Will 2019 be the Year of the Security Token? A Discussion with Juan Hernandez of OpenFinance Network

The initial coin offering (ICO) industry has morphed into the security token offering (STO) industry. This sector shift is due largely to the recognition, alongside the many regulatory enforcement actions, that have compelled digital assets to become compliant within existing securities law. For all intents and purposes, at least in the USA, all crypto assets are securities. At least for the moment.

But being compliant means that strict rules apply and transgressing these rules can be a very big deal as well as costly. To better manage digital securities issued on the blockchain, there is an emerging coterie of innovative young firms seeking to capitalize on what many believe will transform the securities industry.

OpenFinance Network is one of these Fintech firms. In fact, OpenFinannce became the first to launch a live, regulated security token trading platform in the United States. The first security traded was Blockchain Capital (BCAP).

Born out of the Jobs Act of 2012 which legalized multiple forms of online capital formation, OpenFinance founders originally envisioned providing liquidity for more traditional securities. Having suffered through the slow growth of the investment crowdfunding industry, OpenFinance believes that blockchain may be the missing variable in facilitating a new era of smart securities along with much needed liquidity.

OpenFinance Network is a regulated alternative trading system (ATS). This means they have the approval to trade in exempt securities be they digital or otherwise.  OpenFinance has partnered with a litany of other industry platforms, mainly issuance facilitators, such as Harbor, Slice, Huobi, Securitize, Polymath, Republic and more.

OpenFinance enables token-based securities to access compliant secondary market trading – still very much a nascent marketplace. Direct integrations with financial institutions such as broker-dealers, custodians and transfer agents, can provide a bridge to the on-chain crypto capital markets.

Last year, Crowdfund Insider spoke to OpenFinance CEO and founder Juan Hernandez who shared his optimism for the emerging ecosystem. He said that crowdfunding 1.0 did not get as big as they anticipated … “as we all expected it to be…” said Hernandez.

This time he believes it is different.

Hernandez sees a future of “regulation without friction” as there has been too much ink and paper friction in the past. Rules written before widespread use of the telephone still guide the issuance of securities. Legions of securities attorneys trundled through school learning about the 33 and 34 Act. Perhaps it is time for a 202o Securities Modernization Act?

Recently, we caught up with Hernandez for an update. Late last year, OpenFinance Network began trading the first security tokens (issued under Reg D). Will expectations live up to his aspirations?

Our conversation is shared below.

OpenFinance Network launched the first round of trading in Q4 2018 correct? How is that progressing?

Juan Hernandez: It’s been a busy couple of months! We have three listed security tokens on the platform that are actively trading, including Blockchain Capital, and we expect to be listing many more in the coming weeks.

When are the next issuers scheduled to launch?

Juan Hernandez: We have a strict on-boarding and compliance process for every issuer and asset we list on the platform. We are currently working with our next batch of security tokens that are queued up to be listed on the platform, and we expect them to be available on the platform soon.

Everything is Reg D right now – correct? But you expect to trade Reg A+, Reg S, and Reg CF issuers too?

Juan Hernandez: Today we are primarily trading Reg D/Reg S securities, which is a popular pairing that many security token issuers utilize for their primary offering. We see this trend continuing in 2019, although there are some issuers who have begun leveraging Reg CF as well for their offerings.

Reg A+ remains a bit of a question mark since there are currently no Reg A+ security tokens that have been approved by the regulators.

You have partnered with many different platforms – including other “exchanges”. How does that work?

Juan Hernandez: A lot of the platforms that we have partnered with offer services to issuers who are in the process of conducting a tokenized offering. Since our core business is secondary trading of alternative assets, we seek to partner with platforms who help facilitate the primary offering of such alternative assets.

While the majority of our platform partners are currently active within the security token industry, there are others who are still planning their entry into the burgeoning space.

What are the biggest hurdles you are seeing in the tokenized asset sector?

Juan Hernandez: Custody is still a major hurdle in the tokenized asset sector.

Many institutional participants are still waiting for a secure approved solution to this problem, but to date, there hasn’t been a clear answer given. As regulations become more clear, we will see more institutional participation which will help create liquid markets.

What about a standardized protocol for all marketplaces [dealing in digital assets]?

Juan Hernandez: There have been various proposals in the industry to create some kind of standardized protocol, but to date, they have been just that, proposals.

In terms of what we are seeing in the market, several of our partners have protocols that they have published which we are integrating with, including Securitize’s DS-20 protocol and Harbor’s R-Token protocol.

Do you envision a  future of global offerings and global trading?

Juan Hernandez: Yes, cross-border trading is one of the main benefits of tokenized assets, and it is something we are seeing today on the OpenFinance platform.

Traders from many different countries are able to trade with each other on the platform, and the settlement occurs on-chain in a trustless fashion, facilitating global trading in a way that has never been possible before.

What about the idea of tokenizing more non-traditional assets? Will this become a reality?

Juan Hernandez: We have seen some projects begin to tokenize assets like artwork, or intellectual property, but it remains to be seen if this will become commonplace.

Ultimately, it comes down to consumer appetite: is there an audience for investors that want to own a piece of a Fabergé egg?

What are your expectations for 2019 for volume and growth?

Juan Hernandez: Many are already proclaiming 2019 to be the “Year of the Security Token”, and while we firmly believe there will be significant growth in the market this year, we expect it to be largely driven by infrastructure development.

The pipeline of promising projects needs to supported by significant development of key infrastructure in the industry. On our end, we see ourselves primarily as ‘infrastructure builders’ and are excited to continue doing our part to cultivate broader growth in the industry.