The biggest developments in the future of tokenization will be how companies interact with existing legal structures as the regulatory environment will only become stricter and more tenuous. While there are many applications for blockchain technology, there is no legal precedent to provide any clear procedures going forward. For the near future, it will be new blockchain companies who will work to carve out new legal initiatives inside current laws.
It’s for this reason that I believe LAToken will not overcome this hurdle, they have simply built a platform for exchange, but no true legal backing exists. From my understanding, they do not have the legal team in place to establish new ways of incorporating current contract law on the blockchain. I’m also not even sure if they actually are holding the equity shares and assets they are facilitating the sale of on their platform.
They are not the only tokenized asset platform with fundamental problems, there are others that provide no legal contract between the user and the exchange, force users to trade with volatile tokens, cap profits at 100% or are simply waiting for change to occur in the regulatory environment to facilitate their operations.
This is where BrickBlock plans to break ground and separate itself from its competitors, by having all of their equity tokens are backed physical shares, commodities and currencies and enforced by legally binding smart contracts between all parties. By doing so, BrickBlock wants to create the most secure platform against counterparty risk and a valid structure for the exchange of hard equity asset tokens.
Types of Funds
The BrickBlock trading ecosystem has five separate trading structures for real estate funds (REFs), exchange-traded funds (ETFs), passive coin-traded funds (CTF) and active coin managed funds (CMFs).
Property was actually BrickBlock’s catalyst, as founder Jakob told me “Previously I had been successful selling a few apartment buildings, and I had more clients coming to me, so I wanted to develop a structure so as to not take the risk that they trust me and then the market crashes and then I’m responsible for their loses.” However, after he met co-founder Martin in Berlin in April 2016, they quickly came up with the idea and really started on the project in 2016. Describing how the company’s name came about, Jakob said “This is how the name was chosen. I’m the brick, because I’m into real estate and traditional business and Martin in the block, because he’s been into the blockchain since 2011/12.”
BrickBlock user’s wanting to purchase property will at first be able to only be invested into REF’s, which are actively managed by a fund manager. Each fund can have a different strategy or focus, allowing for diversification across different regions and price points, net asset value or minimum investments. In the beginning, geographic focus will be on Germany and then follow suit to the rest of Europe, then global. Later, once the platform has established itself, real estate investment trusts (REITs) and real estate crowdfunding will be added.
During my discussions with Jakob, it became clear that they have big plans for incorporating their blockchain into existing German legal structures. “We are working together with Dr. Richter and Axel Von Goldbeck. They are part of DWF, which is a big law firm and Dr. Nina Seidler, who was speaking at one of our events, is head of the Bundsbank blockchain, which is fighting in Germany to get blockchain on the political agenda, as there are new elections this year. They are the leading partner we are working with in Germany. As we want to sell the first apartment on the blockchain in November 2017, we have the confidences of Dr. Richter that we can make this happen.”
While they may have started by just focusing on property, the team found out that their legal and Digital Trust Fund (DTF) structure could be used to create Proof-of-Asset (POA) tokens for other assets, such as ETFs, which are a huge part of traditional market structures. “We will focus on indices at first. We will start with European ones, then go onto American markets.” The interesting thing about ETFs is that for the broker-dealer who provides the liquidity for the users, it doesn’t matter which ETFs are sold on the platform. What will determine availability is demand and new ETFs will be added if there is a big enough demand for it.
More interesting though, is that broker-dealers who establish trust will be given additional abilities to create new ETF entries without the approval of BrickBlock’s management team. “We are doing an umbrella smart contract, which has all the other smart contracts under it. We can give the broker the possibility, if we trust him, to make their own smart contracts on the platform. For example, Jane Street is a big ETF broker, we could give them access keys for generating their own smart contracts to set their own parameters, feed, ETF type, ISIN, minimum and maximum invest and put it immediately on our platform.”
In the future, stocks and other tradable assets could be added, as their legal structure are exactly the same as an ETF. In effect BrickBlock could become one of the largest exchanges in the world eventually. Long term Jakob said, “I want to be the New York Stock Exchange on the blockchain.”
Coin Managed Funds
As a trader, one of the more interesting things about BrickBlock for me was their Coin Managed Funds. After conducting KYC, signing a contract, and conducting a background check, BrickBlock will allow that trader or fund to raise capital on their platform. Each fund will issue its own POA token and will either trade on secure or unsecure accounts.
A secure account is a smart contract governed account that will limit the fund manager in certain ways. For example, one fund could be limited to the Top 10 coins/tokens by market cap, another just low liquidity altcoins, or any other custom token combination. The fund manager would also not be able to extract funds from the secure account. The only way he would benefit would be through fees and profits. It’s a great way in my opinion to set a new fund up. You could raise funds either privately or publicly, have your strategy fixed and focus solely on trading.
For those funds managers who want to have full discretion as to the size of trades, placement, pairs, and exchange, BrickBlock will provide an unsecure account. After the funds are raised, they are transferred to the fund manager’s wallet where he could then deploy them. There are of course fees, which have to be paid to use the platform this way, but Jakob told me “People pay through Paypal even though there are fees because they know Paypal won’t allow fraud, there is a track record which is verified. As you trade on our platform you will get a history and people can just invest with you, as have been vetted by thousands or tens of thousands of users.”
One item which wasn’t on the platform, but could be added would be the possibility to return tokens to POA holders instead of ETH, as all the wallets involved with their system are ERC20 compliant. Smart ICO Investor may well one day become their first ICO fund on the platform. While it may just be easiest to return ETH, having this possibility could make ICO investment simpler for some.
Passive Coin Traded Funds
It’s incredible difficult to beat the market, due to several reasons. Many investors now just put money away into passive index funds, where they don’t have to worry about digging through the muck of ICO’s or trying to sort out which coins are the best. Instead they just ride the market as a whole, in both its ups and downs. BrickBlock will offer crypto investors passive CTFs where the holdings of the underlying will match a certain composition of the market whole. “You can easily buy the top 10 cryptocurrencies without a manager and make it a passive investment.”
The creation of this kind of CTF is similar in some respects to what Kyber has planned. BrickBlock will use liquidity providers (LPs) to ensure the creation and distribution of the CTF. LPs make their fees on the spread and then also the trading costs to convert tokens to ETH. When a LP deposits funds with the CTF, they receive POA tokens in return. These tokens can be redeemed from the total fund as a whole, but in blocks of no less than 5,000 tokens. “Since the underlying asset (BTC, ETH, LTC…) will be in cold storage, we need to retrieve from cold storage every time there is a redemption. To limit this bureaucratic overhead, we will set a minimum of 5000 tokens to do this work. We cannot run and do a cold storage transaction for every 10 USD.”
Because the coins are actually held in the DTF, Brickblock won’t have to balance the fund “If you have 50% BTC, 30% ETH 20% XRP and the value of the BTC goes down, you don’t have to rebalance. The only time you have to rebalance is when new CTF PoA tokens are created.”
The BrickBlock Ecosystem
In the BrickBlock ecosystem there are five actors: users purchase equity asset tokens on the BrickBlock platform, broker-dealers provide liquidity for underlying equity assets, acts as a “market maker,” the digital trust fund (DTF) holds physical shares, commodities and currencies, custodians verify and notarizes receipt of physical assets, and fund managers trade user funds.
For users, the BrickBlock platform operates a lot like an OTC desk. First, a user chooses an underlying asset they want to purchase. BrickBlock’s smart contract will issue a “request for quote” (RFQ) to the broker-dealers, who then will determine their risk and exposure, then return a price. If the user chooses to purchase the underlying, they will send ETH from their wallet to a smart contract where it will be held until settlement. From here the broker dealer will send the physical asset to a securities account of the digital trust fund. Once received, the custodian will verify and notarize its receipt and then log this information into the blockchain as a cryptographically signed document. The smart contract then opens the document, checks to see if the amounts match and then releases the ETH to the broker-dealer and transfers the Proof-of-Asset (POA) tokens to the user.
For anyone who has dealt with stock trading, this process isn’t as simple as clicking the buy or sell button. Traditionally, settlement and clearance times take three days. Once you place your order, the brokerage firm submits your order and reserves your funds for an exchange with the counterparty. On the second day, a clearing house logs the price, amount and payment method. Then only on the third day does the actual settlement and exchange of delivery versus payment occur. In today’s modern financial markets, three days is almost a century. BrickBlock’s system reduces clearing and settlement times to 10-15 minutes.
“When you look at the big clearing houses like Euroclear or Interclear, what they do is the same as tokenization. It’s the same procedure, but they are not governmental, they are private companies. All these companies are doing when they send assets is just keeping a digital record of it. So, my goal for the future, is to go an apply to be a clearing house. We can automate everything by smart contracts.”
Throughout the whole time the user holds the PoA coin, the physical asset will be held in the digital trust fund, greatly reducing risk to the client and limiting counterparty risk to just BrickBlock. Even if BrickBlock goes under, the DTF funds will be held in a trustee account inaccessible by the company.
BrickBlock was co-founded by Jakob Drzazga and Martin Mischke.
Jakob is a real estate developer, with his experience in the traditional financial sector, now adapting to the blockchain, while his partner Martin is an industry vet
Jakob told me “We started discussing BrickBlock in April of last year. Martin is a serial blockchain entrepreneur, he started in 2012 his first startups Bitcoins Berlin and Bitwala.com later on, which is one of the biggest bitcoin exchanges in Europe. After we met we started brainstorming. Last year, was the beginning, but we really got going with offices and spending time on this project in the end of 2016.”
Martin is the co-founder and ex-CFO of Bitwala, the blockchain-based payment service provider for remittance and international payments. He is a co-founder of Bitcoins Berlin, Europe’s Bitcoin startup incubator. Martin also runs Transistor, Germany’s largest fintech coworking space.
As their smart contract is already created, it will be their advisory team who really allows them to grow. Their experienced advisors have been brought in to cover each part of BrickBlock’s functionality.
Holger Schlünzen is an ETF expert working at a specialized brokerage firm, CIIA®(Certified International Investment Analyst) holder. He will help them develop their ETF offerings. Axel Von Goldbeck is a German lawyer focusing on the regulatory framework for real estate investment funds using a tokenized model. Dr. Wolfgang Richter is a business lawyer and economist with long-term experience in financial transactions and development and execution of business models. He is a partner at DWF, an international law firm. Dr. Richter has developed parallel currency structures and lately dealt with blockchain projects as an expert in crypto currencies, excited now to apply his knowledge to the tokenization of Real Estate and ETFs.
Strengths and Weaknesses
The greatest advantage in my opinion for BrickBlock will be its fund structures. There is a distinct lack of traditional financial instruments applied to the blockchain currently for retail investors. My father for instance, would be much more inclined to buy a passive crypto fund token rather than just trying to do all the research himself and figure out where to hold each token. Inclusion of retail investors into the crypto market is the next major step, as it will signal a shift to investors following value, instead of price.
Unlike LAToken, which is just a front end-platform at the moment, BrickBlock has all of their backend legal and smart contracts already concluded and available to the public. Soon they will release their alpha, which Jakob assures me “will be before the ICO.” The smart contracts are viewable right now in Github.
Additionally, it will be interesting to see how their first apartment sale goes using the platform. I believe that we will one day purchase all of our homes on the blockchain, but now there are distinct issues concerning title and ownership which have yet to be solved. Jakob was positive for the future though that laws would change to accommodate tokenization more.
But at the same time, the biggest issue BrickBlock faces is systemic for all asset tokenization, in that right now they face an uncertain legal and regulatory future ahead of them. The BrickBlock team may be planning for several different regulatory outcomes, however, tokenization presents a difficult set of issues. How do you KYC every token holder? What happens to the tokens once they are sold by the original purchaser on a third party exchange? This list goes on for a while and it’s a scary, but inevitable proposition regulators are going to have to solve. At least, in some respects, BrickBlock is doing the right things by including Dr. Richter and other lawyers on the team.
At the same time, I’m not sure if BrickBlock POA tokens are a security or not. In one sense, they are simple equity assets, however, as per the BrickBlock whitepaper, the POA tokens can and will pay dividends. This, in my mind, confirms that some tokens will be securities and others not, creating a regulatory issue for them.
Another issue is partnerships, which BrickBlock does not have many at the moment. When the platform launches, users will need the support of large liquidity providers to step in and act as market makers. Currently, they don’t have LP’s to facilitate trade on their platform. However, there are still several weeks left till the ICO and with a new marketing push coming, it can be expected that they will attract new partnerships.
In their forthcoming ICO, the company will crowdsale BBT tokens in exchange for BTC, ETH and LTC. BBT tokens will use Proof of Stake to generate Access tokens, the “gas” used by the platform. Broker dealers and fund managers will need Access tokens to list their fund or provide liquidity, continue its placement and for fund closure. Each access token will be comparable to $1 USD.
From their blog
There will be 500.000.000 Brickblock Tokens (BBT) in total. Of these:
51% will be distributed within these two phases
35% will be in company lockdown for at least three years
14% will be distributed to early backers, the bounty program, and founders
There has already been one contribution phase that started on August 2nd and raised 1 million USD. The upcoming crowdsale phase starts on October 11, 2017 and will continue for 30 days. During the second crowdsale, tokens will be sold under the following regime:
- week — 800 Tokens per 1 ETH
- week — 775 Tokens per 1 ETH
- week — 750 Tokens per 1 ETH
- week — 725 Tokens per 1 ETH
Tokens will be distributed two weeks after the end of the token sale
For all of the regulatory issues I brought up in the article, I was really impressed with Brickblock’s team and vision. They have a strong foundation set for the future and an excellent advisory board which will help them navigate legal difficulties. I will hopefully try the platform myself for my clients in the future. I would love to see how they can develop their CMF and CTF offerings. BrickBlock’s platform really could be the next NYSE on the blockchain, they have the skills and backing behind them and I will definitely be taking part in their crowdsale ICO.