304: Will Crypto Kill the New York Stock Exchange?

Buck: Welcome back to the show, everyone. Today my guest on Wealth Formula Podcast is Douglas Borthwick. He’s the chief business officer of INX Wells. First, I think maybe it is the first SEC registered security token exchange. Douglas, welcome to Wealth Formula Podcast.

Douglas: Thanks very much for having me. It’s great to be here.

Buck: So you’re talking a little bit offline about how when you guys reached out about INX, it was very familiar. I couldn’t figure out what it was. But then I realized we knew that some of the stuff that we were doing with Samson Mao was involved as well. But let’s back up and give me a little bit of background on what exactly INX what problem it’s solving, how it fits into the larger digital currency space and all that.

Douglas: Well, I think that your listeners are probably familiar with Bitcoin and Ethereum or cryptocurrencies. I think the market cap is around $2 trillion. Traditional equities is around $115 trillion. What INX wanted to do was move traditional equities onto the blockchain. Now, we saw ICOs back in 2017, and we thought, this is crazy. People are raising money from the general public, not doing any KYC AML, no registration with the SEC. That’s nuts. And our CEO Shy Datika went to the SEC and said, look, I want to do a full registered security. So full prospectus offering just like Amazon or Nike. But I want to raise capital over a website, as you see, told us we were nuts. We went back and spent 950 days with Ernst and Young and MWE, a law firm in New York, and created the first ever registered security token. This is a digital asset security that settles on the blockchain. And it’s very interesting that respect. But it’s also tradable by not just accredited investors but also by retail investors. We opened up a website. We attracted 7250 investors from 74 countries and raised just shy of $85 million with that capital. We then started a cryptocurrency trading business that’s now open in around 34 US States and territories. And should be open in all of them. We’re hoping by the end of the year, we also bought a broker dealer and ATS and transfer agents called INX securities, and we bought an inter dealer broker. That’s someone that deals directly with banks and derivative products. So we’ve got business lines that go everywhere from cryptocurrencies to digital securities and from retail all the way to large banks. What do we solve? Well, there’s a lot of utility tokens out there. When you look on the Coinbases or Krakens of the world or even finance, you find there’s a lot of tokens that the SEC probably believes are securities and gentler. The SEC chairman has made quite a point of this over the last couple of months in his conversations with the Senate and with Congress. What we’ve done is we’ve created a pathway for folks to instead of issuing, let’s say, a utility token, that really is the security, but in sheep’s clothing. Instead, we go for them a pathway whereby they could register as a security, and that’s either as a private security under Regdregs or as a public security using an F1 or S1 perspective. The first F1 prospectus offering for a security like that was INX. So our belief is that soon every single asset. And this isn’t just my belief. Clayton, who is the ex chairman of the SEC, said this in a speech in Philadelphia, but he sees all assets moving to the blockchain in three to five years, and that was a year ago. So we had to create a pathway. We’ve done that now, and now we’re getting ready to start listing a whole bunch of securities by both public and private, available to retail and accredited investors

Buck: Going to back up real quick. INX stand for something.

Douglas: Well, if you were to break it down to be international exchange.

Buck: Okay. I was also wondering, is INX have its own security token then, or how does that work?

Douglas: We have our own security token. It’s the INX token. We issued it at $0.90 in 2021. I think last year. I think it was the 7th best performing IPO in the United States.

Buck: The irony is, if there’s no Securitized or actually SEC, you create this when there’s actually nothing that you can trade it on legally. Right?

Douglas: You can. That’s why we bought an ATS. So on our ATS or alternative trading system. Retail can on board there directly institutions and other folks, and you can trade it there At securities INX.

Buck: Okay, got it. So let’s go back and break down some of what you talked about before. So the idea underlying this is that, okay, right now, the way a lot of digital currency is handled potentially, I would say even maybe the majority, it’s really the Wild West. You have a lot of decentralized platforms in DeFi and all that is the thesis in a way that maybe these things that are happening out there that the SEC and maybe governments in general are going to crack down on them so significantly that they’re going to need to ultimately move on to platforms that are more kosher. Is that part of the thesis?

Douglas: I wouldn’t say it’s the thesis, I’d say it’s the future. So obviously, I think that governments in general look at your electronic wallet that you keep Bitcoin in or Ethereum or whatever. They see it as being Swiss Bank accounts. They have no idea the wealth you have in there, but you know what they’d like to know and they’d like to tax you on it. So when you see deep five platforms and anonymous people trading with anonymous people with anonymous wallets, that doesn’t bode well with the US government or with other governments. Sure. When you see NFC trading for 20 odd million dollars between two anonymous Ethereum accounts, well, that could be seen by some regulators as being money laundering. And so they want to really close the gap when it comes down to security. And what the SEC’s job is to protect everyday investors. And one way to do that is to make sure that the platforms that are trading these products are regulated in some way, either under FINRA or the SEC, and making sure that everyone that comes through and trades on them go through a KYC and an AML process. And so you’ve seen D five platforms today being used by American citizens. The question is, will they be able to do that in six months time? Now, what will probably happen is that all of these D five platforms will have a regulated area of regulated pool versus an unregulated pool. The unregulated pool may be larger today, but it will probably start to shrink. And as more pools become more regulated, meaning that there’s a KYC AML before you partake in it. Well, I think that then you’ll see them actually start to go significantly because institutions will then finally be able to get involved. And institutions in the United States, the large ones, the large mutual funds, can’t get into trading on any sort of platform that isn’t regulated. And so as we bring regulation and we’ll push bad actors out or offshore, but we’ll bring in all of the institutional money that’s been waiting on the sidelines.

Buck: So let’s talk a little bit about, well, I guess what happens, again, I’m just trying to look at the future here. And when I said it was a thesis and you said it’s just the future, what happens to these DeFi platforms? Because it’s very difficult to crack down on these things. I mean, does it just become prohibited activity punishable by jail time? And just that idea alone is what drives people away from them? Or is it that the regulated market becomes so huge and that’s where the cryptocurrency or digital currency, the mass movement in there essentially makes the DeFi platforms that are unregulated it makes them sort of pointless and small and de minimis.

Douglas: I think that’s certainly a case for that. Institutional investment and involvement is something I think that everyone has been waiting for. Bitcoin is a little bit different. Cryptocurrency a little bit different in that they were really, retail was one of the proponents. Remember, about five years ago, people pointed and said Bitcoin is going to 20,000. And that person had five followers on Twitter. And everyone assumed they lived in their mother’s basement and they had to wear like a metal hat at night to keep her radio waves. Today, it’s the richest man in the world talking about or JPMorgan pointing and saying it’s going to go to $150,000. So things have changed very quickly in the cryptocurrency universe. I think that something like 64% of all Americans today believe that Bitcoin is going to go higher, and they like it. And that’s a huge voter block, and it’s a voter block that cuts across race. It cuts across income level, cuts across many different things that traditionally divide people in America. And now you’re finding States and governors start to adopt Bitcoin and cryptocurrencies in a way that the federal government is now slowly catching up on. But it’s becoming so important that it’s going to become part of America’s way of life. And when it becomes that, then the D Five platform has to adapt or wither. And by adapting, it means taking on KYC and AML responsibilities. But what will probably happen is they’ll have different pools, a pool that is much more regulatory friendly and one that isn’t. And that one that isn’t will be offshore, the one that’s regulatory friendly would be available for US use. And you see that with a lot of products, Americans can trade product called CFDs, contract for difference for currency or things like that. And so lots of products are limited to Americans by regulators in the US, and people will just start getting steered towards regulated platforms. Now, cryptocurrency is very different from, let’s say securities because cryptocurrencies are monitored not by a federal agency, but rather by individual States. And they offer things called money transmitter licenses, where securities come under securities law, and that’s under the SEC and FINRA.

Buck: So let’s distinguish a little bit. I mean, I’m trying to understand kind of what happens here as this migration happens. There are certainly some of the older cryptocurrencies, like Bitcoin and Ethereum, and presumably they’ve been deemed not securities at this point. Right. But I believe outside of those two, I don’t know that there’s been a ruling about anything else. Right. First of all, is that correct?

Douglas: That is correct. There’s one that’s been challenged so far that’s XRP or ripple. Right. And the challenge comes from, did a company start this up, use this, selling the cryptocurrency in order to create money, and then use that money to really start up their business? Right now, there’s lots of protocol tokens that it wouldn’t apply to. That how we test, but certainly it applies to a lot of utility tokens that you see trading on cryptocurrency platforms today. Now, if a cryptocurrency platform is trading a security but doesn’t have a digital assets license or registered with the SEC, that’s where the issue comes in.

Buck: I guess my follow up to that is now looking at some of the major cryptocurrencies outside of Ripple, I’m just looking at some of the things that even that I own, like BNB or Salona. These things most of these did not go through some sort of or maybe I’m wrong on Salona, I don’t know. But I don’t think most of them did go through a Reg D offering, and some of them have got pretty substantial market caps. I mean, what happens? Do those have a pathway to get onto?

Douglas: Would I be able to list the BNB coin? I think that the answer today is no. Okay. If the BNB coin was issued, and I may be wrong here, I’m not a lawyer and this is not financial advice. It was listed in an ICO, and I think they sold something like $15 million of it to retail general public. Now it’s in the hands of hundreds of thousands of people all around the world without a KYC or an AML or let’s say a whitelist involved. So you could trade it with someone else or send it to someone else’s wallet, and BNB wouldn’t know

Buck: Just in general. Would you say then that you guys believe that in the US over a period of six months, six years, whatever, you would not be able to legally trade BNB anymore if that were the case?

Douglas: Yeah, I think that that’s probably a good scenario based upon the conversations that the SEC has been having in that I think it’s very hard once the cat’s out of the bag, it’s hard to get it back in again. That’s right. Here’s an example. Let’s take XRP. XRP is owned by hundreds of thousands people all around the world. Now, if you were to ask triple who owns XRP, they would have no idea. They wouldn’t be able to point to the wallets and say it belongs to this person and that person. Now, when you trade in a regulated environment, you have to know your customer, you have to know who owns it and who owns the whole supply. And so maybe XRP could set it. Maybe Ripple could set up a page that says, look, give us your XRP into this site, and then we’ll issue you XRP security. And XRP security is then something that could be traded on an exchange. But to get XRP security, they also have to go through a perspective, offering a full prospectus, offering a registered security rather than a public security rather than a private security, because it’s obviously more than 2000 holders. So that process would have to go through where they would have a website that someone would deliver it to, then go through KYC AML, receive their XRP security that they could then trade on an ATS like mine. And that’s a lot of work. So far, the regulators haven’t given a path. How do you get through this? How do you do it? And so they haven’t come up with a pathway yet. And so a lot of this is just conjecture.

Buck: Yeah. So the idea also you mentioned with these kinds of platforms is that it won’t be just for you. What we think of right now is just digital currencies, digital tokens. You’re talking about a full on switch with the mainstream equity markets into these kinds of platforms like INX.

Douglas: Yeah. Our view is that every single asset in the United States will migrate onto a digital platform and migrate to become digital securities. The reason being that the current system is very backwards. It was formed a couple hundred years ago, and it hasn’t really changed that much. We look at just the time that it’s open new York stock Exchange 934. Why is that? Well, I’m guessing someone has taken horse and cart in from New Jersey trade morning paper trade, then read the evening paper on the horse and cart back home. Now, we all know that securities can be traded 24 hours a day in the digital realm, they are, but they’re not otherwise. And then let’s look at custody. Traditional ways of custody is you custody that Morgan Stanley in the name of Morgan Stanley holds your equity in the name of you. But Morgan sends a custodian, and then they do something called rehypothecation, where they lend it out to a hedge fund that wants to be short it. Now, I don’t know if you followed GameStop and Reddit, but the discussion there was holding this is crazy. I’m buying something to make it go up. And then the person I’m custodying with is then giving it to someone else who’s sorting it and going against me. Now, with security tokens today, there is no way to short, because what you do is you do self custody. You actually hold it in a MetaMask wallet or in whatever wallet that you want to. But in that regards, it’s not being lent out without necessarily your knowledge. And so there is no shorting today. And so that changes things. How about the way that in the current make up, a hedge fund can kind of sneak up and start to buy 5% of your stock for the issuer. And the issuer doesn’t know until the hedge fund does a filing with the security token. You can watch in lifetime on Etherscan IO and watch as people are buying. You can click on the wallet and you can see how many they’ve already bought when they bought. Are they buying and selling and making markets in this, or are they becoming a whale? Is it a new buyer? The amount of color is tremendous, but also, when the government says, listen, does Joe blogs own your security? Today, Nike couldn’t tell you instantaneously, and so that’s a problem. But with us with a security token, I can tell you what my cap table is in lifetime. I can tell you exactly who owns which tokens. I can freeze them if I’m subpoenaed to by federal authority or state authority. And also, I think that’s huge. But one thing that we did, I think that changed the game a lot is when you own Bitcoin or Ethereum or just an ERC 20 token and you lose your wallet. And we’ve heard these stories before, right? You’ve lost your wallet, you’ve lost your Bitcoin. That doesn’t work for your 401K and it doesn’t work for your IRA, it doesn’t work for your securities because you’re holding a lot of money in the securities as well. You can’t lose all of your Nike because you lost your seed phrase. And so we developed, along with a company called Tokensoft. And while we were working through the SEC process, the ERC standard there, if you lose your wallet, I can revoke from that wallet those lost tokens, and I can reissue them to a new wallet. Or if someone tries to hack your wallet and take them, they could take the Etherium out of it. The USCC, the BNB. But the inexpensive that’s sitting on the 14 four standard would refuse to move. It would look to the blockchain and say, hold on, is the wallet. I’m moving to Whitelisted. And if it’s not, it says, I’m going to see exactly where I am. And so we cut down on a lot of the abuses that you see today and the problems that you see today with cryptocurrencies in general. And the reason we came up with it is because we wanted to sell something to the retail general public, and the retail general public doesn’t want to lose their investment. Now, if you have one of these utility tokens and is sitting in a wallet that could get hacked or it could get stolen or you could lose your wallet, that doesn’t really work. Being in a regulated sense has a lot of positives. So you may have to pay taxes, but I think most people pay taxes in the United States, but you also have that surety of knowing that it’s not going to get lost. We’ve mitigated those circumstances considerably.

Buck: Well, when I think about what you’re talking about, like the Bitcoin purists and blockchain purists, basically, they’re like, this is anathema, like what you’re talking about, like being able to identify who the people are immediately

Douglas: Bitcoin is a cryptocurrency, whereas Nike’s not

Buck: Right. Yes. But you’re talking about a platform that does the same with both, though, right? I mean, you’re treating them similarly.

Douglas: No, we have a cryptocurrency trading platform, and there the Bitcoin, Bitcoin Ethereum move around just like it does in any other platform. Got it. And then for securities, it’s a different matter.

Buck: Okay. So where does INX what role does INX play in this? You got some big players here, right. Who don’t necessarily benefit from some of what you’re talking about, like the hedge funds who are sneaking up and the big brokerages that are helping people sell short by borrowing. What are the implications of that? Because I can’t imagine those players don’t have a lot of political clout or will not try to avoid some of what you’re talking about.

Douglas: Well, yeah. Well, the big players aren’t going to do something because I tell them. They’ll do it because the regulators tell them if the regulators feel there’s a better way to do something, then in the end people will move to it. But certainly self custody isn’t a good thing for anyone. That’s a large custodian. But if you look at anyone under 30 years old and ask them where your stocks custody, they point to their phone and say, It’s in Robin Hood, the days that our parents spent calling up a broker to do a trade are pretty much over. And so folks are moving towards these faster platforms and they’re looking mobility and they’re less concerned about custody than they used to be. And so there’s a big change of foot. It’s sort of like, look, when the Model T came out, I’m pretty sure that the guys making horseshoes said that cars are dangerous and you’re going to get an accident. They go too fast. I’m sure there’s a lot of excuses and they probably had a lot of lobbying power, but after a while, people realize the convenience that they had with cars. And so cars started taking off. Look at mobile phones. Mobile phones were around for about twelve years before they really started taking off. And you can graph this cell phone adoption in the United States. I remember for the first ten years, people said, oh, it’s a brick, it’s too heavy, it’s too big. I don’t want people calling me on my commute. The last one I think was going to give me brain cancer when I put the phone next to my head. Now I think there’s three mobile devices per person in the United States. So new technology adoption takes time. And first you’re looked at strangely, then people laugh at you, then they say it’s dangerous and then it’s adopted. And Bitcoin and cryptocurrencies in general are sort of reaching that stage now where we’ve gone through all the effects. But now when JPMorgan starts talking about it as being an asset class and when Elon Musk does, everyone starts to take notice and say, you know what? I really should be involved in this asset class space. And they start to adopt. And as more and more people adopt it, well, then governments have to get around or they get voted out. And I think that that’s where we are today. Now as an issuer, I have a security token and I like the fact that I can pay a dividend directly into someone’s wallet wherever they’re holding that token, that’s a phenomenal achievement. I don’t have to go through all of these third parties that today. Maybe if Nike sends out $100 dividend, I don’t know, but maybe it’s $0.97 before $97 where it gets into someone’s wallet because of all the middlemen. When you take out the middlemen and they’re going to be anxious about this, but when you take them out, you don’t need them anymore. Look at the DTCC. The DTCC is sort of the restaurant behind the kitchen, behind the restaurants that are New York Stock Exchange and Nasdaq, and they do all the entries. This has gone from this person to that person. Well, if you can settle on the blockchain, the blockchain is recording all of this and you don’t need them anymore. So they’re going to be reticent about this and they’re going to be pushing back against it. But as more and more people get involved in this space and more and more people start to migrate towards it, not just issuers, but also just folks that work, you’re going to find that things start to move very quickly. And already when you look at job postings, there’s fewer job postings in Legacy and a lot more in the crypto and digital asset space today. And senior guys like myself are all moving over into this digital asset space because we see the future and we can see the opportunity.

Buck: One more question with regard to the future. So effectively, what you’re talking about is the New York Stock Exchange. All of these stocks and all these equities that are on exchange going to a digital model. Why would those equities go to a company like INX rather than the New York Stock Exchange, ultimately just changing its own technology, right?

Douglas: Well at INX, we did a registered security so public reporting just like Nike or Amazon. And we went to the New York Stock Exchange, we went to Nasdaq, we said we’d like to list here. And they said we’re not ready for digital securities. It’s too early. It’s going to be three or four years. So that’s an opportunity. Now, in three or four years, I’m not looking for IBM to move over to INX. That’s not going to happen in the next year. But in the next year, maybe I’ll move over a couple of hundred from the OTC. First I got to crawl before I walk, before I run the OTC is 13,000 companies. I’ve identified 225 with a short over 50%. Now, if you’re heavily shorted, naked short, and your companies sitting on the OTC, you probably want to be a security token. And the chairman and the CEO of these companies are sitting there in the first paragraph of the employment agreement is to maximize shareholder value. If I know that by switching my equity into a token, I can squeeze out all the shorts, the odds are they’ll probably do it. That’s 225 companies with a high degree of certainty that I think I could probably move over. And as you start moving over, more and more companies, while the smaller broker dealers that deal with OTC companies start to link into this as well, and they start to get behind the program. And as the audience starts to grow of the amount of people that are interested in digital securities, then the larger market cap companies start to move over in the Nasdaq as the Nasdaq one started to move over, then the New York Stock Exchange ones have to as well. And you’re right. But within three or four years, I’ve got three or four years where I’ve already got a platform that’s digital. And let me tell you, it took 950 days to really going to get through the whole process and make it all working. These guys have to play a little bit of catch up. Now, they could certainly buy or they could recreate themselves. One really interesting thing about security tokens as well is they’re not just related to equity. People that bought my token didn’t buy equity in my company. What they bought was 40% of our profits accumulated adjusted net operating cash flow in the future, should we have any. So 40% of our profits in the future, we also have equity and the equity gets the other 60%, but it’s not mandatory distributed. Instead, the company decides how it should be spent. And the equity also have, obviously border rights, and they also have all the licenses that we have as a company and that equity trades on the Neo Exchange in Canada under the ticker INXD. So we’ve got two different capital stacks. But let’s say you’re a company and you realize, you know what, before, if I wanted to do something, I had to issue more equity or I could take on some debt on my balance sheet. Well, let’s say now you can carve out future cash flows that you don’t have today, and you can sell that as a security token and you can raise capital that way. So we’re seeing a lot of companies come to us that are publicly traded companies that want to do that. They want to raise capital in this new way where suddenly they have a community that they can sell to. An example would be ALK Capital. They’re the owners of Burnley Football Club Premier League soccer team in the UK. We’re working with them in a full perspective. So offering where their fans will participate in the future successes of the club. For the OTC example, there’s a Press release put out by a company called Ed Biologics. They’re trading on the OTC, and they said, look, we want to delist from the OTC, we want to give up our ticker and we want to list on INX. So the companies are already out there and they’re doing it. I think that the fact is that these are trees falling in the forest and no one’s actually seeing them. But as they come on more shows like your own, I think that more people become aware.

Buck: Is INX active right now? Are you launching?

Douglas: INX is active right now, but the largest market cap that trades on our platform. So that’s one thing. And we’re adding more and more tokens as the year goes on onto our platform. We’re also open and trading on our cryptocurrency site as well. And we’ve got an app coming out in February to trade cryptocurrency. We weren’t in the Super Bowl like all the other guys, but people will start to hear about us. And then also in September/October, we’ll have an app that combines both the securities and the cryptocurrencies. So that will be the first time anyone’s ever seen something like that.

Buck: How do you access INX right now? If you are listening to the show and you’re interested.

Douglas: You can go to INX co. And there you’ll learn all about the company and all the different products that we have. If you want to trade the security token, you go to securities INX.co. If you want to trade the crypto, you go to cryptoINX.co. You can see why I’m coming out with an app. It’s a lot easier for me to say just go to the app store, but I won’t be able to say that until the end of February.

Buck: Very good. Well, we’d love to have you back on the show and see how this progresses in the near future. Thanks so much for joining us in Wealth Formula Podcast.

Douglas: Thanks very much for having me, Buck.

Buck: We’ll be right back.