A fast-growing cryptocurrency company has staked its position in the emerging field of financial logistics by developing “programmable value” applications for cryptocurrencies. Securrency enables the programming of rules, conditions and compliance safeguards into the crypto assets themselves, providing better oversight for transactions executed on decentralized networks that may be subject to laws in multiple global jurisdictions.
Dan Doney, Chief Executive Officer, Co-Founder and Lead Architect of Securrency, was featured on a recent episode of the Investable Universe podcast. In it, he says Securrency’s infrastructure technology could reduce up to 90 percent of bank compliance requirements through automation, potentially disrupting the estimated $270 billion global market for human-centric compliance activities.
”Imagine this: I’ve got a small company in Australia that issues securities into the marketplace, and its [security] is being traded by a U.S. investor with another investor from the U.K. for another asset that was issued in the UAE. There’s four different regulatory frameworks that come into play for that particular jurisdiction,” Doney says, explaining the basic Securrency value proposition. “We have the means to take each of those rule sets and enforce it at the time of the transaction. There are very few banks who can do this, even given considerable amounts of time. They typically do with [so] with heavy-duty compliance departments, but we can eliminate those costs. And that fundamentally transforms the business of financial transactions and opens it up so that small players can participate in these big challenges at international level.”
It came from U.S. intelligence
A surprising twist to the Securrency backstory is that it may be the first crypto startup on the scene with a security clearance. Doney is a recognized industry expert in AI, cybersecurity, dynamic asset pricing, and software development, with years of experience within the U.S. intelligence establishment. After the attacks of 9/11, Dan was recruited into the National Security Agency (NSA), and went on to serve in the Department of Homeland Security (DHS), the FBI, and the Defense Intelligence Agency, where he served as Chief Innovation Officer before leaving to launch Securrency.
Doney says that while Securrency aims to disrupt old-school compliance, government oversight of cryptocurrency and blockchain transactions is definitely not being disrupted—and will likely only intensify in coming years.
”In the end, anyone who figures that governments are going to turn away and not intervene is just flat out wrong,” Doney says, explaining that his own exposure to Bitcoin dates from his involvement in the first BTC transaction back in 2012. He was thrilled by the potential of the technology, only to return to his day job working for the U.S. intelligence community, where a top priority was combating human trafficking—which was also being facilitated with Bitcoin payments.
“Very clearly, as you inspected these Bitcoin transactions, you saw a nexus with human trafficking and Bitcoin transactions. It’s not the [kind of thing] that you could say, ‘Well, this is a censorship-free currency. Let’s just step back and accept that.’ No reasonable government, no reasonable society can say, ‘Let’s [just] let that happen.’ There has to be oversight—and there will be oversight—for the sake of protection.”
He says there are similar misperceptions about the secrecy of transactions using stablecoin, which are fiat-denominated blockchain instruments, though not a precise analog to paper money. Cash can be used for illicit activities with little oversight, but it’s harder for a person to take $100 million of cash across borders without disclosing it, or facing seizure. Because of the potential for and demonstrated history of abuse, stablecoin transactions on blockchain will continue to draw regulatory scrutiny.
Get ready for Blockchain bonds
As Bitcoin has become more widespread in the legitimate financial space, one potential use case has been asset tokenization, or fractional ownership of large, illiquid assets that are priced in units of cryptocurrency and traded on a blockchain.
But Securrency’s Doney says you might be surprised to learn that the ripest market for fractionalization is neither real estate nor art.
“Distributed ledger technologies are just database technologies. But they’re ones that allow for an immutable record for consensus—for all parties to agree on the truth and for programmability. And so, with those principles, we can actually take legacy financial instruments and represent their ownership and transact…very efficiently. Crypto isn’t only cryptocurrencies. It’s any share of anything that can be represented in this model and transacted efficiently. So that’s the exciting new world.
“Now, here’s where most of the crypto community or the blockchain or even the tokenization community is flat out wrong: real estate is not the ideal asset. Nor is art the ideal asset. We think both of those things will be important over time. But here’s why. First, if I take a piece of real estate ownership stake in, let’s say…my house, and I fractionalize it. First, the price of the instrument is actually the hard thing to assess. What is the value of my house? Just representing it in shares actually makes my house less liquid, because it’s now hard to sell my house from underneath this token structure without having everyone agree to it. So, the first question is, if you’re holding ten shares of [a] house, did they have mold in their basement? Did someone just put up a ceiling? It’s actually the pricing information which defines liquidity now. So we think that there is an important future for the tokenization of real estate or art. But it’s farther down the line,” he says.
A nearer term tokenization use case could be REITs, Doney explains, as these investment trusts are administrated by managers—”professional curators,” in a sense, whose job it is to actually track each of the individual assets in those funds. This shifts the risk from the individual asset to the systemic level: i.e. a region or particular sector. This still presents challenges in pricing the instruments without sufficient information.
“Debt, on the other hand, on blockchain becomes very easy to price,” Doney says. “Debt really represents yield. If I own a bond, what I own is future income streams. If I own a mortgage, I own future income streams. One of the powers of blockchain is that mortgages can be self-processing. [A mortgage’s] history—every time a payment was made, every time a payment is late—is actually built into the instrument itself, so it’s much easier to know the behavior and performance of that instrument. What’s more, because it represents yield, if its price goes down, its yield goes up, and if its price goes up, its yield goes down, etc., so its price varies. It’s easy for the market to settle in around a price. It’s not a pure speculative asset, as real estate [not tied to income streams] would be. So debt is much easier to price. It’s therefore much easier to become liquid in this market…So, this is where the market’s…already’s going very quickly. And those early moves to tokenize real estate, we’ve found they haven’t actually created liquidity in any substantial way.”