The Digital Wrapper | Tokeny
Derek Edward Schloss (TDW): Luc, great to have you on The Digital Wrapper. You’re the CEO of Tokeny, a Luxembourg-based tokenization platform. Before we jump in, can we talk about your background?
Luc Falempin (Tokeny): Yes, happy to be here. I have 10 years of experience in entrepreneurship. In school I studied e-commerce and marketing. To get my diploma I had to do an internship — I ended up starting a company instead which went pretty well.
Derek Edward Schloss: That’s great — what type of business?
Luc Falempin: The name of the business was IZBERG Marketplace. We started on AI within the e-commerce industry — the idea was to recommend products to end users. After some time we realized we were missing the main data — the purchase — so we started building a marketplace solution. We worked with some of the largest e-commerce websites in France, and eventually, I sold my shares in that company in 2017.
Derek Edward Schloss: You jumped right into entrepreneurship and never looked back. What brought you into the blockchain space?
Luc Falempin: Actually, it was back in 2011 — I had 1,000 euros to invest as a student. I wanted to invest it into Google, but it would have cost me 100 euros in transaction fees. It seemed like it might be difficult for a trade like this to be profitable. I found out about Bitcoin — it was $11 at the time — so I bought that instead.
Derek Edward Schloss: I think you may be the earliest to Bitcoin and blockchain that I’ve interviewed yet.
Luc Falempin: [Laughs] Yes, but six months later it was trading at $400, and I sold most of them at that time. After I sold my shares in the company, I started getting really intrigued by blockchain again. This was 2017, and I remember everybody was talking about decentralized marketplaces¹. I started my research to understand how they might work.
Derek Edward Schloss: Did you start working on Tokeny at that point?
Luc Falempin: I spoke with some of my previous investors and tried to explain what was happening in the space with tokens and with the technology. I think, because of my financial background, I had a really strong interest in securities and trading securities and how this might apply to this space. It was at this point that I started to have the initial vision for Tokeny, and building solutions for security tokens.
Derek Edward Schloss: You were ahead of the curve. There wasn’t a lot of infrastructure for security tokens back in 2017.
Luc Falempin: Yes, the market was not there yet — people wanted ICOs². We decided — “Okay, this might actually be the perfect MVP³. Simple issuance, simple tokens, simple investors, strong market demand.” We started creating compliant solutions for ICOs, and as the market matured, we refocused on STOs⁴.
Derek Edward Schloss: It sounds like you have experience building marketplace solutions, a strong understanding of business and technology, and an entrepreneurial background. How do you think these experiences help inform what you’re building at Tokeny?
Luc Falempin: Yes, I think there are two main aspects here. The first is my experience as an entrepreneur — building the team, scaling the team, getting the product to market. The second is technology experience — we’re building a transactional platform. It’s a big back-end API⁵ with different interfaces for each stakeholder. In my past venture, it was updating one million products each minute. With Tokeny, it will be recording millions of investments each minute. Many of these logics are the same.
Derek Edward Schloss: The Tokeny team is based in Luxembourg, a small but finance-savvy European country. What has it been like building security token infrastructure in Europe, and more specifically, within a financial powerhouse like Luxembourg?
Luc Falempin: Luxembourg is very interesting — we’re two hours from Paris, and my Co-Founder Daniel Coheur, also one of my previous investors, was already a Luxembourg resident. It is a small country, but like you said, it’s filled with expertise in finance and markets. When you have a place where everyone knows about finance, you’ll see interesting things happen between governments and regulation and companies. As a small country, we’re able to move much faster than other countries.
Derek Edward Schloss: We’ve already started seeing this in action, right? In February 2019, Luxembourg passed a bill giving securities issued and traded over blockchains the same legal status as other issued securities.
Luc Falempin: Yes — this was very important. It’s a positive sign for the global financial industry at large, and for Luxembourg as one of the finance leaders in Europe and the world.
Derek Edward Schloss: It’s always interesting to track the more agile regulatory environments that support new technologies, since they can often help shape and guide downstream legislation. Do you have a relationship with lawmakers, or a level of access that provides you regulatory clarity and insight as you build out Tokeny?
Luc Falempin: We meet with regulators all the time — we really have the opportunity to explain what we do at Tokeny, and what we can do with technology. They are very open to listen and cooperate. Yes, there is definitely a level of direct access which has been very helpful for us.
Derek Edward Schloss: That’s great. Let’s jump over to security tokens more broadly. In your mind, what are some of the major problems with issuing and trading securities today? Also, how might these problems be different between private and public markets, and which category does Tokeny focus on?
Luc Falempin: Yes, I think it’s important to differentiate between private securities and securities in the public markets. Public markets are already fairly liquid. Of course, you have a ton of intermediaries that make public markets expensive and inefficient, but with that said, these markets work. It may be inefficient, but they work. Private markets are different. There isn’t really a lot of infrastructure for privately traded securities, so transferability is probably the largest problem. I’m not even talking about liquidity⁶ — I’m just talking about transferability. If you want to sell shares in your company, there’s really no easily accessible marketplace to do this. It’s complicated, it’s painful, it’s costly. As a result, transferability for private securities are very limited.
Derek Edward Schloss: That’s generally how I see these problems too. Our public market problems are efficiency problems. Our private market problems are infrastructure problems. Tokeny seems to be more focused on solving the infrastructural gaps that exist in the private markets. Is that a fair statement?
Luc Falempin: Yes, that’s right. Right now, we don’t work with public securities. We really believe the biggest opportunity here is around private markets. There’s no current infrastructure built around private markets, and blockchain has the potential to be this global infrastructure.
Derek Edward Schloss: In a few words, what is Tokeny?
Luc Falempin: Tokeny is the compliant tokenization platform. We are a technology provider and an end-to-end platform to issue, manage, and transfer security tokens.
Derek Edward Schloss: Can you walk me through how Tokeny helps in each of these categories — issuance, management, and transfers?
Luc Falempin: First is our issuance solution, which includes everything to provide issuers and investors the ability to issue and tokenize securities. Compliance is a big part of this step. Blockchain infrastructure is global, which is great, but things get complicated when you’re talking about securities. Securities are regulated differently across the world. Tokeny adds value for issuers by automating the compliance of security tokens from start to finish.
Derek Edward Schloss: The second category is security token management. How does Tokeny help issuers with this process?
Luc Falempin: For security token management, we’ve actually developed a web solution to manage the entire process — including management of tokens, investors, transfers, tax reporting, compliance, and portfolio management.
Derek Edward Schloss: The third and final category is security token transfers. How does Tokeny provide value here?
Luc Falempin: Yes, as we spoke about, transfer restrictions are very important when you’re dealing with securities regulations. To restrict certain types of security token transfers, we wrote the T-REX whitepaper and standard. T-REX is Tokeny’s standard for compliant transfers of security tokens across the world and is comprised of three key pillars — identity management, a set of validation certificates emitted by trusted third parties, and a transfer manager whose role is to act as a filter for every security token transfer. Basically, these three pillars create a decentralized validator — this allows issuers to control transfers and enforce compliance.
Derek Edward Schloss: One major part of this T-REX standard is identity management. Tokeny just launched a major new effort called investorID, which allows investors to generate their own on chain identity to access and trade tokenized securities using the T-REX standard. Can you tell me more about how investorID works?
Luc Falempin: Yes. We’re using blockchain technology to provide an infrastructure for private markets. In order to apply regulation to this new infrastructure, you have to identify each and every stakeholder. We can’t identify someone with just his or her blockchain wallet alone. Instead, we created a smart contract that includes signed proof of both the investor’s identity and wallet. Proof of the KYC⁷ check and wallet is signed by a trusted third party, which creates a direct link between KYC and the investor’s wallet, signed on the blockchain. With investorID, we are creating a powerful identity management system, represented by an industry-recognized label.
Derek Edward Schloss: Will investorID tie in with government identity programs like eIDAS, Europe’s digital identity program? For those outside of Europe not familiar with this program, can you provide some background about eIDAS and other government-issued digital identities?
Luc Falempin: Yes, any form of digital identity can be connected to investorID. Once created, the blockchain identity will be under the sole control of its owner, the investor. We’re seeing many countries provide individuals with digital identities already. In Europe, we have the eIDAS — it’s a standard known within the 28 member states. The program is in progress and is currently being deployed, and basically every country in Europe will use this standard. We will connect this standard, or any other form of digital identity, to investorID.
Derek Edward Schloss: What is another example of a digital identity that can connect to investorID?
Luc Falempin: For example, anyone with a Luxembourg bank account has a LuxTrust identity, which is directly linked to their passport ID. Through investorID, we can link that LuxTrust identity to a blockchain identity. By connecting with LuxTrust, individuals can prove who they are, and enrich investorID with documents and information associated LuxTrust.
Derek Edward Schloss: Looking out, what are the major benefits that investorID will bring to security tokens?
Luc Falempin: We’re trying to make the entire security token experience digital — once everything is in digital form, automation becomes much easier. investorID will help provide new opportunities for automation. Another area of focus is self-management — with investorID, the investor is managing their own identity. The investor can grant or revoke access to third parties, and they are in control of their blockchain identity at all times, which we think is super important.
Derek Edward Schloss: Let’s say I’m an investor planning on participating in an STO powered by Tokeny’s technology solutions. How do I set up my investorID?
Luc Falempin: As an investor, you don’t need to do anything special. You will register on the website of the offering, provide your information, and make your investment. At the end of the subscription period, an investorID will be deployed automatically on the blockchain for you, and you will get your tokens.
Derek Edward Schloss: Will investorID streamline my ability to invest in other STOs from other issuers?
Luc Falempin: Yes. Once you have an investorID, when you arrive at a new issuer’s website, you’ll see the investorID logo. In one click, you will be able to connect your existing blockchain identity. As long as the new issuer trusts the same KYC providers from before, the issuer will not need to request a new KYC and identity test all over again. The investorID will already have a signature from KYC providers verifying and proving your identity. In this way, investorID is a reusable identity system that links together KYC/AML⁸ verification, wallets, and any other claims the issuer is requesting to apply compliance for each security token.
Derek Edward Schloss: If we apply the concept of investorID to the larger T-REX framework, how will investorID apply to token transfers throughout the lifecycle of the security?
Luc Falempin: Each time there is a transfer request within the T-REX framework, the on-chain validator will verify compliance and check for things like the offering type, the maximum number of investors, the list of approved countries, and the investorID.
Derek Edward Schloss: investorID is starting to get some recognition. Last week, I read that Pierre Gramegna, Luxembourg’s Finance Minister, is the first blockchain identity holder initiated through investorID.
Luc Falempin: Yes! The Luxembourg government is extremely proactive about blockchain and global technology. We’re grateful that Pierre Gramegna was the first receive a blockchain identity through the new platform.
Derek Edward Schloss: Let’s talk about Tokeny-powered security tokens once they’re ready to start trading in secondary markets. You recently announced a collaboration with London-based security token exchange, Archax. How do partnerships with trading platforms like Archax empower Tokeny’s issuers?
Luc Falempin: Archax is a London-based exchange for security tokens. Their main focus is on institutional investors, and they’ll provide liquidity for investors and for our issuers. At Tokeny, we enforce compliance to allow for transferability — but we need liquidity providers like exchanges, market makers, and broker dealers to bring liquidity, and to ensure that supply and demand can meet at the right price. Partnerships like the one with Archax definitely complements what we’re doing at Tokeny, and the Archax team is very experienced. We think it’s going to be an interesting partnership over the next few months.
Derek Edward Schloss: From what you’re describing, Tokeny aims to optimize the full tokenization process end-to-end by adding value to issuers at all stages of the stack — from issuance, to lifecycle compliance, to leveraging the distribution of liquidity partners.
Luc Falempin: Exactly, that’s right.
Derek Edward Schloss: I want to switch over to some other Tokeny news. Last week, you announced the Digital Securities Alliance, a partnership with global law firm DLA Piper that bundles world-class legal compliance and technology into a transparent pricing package for issuers. Why is this partnership significant?
Luc Falempin: Yes, this is very exciting. DLA Piper is one of the largest law firms in the world, with more than 4,000 attorneys in more than 40 countries. DLA Piper has a lot of experience in corporate law and securities law, and the idea is to create a package offer for issuers to really understand costs as they put together new security tokens. The package includes full setup from DLA Piper and Tokeny from a compliance and technology perspective, and extends through the lifecycle of the security token. The new partnership essentially creates an all-in-one package for new issuers, and a bridge between compliance and technology between two leading organizations in the security token industry.
Derek Edward Schloss: Before we end our interview, can you tell me what challenges still need to be overcome for the security token industry to really thrive?
Luc Falempin: I think the main challenge comes back to institutional awareness. Right now, it’s difficult for institutions to understand that security tokens are differentiated from cryptocurrencies. Today, we can apply the same securities regulations that we always have to security tokens. We’re following the exact same rules, and we don’t need new regulations to make this technology work. We will welcome regulatory changes — but this may happen over time as the technology is adopted. But it isn’t required today.
Derek Edward Schloss: Incremental changes in regulation moving in lock step with incremental adoption of technology. Is this how you see the security token industry evolving over time?
Luc Falempin: Yes, exactly.
Derek Edward Schloss: With that in mind, what does the rest of 2019 look like for Tokeny?
Luc Falempin: The T-REX standard is complete and fully released, and our next step is to integrate the technology with all of our partners. We’re constantly working with exchanges and liquidity providers. On the issuer side, we have some very interesting projects we’ll be announcing in the next few months. We’re setting goals for the next 10 years and working backwards from there. There’s a lot of work to be done, and technology is moving very fast.
Derek Edward Schloss: Luc, on behalf of The Digital Wrapper, thanks for your time.
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Footnotes
¹ Decentralized marketplaces are trading platforms that do not rely on a third party intermediary to hold the customer’s funds. Instead, trades occur directly between users (peer to peer) through an automated process.
² ICO is an abbreviation for Initial Coin Offering, a fundraising mechanism where individuals purchase digital tokens to help bootstrap new token-based networks. In the US, the SEC has released ICO comments to help provide guidance around compliant token-based offerings.
³ MVP is an abbreviation for Minimum Viable Product, an iterative startup process by which to develop products with just enough features to satisfy early customers, and to provide feedback for future product development.
⁴ STO is an abbreviation for Security Token Offering.
⁵ API is application programming interface — a set of subroutine definitions and tools for building software. A good API makes it easier to develop a computer program by providing all the building blocks, which are then put together by a programmer.
⁶ Liquidity is the ability to find someone on the other side of the market, at a reasonable price, for the size that you’re looking for. It’s both the size of the “bid-ask” spread, which is the difference between what people are willing to sell and buy for, and also how deep those markets are.
⁷ KYC is an abbreviation for Know Your Customer, and is used to describe the legally-required process by which a business identifies and verifies the identity of a client.
⁸ AML is an abbreviation for Anti-Money Laundering, which refers to the legally-required set of procedures, laws and regulations designed to stop the practice of generating income through illegal actions.
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