Ever wondered how the recent Ripple decision might reshape the landscape of crypto investments? Join me, Joeri Billast, as I chat with the distinguished Mark Fidelman, founder of Smart Blocks Agency. Together, we unravel the implications of the Ripple decision, dissecting its nuances and exploring the pivotal exemptions to the SEC that could streamline the investment journey.
Our conversation sheds light on the Howey Test and Ripple's notable violation of the Investment Act. As we sail through the vast ocean of security tokens, we weigh their risks against those of traditional stocks and the unpredictable world of NFTs. This episode is more than just crypto talk; it's about understanding the imperative for robust regulations that safeguard both investors and digital assets.
Dive deep with us into the transformative potential of tokenization and its impending revolution in the finance sector. And before we wrap up, Mark extends a special invitation to his W3X Web3 Mastermind and provides details on how you can get in touch with him. Gear up to unlock actionable insights and empower your crypto investment decisions.
This episode was recorded through a StreamYard call on July 13, 2023. Read the blog article here: https://webdrie.net/navigating-the-ripple-decision-and-untapped-potential-of-tokenization-a-deep-dive-with-mark-fidelman-founder-of-smartblocks
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What we say is if you're selling crypto for profit or with the expectation for profit and you're putting out some sort of ICO or any kind of white paper about raising money for it, then it is a security and I think that decision reaffirms that. And so we say there's an easier way to do this and you do it through exemptions to the SEC, like a REGJ, a REGDS if you're in the US and want to sell internationally pretty easy.Joeri:
Hello everyone and welcome to the Web3 CMO Stories Podcast, season 3, episode 12. My name is Joeri Billast and I'm your podcast host, and today I'm really thrilled to be joined by Mark Fidelman. How, Mark? How are you? I'm doing well, Joeri. Thank you for having me. Yeah, I'm excited about this episode because, guys, if you don't know Marc, he's a tech- savvy founder of Smart Blocks Agency and he's a recognized force in crypto and e-commerce, from driving growth for NFT giant Wexio to running his own YouTube channel, Cryptonized. Mark's two-take-to-decade journey already is marked with impressive achievements. Mark is recognized by Forbes as a top influencer and also named as a social media keynote speaker by Ink Magazine. That's already an impressive introduction, Mark. What I was interested to invite you is, of course, the business that you are in, which is in tokenization, so I would like you to you can give some feedback or talk a bit about your background, of course, but I'm really interested to learn more about security tokens and what are those.Mark:
Yeah, I mean so. Just announced today was the ripple decision on what's security and what's not. It turns out XRP is not inherently security, but maybe part of the way they sold it to institutional investors is security. What we say is, if you're selling crypto for profit or with the expectation for profit and you're putting out some sort of ICO or any kind of white paper about raising money for it, then it is a security, and I think that decision reaffirms that. And so we say there's an easier way to do this and you do it through exemptions to the SEC, like a REGJ, a REGDS if you're in the US and you want to sell internationally, pretty easy. If it's a US investor, then it gets increasingly difficult, depending on how you want to sell to them. So security tokens are simply an exemption to the code that says, hey, you can offer these things, but you've got to follow these rules. As long as you follow these rules, then you don't have to register for to go public, and that's an arduous process, very expensive. So you could literally go public and trade on exchanges through security tokens, as long as you follow these exemptions that the SEC has put out there for you and Finder has put out there for you, and so that's what we do. We walk people through that process, we make sure they're totally legit and they get a trade on similar exchanges to crypto, but specialized exchanges that are deemed to be safer than some of the other ones that are out there.Joeri:
Yeah, it's an interesting time and then the podcast recording is really at a good moment because I haven't heard of the XRP decision. It's already been hanging for some time. Maybe also for my listeners that they understand really the difference. So you explained what is a security token, but how is it different from traditional securities?Mark:
Yeah, I mean our SEC here in the United States the pan the ass, they won't clarify anything. They go back to a 100- year- old decision called the Howey test. The Howey test essentially was about an orange grove that promised future profits if they invested in this orange grove and that is deemed a security. Back then they weren't selling it as a security with all the necessary disclosures. So the thing that that little thing applies to all crypto and anything having to do with crypto of the SEC's basically said no, that's not true. It's not inherently security, even if there's an expectation of future profit, as long as it's not coming directly from the company itself, ripple. And so if XRP is traded on secondary exchanges there's a little nuance to here Since Ripple's not the one promoting it then Ripple can't be held liable. You know, if it's a security or not, it's traded on a secondary exchange and the benefit doesn't go to Ripple directly, Michael, indirectly. But I think what the judge's rule today is it doesn't matter, they can't, they haven't violated any securities laws. What they did violate which is interesting enough, was they. The judge said what you were selling to institutional investors which are supposed to be accredited was a violation of the Investment Act or the Howey Test, but it's weird because they're accredited investors. Even if you're selling to accredited investors like institutions that should know better in the United States, you still need an exemption. So they should have gone the security token route, ironically, and filed a REG-A or a REG-D and within those, there are specialties within those or a REG-CF, but they raise more than $5 million. So they would have done a CF. That's the only thing they did wrong and they'll probably be fine for it, but everything else that the SEC claimed they did wrong was basically tossed out.Joeri:
Yeah, maybe to go for our listener to go one step back because that's already now hot in the news of scores. But can you explain a bit more about how tokenization, how it works, and which assets can be tokenized?Mark:
Yeah, really, any assets can be tokenized. What does that mean? That means you're fractionalizing the investment in something. Let's use the Mona Lisa. Everyone knows what that is. Let's say the owner of the Mona Lisa, which is probably the Louvre Museum. I could be wrong, but let's just say it is. They said look, the Mona Lisa is worth $100 billion. It's probably more than that, but let's just round numbers off. And if you want to own a piece of it, you could buy security tokens that represent your interest in it. So let's say, for every dollar, that's $100 million of ownership of the Mona Lisa. So the more you buy, the more you own, just like a stock essentially. And when that's a painting sold maybe to another museum or to a private individual, then you participate in any profits. But it's not just paintings, it's real estate, it's debt instruments, it's equity in companies. Anything of value that's tied directly to that particular token can be tokenized Royaly on an oil field, really, anything. The beauty of tokenization versus traditional is that you've got an instant pool of liquidity. So if you want to sell that interest, you could do so on the secondary markets, which the judge, at least the United States, deemed to be not security. So but even if it were, because you've issued it as a security token, it comes with all the protections that you would in a stock transaction but in the United States you could trade it anywhere in the world as opposed to a stock which you can only trade here in the United States. So there are quite a lot of benefits to security tokens. I think it's gonna open up the back. Blackrock and Bank of America and Citibank have all said by 2030, this is gonna be a massive, multi-trillion dollar market.Joeri:
Yeah, I think that the tokenization, or the concept of this, is something really interesting that the blockchain has brought us, which, will you know? It will always be there, if even our doting Web3, this is something that is here to stay. So what also is interesting, of course, with that tokenization, it's linked to smart contracts We'll hear a lot about it. So what role do smart contracts play in security tokens and offerings, and how can they streamline the investment process?Mark:
There are a lot of ways. Just like crypto, you could program the security tokens to do certain things based on certain triggers. For example, if you put out any kind of information related to the stock, it's automatically sent to the security token holders. That in itself is very efficient. You don't have to mail it out or email it out. It's just done automatically on the blockchain. Also, let's say Justin Bieber put out a security token on the earnings of his tours. You know he's going around touring and that's where he makes most of his money as a singer, maybe merchandise. But you can program it to say hey, if Jorio owns five security tokens of Justin Bieber stock or Justin Bieber security token, he gets free access to five of my concerts a year Automatically. You're just connecting your wallet to Ticketmaster or whatever site it is, and it sees that you've got five security tokens, sees that you haven't used them yet, so it'll give you access to it. I mean, really, the sky's the limit. You can get really creative. But I think you're going to see a lot of people that do get creative, especially around securitized NFTs. It's not just tokens that can be securitized, it is NFTs that can be traded. We're seeing that in Europe, where NFTs represent interest in real estate. So but the key point is, smart contracts in themselves can be programmed to do anything and it's all executable on the blockchain and nobody has to do anything. It's already been pre-programmed.Joeri:
Yeah, that's the beauty. Yeah, you mentioned real estate. One of the people in, I'm in Mastermind myself, is around team marketing, and there is someone that has clients in the real estate sector and in the real estate that's also. Tokenization can also be something really interesting because if there is a big building that people want to sell or buy, that can also be an interesting concept. Maybe you can comment a bit on that.Mark:
Well, I mean, if you want to buy or sell real estate and if you're talking about tokenizing it first, you and I, unless we've got hundreds of millions of dollars, can't get access to major projects that are out there. You know nobody. These big developers don't want to deal with somebody buying 20, 30, $50,000, and especially not $500, $1,000, it's just too much for them to manage. But if they tokenize these projects, not only can they sell it to anyone they want, because, remember, with those smart contracts, a lot of these things are being done automatically, so they instantly open up the field to anyone and everyone that wants to invest in these real estate projects. So there's a benefit to them and there's a benefit to you and I that would never be able to get in on these projects, these very valuable projects where people are making tons of money, if this option of tokenization wasn't available. And let's just say, the real estate market tanks like it's doing in commercial offices right now and we want to get out of it. Well, there's a secondary market so we can get out of it. You know we're not going to be sunk with the ship, so to speak. So a lot of advantages and I definitely think mark my words by 2030, almost all major real estate projects will be tokenized.Joeri:
I think so. If people ask me about what concepts in Web 3, that's, I talk about real estate because it's really obvious that that is the way to go. You mentioned in the beginning those challenges with SEC and so on making decisions and you're not really sure what is going to happen. But some of you can also comment on that. But some of the challenges in terms of regulation and compliance for security tokens that you are seeing and how can we address them.Mark:
Yeah, let's keep in mind that security tokens are following an SEC FINRA process, so by default, they are legal because you are following an exemption. What's not clear and this is the problem with the SEC is the security token representation of them on a secondary market. But today's decision at Ripple me clearly states hey, the SEC can't state something to security in a secondary market and blame Ripple for it. So you're safe to issue with them the correct way, which is the security token way that I've just described, with a regulatory range deal like this, but you're not going to be held liable for secondary market sales on secondary exchanges. So that's great news because that was a little bit of a mystery for people who are issuing security tokens. So in terms of that, the regulation is pretty clear. With this judge's decision, it'll probably be appealed. The real problem is we've got FINRA and SEC that aren't updating these rules in a digital world from 1928 or whatever the Howey test was put in place, They're refusing to update it and if you saw them in testifying before Congress, they couldn't say whether Ethereum was a security or not when asked directly. Well, wait a second. You guys are the body that's supposed to be telling us, hey, this is the security, this isn't, and you're punting on it. You're basically saying go find a smart attorney and hope he's correct. Well, that's no way to manage this industry. They should all be ashamed of themselves. My call is they all resign because clearly they're not ready for the digital age and we need to bring in some people that really understand what's going on and are able to regulate it properly.Joeri:
Yeah, so you know these circumstances that you don't know. You know what is going to have it. It's its risk. There are some risks involved every time you are the other's investor, and want to get an ROI on your investment. There is a risk involved. Can you talk a bit about the risks associated with investing in security tokens and all to mention the same?Mark:
same risks as Stock because it's it's very transparent, especially on the blockchain. It's actually more transparent than stocks. Every single transaction you can see and, if you could, and since these wallets are whitelisted, you can find out who's making the trades, unlike crypto, where you know a lot of these things require detective work in order to figure out who owns that wallet. Sometimes you never know, but with security tokens, they're always whitelisted, or most of them are whitelisted, so you do know. So the risks are no different than a stock. Do you know what type of risk stock? Because they're publicly traded, they have more requirements and security tokens. So it's it's riskier than a stock, but nowhere near as risky as crypto without any real protections. Yeah, so I mean you really have to study the deal. It's not an automatic win. It's not automatic. Hey, this is, this is a legit business. You, we scrutinize every company. We help bring the public and I know the exchanges are doing the same. So right now it's relatively safe. You know you'll, you'll be assured it's a real business. If we've got out in financials, they're gonna be putting out financial statements going forward. But I mean there's been plenty of fraud in the stock market as well having there. So you, you really don't know. You have to be vigilant. You've got to really check out who the founders are, and make sure that they are Legit.Joeri:
Essentially, yeah, like with every investment, a levy project, and then you never show either, because you can invest in the stock, and then things happen that you don't know as an investor. Cryptos you mentioned it. It can be very volatile. And then you have also the NFTs, which you know are. You never know really what is happening if you don't know the founders. So, therefore, it's interesting to know the utility behind it and so on. How do you look at NFTs and maybe compare this to Digital talk assets?Mark:
Well, I mean, NFTs can represent digitized assets and you'll see that more and more. I advise people never to buy NFTs, only buy them back by something, whether it's a ticket to get into a show, Real estate, or a piece of a painting. I mean, NFTs are perfect for owning a part of the painting. T he Mona Lisa example that we just described. But I really don't like this first generation. That's just a JPEG that can be copied. Yes, you own the JPEG, but so what? Unless you're able to license that for commercial purposes, who cares? I mean, that's, that's me, because you, let's say, you own one of the board apes, yeah, why can't I just copy it and put it on my site? You could ask me to take it down, sure, but so what? What do you really own? There's nothing backing it. It's, it is a unique item, but it can be copied quickly because it's digital. I don't like first- generation NFTs, but if it, if that board 8, it was backed by membership in something, which it is now. I think, yeah, it is there's some value there, right there, whatever you want to classify as value, but certainly not what they were selling for before unless this membership is making you, you know, a hundred thousand dollars a year just because you're a member. Yeah, so I think NFTs backed by something of value that you can analyze are going to be the next generation, and it should be the only general right, that also.Joeri:
You know, if people ask me about me, about NFTs, that's also when I buy an NFT or a cat NFT, it's the value, it's the utilities, is the benefits. Maybe it's a lifelong ticket, maybe it's a certificate, maybe it's access to a membership or to a community, as you say. And then you need to decide for yourself Is it worth it? And it's just because it's on the blockchain, a few more possibilities. You can sell it if you want. You can, you know, drop more stuff to people. Have the NFT. You can have maybe future benefits that you don't know what will happen. Like Gary V. If you have his NFT, maybe you will get more stuff in the future, but you don't know.Mark:
Yeah, you get access to his future events, which there's value there, but I don't think it's what he was selling it for six, seven thousand dollars, but no, it's, it's all subjective. Maybe you get VIP access, I don't know.Joeri:
Yeah, yeah, probably it's sometimes also you need to trust in. If you trust in the person who has created the NFTs and that they will add value, then I'm in the jump community. Yeah, for also some NFTs, maybe for the first time. First, look, maybe he's infallible if you are not inside the community. But it's also like a bet if you want a good bet. Now you are the CMO at SmartBlock, so there are a lot of rules and so on. How do you make sure that you find your clients, and that people know about you? That's also one of my questions.Mark:
Yeah, well, I've got a newsletter that's on LinkedIn and in sub-stack and if you subscribe to it, that kind of gives everyone an idea of what's going on in the security token industry. I've got a video channel on YouTube called Cryptonized, so it's at Cryptonized, the number one, and we talk about all of the issues that we've talked about with you. I'm on Twitter now Threads, and Instagram, so I'm putting out content, and getting feedback. We're bringing companies public. I'm working with the industry players to really promote this industry. If you're familiar with Jeffrey Moore's crossing the chasm, you know we're still trying to cross the chasm, but I think the SEC would just get clear on what it is that we need to do in order to bring our company public, and with today's decision, I think it's a little clearer that if you're issuing anything value and you're claiming it's going to go up in value, or you're issuing it a way that it looks like security, you need to go my route, which is the security token route, which is not much more expensive to go. It's certainly way less expensive than bringing a company public, and most companies can't be brought public. With security tokens, anything can be brought public.Joeri:
Yeah, that's, I think really that's what also Web 3 promises. Are those opportunities? Yeah, so you are using Web 2 channels, you know, also to get known with your Web 3 business, of course, as a lot of people do, and it's interesting how you see everything that's evolving, all the possibilities. But look now a bit in the future. What trends and developments do you see on the horizon of security tokens and tokenization?Mark:
Yeah, I mean the trends for me are more international. In the United States, if you want to get access to US investors, you'll tokenize, whatever it is, your high- value asset, because it'll be way easier for somebody in the US to buy it than if you did it locally. I see in the United States, companies, instead of going public, will tokenize their equity. We're already seeing huge bonds and other things that the big institutions are playing with every day. They're tokenizing that for a wide variety of reasons. If you look at what BlackRock's done and what they're claiming they're going to do for some of the real estate needs or what they're going to do it just makes more sense to go that direction. But look at the future. I see a tokenized future. I think this will become the norm, especially as whether it's court decisions or the SEC gets smart, they put out the right regulations, as they did with the crowdfunding initiative. That's the red CF I talked about earlier. They said hey if you're raising up to $5 million. Here's an easy path to do it. Here's how you do it. That's all we need from the SEC Right now. We're just back-dooring it through current regulations or exemptions to some of the SEC FINRA requirements, but it's following a legal process. To date, SEC and FINRA have not complained a single time because you're following a process. Now that the judge is ruling about secondary markets, it's even clearer. Tokenization is the future. Crypto will meet tokenization in the middle. Anyone who wants to issue it as an ICO, or what we call an STO, a security token offering will have to be a security token. If you just put it on the secondary market and say nothing, you're essentially okay in crypto, but I don't know what kind of value you're going to get out of that.Joeri:
So, Marky, we talked a lot about tokenization, so I guess people now get ideas, are interested in knowing more, maybe going throughout themselves themselves with their company. How can they reach out to you? How can they follow you? Why would you like to send them?Mark:
Yeah, I would just go to Smartblocks with an agency. That's our website and hit the Getting Started button. It'll ask you a few questions and then you'll be connected with me or somebody else on the team.Joeri:
Okay, and if people want to connect with you personally, you already mentioned your YouTube channel, so you will put everything in the show notes, as I always do. Is there a place that you prefer that people connect with you or follow?Mark:
You probably Twitter yeah, probably Twitter at Mark Fidelman is my Twitter handle. That's probably the best place to want to get a hold of me. Or just go to the website and just say hey, I want to talk to Mark. After you hit the Getting Starting button.Joeri:
Okay, amazing. Thanks for sharing all your wisdom on my podcast. All right, thank you. So, guys, again a really interesting podcast on a specific subject. So if you think this tokenization, these security tokens, it's something for you or maybe for someone that you know around, you be sure to share this episode with them. If you are not yet subscribed to the show, I think it's a good moment to do that now, and, of course, I would like to see you back for the next podcast episode. Take care, bye. Web3 can take your miss to new heights and you're ready to harness its power, but feeling lost and overwhelmed. Therefore, join my W3X Web3 Mastermind. Send me a personal message for more info. You can find me everywhere on social media. There's only one person with my name, Joeri Billast. Talk soon.