On the evening of October 28, the creator of the $5.2 billion cryptocurrency litecoin, Charlie Lee, received stock in a little-known video game startup called Exordium, using technology built on the bitcoin blockchain. While a stock allocation isn’t often the stuff of breaking news, I was there, eating a salad, like it was popcorn at the most gripping science fiction movie of the year.
A few months prior Lee had signed a contract, called a simple agreement for future tokens (SAFT) that guaranteed him 10,000 tokens represeneting a stake in the new game publisher. Modeled after traditional equities agreements, the contract is designed to ensure tokens issued on a blockchain, similar to bitcoin, comply with U.S. securities regulations.
But this was anything but a traditional investment. While SAFT contracts were originally adopted by entrepreneurs (and scammers) who raised $22 billion in token offerings on more versatile, but less valuable blockchains like ethereum, EOS, and tezos, this allocation is the first of its kind settleable in bitcoin, now valued at $356 billion, and paves the way for future offerings. Present at the historic virtual event was Lee, 43, who previously worked as a software engineer at Google, Samson Mow, 41, chief strategy officer of bitcoin software startup Blockstream, which has raised $101 million, and Sonny Alves Dias, 34, chief technology officer of the game’s developer Pixelmatic, and acting CEO of Exordium.
After a brief introduction, and some obligatory comments from Mow to clarify that what I was about to see didn’t constitute a stock offering, Alves Dias ran the first line of computer code he’d written the day before using Blockstream AMP, software for issuing tokens that comply with regulatory requirements by using a white list, ensuring that only certain people can trade them, or only at certain places.
Instead of the days it normally takes to create new securities from scratch and distribute them to investors, the assets, called EXO tokens, were ushered into existence in seconds. If the technology wasn’t so impressive, the moment would have been anticlimactic. “That’s it,” said Alves Dias, about 2 seconds after hitting enter. “It’s issued.” Taking a bite of my salad, I looked around for fireworks. The cryptocurrency veterans smiled casually like this happens everyday.
After marking the tokens with a code that means only other investors with the same code can trade it, creating the first half of the white list, Alves Dias prepared to grant Lee the same credentials, the penultimate step in the transaction. “Aaaand…it’s not working,” Alves Dias, awkwardly laughed. “Sorry, I need to dig into the code.” Mow cringed a bit. “We did a dry run last night,” he said. “And it worked perfectly.” I laughed, having seen enough tech demos to know this pretty much always happens. Lee sat robotic, barely reacting.
Mow vamped like a pro. Immediately going into the back-story about how Blockstream AMP had recently been rebranded from Liquid Securities to make it clear the technology had more than one application. For example, a project currently underway by the Bermuda government would issue stimulus tokens to bolster its citizens during economic downturns. But the tokens could only be spent at certain locations, for example to buy food, or pay a babysitter. “It’s a very broad platform,” said Mow, “that has broad, sweeping implications.” That is, of course, if it works, I thought to myself.
Alves Dias interjected. He’d found the error, some old code. “The asset has been properly associated with a category,” he said. “It’s already visible online.” By matching the code embedded in the asset to the code embedded in Lee’s wallet, they ensured that only Lee, and other compliant regulators, could trade the assets. And by doing so, took a huge step towards ensuring that traders generally speaking were compliant, without needing a costly middleman to check every transaction. I took another bite of my salad, watching to see what would happen next.
After a bit of back and forth to confirm Alves Dias would send the securities to Lee’s wallet he wound up for what would be the final pitch if this was the World Series. “Now, I’m going to run the actual commit to distribute,” he said as he typed. After comparing the code in the EXO tokens with the code in Lee’s wallet, the software sent a message to the AMP platform’s underlying technology, called the Liquid Network, a separate blockchain that sits on top of the bitcoin blockchain. “Okay, and then…there is another mistake.” Alves Dias laughed nervously. “Let me double check.”
Mow vamped again, explaining how the Green wallet Lee was using, purchased by Blockstream in 2016 for an undisclosed amount, can now hold any asset issued on Liquid, called a sidechain, and already included a version of the Japanese Yen, the Canadian dollar, and of course bitcoin itself. Alves Dias identified the errant code, enthusiastically interrupting. “We’re just starting to commence,” he said, pausing apprehensively. “Soooo, that’s it. It’s issued now.” He looked into the camera at Mow, myself, and Lee. “So, maybe Charlie, you can have a look?” Lee replied, holding up his phone. “Okay, I see I received 10,000 EXO from exordium.co.”
To capture the moment I asked if I could take a picture. In the image, Alves Dias sits literally surrounded by the code he’s just executed, Lee casually holds up his phone to prove the transaction, and Mow oversees it all, smiling like a proud father. Thanks to a virtual green screen behind Lee, obscuring everything in Lee’s room except himself, it took four tries before the image of the phone wasn’t also obscured. “Its the green wallet,” quipped Alves Dias. “So it gets erased by the green screen.” What I’d witnessed wasn’t flawless, but it was elegant in its simplicity.
In total, a relatively small $3.1 million was invested by Lee, Blockstream CEO Adam Back, former Monero lead maintainer, Riccardo “FluffyPony” Spagni, an influential, pseudonymous investor known on Twitter as @WhalePanda and others. Approximately 20% of the firm’s revenue is expected to be shared among the early investors, employees and other token holders, with a four-year vesting schedule. Exordium is currently raising another $12 million via additional token offerings in the U.S. and EU. But it isn’t the size of the investment that’s important here, it’s the technology.
“With a normal investment, you invest in a company and then you get the equity. And it’s a piece of paper, or it’s a digital certificate or something,” says Lee. “But you don’t actually hold the token in your hand, and you can’t really transact with it. And you can only cash out when the company goes IPO or it gets bought-out. But with an STO investment, the upside is it’s it can be quite liquid.” Mow says that “STOs are going to open up the door for a lot of smaller investors that typically would not have access to these types of deals. Early round investments will typically go to insiders in legacy finance or equity firms or VCs with a big name. But if more people are adopting security token offerings, and these tokenized platforms where they can solicit investments from the market, then it democratizes the whole investment process.”
In addition to being the CSO of Blockstream, in 2011 Mow founded Shanghai, China-based Pixelmatic, which developed the first video game Exordium will publish, called Infinite Fleet. Unlike more traditional video games like Super Mario Brothers, where coins can be used to buy extra lives, or purchase items that disappear when the game turns off, or World of Warcraft that lets you keep and trade virtual items like swords indefinitely, but only within the game itself, Pixelmatic builds video games where the coins and digital items will be able to be exported, traded on cryptocurrency exchanges, and used to purchase real goods. To give an idea for the possible demand, a 2019 report for the 8th International Congress on Advanced Applied Informatics estimated that $2.9 billion is spent annually on digital goods.
The current fundraising round will be used to develop Infinite Fleet, created by lead systems designer of Age of Empires, Jason Lee and technical art director on Age of Empires IV, Wayne Wong-Chong. The massively muilti-player online (MMO) game lets players earn a cryptocurrency called INF—also created using the Liquid Network—by blowing up spaceships and defeating armadas. Similar to bitcoin, these tokens will have a fixed supply, making it easier for them to accumulate value on the open market, assuming the development of a secondary market of people who want to spend the token or speculate on it. The game is currently in closed beta, meaning invited players can test out its limited functionality. Importantly, the INF token is different than the EXO tokens Lee, Back, and Spagni will receive in exchange for their investment.
The white list described above helps ensure that only qualified U.S. investors trade with other qualified U.S. investors. Exordium law firm Dorsey & Whitney due diligences the U.S. investors, while blockchain markets startup Stokr, based in Luxembourg, checks for EU compliance. The U.S. tokens are designed to comply with Reg D requirements implemented as part of the JOBS Act signed into law by former U.S. president Barack Obama in 2012 to let smaller crowdfunding operations offer capital in exchange for investment. “These kinds of assets are dividend-paying at an earlier stage of their investment evolution, and potentially liquid at an earlier stage,” says Back, whose work in the cryptocurrency field was cited by bitcoin creator Satoshi Nakamoto in the white paper first describing the technology. “And, the regulatory filings there that they’re using, [make them] potentially available to a wider range of people.”
In addition to being the CEO of Pixelmatic, Mow is the chief strategy officer of Blockstream, the Victoria, Canada-based startup developing a wide range of technology that supports bitcoin, including a satellite network designed to enable bitcoin transactions without the internet. Another product, is the Liquid Network that powers Blockstream AMP by providing additional functionality, including the ability to write code that automatically executes when certain criteria are met (called smart contracts). Liquid also has its own cryptocurrency, called liquid bitcoin. As a result, any assets created on liquid can be settled in its free market value against either bitcoin or liquid bitcoin, and traded accordingly.
While AMP’s white lists might seem to be a natural fit for letting compliant traders trade with each other without the need of a middleman, there’s at least one other application: ensuring that people exchanging the asset for a good or service only do so at select vendors. In September the Bermuda Government launched a pilot using Blockstream AMP to issue stimulus tokens spendable by 20 test citizens at three previously approved merchants. Upon successful completion of the pilot next year, the Bermuda Economic Development Corporation will prepare a wider public rollout with select merchants. “Our vision is to see the Bermuda dollar digitized on every blockchain protocol,” says Denis Pitcher, chief fintech advisor to Bermuda Premier David Burt. “A wallet on every phone and the ability for Bermuda to act as a showcase of what is possible when money and value becomes programmable and interoperable.”
Though ethereum is still the blockchain of choice for most STOs, according to a report last year, the opportunity for such a platform on bitcoin, which comprises 62% of all cryptocurrency value, is enormous—and the competition is tightening. Bitcoin’s arch nemesis Bitcoin Cash, has been quietly operating a similar service called Mint designed to enable public offerings for black market businesses, since at least April 2020, and a number of custom platforms for STOs, like Polymath and Securrency, are developing new tailor-made blockchains.
One of the biggest obstacles to mainstream adoption of STOs is the dearth of reliable markets where compliant investors can go to meet. Currently, trades of security tokens are largely limited to word-of-mouth exchanges, according to Mow. As a result, while tokenized securities promise to democratize investing by opening up access to retail investors, most trades still occur between people within a tight-knit community. Mow hopes to break that trend by opening trading of the tokens to U.S.-based INX, domiciled in Gibraltar, itself in the process of raising cash using an STO on the ethereum blockchain.
In October INX announced it purchased Chicago-based OpenFinance, a registered broker-dealer that had already been granted status as an alternative trading system (ATS), meaning it can host securities trades. INX expects to announce that it will list the security token soon. Crypto-ATS competitors include Overstock’s tZero, which in August started trading its third blockchain equity, and PPEX managed by brokerage firm North Capital, which revealed its first three blockchain equities last week.
There are, however, drawbacks to Liquid. Similar to bitcoin and ethereum, a group of computers distributed around the world, called a federation, helps ensure Liquid’s record of transactions is accurate. But unlike those earlier, more decentralized blockchains Liquid is audited by only 15 companies, called functionaries, that run custom hardware, or “boxes,” including Bitfinex, Unocoin, Crypto Garage, and others. For comparison bitcoin has 11,212 live nodes, making it nearly impossible for them to collude and change the blockchain. Sidechain competitor RSK can be downloaded by anyone, and is theoretically capable of being much more decentralized.
To help off-set concerns over centralization Blockstream plans to make it easier for functionaries to join next year. “We’re adding this new function called ‘dynafed’ or dynamic federations, where we can add and remove functionaries at will,” says Mow. “But essentially, those 15 are the ones that decide who will get a box. So they all need to be in agreement to add a new functionary.”
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