Inside the cryptocurrency startup that emerged from U.S. intelligence

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.”

Norwegian shipping and energy giant turns Bitcoin hodler

On Monday, Aker ASA—the 180-year-old shipping, fishing, energy and manufacturing multinational that is Norway’s 11th largest company by revenue (and 5th largest by market capitalization)—announced that it is launching a new Bitcoin subsidiary. The new firm, Seetee—a nod to the phrase “contraterrene,” or anti-matter, (abbreviated CT)—will be seeded with half a billion Norwegian fiat kroner, making Aker ASA the first major Scandinavian country to allocate to Bitcoin

According to Aker ASA Kjell Inge Røkke said the venture’s initial capitalization is expected to “increase significantly over time” as Seetee gains experience and identifies new opportunities. Seetee itself is being established under a holding company that is 90.1 percent owned by Aker Capital.

In a 23-page letter to shareholders on Monday, Røkke—Norway’s fifth-richest man and a charismatic media figure—set forth his company’s rationale for allocating to cryptocurrency, which he says is based on a three-part strategy.

True passion!

First, he said, Bitcoin has been designated Seetee’s treasury asset, making the company a holder (or, in crypto parlance, a “hodler”) as opposed to an active trader of cryptocurrency.

Second, Seetee will engage in mining operations to transfer stranded or intermittent electricity without stable demand locally—e.g. wind, solar, and hydro power— to economic assets that can be used anywhere. Røkke said his firm sees Bitcoin functioning like “a load-balancing economic battery,” batteries being “essential to the energy transition required to reach the targets of the Paris Agreement.”

Finally, Røkke wrote, Seetee will build and invest in projects and companies across Bitcoin’s ecosystem. “This is where our true passion is!” he declared.

Seetee has already launched a collaboration agreement with Bitcoin and blockchain infrastructure firm Blockstream, with an initially focus on mining operations, but later building on Blockstream's unique strengths in blockchain technology and Aker's industrial legacy and capability set.


Bitcoin may still go to zero,” Røkke acknowledged in Monday’s shareholder letter. “But it can also become the core of a new monetary architecture. If so, one bitcoin may be worth millions of dollars. The asymmetry is interesting to a portfolio. People who know the most about bitcoin believe its future success is nearly inevitable. Whereas the other camp thinks that its failure is equally certain. Status quo is not possible.”

In any case, the sensationalistic Bitcoin venture could be a valuable (and necessary) hedge for Aker ASA. The company, whose exposures to offshore oil and shipping left it hard hit by the initial wave of covid-19, lost 52 percent of its equity value in the first three months of 2020. Its fiscal fourth quarter and full year 2020 report, released late last month, showed the company’s net asset value ended the year at $53.4 billion (about $6.3 billion), up 75 percent from the previous quarter and the largest quarterly increase ever recorded in the company’s history. Upon that release, Aker ASA President and CEO Øyvind Eriksen attributed the rapid recovery to its flexibility.

“As proven in the last few months, the ability to continuously adapt is in Aker’s DNA,” Eriksen said, adding that Aker ASA had made a “step change” in its portfolio, rapidly diversifying and staking positions in renewable energy, green technology and “increasingly allocating more resources and capital to digitalization and industrial software.”

Conference Board's policy center makes appeal for sweeping U.S. infrastructure changes

The Committee for Economic Development (CED), the public policy center of the non-partisan think tank, the Conference Board, has issued a new report identifying sweeping policy recommendations for comprehensive, long-term-focused U.S. infrastructure investment.

"Modernizing our infrastructure is one of the few issues that enjoys broad bipartisan support, so both sides can work together to comprehensively address this glaring issue," said CED President Lori Esposito Murray, in a statement upon the report’s release. "The large number of areas that fall under the infrastructure rubric demonstrates its importance to our economy. A sharp focus on its role and key issues can lead the nation toward faster economic growth and job creation, environmental protection, equality of opportunity, shared prosperity, and eventual public savings."

CED’s report documented multiple shortfalls in U.S. infrastructure performance compared to other developing economies, as well as current industry standards. In many cases, they noted, Americans themselves are dissatisfied with the state of their own local or regional infrastructure, with government and private sector actors more or less equally blameworthy for the decline.

Transportation infrastructure is a key source of discontent. A 2018 Monmouth University poll found 64 percent of Americans rated the roads and bridges in their area as only fair or poor.

Energy reliability also rates poorly compared to other developed economies. CED found that the average U.S. customer loses power for 214 minutes per year, compared to 70 in the United Kingdom, 53 in France, 29 in the Netherlands, 6 in Japan and 2 minutes per year in Singapore.

“These outage durations tell only part of the story,” CED’s researchers wrote in the report. “In Japan, the average customer loses power once every 20 years. In the United States, it is once every 9 months excluding hurricanes and other strong storms.”

Despite the fact that broadband access has become “a necessity of citizenship, like public education (of which broadband has become a prerequisite), postal delivery and electrification,” CED notes that internet speed and coverage in the U.S. lag global industry standards. They point to studies from independent wireless research group Opensignal, which ranked the United States 25th in the world in overall internet speed in 2020, and 30th in the world for cellular download speed in 2019.

Yet despite the glaring need and demonstrable economic benefits of smart infrastructure investment, Bureau of Economic Analysis data shows average annual investment in U.S. non-defense public infrastructure has fallen from 4 percent of GDP in the 1960s to 2.7 percent in the 2010’s.  

What to do

CED offers a number of broad policy recommendations to reverse this decline. First, in their view, is to choose the right projects for investment, based on rigorous cost-benefit analysis. Innovation in infrastructure development should be encouraged, and cost of financing infrastructure projects should be reduced—possibly through the use of a refundable tax credit, available even to non-taxable entities.

This alternative credit, they say, would make state and local government bonds potentially attractive to a new market of institutional investors: specifically, pension funds, endowments, and insurance companies.

CED also recommends reducing regulatory burdens through smarter, more efficient regulatory regimes. They offer as an example a 2018 analysis that found the median time for review of federal projects under the National Environment Policy Act (NEPA) in the 2010’s was more than three and a half years, while Federal Highway Administration and Federal Aviation Administration projects averaged more than seven years to complete.

“Like other efforts aimed at encouraging innovation, an efficient regulatory regime would facilitate faster deployment of new technologies and upgrades to existing infrastructure assets to capture economic opportunities, increase resilience, and reduce environmental impact,” CED writes. “In areas like broadband, regulations should ensure that providers must compete over customers based on innovation, quality, and price rather than rely on barriers to entry or other forms of ‘crony capitalism.’”

PPPs

Private-sector involvement can be better managed, CED writes, through “appropriate” deployment of public-private partnerships. Such partnerships could fund the construction of new, revenue-generating projects, or assume operational responsibility for existing assets and encourage innovation, efficient operations, and sustained upkeep and modernization, rather than the “build-it-and-forget-it” approach to some public infrastructure projects that result in rapid decline due to poor maintenance.

CED favors exploring alternative approaches to private investment. While private-sector funding through tax-exempt municipal debt issuance is central to today’s U.S. infrastructure funding model, CED notes that creative financing mechanisms like Transportation Infrastructure Finance and Innovation Act assistance, as well as the (currently lapsed) Build America Bonds program, have been successful in encouraging efficient upfront utilization of private investment resources.

Finally, CED urges infrastructure policy makers to build allowances for technological advances (like the advent of autonomous and electric vehicles) and climate risk (and preparing for climate-related stresses and hazards from extreme weather events like floods, droughts and wildfires). The need for resilience and adaptability is both challenging and urgent, given that the “life cycle” of infrastructure investment is often measured in decades, while technological and environmental changes are rapidly accelerating.

“Investment decisions made today can lock in current technologies, with their carbon footprints and weather and climate effects. Given present large uncertainty, analyzing and pricing such risks will be essential to achieving sound infrastructure decisions. To avoid making such mistakes, options that preserve flexibility, even though they may add some short-term cost, may be preferable to irreversible decisions,” CED writes.

New report makes a strong case for "holistic reshoring" in the U.S. heartland

A new report from Heartland Forward, the non-partisan, non-profit Midwest economic renewal think tank based in Bentonville, Arkansas, has called for a range of “holistic reshoring” initiatives to bring manufacturing supply chains back to the U.S. heartland.

In a newly released report, “Reshoring America: Can the Heartland Lead the Way?” authors Joel Kotkin, Michael Lind and Dave Shideler cite figures from the Reshoring Initiative, the reshoring research and advocacy group started by Harry Moser, former President and CEO of industrial machinery maker GF AgieCharmilles, estimating that manufacturers have historically undercounted foreign production costs by as much as 20 percent. Adjusting for these added costs, 10-30 percent of producers considering relocating outside the U.S. would actually find it cheaper to remain or expand domestically.

As this realization catches on with some manufacturers, Heartland Forward has put the number of reshored U.S. jobs at more than 400,000 as of 2019, up from 6,000 in 2010.

That figure is expected to grow, made more urgent by critical supply shortages of personal protective equipment and other foreign-made goods experienced during the covid-19 pandemic.

According to March 2020’s Thomas Industrial Survey, covid-19 supply chain disruptions resulted specifically in an acceleration of appetite for locally-sourced materials and services, as up to 70 percent of firms surveyed said they were “likely” or “extremely likely” to reshore in the coming years.

Additionally, the authors cite a UBS study revealing that of U.S. firms now producing in China, 76 percent have moved or are planning to move capacity out of China, with one-third planning to move in the near future. Including Asian and other foreign firms, UBS projects 20 to 30 percent of all China capacity moving, which on $2.5 trillion of Chinese exports would imply $500-750 billion shifting elsewhere, not least to North America.

Multiplier

Between 2000 and 2007 alone, the authors note, the United States lost 3.4 million manufacturing jobs, about 20 percent of the overall number. Another 1.5 million were lost between 2007 and 2016.

By that time, manufacturing accounted for more than one-fifth of all blue-collar professions paying more than $15 an hour, twice its share of the overall workforce.

The authors caution that not all manufacturing jobs are likely to return, as automation and other process improvements have led to leaner operations in multiple industries. But returning jobs would be technically more demanding and potentially better paying: when counting non-wage benefits, the authors note that manufacturing workers earn 13 percent more in hourly compensation than comparable workers elsewhere in the private sector.

Additionally, they note, manufacturing typically has one of the highest multiplier values in a region, such that when manufacturing jobs are reshored, it sparks growth in other sectors by bringing dollars back into communities.

Beyond big tech

Heartland Forward writes that traded sector firms are critical to U.S. international competitiveness. In 2019, the United States exported $2.53 trillion worth of goods and services combined. Of this total, they say, only $875.8 billion, or about one-third, consisted of services. Exports of goods, on the other hand, totaled more than $1.65 trillion. Manufactured goods accounted for 45 percent of all exports.

“It is notable that intellectual property payments, like royalties to Silicon Valley tech companies and entrepreneurs, amounted to only $117.4 billion—13 percent of service exports and less than 5 percent of total exports of goods and services combined,” they write.

The authors say reshoring will require not just “sticks,” like tariffs and bans, but also “carrots,” such as tax policies that encourage investments, loans and loan guarantees, grants, public-private partnerships, and support educational and physical infrastructure to promote areas like development of critical rare metals in the U.S.

New initiatives in education, and a greater understanding of the role of tradable sectors, can be implemented across the country, they write, but most effectively in states with the logistical infrastructure and expertise, business climate and skills that are abundant in the American Heartland.

The authors cite a recent business climate assessment by Chief Executive Magazine Foundation ranking Heartland states Indiana, Ohio, and Texas at the top in business friendliness, and putting seven of the top ten mid-sized cities preferred for new investments, including Columbus, Indianapolis and Kansas City, in the region. Additionally, they note, six of the top eleven public engineering schools in the U.S. are located in the Heartland region.

The authors advocate a politically non-partisan, “holistic reshoring” strategy that would also include major investment in infrastructures like roads, bridges, and wireless networks, updating the historic role of government in these assets.

They say the federal government could also, alone or in collaboration with state and local governments, use instruments like federal loans, loan guarantees and grants under the Defense Production Act, the National Network of Manufacturing Institutes, and the Manufacturing Extension Partnership (MEP) of the National Institute for Standards and Technology (NIST), as well as new tax incentives for investment in high value-added traded sector industries, among other policies.

“The reshoring of industry should not be a partisan issue. As we have seen with the response to the production of critical medical supplies, there is a broad-based bipartisan coalition to promote such policies,” Kotkin, Lind and Shideler write. “For businesses and consumers, attempts to shift out of China could cost as much as $1 trillion, but these shifts would make supply chains more reliable and allow firms to exit from the notorious high carbon supply chains in China, which now emit more GHG than in the United States and the European Union combined.

“Overall, regional economic development strategies, particularly in the Heartland, should prioritize small, traded sector firms capable of major growth and preserve or attract existing large firms in traded industries. This emphasis should not be confused with a bias against small businesses. In a flourishing biological ecosystem, large trees provide shelter under which smaller trees can grow, along with bushes and food sources for various organisms. Similarly, large firms in a region can provide a healthy environment for local firms of all sizes and provide a consumer for their goods and services.”





KPMG sees another rich year in store for Asia-Pacific private equity

Multinational accounting firm KPMG—one of the global “Big Four” auditors—has released its forecast for 2021 private equity activity in the Asia Pacific region, where it sees ample opportunity for new fund growth and windfall exits alike.

"In Asia, General Partners (GPs) remain overwhelmingly bullish on the outlook for 2021, as demonstrated by the large amount of capital that continues to be raised and that is to be deployed in the Asia Pacific region,” said Andrew Weir, KPMG’s Global Chair in Asset Management and Real Estate, and Regional Senior Partner and Vice Chairman for KPMG China. “Given the capital available, the wider range of asset classes that GPs can invest into and their ability to invest across the capital structure, I am confident the industry will continue its strong growth trajectory in China and the rest of Asia in 2021."

Pent-up demand

KPMG notes that PE trade sale exits in Asia Pacific decreased to an aggregate value of $29.5 billion in 2020, as travel restrictions limited in-person deal meetings and due diligence activities. This in turn slowed acquisition timelines and caused delays in closing transactions.

But with the anticipated rollout of vaccines, and amid more widespread institutional embrace of virtual meetings, KPMG expects a healthy exit market for both IPOs and trade sales in Asia Pacific in 2021. Public market valuations, the firm notes, have remained steady, and this—along with a continued low interest rate environment and a backlog of delayed exits—should support seller pricing.

The Asia-Pacific IPO market itself was relatively less affected by the pandemic, a phenomenon KPMG has attributed in part to the performance of the Science and Technology Innovation Board at the Shanghai Stock Exchange (Asia’s Nasdaq-style tech big board, which launched in 2019), in a banner year for tech stocks as a whole.

China’s major exchange in Shenzhen and Shanghai, along with Hong Kong, ranked in the top five for IPO proceeds, with $118.7 billion raised during the year, 50 percent higher than the amount generated at U.S. exchanges in 2020. KPMG says the Asia Pacific market is well positioned for another year of solid IPO proceeds, with strong pipelines expected in China and India, and some large companies anticipated to IPO in Southeast Asia.

Dry powder, debt, diversification

KPMG has identified multiple themes that are likely to drive the private equity market in Asia Pacific in 2021.

First, Asia continues to outperform capital raising, setting new dry powder records. At $476 billion as of November 2020, Asia-Pacific PE and venture capital (VC) dry powder share now accounts for 25 percent of the global total, surpassing Europe’s 19 percent, which KPMG expects to continue to outstrip the U.S. and EMEA and drive deal activity.

Asset class diversification will also remain a compelling subtheme, as limited partners (LPs) increase their exposure to the region, and PE seek to expand their universe of investment strategies to attract capital.

Environmental, social, and governance (ESG) informed strategies—a familiar theme to most market participants in 2020—could see a “breakout year” as ESG as a distinct asset class is increasingly viewed as a value driver.

Private debt is likely to see continued investment momentum in 2021. KPMG notes that Asia private debt funds have more than doubled in size from $28 billion in 2014, to $64 billion as of 2019, a trend that shows no sign of slowing in 2021 as government liquidity programs are withdrawn, bank lending requirements tighten, and Asian companies continue to need financing—all of which will support demand for private credit providers.

Asia Pacific debt product offerings are also becoming increasingly diverse, encompassing direct lending, mezzanine financing, sponsor lending and special situations funds.

Infrastructure!

KPMG sees a particularly robust market for Asia Pacific private infrastructure, driven by strong investor interest and generous government incentives in both greenfield and brownfield projects. Per KPMG, global assets under management in private infrastructure funds are expected to grow 25 percent to $795 billion by 2025.

Additionally, renewable energy and logistics projects—areas that span across infrastructure, real estate and commodity asset classes—will likely continue to attract investment into Asia Pacific in 2021, particularly through local partnerships and joint ventures.

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