors. We’re developing a few ventures in different jurisdictions and very excited to see it all come together. I think it’s going to be a big year for both HyperLink and the security token space as a whole.
Thank you for the interview.