The Why and How of Bringing Securities On-chain

Date: 22/02/2024

Host: Gregor Neumayr, R&D consultant and data scientist - Callaghan Innovation

Guests: Ryan Johnson-Hunt, Tracey McDonald & Graeme Leversha (DSG). Bryan Ventura (Hamilton Locke)

Webinar Length: 1:09:06

Transcript

00:00 Introductions

Gregor Neumayr: Welcome everyone. Yeah, we have a really exciting session today. And as we can see a great turnout. So, I'm glad you all came, thanks for coming. I will hand over to Ryan in a moment. Before that, just briefly about the the format of today, some housekeeping, if you will. If you want to ask a question, please put it in the, please use the chat function.

And if you want to ask a question during the presentations, this session is being recorded. And in the end, I will ask you to complete a quick survey. It will only take about a minute or so. So we are dependent on your feedback to improve these learning events. So that's why before we're, before we get going into the questions, I will show you guys a a QR code and you can, you can hop on and just briefly answer some questions.

Ryan, I just made you a, a presenter, so I will, or a co host, so I will stop sharing now.

Ryan Johnson-Hunt: Wonderful.

Gregor Neumayr: Over to you, Ryan.

Ryan Johnson-Hunt: All right. How's it looking, everyone? Coming through nice and clearly?

Gregor Neumayr: Very good. Yeah.

Ryan Johnson-Hunt: Okay. Wonderful. So thank you very much for coming today, everyone's precious time. Hoping we can answer all your questions about this future of investing and, and the why and how bringing securities on chain.

So this is a high level agenda. We'll start off with just introducing each of us presenters. Graham will then talk to us about what some of the challenges are in the status, status quo of the capital markets, I'll share a bit about the journey of tokenization over the last five years or so, and theBryanan will jump in and talk about what the legal and regulatory framework of, is in New Zealand of this kind of emerging scene. Then I'll jump in and talk about what some digital solutions look like and what in particular we're doing at DSG.

Then Tracey will be able to share what the kind of big picture looks like in terms of demand for these types of solutions. And then I'll just wrap up by talking about what are some challenging, some challenges that remain. And just before we get, jump into that, there will be a bit of terminology and jargon thrown around.

So I thought it might be a good idea just to clarify. kind of two particular phrases that will come up a lot. One is the term capital markets. So for those that haven't kind of been in that scene a lot or kind of understand what it means, just basically high level, it's just the, the lifeblood of the economy.

It's the financial infrastructure that connects those that have some spare capital or kind of funds with those that want to put that to productive use. So that's everything from a government raising funds through bonds, to a small business raising some money to grow their business. All the way through to your bank offering a term deposit.

That all comes under capital markets. And then another term that we've thrown around a lot is securities. So securities are kind of the building blocks of capital markets. And really they're a regulative kind of financial product. Often it's like an equity security, which is what we would commonly think of as a share.

It's like a, a right to ownership of that company. And the other type of security is a debt security, which is kind of like a right to be repaid with interest. And then there's some other derivatives and bits and pieces, but at a high level, that's kind of what we talk about when we're talking about capital markets and securities.

So I'll hand over to Graham to walk us through the status quo. Oh, actually, no, sorry let's start off with a little introduction. So my, my background is in the emerging tech education side of things not only running sessions with with companies, workshops as well as doing guest lectures on the topic.

My background in high education is kind of more on the management, marketing and finance side of things. And my kind of the base of my career is in medical devices. So technology discovering what people need and kind of tailoring a solution for them. And doing that both at a clinical level, as well as a management level in New Zealand and overseas as well.

And I'm also a proud member of the Blockchain NZ Exec Council. Which is a really exciting group of people that kind of that, that connection between industry and regulation and government. Tracey, over to you.

Tracey McDonald: Hi, yeah Tracey McDonald. My background is traditional finance. I work for two of the largest banks in Australia, as well as AMP here in New Zealand.

Then I moved into, well, first I went down the crypto and NFT rabbit hole which I couldn't get out of, so I ended up working for the biggest CeFi, DeFi yield provider which unfortunately went into bankruptcy now I'm working with, yeah, Ryan, and super excited about the you know, what we're working on and, yeah, here I am in cryptocurrency.

Yeah, four years in cryptocurrency.

Graeme Leversha: Hi my name is Graeme Leversha. I have a background in accounting, finance, economics, so I'm a director of a number of companies, one of them being DSG or the DSG Group. I've worked with a number of quite large organisations in New Zealand in the funds management area. And in a previous life, I I helped set up the New Zealand Venture Capital Association.

And it has quite a bit of relevance to sort of what we're going to talk about today. And I've yeah, I've spent a little bit of time at university doing a few quizzes there, so I've got a master's in business administration focusing on strategy and change management.

Bryan Ventura: Hi all, I'm Bryan Ventura, I'm a law partner at Hamilton Locke which is Australasia's fastest growing law firm. I, I'm a financial services lawyer, fintech, digital assets, venture capital, capital markets and also investment funds. I've been in crypto since 2016 and been a crypto lawyer since 2017 working on ICOs during the ICO boom.

I've advised global Defi protocols. I'm advising on various DAO setups and also working with some of New Zealand's leading FinTech and digital asset companies. I'm, I was previously chair of Blockchain New Zealand for two and a half years and I'm still on the Blockchain New Zealand Executive Council.

Ryan Johnson-Hunt:

Awesome. Thanks guys. So now I'll hand over to Graeme to give us a bit of context of what the status quo is in capital markets.

06:55 Current challenges in capital markets

Graeme Leversha: Okay. Thank you, Ryan. As Ryan sort of suggested, there's sort of two aspects to the financial markets, so sort of debt and equity if we sort of start off on the equity side I mean, most people are familiar with listed equities, so share markets you know, each country, regions have equity listed equities markets, and they're, they're relatively efficient, shall we say part of as I said before, part of what I've done in the past is help the development of the private equity industry in New Zealand.

And the, the private equity is, is not a very liquid market. It's not very efficient. And so what we did then is we set up an industry body you know, we had annual conferences, we had all the key parties getting together on a, on a on a committee. And one of the particular things that I was quite proud of is that I opposed the implementation of limited partnership.

That was the that was the key legal backbone to the private equity industry in New Zealand. But it also has you know, similar sort of legislation all around the world. So when you look at private equity in effect what we're trying to do here is we're trying to do the, the unlisted part of equity.

And DSG has a big, has a big part on that. So, we're trying to increase the efficiency. We're trying to provide greater access. And importantly, we're trying to provide liquidity too. And the fundamental premise of an exchange is that it, it's a, a sort of price discovery. So if you can provide access and liquidity to a particular asset. You can get efficient pricing on that. So that's what we're doing.

The second part that Ryan mentioned was the, the debt markets. And the debt markets are actually are very large. A lot of people don't quite understand how large they are. The, the debt markets in New Zealand you can talk about government debt, council debt corporate debt.

It, it isn't a very efficient market. Access is through what you would describe as relatively high cost agencies like some of the big investment banks, and there's not a very good secondary market in that. So, so DSG will play a a big part in developing the sophistication of both private equity markets and the and the debt markets, not only in New Zealand, but in New Zealand, Australia, Hong Kong and Singapore.

How does that, how does that sound, Ryan? Was that on the spot?

09:35 History of tokenisation efforts

Ryan Johnson-Hunt: Yeah, that's, that's perfect. So definitely some room for improvement. Some, some aspects are done, some asset classes and kind of, kind of categories are served quite well. And maybe others, there's some room for improvement. So yeah, I mean, one of the fundamental kind of basis of where we started with DSG and, and almost one of the promises of tokenization is to try and allow people to get better access to investments that they're eligible for.

So let's just take a step back and, and understand how we got to this period of, of the tokenization journey. So tokenization at a, at a very, very high level is a concept of representing some kind of physical real world asset or some kind of maybe conceptual asset that doesn't kind of move very well in the capital markets.

And, you know, tokenizing that or linking that to a digital representation of it, that can move around the capital markets better. And so what we've seen over the last kind of six, seven years is this kind of historical step towards trying to achieve that. So the very first kind of ideas and the big kind of ICO boom, initial coin offerings, they did achieve tokenization.

The tricky part was, is that it was a bit of a wild, wild, wild west. And there was very little protections for investors that actually coupled that token to that that value. So there are you know a few really big high profile projects and a few scams and a few bits and pieces, but the consensus was, hey, there's something in this, but it needs to be a better system.

And there was a lot of regulatory pushback. And so regulators started to kind of crack down and apply existing securities laws to ICOs. And so you started to see this development of, okay, what are some solutions to this? What could be baked into this token to allow regulators to be happy and to tick off the boxes of making sure the right people get it and they have some kind of protection of that ownership?

And then you start to see experimentation with real world assets, real estate, art, and things like that with varying degrees of success. And then we started to see institutions really understanding the size of this market and the future trajectory of where it was going. And so you start to see these kind of behind the scenes, kind of closed experiments proof of concepts to see how this could work.

And you start to see the emergence of lots of on chain solutions to facilitate this interaction between different blockchain ecosystems and the blockchain world and the real world. And then really in the last couple of years, there's been a real change in the narrative in the regulatory side of things and starting to see early signs and some early adopters, the likes of Singapore and, and, and Hong Kong and Dubai and London to some degree that are starting to integrate concepts of a very permission controlled tokenization solutions into into the financial system.

And in particular is a concept called a regulatory sandbox, which is like a little, a little closed experimental playground, hence the term sandbox, where it can be kind of like a neutral Switzerland between industry, government, and regulators and policy makers to do very controlled experiments and see how all this works and to do kind of what if analysis and things like that to make sure everything's really robust before it's rolled out to the public.

And then just in the last year or so, start to see some kind of global standardization in some areas, still a long way to go. But you see the, the narrative strengthen and you start to see these token standards emerging as as, as really robust proven systems for bridging the regulatory requirements and the compliance and the know your customer requirements with these tokens, allowing them to really plug into the financial system in a way that they've never been able to before.

And I like to come back to the Gartner kind of hype cycle. It's true for, for so many things and tokenization is, definitely falls in that. So you would see the, the peak of inflated expectations kind of 2017, 2018. And then this big trough of disillusionment where it was like, Oh, actually the regulatory frameworks aren't there and the technology isn't there to be able to actually deliver this.

And then over the last four years, this kind of grind up as technology gets better, as regulators get their head around it. And we're heading towards this plateau of productivity where you know, the hype might not really be as big, but the real world benefit there is there. And it starts to really gain some momentum.

So I like to think maybe we're kind of at the spot here, but I guess it's up to interpretation. And I wanted to just quickly close touch on the concept of kind of closed and proprietary systems versus open and interoperable, because it has a really big part to play in the, in the rest of the presentation.

15:31 Closed/proprietary vs. Open/interoperable

Ryan Johnson-Hunt: So closed and proprietary, they, they have really good use cases in, in the context of financial systems, especially, and tokenization. Really important to have these early proof of concepts kept ring fenced and controlled before they get kind of rolled out to the public. And also lots of big banks and institutions will, will tend to gravitate towards these because of the level of control.

And that's totally fine. And you see lots of institutions are massive and often across different countries and different kind of kind of business units. And so closed systems are really good for those internal efficiencies. The benefits of open source and kind of a interoperable standard is that, and we see this with lots of projects.

You know, all the way through from, you know, Linux when it comes to computer systems. Google Chrome, when it comes to browsers, there are some benefits it offers code open for scrutiny. There's regular auditing and it means that bugs get, get found very quickly. And there's a, a real collaboration around trying to build the product to be the best it can be and evolve it over time.

An example in, in the context of what we're talking about today is an association of industry peers that, you know, on the surface could come across as being competitors, but really they have a vested interest in making this kind of open source token standard the best version that it can be.

So there's a nonprofit association that comes together to help grow the, that token standard. And, and token standards in the blockchain world just think of them like Lego, that kind of standardized blocks that can be plugged and assembled in different ways so that you can build really wonderful things at scale without having to kind of start from scratch each time and, and reinvent the wheel.

And the, the reason why open source and interoperable is so key when we're talking about capital markets. I, you know, my conviction is. is that it's really the only way to get network effects. So network effects are this wonderful magic thing that lots of people talk about, but it's actually quite hard to achieve unless everyone is using the same kind of language and the same infrastructure.

Because it's all about you know, more people joining the network. Making that network stronger for everyone in that network, including the earlier people that adapted, adopted. And a, a great example is the internet. The internet, you know, could have been some closed proprietary system that probably wouldn't have taken off as fast and we wouldn't be where we are now.

And so the very fundamental rails of how the internet works and how two computers and operating systems talk to each other through the internet is all through interoperable token standards and open token standards. And that allows multiple people to build really awesome things, knowing that someone from the other side of the world with a different computer and a different operating system will be able to load up that website and have it show how, how they want.

All right, so I'll hand over to Bryan now to give us a little bit of a context of the legal and regulatory framework in New Zealand.

18:56 Legal and regulatory framework in NZ

Bryan Ventura: Thanks Ryan. New Zealand's financial services regulations and securities laws are very clear. They've been well established for decades, although they are constantly evolving. If you look at it from the macro perspective, New Zealand tends to be an importer of regulations. And that means we tend to follow the trend of what's happening in other Western countries.

Our regulations and financial services, they're regulated by the Financial Markets Authority, by the Reserve Bank of New Zealand and by the Department of Internal Affairs, as well as the Commerce Commission depending on the type of service. Some of the types of regulated financial services includes operating a financial product market, broking custody of securities or money, financial advice, managing investment funds, deposit taking, lending, banking, insurance, and, and much more.

Depending on the type of service and the type of clients you work with, you may require a license from the Financial Markets Authority, Reserve Bank that, or provide, before providing the service, and you'll very likely need to comply with the New Zealand Anti Money Laundering Regulations as a reporting entity. There'd also be registration requirements on the financial service provider's register.

There are a lot of carve outs under our regulations if your clients are only wholesale investors and those types of investors tend to be companies which are in the investment business, they are sufficiently large, or they have sufficient experience in financial services.

I should note that New Zealand doesn't have legislated virtual asset service provider regulations yet. There are, there are some guidance from the regulators on what a virtual asset service provider is, and also expectations about what virtual asset service providers need to do.

Now what is a virtual asset service provider? It is a service provider dealing in virtual assets. Virtual assets are digital representations of value which can be used for investment or payment purposes and this includes crypto assets, this includes some non fungible tokens, and this will include tokenized financial products.

Now, tokenizing real world assets and tokenizing financial products will fall within existing regulations, which is good, and that means there's some investor, some investor protections, consumer protections, and also there's a framework for service providers in this space to comply and to operate, operate in a best case fashion.

Now, tokenizing a real world asset will tend to require the setup of a legal entity. This could be a company, a limited partnership, unit trust, and the purpose of the legal entity is to own or hold that real world asset. Think of think of a piece of real estate in order to change ownership of that real estate, you need to use New Zealand's system through LINZ and you wouldn't, you wouldn't get the benefit of tokenization without using a legal entity there.

Tokenising financial products that is regulated by our securities law under the financial markets conduct act. Now what are securities, Ryan touched on earlier we have four types of financial products they include an equity security which is share in a body corporate or company. It is a debt security which is a right to be repaid principal and or interest.

It could be a managed investment product which is an interest in a managed investment scheme and a managed investment scheme is a scheme where there is an expectation of, there is an interest in the scheme, there's an expectation of financial benefit and that financial benefit is generated by the efforts of a third party.

And there's also derivatives, which are contracts where the value of a contract is determined by the value of an underlying asset. Think of an an option for gold, or a futures contract for grain. Now, operating, operating a tokenization marketplace that's regulated like NZX. And that will require a license from the Financial Markets Authority, unless there are robust safeguards to ensure that the only participants on that marketplace, i. e. the investors, are wholesale investors.

There are safe, there are safe harbours under the Financial Markets Conduct Act, where if you are if you want to ensure that you are dealing only with wholesale investors, you can require the investor to provide a safe harbour certificate, and you also need to complete some due diligence on the investor to make sure they meet some of the requirements of wholesale investor, which I've mentioned.

And now NZX itself is. A very intermediate, intermediated marketplace. You have brokers, which are all accredited by NZX. And these brokers essentially push the financial products out to the, out to the investors. And if investors want to trade these financial products on, on NZX's secondary market, they need to, they need to do that through a broker and custodian. Importantly investors can't custody their own financial products on the NZX market, which means their financial products are held by their broker slash custodian.

Now, I'll go to how NZX how the NZX model can be disrupted by using a tokenization engine and using blockchain technology. Now, operating a marketplace, tokenization marketplace will trigger New Zealand AML regulations. The service provider will be a reporting entity. And at a high level, the service provider will need a compliance officer. It will need a risk assessment and a compliance program which would set out how it intends to comply with the New Zealand AML Act.

The service provider would need to do KYC on its invent, on its investors and its clients, and it would need to lodge suspicious activity reports and prescribe transactional reports to name a few. There will also be registration requirements on our financial service provider's register. And in the case of a marketplace using digital assets or virtual assets, then that will be a virtual asset service provider.

And according to the Department of Internal Affairs, that's higher risk type service, which means more robust controls need to be put in place. In terms of the digit digitization of financial services and using a blockchain, there are a number of legal benefits to that as well. So, New Zealand AML allows reporting entities to rely on KYC performed by their agents and also by other reporting entities.

And if there is a, an overarching marketplace, which is performing KYC on all of the investors in that marketplace and that marketplace is a closed loop, then theoretically any reporting entity within that marketplace can rely on the marketplace operators KYC. Now in terms of financial products, there are benefits in terms of using blockchain wallets for investors to self custody their own assets as and instead of using custodians like ASB Securities, and, and then you can also program a lot of these investment products so that you can have automated escrow arrangements and then also automatic payments.

In terms of the marketplace itself, I talked about how it can do away with a lot of the intermediaries that NZX uses, and in terms of that, you can essentially operate a marketplace without any brokers or custodians. Happy to answer any questions during Q& A but I'll leave it now to Ryan and the team.

Ryan Johnson-Hunt: Awesome. Just want to quickly touch on the CoFR, Bryan.

Bryan Ventura: Yes the Council of Financial Regulators, it's it's a council of the, some of the regulators which I mentioned, and it's, it's led by the Financial Markets Authority and it is it is essentially a network for innovative companies, fintechs in New Zealand to reach out, reach out and test their services with the council. Before launching it's also an opportunity to identify key issues which need to be resolved before the service goes to market or, or it begins to scale.

28:28 Digital securities at DSG

Ryan Johnson-Hunt: Awesome. Thank you. So, given that backdrop I want to share a little bit about what how we kind of tackle digital securities at DSG and the path that we've taken.

As you can tell from, from Bryan's section. This space is well regulated in New Zealand and so we then made the decision very early on to completely build a regulated product from the ground up, build it from the ground up to be compliant with regulation. So our, our route was not to go down kind of decentralized route and to, to build something that gives traditional finance and the regulators complete confidence in our ability to make sure the offerings only traded within people who are eligible for it and at all times that we can ensure that we know who they are and to you know, abide by any anti-money laundering and counter-terrorism requirements.

So. If the fact that we chose to build something that is structured as a security means that it gives people confidence that what they are dealing with is for all intents and purposes in New Zealand regulated shares or regulated bonds. So, the same kind of legal protections and recourse as there would be if it was more of the traditional paper version.

The loop is completely closed with the company's office in terms of equity securities. So the same process that would happen with paper securities. The great thing about working on digital rails is that dividends and interest payments can be distributed very easily and efficiently which isn't always the case in traditional markets. And same things when it comes to any corporate government's decision if there's voting or anything like that, it can be facilitated very easily as well.

And what's really critical from the get go is that everything is, is compliant in terms of, of knowing who the, who the investor is. So our approach was to to go down the route of until the person goes through the full KYC process and is able to prove that they are a wholesale investor, then the token just will not transfer into their account.

So that gives us a lot of confidence as well as, as regulators, as well as market participants, that all the users in that system is a nice kind of walled garden as they call it. And that the, the, the, um any kind of retail investor or someone that doesn't meet the eligibility is not able to physically get those tokens.

What's also really, really important is that the asset issuer. So for example, if it was a company that was wanting to raise some funds to grow and they wanted to issue some equity, some digital shares, that company has full control of those assets through the entire life cycle. So they can be issued, they can be sold, they can be you know, locked up for certain periods of time so that they can only unlock over time, which is really handy for, you know, allocating to early advisors and people that are in the company.

And they can be frozen if a, one of the, the jobs of the marketplace is to do regular sanctions checks on, on participants. And if, you know, there was some kind of issue there, those assets can be frozen until we find out more. And of course, because they're in digital format, they can be forcibly transferred or new ones made in the case of a stock split or tokens burned in the case of dissolution of a company. And what's really important from an efficiency point of view is that a very accurate register of who owns what at any point in time in the past can be generated with a click of a button.

So in the traditional world, that's an entire kind of company's job is to keep track of who owns what, lots of phone calls and emails and things like that. And it will never be 100 percent accurate where there is in a digital format, it's much, much easier.

And being on digital rails it's just a superior ledger. So unlike in the traditional world, where going from purchasing shares in, let's say, Air New Zealand through to having them in your broker account could be kind of three days, there is by necessary. There is by necessity an entire kind of intermediary called a clearinghouse that kind of guarantees that trade and gives everyone confidence that the trades will take place.

Well, if we do that in a ledger format on blockchain rails, we can do instant settlement, which means that you've just completely disintermediated that entire function and actually made it more accurate and more transparent. The ledger provides a single source of truth for everyone from, you know, regulators or third parties that need to have access to that. They can under the right circumstances.

The administration, which in the traditional world means fees start to add up quite quickly, administration is extremely efficient, which means the fees on a digital securities marketplace an order of magnitude lower than in the traditional finance world.

And going back to the open you know, we're using an open interoperable token standard. So we're actually able to tap into this global network of marketplaces like ours. And so, under the right circumstances, we can share liquidity and so we're tapping into something bigger than just ourselves at DSG.

We're building on the, on, on the backbone of something that's already battle tested and being used very effectively. And this is really important because a lot of, you know, emerging kind of platforms like ours, everyone's concerned about platform risk. You know, what happens if DSG disappears? Do my investments all disappear?

Well the answer is no, because we you know, the, the, the assets are on a blockchain and a transparent ledger that is much bigger than just us. So it's, it's. It's quite easy to go through the what if planning and see okay, what are the different contingency plans and do we still have a record of who owns what should different you know, contingency plans happen and it's really important part of de-risking for, for everyone and it's quite it's quite easy to do in this setup.

Alright, I'll hand over now to my colleague Tracey to talk us through some of the global demand

35:39 Tokenisation of global illiquid assets

Tracey McDonald: So tokenization has the potential to revolutionize the way we invest the total size of tokenized illiquid assets, including real estate and natural resources could reach 16 trillion by 2030, according to The Boston Consulting Group, but that that 16 trillion is actually a conservative estimate.

The actual potential could be as high as 68 trillion by 2030. So, you know, a large portion of the world's wealth is currently tied up in illiquid assets, such as real estate, private equity, and infrastructure. These assets are often difficult to buy and sell, which makes them less attractive to investors.

Tokenization will change this by creating digital tokens representing ownership of the assets and then traded on exchanges like DSG, making it easier to buy and sell. It also makes it easier for companies to raise capital and for investors to find new investment opportunities.

So family offices are actively exploring a wide range of asset classes and tokenization enables high net worth and other wholesale investors access to asset classes that were previously only available to the ultra high net worth or to family offices. And impact investing family offices are deeply connected to the long term vision and values of the family they represent.

So like younger generations within family offices are often expressing strong values relating to you know, sustainability and social justice. So, you know, examples of impact investing could be solar farm projects. Real estate developments focusing on affordable housing. Et cetera. That's anything else to add, Ryan?

Ryan Johnson-Hunt: I guess the only other thing I'd say is the, is often, especially when you were talking about the smaller to medium sized investor, there's a lot more pressure on having liquidity. Because they might be a lot more nervous about locking up a big position that they might need to hold in place for five to 10 years.

And so being able to have the ability to take some profits and free up some capital for unforeseen events, or maybe to flip into a different opportunity is something that seems to resonate a lot with, with investors. Cool, so now I'll take over and talk about some of the remaining challenges

38:20 Remaining challenges in this space

Ryan Johnson-Hunt: So, I mean, we're talking about a space that is still very much, open and you know, regulators and policymakers around the world are still navigating this new space. And so there are some jurisdictions that have taken a really proactive approach and regulatory sandboxes are a big part of this.

And they've been used with quite a lot of success. What we're seeing is in some of the more emerging markets, like the ACM countries you know, the indonesia Thailand, Vietnam Cambodia, there's about 10 in that kind of ASEAN block. They actually see this as a huge opportunity because they have the, the manpower and the resources and the infrastructure to actually work on this in a more nimble way.

And a lot of them, for example, Indonesia's new government that is either got in or is likely to get in very shortly has taken a pretty vocal pro crypto, pro digital assets stance, because it's an opportunity for them to really tap into a really exciting and growing part of capital markets and gets them on the scene, gets them on the map.

New Zealand has chosen quite, quite smartly to, to use very technology agnostic language in the existing framework. And so all the existing kind of legislation and regulation that, that Bryan talked about, that kind of captures everything from the paper and digital world. So there hasn't been a need to make a whole lot of new, you know regulation around digital assets. Although some of that might emerge over time, but, kudos to kind of more tentative wait and see approach because the last thing you want is to create all these new regulations and they either don't work, or they're not fit for purpose because the space is growing quite a lot.

But the challenge of all this is that consistency over time is what will bring better cross markets, cross border synergies. So lots of opportunity to connect more developed economies with more emerging and frontier markets, but they need to be all be speaking that same language. Not only from a regulation point of view, but also from a taxation administration point of view as well.

And the other side is the perception and education. So most of traditional finance has very surface level or no kind of awareness of what tokenization is. It's lots and lots of education needed to kind of differentiate between crypto, which are at a very high level kind of speculative, maybe some utility financial kind of products that are run on blockchain versus tokenization and other types of utility that use the same rails but are trying to solve problems in the real world, and kind of integrate into traditional markets, like DSG.

A big part of this, of course, is making the technology really accessible. So we have chosen at DSG to have our, our user interface very familiar, very friendly. So the person's logging in with their email and password, their two factor authentication, everything that they're used to. And then we just make sure that in the background, the digital wallet management is being done properly and, and all the security put in place for that to make sure that, you know, they don't necessarily need to know that they or need to be reminded on a regular basis that you know, transferring digital tokens through digital wallets. What they're doing is they're purchasing investments and it's held in their account and kind of we take care of the rest.

And some of the, the high stakes element around crypto wallets are de risked slightly because unlike with a crypto wallet, if you lose your keys, you lose that crypto or it's gone forever. Whereas when we're talking about digital securities as how we are implementing them at DSG, the, if the person lost access to their wallet somehow, they can prove their identity and we can transfer those assets to their new wallet because they are legally owned by the person and the wallet is just a vessel to, to help that.

And there's a lot of, of, as you can imagine, lots of work to do in this space as thought leaders. So we've committed, we committed very early on to taking a, a really primary role in the thought leadership in this space. And I'll hand over to Graham to share a little bit about our magazine, which has been one of the cornerstones of this.

Graeme Leversha: So as you sort of maybe understand now that this sector and financial markets is going to be very large in the future if you look out five or 10 years trading of digital assets on digital exchanges will be a fundamental part of our financial markets. So at DSG we're early and part of our program for encouraging participation is is our wonderful magazine.

It's on a on a quarterly basis. The next one is coming out Ryan, when's the next one out?

Ryan Johnson-Hunt: It's going to print on Monday, so it'll be on shelves the week after.

Graeme Leversha: And I think there's some special, extra special guests in there that you'll recognize. So that's our magazine, catch it. You can do it in airports magazine shops, you can do it online and if you want to contact any of us, you can contact Tracey, Ryan, or myself through our socials, LinkedIn you can go to DSG.Exchange, you can talk to Bryan, who's been very helpful, although don't talk to him at the moment because he's on Hamilton Island on a conference.

So I think I think the prospects are good. So I think this is a very exciting space and I think you can hear from Ryan and Tracey that were all very excited about what's happening.

Ryan Johnson-Hunt: Awesome, thanks Graham. So Gregor I'll hand over to you to maybe field some, some questions and if anyone is a little bit shy feel free to email us, our emails are on the screen or just connect with us on, on LinkedIn.

Gregor Neumayr: Awesome. Thanks a lot for this. I am going to, I leave this the emails there on the screen just in case somebody wants to write it down for just a little bit longer.

Then I'm going to show you guys a QR code. I also have a link for our, for our survey. So I would ask you to hop on there and briefly it's only, I was told it's only, it's only going to take a, take a minute. I've just shared the link in the chat. It helps, it helps us to, you know, put on these kinds of sessions in the future and making them, make them better and better.

So I also....

45:22 Is there a live demo of the interface yet?

Ryan Johnson-Hunt: I'll just answer the question while you're doing that Gregor, I'll just answer some of the questions in the chat and so one of them was from Jay. She asks, is there a live demo of the customer facing interface yet? We have an internal demo of that. We'll be essentially launching the, the, the investor portal and the marketplace by the end of March.

So we'll be live very shortly. We've already been issuing kind of test tokens on testnet and, and verifying that all that works and it is, which is very exciting. So yeah, we'll be going to market very soon. So I'm sure you'll hear about us blasting it on socials everywhere. We're very proud of it.

46:03 Barriers to market

Ryan Johnson-Hunt: Was there one as well from Darcy. Let me double check.

Darcy says no brokers and custodians. Sounds amazing. Massive opportunity. What are the barriers in the way to get a service like this to market? And is this reasonably achievable? It's not that it's too good to be true, although it feels as though this is virgin territory.

I guess Darcy, the launching this into the wholesale market and having really robust processes and compliance program around making sure that it is kept to wholesale investors. That's our first stage. And so there's not any major barriers to that because we're doing it in a matter of weeks. What is more kind of barriers it is being able to then expand that to retail you know, investors, that's going to be a little bit more tricky.

And there's a journey there around licensing and kind of some of it's just proving yourself in the, in the, in the ecosystem. Bryan, do you have anything to add to that?

Bryan Ventura: Yeah, that's, that's right. In terms of what Ryan said also because this is these are financial products which resemble the investments which are already out in the market.

The only difference is they exist on a blockchain, and you, as an investor, can custody these assets. But everything else, the distribution will be very similar. The marketplace will rely on a distribution network of financial advisors other financial service providers as well. So it's possible that it won't be fully disintermediated, but there'll be a network of financial advisors, potentially fund managers and, um, DIMMs providers, for example, to help with distribution.

But the settlement, the settlement and the the assets themselves could be fully disintermediated.

47:59 Tokenized SAFE infrastructure

Ryan Johnson-Hunt: Question from David. Can you tell me a bit more about the tokenized SAFE that you're about to release? And so this falls in the category of what are some real world problems at the moment that this type of infrastructure can solve?

And at DSG, we encountered the same challenges, lots of early stage kind of frontier technology startups. It's really hard to raise capital. And the kind of VC and angel scene in New Zealand does the best it can, but it's just because of the scale. It's, it's not able to, to do the best support that it could do for the innovation ecosystem.

So we decided to have a think about how we could solve that with a tokenized offering. And so we're bringing this to market. Our first iteration of it will be a tokenized, SAFE Agreement for DSG on our marketplace. So, for those that aren't aware of the term SAFE it's a simple agreement for future equity.

It's a, a very time tested agreement that works well for investing in early stage companies that don't necessarily have a really robust way to value it. And so essentially at a high level, it's an IOU. So the investor, as part of the SAFE agreement, would put forward some, some money to the startup to help them grow.

And the agreement is okay later on when you do a proper valued capital raise where it's there's a more of a value around the enterprise, then we'll actually put that money that we gave you towards buying part of your company, but we want to add a discount rate to reward us for believing in you early.

And so that agreement has been used in the startup scene around the world for many years now. So we decided, how can we democratize this and so at a high level we decided to have a single SAFE agreement with DSG and to put that inside a special purposes vehicle company, called SPV and actually sell shares to that SPV on our marketplace.

So in a certain essence It gives wholesale investors a chance to own a piece, a fractionalized portion of that SAFE agreement. And so to get all the same terms and perks as typically a big VC would get with like a 2 million kind of writing a check, get that same benefit, but at a, maybe a much smaller, so maybe a 10, 000 check, for example.

And, you know, once we prove it works and iron out all the wrinkles by using it ourselves, we're really excited about using this as a vehicle to help other startups in the space connect with wholesale investors around APAC that are looking to get exposure to early growth startup.

This is a asset class that is very inefficient and it's very hard to get for family offices to go around, around APAC to go through all the due diligence and kind of connect with each of these startups. And so it's a really interesting kind of vertical of our marketplace that we're excited to expand on.

Bryan Ventura: Could I add as well that, this is this is what they call securitization in TradeFi, and that's where you have contracts which have a right to receive income they are securitized in an SPV that's overseen by a trusted intermediary. And then the SPV issues financial products to investors.

So this is using an existing existing model, but also the financial products themselves are tokenized. So you get the benefit of blockchain as well.

51:55 Private equity exit routes

Ryan Johnson-Hunt: Another great question here. I assume the primary the private equity secondary market is not that deep. Meaning there's not a whole lot of people that are interested in buying that.

What is the average investment period for private equity in New Zealand? And bracket seven to 10 years? Question mark. And what are the common exit routes? How will digital security shape the exit routes? Fantastic question. And there's already completely outside of tokenization. There's a, a, a, a big growing market for secondaries with private equity.

So, people actually purchasing interest in private equity projects and funds kind of maybe later on in the last kind of few years of that cycle. So the, the the baseline for a primary market is something that's happening outside of tokenization. But in the context of tokenization, it allows, I guess, there to be in smaller size packages, and more liquidity to trade those over time. And the exit routes change slightly because you could have all sorts of different interesting ways to be able to hold onto those tokens and maybe borrow against those.

This is obviously later down the track. And so getting these, getting financial products in a digital form just opens up so many more interesting use cases. And a great one that we haven't talked about today is the concept of tokenizing a dollar. So stablecoins you know, a digital dollar. And of course there's different ways that you back up that digital dollar with the real dollar.

And so having that mechanism be really robust is the key to having a really a really good stablecoin, but having that dollar in a digital form allows that dollar to, to travel around the world at the speed of the internet, to be split up into, you know, 18 decimal pieces to be able to use and programmed in lots of different ways.

And the analogy I often give is if you think about the journey from music, from analog on a record, through to digitizing that the, the first version of that is just creating a better record. So a CD is arguably a smaller, better record that holds more songs. But that's just the first step. Once that song is in digital format, then suddenly you can have a marketplace where you just buy a single and then you can carry, you know, the original iPod, you can carry, you know, a thousand songs in your pocket.

And then now the point where you pay a subscription and you have basically unlimited songs for $15 a month. And that is the journey of what digitization of something can do. And so yeah, the, the first stage is just improving the current system and making it work better. But the options for where this can go that what really makes lots me and other people very excited.

Anything you want to add to that, Graeme?

Graeme Leversha: Yeah, no, well I think there is a high level of excitement. That question was actually almost answered itself. How will digital security shape the exit routes? Well, we'd like to think that after you've had seven or ten years in a limited partnership agreement, which is sort of a closed end fund the, the digital securities markets will be quite a bit more sophisticated.

And maybe the exit route is to, I've asked, I've asked a question there is Web3 going to organise a, a function so interested parties could meet us face to face? I guess the, sort of a secondary question, and there could be what are opportunities for Web3 New Zealand participants to play a part in the development of digital securities?

There, there, there is a, there is a big opportunity and I think it's on you. You could help part help be part of the ecosystem. For example, we have Greenstone AI they're developing a tokenization as a service facility for us. There are other, other parties could put their hand up and say, okay, we will help in assisting tokenized industrial properties or something like that.

So the marketplace is the infrastructure or mechanism to to list the digital securities, but we still need access to those digital securities. And that could be that could be a part that we'd free New Zealand participants by.

Ryan Johnson-Hunt: And just to add to that, the, the tools, the suite of tools to offer tokenization as a, as a service for this for this interoperable standard is open source and on GitHub.

And so, we made a conscious decision to build on a network that would allow others to build and create value as well. There's certainly a lot more assets to tokenize that we could ever do as a, as a company. And I'm really looking forward to at some point in time connecting with someone who knows the art market, fine art market inside and out, and they want to develop their own tokenization as a service business to help digitize ownership of fine art and so we need all that kind of niche knowledge of people that have the network and have the the specialist knowledge to create vehicles to, to digitize these assets, and then we can provide the thriving marketplace to find to find buyers

Any other questions, just pop them into the chat.

57:49 Key differences between ICOs and security tokens

Ryan Johnson-Hunt: We had some that were submitted earlier so I might ask this for Bryan actually. So Bryan, what are the key differences between security tokens and ICOs?

Bryan Ventura: Security tokens, they are tokenized securities in New Zealand they are tokenized financial products. And they are the four types of financial products I mentioned earlier. Whereas an ICO, it is a crypto asset, which is designed specifically not to be a security, not to be a financial product, and they tend to be utility tokens, governance tokens, which either have some utility on a platform or give the holder governance rights over that platform.

And the idea is if you're a security token, then you fall within existing regulations. Whereas if you're a utility token, you fall outside of those regulations. However, globally, there are regulations for utility tokens now, and service providers for utility tokens, so the the regulatory arbitrage is narrowing.

59:04 Digital securities as block-chain native

Ryan Johnson-Hunt: Another question for you, Bryan is from Tim. So it relates to liquidity and regulation. So Bryan mentions that the TradeFi equivalent is essentially the same product, but on the blockchain, does this mean digital assets? Maybe he means digital securities as conceptually, conceptually a derivative.

And will there be two forms of liquidity for the same asset?

Bryan Ventura: That's a good question. The digital financial product is native to the blockchain and the idea is it won't exist in TradeFi land. There wouldn't be anyone who will keep a record of it. The record of ownership will exist on the blockchain and that's and that's maintained by a network of independent computers. All recording and verifying the same information.

So when we're talking about digital financial products, digital securities, we're talking about assets which are native and exclusive to a blockchain.

Ryan Johnson-Hunt: And I think as a, as a thought experiment to flesh that out, if we imagine a company, that has been building up their business for three or five years and they already have shareholders and they've maybe raised some funds so they might have 20 or so shareholders and then they come to DSG and they say hey look we want to raise some more capital.

We want to issue some more shares through your platform to raise some more funds. So those shares would be treated from a regulatory point of view, exactly the same as the paper versions. And so those shares would be sold on our platform and they can move around in digital form on the secondary market as well.

Now that company has a certain time frame to then update the company's office as to who owns what of those digital securities. And so the company's office will have a record of all the existing kind of paper securities as well with the digital ones. And so that closes the loop. So it's not a derivative because it's not trying to couple with the real world equivalent. It's like Bryan said, it's a digitally native offering that moves around really, really easily within the digital ecosystem, but it has, it's treated the same way from a legal and regulatory point of view as it's kind of paper brothers and sisters.

Is, have I got that right, Bryan?

Bryan Ventura: Yeah. Yeah, that's right. And, and I guess to close the loop there, you could also tokenize TradeFi financial products and DSG's function fun functionality does allow for that. You, you'd essentially be tokenizing real world assets and you'd, you'd be essentially moving those real world assets or real world financial products and onto an SPV and then the SPV will issue its own financial products, which are digitally native.

Ryan Johnson-Hunt: And, and so that mirrors what is also, what is often done anyway in the traditional finance world, often you'll put a building into a special purposes vehicle for different reasons. All we would do on DSG is we would then create digital shares to that SPV, and so that digital right of ownership to that, to a portion of that commercial real estate building can then move around within the primary and secondary marketplace.

So the primary is the first time those kind of offerings are sold. And then the secondary market is as they change hands over time. And what's really exciting is when we talk to family offices or higher net worths that would like to say, get exposure and to help diversify the investment portfolio with industrial real estate, it's really challenging to do that because to get in those deals is really hard in terms of access and you need to come in with writing a big check of 10 million dollars or something like that.

Whereas our value proposition is hey, on our, on DSG, we endeavor to have maybe 10 different industrial properties around the APAC region. And so an investor could easily purchase $20, 000 of 10 different buildings and have a really diversified $200, 000 portfolio that is not only different buildings, but different geographies, different economies.

So it actually allows for a level of hyper diversification that in the, in the traditional finance, you just lose the efficiencies of scale of having an overly diversified portfolio. But with this new digital infrastructure, it opens up those possibilities.

01:04:01 How prepared are the NZ public?

Ryan Johnson-Hunt: I've got a question for Tracey. So Tracey, what are your thoughts as a certified financial planner in terms of how the New Zealand public are ready for this?

Tracey McDonald: So as far as the the public, the, so the public are asking the questions of their financial advisors, definitely but at the moment the financial advisors are not able to advise on. So yeah, so the appetite is there from the public, but the advisors their licensees are not letting them you know, advise on, on blockchain or crypto at this stage. But the appetite is there, you know, everyone is asking the questions, so they, so, you know, we want to educate the advisors so that they are ready for when their clients, you know can invest.

01:04:49 What role does regulation play in protecting investors?

Ryan Johnson-Hunt: And one last question for Bryan, and I guess there's a few levels to this, but does regulation help protect the average person from exposure to bad financial products and security tokens? So let's, let's interpret this in the way that, what is the role of regulation in protecting investors? And how, what does the product disclosure and things like that, what role does that have to play in that decision?

Bryan Ventura: That's yeah, it's a good question. Our financial services regulations, our securities law are built on EVA licensing, which is licensing the service provider, and that acts as a gate for people to enter this industry. And there are gatekeepers, the regulators issuing these licenses. And then it's predicated, the regulations are also predicated on disclosure.

Giving sufficient information for the investor to make an, to make an informed decision. And we have what they call product disclosure statements, which are required if you're offering financial products to retail investors. And the contents of these product disclosure statements are prescribed under New Zealand regulations. Our Financial Markets Conduct Act.

And then from there you have other forms of regulation. You have the regulation of custody and broking of these financial products. And then you also have registration requirements on the financial service provider register. And so there's sufficient regulatory infrastructure to make sure that you have good actors in the space, but also giving the investors sufficient information to make decisions.

01:06:40 Digital bonds vs. TradeFi bonds

Ryan Johnson-Hunt: Awesome. And one for Graeme. What would be the benefits of, for example, New Zealand Treasury issuing digital bonds versus issuing typical TradeFi bonds as the status quo?

Graeme Leversha: I think I sort of alluded to that before is that we can provide a lot more liquidity and access to market at a lower cost than the secondary market, or primary or secondary markets in government bonds So I would, I would suggest that the way that they are gonna issue bonds in the future would be in digital form.

So I, I I, I tend to think that the participants in the bond markets are a little, and it's a little bit of an old boys network and very high priced Was that diplomatic enough answer?

Ryan Johnson-Hunt: Yeah, I think so. Also the, I guess the other side is the, the administration and kind of the back office portion of things is, is so much lighter because you can easily find out who owns what when it's time to do a coupon kind of payment, an interest payment. And actually the delivering of that payment can be done by a stablecoin as well to, to make that even more efficient.

And then there's the capability to be able to determine, where is that person in terms of geography and then so there's the possibility down the track to be able to hardcode the withholding tax and other kind of taxation elements and have that really custom individual situation.

Okay. So I think that's all the major questions. Any other questions before we wrap it up and call it a day. Thank you very much everyone for your time and for, for listening to us. Please connect with us just as a matter just to keep in touch with what we're doing but also, especially if you have more questions or you think there's some way that we can help you or your business.

Thank you very much.

Gregor Neumayr: Thank you very much and thanks for your, your fantastic hosting, Ryan. See you guys have a great day.

Ryan Johnson-Hunt: Alright, thanks all.