Interviewed By The Asian Banker Live
Philipp Pieper, partner and co-founder of Swarm Fund, talks about the nature of the company, how it is using blockchain, and how it deals with different regulations on cryptocurrencies and initial coin offerings.
Philipp Pieper: So, we’re solving for two distinct groups of people, we’re solving a very core issue. So, the first group, and that’s the group where I came from is the crypto-investors themselves, most of which actually have a high degree of their net worth in crypto assets. And so, it’s a high volatility that they’re exposed to, so by creating asset classes that are connected to real cash loads and balance sheets, I am reducing the risk profile for them and allowing them to invest in something more stable. The second group of people is family offices and retail investors that live outside the United States, outside of Europe, but they want to invest into US dollar-denominated or euro-denominated asset classes that have some kind of return and mostly, actually, there’s high degree of hurdles they have to jump through in order to successfully do that, either it’s money logistics or legal logistics or the simple fact that they actually have to bring a high degree of capital before they can actually qualify. We can break that down, we can make that more fragmented, we can standardise that using blockchain, both from the investor qualification processes and just the simple ownership processes of how to invest.
And so, ultimately, it’s beyond a cash collapse, meaning you get rid of a whole bunch of fees of middlemen, it’s also a new liquidity of a new investor base that normally wouldn’t invest in these kinds of things.
So, let’s assume for the first group of people meaning, so that’s the crypto-investors, there’s $180 billion at this point in time as market cap, this is all crypto…Well, bitcoin is a $100 million of that, and ether is basically is another $40-something billion of that, right? Yeah, and there’s the long tail falling off as a result of that, right? So, if you think that actually your portfolio should be geared more towards security, you may look at maybe, at the beginning 20% or 30% to be put into something that’s properly de-risked. So, take 20% to 30%, that’s already $40 billion to $60 billion that actually is, potentially wanting to go into this direction.
That’s right. So, give you an example, the first fund that we are actually sort of going to launch in January is a fund that actually invests into pre-IPO tech stocks, so, very significantly de-risked tech companies that have their own brand, well-known there shortly before becoming IPO candidates and people can invest in that kind of value, that market in itself in the United States is $55 billion annually, so matching up these two streams of, you know, someone that wants to deploy capital and there’s a huge sink of capital that has a very, very well-defined risk profile, that’s the market we’re going after.
It is huge, so family offices, their normal deployment of capital, they actually would like to go into these high-return asset classes, the problem is that they have a lot of things they have to go through to make that happen, there’s money logistics, there’s legal logistics, they have to get the deal flow, once they’re invested there’s actually a very long time they have to buy in their capital in that, and lastly, it is not even clear whether they actually formally can. So, by going through this mechanism, we can allow them to actually get some exposure in whatever level they want to, and make that very cheap to engage. And by the way, this doesn’t stop at family offices, it doesn’t have to be the wealthy, quite to the contrary, the retail investor has the same thing. So, if you are a $5-dollar investor from Indonesia, why don’t you get access to this kind of opportunities, and that is mostly because you don’t have enough say in dealing with the counterparts that run these kinds of investments.
So, we’ve been on this part of the question, we’ve been dealing with already for two years, and building actually sort of legal technology and sort of procedural processes that allow us to be compliant with different legislations. So, we basically, we’ve been dealing with sort of through a legal counsel and other institutions, we’re just understanding better what the Securities and Exchange Commission (SEC) and other institutions in the United States are asking, but even beyond that. So, to answer the question, we’ve constructed a two-layer token-sphere, one of which is purely the governance of the software company, which is Swarm as a foundation that builds all the software that is deployed into managing these funds. The second token-sphere is actually the asset-backed token-spheres where we’re creating a standard of how alternative investments can describe themselves, and be regulatory compliant. And that’s an off-chain marketplace that needs to abide by AML-KYC investor accreditation etc. And so, we’ve defined neural points in that, whenever someone comes in to the marketplace and wants to invest into one of those asset-backed tokens and then, takes the money out, there are different points where you have to apply these checks.
And that is happening obviously in a controlled marketplace that you can then actually check first, before you let people transact.
So, there’s… let me answer first why the reason that people look very critically to ICOs, I think the predominant one is actually, there’s a lot of Ponzi schemes, there’s a lot of noise that actually shouldn’t pitch this. So, there’s a, you need to de-fraud the marketplace and every regulator looking at that is doing the right job to protect investors, retail investors mostly from having downfalls there, right? So, you basically, there’s a safeguarding function that is the result of that.
Secondly, the criticism is that people are trying to evade securities laws. So, some of these are clearly securities. But they try to depict it as though they are not. So, we’re not even trying to do that. We’re trying to actually bring out a marketplace that actually will have securities on them. Meaning, that we’re going to be compliant with local securities laws, wherever that legislation is, it will have the proper check processes in place and so forth, and so, these many ICOs of the asset-backed tokens are actually securities that just happen to be traded to a token mechanism. So, in a way we’re trying to be like, cutting through the red tape in a more proactive way, by actually bringing the market towards that direction and making the participants transact in the regulatory-compliant way. Although, we probably are pushing the limits on many fronts, we’re trying to do it by tying in to a conversation with the regulators at the same time.
A token sale. Yes. Again, obviously the architecture benefits that tremendously, where with our counsel, we’ve been working diligently to actually make sure that our governance token, which is a Swarm token, is actually purely a utility and we’ve been qualified as such, still we are qualifying investors in accrediting them and this sort of belt and suspenders, you have to be sure, that although, you know that you have flexibility, the eventuality down the road, that something might be differently, we’re actually trying to prepare for that, and still have everything in place, when the time would be needed to. So, we’re selling a token in to the market that has been clearly defined as not a security and the outflow of the money actually built software or has software-built that is being taken to market, that basically creates a landscape of securities tokens down below.
Oh, very exciting. I think, one of my criticisms personally, for some of the ICOs is that with the moment of the ICO – is the music stops. And we’re consciously trying to do that differently. Number one, we’ve built product before. Number two, we’ve actually built business relationships that are coming to market and we’ve announced some of them. And number three, we have a very clearly defined timeframe. So, by early first quarter of next year, we will actually have the marketplace launched with the first one or two funds actually being listed there. So, the real impact on the ecosystem will take place tangibly, right away after this. So, the first immediate action is that we’re actually putting a liquidity democracy vote to place, right after the sale closes, where the participants and the members can vote on how this concept should function, so specifically the token behaviour, and so, we’re putting the money where the mouth is.
Well, you could consider every one of the underlying tokens to be it’s “own ICO”, so, that’s not the right description, it’s actually a token release that is then promoted into whoever wants to invest in it, but it’s less described as an ICO, but it’s just a token availability on the market, and obviously, there’s marketing around it, but it’s not with pre-sales, it’s not the typical way that people look at ICOs.