The Protocol Newsletter is an inside examination of accomplishments within the digital securities industry. The Protocol Newsletter features issuers, issuance platforms, marketplaces, broker-dealers, custodians, marketers, and more, with a specific interest in their real-life stories about what it takes to issue and manage digital securities on public and permission-based blockchains. Our goal is to provide the digital securities industry with invaluable insights and to serve as a resource for those looking to issue digital securities in the future.
In this issue, we will be taking a closer look at North Capital.
We spoke with James Dowd, Founder and CEO of North Capital, about his experiences in the digital securities space and why custody is so important when it comes to digital securities.
1. Can you please describe NorthCapital and what you are best known for in the security token (digital securities) space?
North Capital is a financial technology firm focused on transforming the infrastructure of the $3 trillion private securities market. As a leading provider of transaction technology infrastructure for primary issuances of securities under Reg D, Reg S, Reg A+, and Reg CF, North Capital serves issuers, intermediaries, and investors. Issuers of digital asset securities also referred to as tokenized securities, utilize the firm’s TransactCloud technology (which includes KYC, AML, accredited investor verification, escrow, and payment services) to conduct exempt primary offerings of digital asset securities.
2. How did North Capital initially become involved in the security token market?
We built a scalable technology stack for traditional, non-digital exempt securities offerings beginning in 2013, drawing upon Jim (founder) and Anton’s (CTO) experience with the HedgeSelect Platform at Bear Stearns. We first learned about blockchain and crypto digital assets in 2016, and we became interested in experimenting with blockchain as a way of developing open standards for processing exempt securities transactions. Jim held an all-hands meeting after Christmas 2016 with a copy of “Digital Gold,” and he asked everyone at our firm to read it. We had no idea that so many other firms had already taken the technology so much further and were preparing the first primary offerings using ERC-20 tokens on the Ethereum blockchain. At that time, we were experimenting with the Bitcoin blockchain and had not yet done much with Ethereum. In early 2017, we were asked to be the escrow agent for one of these first securities offerings, for Blockchain Capital’s tokenized fund offering. At that time, we were still learning about blockchain generally, and Ethereum in particular, but we had deep domain knowledge about private and other exempt securities. This proved to be an invaluable differentiator in the early days of the market because we understood how to conduct a compliant securities offering. We began to work with other technology firms that were focusing on blockchain and digital asset securities, and we continued to experiment with the technology and started to engage with the SEC and FINRA on related regulatory issues.
3. How many security token-based accounts have you worked on? Is there one in particular that you can talk about that you are particularly proud of?
We’ve been involved, in some way, with about 20 deals, either providing investment banking, technology, escrow services, or placement services. It’s impossible to pick out a particular deal that is our favorite. Keep in mind that we were one of the first registered broker-dealers involved in the space, during the gogo period of 2017 and early 2018, and nearly every deal we have been involved with has been heavily scrutinized by both the SEC and FINRA. We have consistently maintained that digital asset securities should be subject to the same compliance standards as other exempt securities offerings, which has kept investors out of a number of terrible deals (and kept bad investors out of good deals). So we’re proud of that.
4. Why is custody such a big deal when it comes to security tokens?
This is a huge, almost religious question. Crypto digital asset securities were created when blockchain technology exploded just four years ago. Some of the first tokens were just like bearer securities, which are illegal in the United States. A hallmark of blockchain technology --- many would argue its most important feature --- is its “trustless” nature. Information can reside in public, decentralized blockchain systems, but individuals hold the keys to the encrypted contents or value of their public “wallets” through their private keys. Crypto purists would argue that there is no need for custodians with blockchain technology because each owner maintains control over their own credentials and thus their own crypto digital assets. We have never subscribed to this view in the context of securities because our experience has proven otherwise. Most people have zero interest in custody-ing their own securities… no more than they want to keep money hidden in a wall of their house or buried in the backyard instead of in a bank. Viewing this issue through the eyes of a regulator, maintaining trusted, regulated intermediaries serves the public interest. People die, get divorced, lose records, forget passwords, crash hard drives, have their accounts garnished by creditors. Regulated custodians help address these issues and more. The idea that intermediaries add no value to the financial system and are just a frictional cost is silly. We believe that blockchain-based digital asset securities will slash the costs related to private and other exempt securities markets, but intermediaries --- transfer agents like Securitize and custodial broker-dealers like us----will continue to play a critical role.
5. In your opinion, what makes security token-based assets unique compared to traditional ones?
We think there are two critical features. First, they are programmable. Traditional securities are passive. A stock certificate does not know when it is being bought, sold, or transferred. It does not have any ability to interact with software systems and it exists outside of the technology systems used to track it. Digital asset securities can be designed to interact with other digital assets and technology systems, which offers the promise of automated real-time settlement, elimination of Herstatt risk and other credit risks, and a wide range of tools to facilitate safer, more efficient markets. Second, the software used to create these digital asset securities is predominately open source. We think this is hugely important, equivalent to the switch from closed systems to open standards in email and other networking protocols.
6. What most excites you about security tokens and the security token industry?
In five years’ time, we will not be talking about exempt securities and exempt digital asset securities, because all exempt securities will be digital asset securities. It’s inevitable. We feel very fortunate to be playing a role in the development of this ecosystem and to be able to bring our experience to influence how the market is developing. We think we understand, in broad terms, how U.S. regulators plan to oversee and manage the growth of digital asset securities, so we foresee the growth and development of a market that reduces capital costs for issuers and offers more choice for investors while maintaining the investor protections that are critical to our financial markets.
7. What is your outlook for the security token (digital securities) markets?
Bullish, but not until later this year.
North Capital is the leading provider of transaction technology for primary issuance of exempt securities, and we are driving the evolution of clearing, custody and secondary markets on the Ethereum blockchain.
We create and deliver services, utilizing custom APIs, open-source blockchain technology, smart contracts, and securities tokens to transform access, liquidity, and transparency of exempt securities.
Our Registered Investment Advisor, North Capital Inc. was founded in 2008. The firm’s founder, Jim Dowd, started the firm after spending 20+ years as an Institutional Asset Manager, with the goal of bringing institutional-grade advice to retail clients. North Capital Inc is headquartered in Salt Lake City, UT, with branch offices in Benicia, CA, McAllen, TX, Sea Island, GA, and Pittsburg, PA.
To learn more, please visit https://www.northcapital.com/
Securitize delivers trusted global solutions for creating compliant digital securities. The Securitize compliance platform and protocol provide a proven, full-stack solution for issuing and managing digital securities (security tokens). Securitize’s innovative DS Protocol has the highest adoption rate in the industry and enables seamless, fully compliant trading across multiple markets simultaneously. Multiple Securitize powered digital securities are already trading globally on public marketplaces with many more in the pipeline.
To learn more, please visit our website.
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