Fintelum has established a custom token launch platform to cater to token issuers in carrying out technically sound and compliant ICO/STO token sales. Fintelum was founded in 2018 and subsequently licensed by the Estonian FIU to provide services for the crypto industry in compliance with EU AML laws.
TeqAtlas: How did you come to be interested in the Digital Securities space?
Liza Aizupiete: A tech-savvy colleague introduced Bitcoin to me about 7 years ago. Given my libertarian penchants, I immediately took to it. Soon enough, I pondered what business should be built around what I thought of as “the future of money”.
With our team, at the time, we worked in trading and portfolio management. We traded both physical and derivative commodities. We employed various arbitrage strategies in listed exchange instruments, especially in commodities globally and myself, particularly in China mainland. From this background, combined with not-so-stellar experience in trading on then-existing bitcoin exchanges, we decided that a quality and regulated bitcoin trading venue should be established. That is how we started to build an EMI (electronic money institution) licensed exchange. It also carried out a successful ICO, pre-selling platform fees in the form of utility tokens. However, following the fundraise, with my team, we were unfortunately ousted from our company, as founders and minority shareholders. Instead of going to court, we decided to build Fintelum. Our new venture deals directly with the issues we previously encountered: having greedy venture capital investors vying for control and takeover in our own company. We believe crowdfunding in many projects can be a better alternative to giving up control to one or several investors. Equity or debt crowdfunding schemes offer a variety of setups and investor rights.
Today, Fintelum is an IT development and compliance provider, authorized by the Estonian Financial Intelligence Unit (FIU) to provide cryptocurrency custodian wallet and exchange services in compliance with EU AML laws. Our main product is a token launch platform, specializing in security token offering (STO) and initial coin offering (ICO) primary issuance and secondary P2P trading with emphasis on Know Your Customer (KYC) and anti-money laundering (AML) compliance and technology services.
We have also developed our own STO implementation and can, therefore, operate as a security or utility crowdfunding platform, tokenizing any type of assets with the opportunity of trading them on a P2P secondary market.
TA: What is your unique approach to determining if the project is suitable for the tokenization?
LA: We get a lot of inquiries from various industries, especially in real- estate. We encourage physical industries to consider tokenization as a fundraising option. There are also those who look at tokenization as an exit strategy for their early investment. We get both utility and security token issuance inquiries, with a predominant interest in securities offerings. The project’s suitability can be assessed from the point of view of an investor. If the project is a pure white paper idea without a ready minimum viable product (MVP), or there are no clear benefits to why an investor may want to own the project, then such project is likely to be too early or unfit for tokenization. Such projects may, however, qualify for grants or donations, depending on the business case.
TA: Have you ever refused to provide the DSO (Digital Securities Offering) services to any company? What were the reasons? What companies do you think are not suited for DSOs?
LA: Yes, we have been upfront with our potential clients as to what we can and what we cannot do for them. Many turn away as a consequence, expecting more than this industry can offer. Some, we have advised about other sources of financing instead. And to some others, we have told outright that their project needs more development. To others again, we offer our own IT development services. We’ll see if they decide to tokenize in the end. To yet others, we are able to provide our product as a white-labeled solution — namely, an exchange product both centralized and decentralized; wallet systems; blockchain solutions and much more.
TA: There is a lot of interest in the DSO fundraising instrument among the real estate related companies. What are the reasons for that as per your opinion?
LA: Real estate is something tangible and relatively stable as an asset. Also, for some real estate owners, tokenization presents itself as either a financing option or an outright exit strategy.
TA: The EU adopted a new prospectus regulation recently to streamline the EU prospectus regime. Will this impact on how you do KYC/AML or DSO process in general?
LA: We at Fintelum have been counting down to 21 July 2019, when the new regulation comes into force to increase the threshold to EUR 8m where issuers are exempt from publishing a full prospectus, as proposed by the EU
Our processes are compliant with the EU KYC/AML requirements. Namely, they are fully in line with the 5th EU AML directive. Indeed, we applaud to EU-wide uniform prospectus regime and process simplification. We also hope each member state will implement the maximum possible threshold for a prospectus-free issue, as well as we hope that EU institutions will move swiftly to adopt the EU Crowdfunding Regulation. This means startups and various tokenization projects will be able to raise public capital as well as access the subsequent secondary market more easily.
TA: Could you please comment on the recent news on the FCA's ban on financial instruments linked to digital cryptocurrencies? How could this impact blockchain service providers that are working in the Digital Securities space?
LA: It is not clear what came over the lenient and reasonable regulator thus far, the UK’s FCA. My hope is that the recent proposal to ban financial instruments linked to digital cryptocurrencies such as bitcoin will not come into force. If it does, however, this may incite a thriving and inevitable under-the-radar market. We firmly believe that financial education is the answer, not legally prohibiting financial innovation from happening.
TA: What do you think will help resolve issues related to the extreme volatility of the crypto assets?
LA: It is important to, first of all, distinguish crypto assets as currencies from other types of assets, such as security or utility tokens. Tokens that are not payment tokens are stable in so far as their represented underlying assets are stable. Whereas cryptocurrencies, be it Bitcoin, Ether or more privacy centered Monero are still very new currencies.
It’s perfectly acceptable that a new currency is taking time and exhibiting certain volatility along the way of establishing itself as an accepted means of payment. If you just want to use stable digital money, you may as well use a centralized, stable coin that purports to have 1:1 peg to some widely accepted asset such as the US Dollar. However, it is not the purpose of decentralized cryptographic money. The whole point is to offer an alternative monetary system, where the money supply is not tampered with by anonymous private central bankers, affiliated to governments.
Therefore, I do not believe that the volatility is a problem as far as payment cryptocurrencies go. Rather, it’s a necessary side-effect of a free-market currency.
A stable monetary asset is the one, where demand and supply are in relative balance. It can be achieved by ever-increasing points of contact, where these assets are required to circulate. Therefore, it will take a wider acceptance as a means of payment for cryptocurrencies to gain stability. Not only as a payment for coffee in cyberpunk cafes, but also as means of exchange for bulk commodities in industrial use and financial assets priced in crypto.
TA: Why do you think most retail investors have difficulties with properly valuing crypto assets? What would you suggest they do?
LA: It is not easy to evaluate anything in life, let alone a myriad of investment opportunities currently presenting to the retail investors. On the one hand, it is great that the doors swing wide open to retail with opportunities never possible before. On the other hand, it is a real problem to navigate the scene, especially in crypto assets. I predict that there will be more standardized analytics options available to the investing community.
Analytics tools that employ artificial intelligence to classify and score the given investment opportunity. Then there are also investors who voice their opinion publicly or the so-called influencers. I would suggest caution and maximum disclosure from anyone who recommends investment into any particular asset. Listen less to the hype and evaluate individually the investment quality of the project or asset.
Finally, investment always involves risk. With democratizing access to investment opportunities, we do not modify statistics about success ratios. There will still be 9/10 early-stage projects that fail. As long as full disclosures have been provided, we can at least try to weed out the bad actors.
TA: What do you think the future holds in terms of finding a balance between outdated regulatory framework and FinTech innovations?
LA: With regards to small capitalization markets and crypto, there are three points that the regulators will need to come to terms with. There are no 100% effective preventive measures for stopping fraud. The best way is to require full disclosure rather than stop the game itself. The issuer with or without a prospectus requirement should be able to act on their own account; it is not a licensed activity to solicit public funds within certain limits. The issuers should also be free to use technical, legal, marketing and other service providers, the regulator should not stipulate any required entities, as it leads to inevitable cronyism and closed competition. Representing securities or utilities with a cryptographic token may need to be elaborated as a law. And finally, we will need a wider definition for cryptoassets as a perfectly acceptable means of payment. Germany and Japan have been at the forefront of admitting cryptocurrencies to be either “private money” or “accepted means of payment”.
TA: The blockchain service providers market is growing day by day - as does their competition. Have you experienced this in the niche you are operating in? What is your main approach to attract new clients?
LA: This is true in wider financial markets. There is a certain shift of preference for consumers from old school financial service providers to new and disruptive players. The competition is also on the rise amongst banking disruptors. Although the core services remain the same, the newcomers win by placing emphasis on user experience and most importantly - the speed of execution.
As for various blockchain-related projects, it depends on the services industry. For us, the small capitalization markets, or crypto crowdfunding space is still very new, when it comes to securities issuance. There are indeed a handful of securities issuance instances, not counting self-made projects, that have been successful. Today, we are still in a FFF (friends, fools and family) stage for STO industry development at large.
TA: Many blockchain companies operating in the DSO space attract partners among blockchain technology solutions to occupy a larger market share together. What do you think of this approach?
LA: Indeed, it has been a trend to announce various partnerships for issuance platforms and trading venues, or compliance providers with legal services providers and alike. Consolidation is a valid strategy in the present state of development. The utility token (ICO) bubble has been burst by the regulatory scrutiny and the security (STO) token issuance is indeed slow to takeoff.
For Fintelum, it is also possible to envisage a partner in the space. Despite the wide scope of services that we can put on the table. Namely, primary security or utility token issuance, secondary P2P trading, white-labeling and IT development. Fintelum could still benefit from partnerships in the space for marketing and distribution as well as legal counsel, ready to help advise our clients across all EU jurisdictions.
With the help of our own STO implementation, we ensure compliance with the issuer’s jurisdiction laws and provide the full scope of technical and compliance tools to carry out the fundraise or P2P trade. There is, however, always a space to collaborate, and we’re open to partnerships.