We spoke to MOSHE JOSHUA, CTO of Blackmoon, about how the company is opening up investment to everyone and how they’re breaking out of the ‘regulation straight-jacket’.
Our cover story earlier this summer was on financial inclusion – the cost of being poor. What’s your take on that?
There is the idea that you can split every economy into three groups – the wealthy, the middle class and the poor – but the question is how much do people have in investable savings? Not because it grants them the ability to invest and to grow their wealth, and become wealthy from that, but it grants them the ability to take risks. If you’re living paycheck to paycheck, you can’t breathe – you’re locked. If you have a little bit of a buffer, and you lose your job or something like that, it’s not so bad – you’re not going to break down. But, more importantly, as you have more investable wealth and a bit more solidification, you can take more risk. In order to gain reward, you must take risk – that’s the formula, but risk requires a certain level of cushion. That, I think, is the key point of the cost of being poor.
How did you get involved with BlackMoon and how did you initially enter this space?
I have been a technologist writing code for 25 years for all sorts of different Wall Street based firms. The thing that got me into cryptocurrencies was around nine years ago, I was working at a hedge fund and we started thinking about a crypto fund. Bitcoin was around $8 and we found it interesting. We thought it might be a bit of a bubble, but maybe we should put some real money towards it – create a fund and make it marketable. We did the research on it and realised the market just isn’t there to support $100m. There were three exchanges and limits on withdrawals and deposits. There was money to be made in terms of arbitrage, but it was a few thousand dollars a day – it wasn’t a lot. Certainly not enough to be worth our while to create a fund around it.
Through some other relationships that we had in the hedge fund, we got invited to be the first market maker on Ripple, through a partnership group that we created specifically for that. I built the model and, when the guys at Ripple saw what I did, they wanted to know how I did it, as their API didn’t support what I as doing. Then, through a lot of other conversations that went down many different paths, Ripple asked me to do the same thing for them. So I wrote and authored a technology called Ripple stream, and that gave me a really good soapbox and understanding of the underlying technology of DLT. Through those relationships, I also built a bunch of crypto arbitrage strategies for other hedge funds that were getting into the space. This started for me about six years ago.
Through that environment I realised that one of the main key points missing in the crypto industry is an ecosystem. You have to bootstrap an ecosystem first in order for it to work – there’s a network effect that makes it happen. Through that experience I was a big proponent of ‘it’s not about the currency, and it’s not about banks.’ My view was always that it was about asset management, it’s about the derivative functionality of the inventory management.
When I found out what BlackMoon was doing, I called up the CEO, Oleg, and I said- ‘I like what you’re doing, I understand everything that’s going on,’ and through that relationship he made me an offer and I took it without an argument. That was a little over a year ago.
What is the vision behind BlackMoon?
There is a tokenisation paradigm related to investment. Making an investment is actually a really hard thing to do on an operational level. You have to consider the on-boarding of an investor, the investment itself, the lock-up periods, the illiquidity, the reporting requirements that go along with it. For every fund manager that’s actually making trading decisions and taking risk, there’s probably five other people surrounding him as his support – the fund administrator, the auditor, the compliance office, the CFO, and everybody that’s sitting on top of him. Never mind the brokers and the exchanges and all the reconciliations that have to go around between all of these different counter-parties in order that everybody can oversee and ensure that that trader and fund manager is doing what he is supposed to do – that he’s investing the money correctly and not doing anything fraudulent. The whole blockchain paradigm removes a lot of that inefficiency. We as a platform have made it really convenient and easy to use, to ensure all of those same investor protections, in a compliant and regulated atmosphere, at a much better, cheaper, faster level. But all of that is really geared to the key-stone element of what BlackMoon is doing, which is creating liquidity for markets that traditionally didn’t have them.
How are you doing that, and with what products?
Right now, there are three separate product types. The core product, which we built the system for, is to support fund investment tokenisations. Funds can list themselves on the platform and we can do the full service of the operation of managing that fund from a reporting standard. So we take care of the investor on-boarding and registrations, KYC and AML; we take care of the creation event relating to the investment itself; we take care of the reporting as it relates to the NAV (net asset value), including the integration with all the fund administrators; we take care of the reporting on the transaction layer, as well as the tracking of your portfolios; and we take care of the redemption.
The second product type we have today is equity tokenisation. We have tokenised two of the largest ETFs (exchange traded funds) in the world – SPY and EEM, as well as an IPO that is listed on the Hong Kong Stock Exchange. Both of these product types will grow and expand.
The third product type, that we just recently started with, are crypto indexes, which have been very successful since we launched. We have a Top 20 tokens, representative of the Top 20 market cap coins, a couple of rebalanced daily funds – some are looking at the most volatile coins and some have a cash overlay. We’re going to expand that and add new strategies as well.
Ultimately, all three products represent an infrastructure play surrounding the ‘token-redemption-cycle’, for us to be the resource of the ETFs of the token world – not just crypto, but everything. Because the infrastructure relating to creating an ETF, managing the underlying, reporting the value of it, of the creation and redemption, as well as the pricing of it, is not so simple. There is literally no other token-issuing platform live and operational today, and none of the ones currently coming online are built for token redemptions. This is the main feature where Blackmoon separates itself, and, as a result, is able to formulate beneficial relationships and strategies focused on creating marketplace liquidity.
How does it all work from a regulatory point of view?
You do need to be regulated and compliant to be able to do that for securities. We are expecting the MiFid license approval from the Malta regulator by the end of this year. That is the standard of operating procedure that you have to have in order to do that. There are limits in terms of what can and cannot be done, it’s not so simple, but working within the framework of tokenisation, and the the framework of compliance and regulatory oversight, it’s possible, it’s just a little bit different in the token world than it is in the traditional world. We are fully compliant and very much focused on doing everything by the book.
Isn’t that one of the foremost challenges that tech companies have to deal with? Regulation around finance not being quite fit for the tech world.
I think that point is lost on technologists. Technology is easy. Technology is not intellectual property.
There are real fundamental reasons for that. I think traditionally regulations are built in a bordered environment. A regulator has a jurisdiction, created by a bordered country, that they can control. Currency plays a big role in that. But, tokenisation and decentralisation is a borderless environment. So how does a regulator regulate a borderless environment that effectively is limited to the internet and is global? That I think is where the rubber meets the road between regulation and technology. Slowly, smaller countries are coming up with novel ways to tackle that problem. Primarily because they are a little bit more nimble and they can get legislation passed a little bit faster than larger countries. Larger countries also have a lot more risk involved in order to make fast changes. Quite frankly, I don’t think the market is large enough to gain their attention to do that. I think everybody accepts the promise of blockchain, but where we are today, it hasn’t even begun to reach its promise. What we’re doing at BlackMoon is actually more of a leadership role in terms of trailblazing what can be done versus what should be done, and I think that very much plays into what can be done regulatory and compliance wise. It is a very important limitation and straight-jacket that we wear every day.
With a social app, like Facebook for example, they can choose to self regulate. With financial services, it’s the opposite, we start with the regulation – what we can and can’t do, and work our creativity within what we’re allowed to do. So if you think of regulation as a sandbox, what we can do today technically has filled the box – there’s no more room to grow, and we’re just chomping at the bit to be able to push past those limitations. So I think the limitation of the regulatory straight-jacket is loosening, but it’s going to loosen very slowly. The key point is that because technology is so flexible and so creative, as regulation changes, you’re going to see the changes in the industry immediately. Previously it wasn’t like that. Regulation would change as a response. Regulation is usually behind technology – like it’s being pulled on a leash. I think blockchain, decentralisation and the borderless environment we find ourselves in, has extended the leash to its limit. The leash doesn’t go away, because regulators still empower and control what is a financial market – these limits are never going to go away, but we’re at the edge of it in terms of pushing it forward.
There’s so much work to be done. I abide by the 90/10 rule – where 90 percent of the work gets done in 10 percent of the time. It’s always the last 10 percent of the work that gets done in the 90 percent, because it’s about the details.
What’s the biggest threat for the project?
I don’t think that there’s an active threat, but there’s a passive threat as it relates to institutional acceptance. I am sitting here in front of you telling you that it’s inevitable that tokenisation will be accepted in the traditional capital markets. But that’s an assumption, and I don’t know when – it might take a really long time. I believe it will take a really long time, it’s not going to be a light bulb event, it’s going to take its own incremental staging to get there. So the threat is time. But really the challenge is, as we mentioned, regulation and compliance.
As long as we can abide by the standard of saying – look, this is just a traditional financial company, with or without blockchain, with or without decentralisation or crypto – it’s the same thing, with a different underlying technology layer, that allows us to do things you wouldn’t traditionally be able to do it terms of being creative and creating different financial products. I do not believe that the crypto market is going to change Wall Street – it’s never going to happen. What’s going to happen is Wall Street is going to adopt the underlying technology because of the efficiency that they gain from it, and will continue to be Wall Street. US dollars are not going away just because Bitcoin exists. Bitcoin has its value proposition, and so do US dollars. Technology is a convenience factor, it’s not an economy. It’s just not big enough – that is the threat. If it doesn’t get enough traction, what we’re doing won’t be enough of a threat to the traditional economy to pay attention. But I do believe that the efficiency factor is too great to ignore and we see the traditional companies and banks looking at it, considering it as an option, but it’s not going to happen so fast.
What is your strategy as a business?
Today we have our three product types. A couple of months from now, we will have a secondary market exchange listed, the BlackMoon exchange, which will be a secondary market for those tokens that we issue. Going into the new year, and working within our Maltese broker-dealer license, we will be an issuer of STOs, which will become our fourth product line. What you know as an Initial Coin Offering, an ICO, wrapped up in a box with a bow on it called regulated security issuance, like something that’s allowable in securities markets versus ‘hey, I just created a coin.’
There is an internal strategy supporting all of the four spokes on the wheel, and again that’s the liquidity provision. Even the fact that we’re creating crypto indexes today, it’s really an infrastructure play surrounding the token redemption-paradigm, where the crypto indexes act as an ETF infrastructure that creates liquidity. So as a business strategy going forward, I’m actively engaging with other exchanges, other advisors, other aggregators, to not only increase the flow of businesses that are going to be listed on the BlackMoon platform, but also to brand together with them and leverage our infrastructure.
Are you going to work with asset managers?
This is a different product type. The core product type of what BlackMoon is, is the fund token issuance. This is live today. For example, we launched with a company called Prime Meridian, a $700m fund that is managing real-estate loans, they have an expectation of an eight percent return. Today, on BlackMoon, at the click of a button, you can become an investor in Prime Meridian, something that you probably would not be able to do by picking up the phone, calling Prime Meridian directly. There are limits that Prime Meridian has, and they recognise that tokenisation helps them.
What’s the smallest investment possible?
There’s no limit.
Won’t it potentially lead to the same thing that happened in crowdfunding, when completely ignorant people were investing?
I think crowdfunding is a bad example, primarily because the crowdfunding laws were built prior to tokenisation.
The other, better example is decimalisation. If you go back 20 or 25 years, at the New York Stock Exchange, for example, the spread of stocks were an eighth of a penny. So, a stock would go tick, tick, tick, and it would be up and down 50 cents. The volatility of that was just huge. Today, stocks are trading at the fourth decimal point because of the fractionalisation and the thickness of liquidity. What ends up happening is that the decimalisation of fractional ownership creates liquidity in of itself, and I think that’s ultimately where we’re going with tokenisation. So if you were to call up Prime Meridian today, you would be required to invest a minimum of a hundred thousand dollars, but tokenisation allows them to not just aggregate smaller amounts, but allows them into a decimalisation paradigm of liquidity creation, which is also an event that’s going to help us in the secondary market.
How do you make money as a company?
We make money by charging platform management fees to funds. We are a one-stop shop solution for fund managers – we’re a better, cheaper, faster model, but they still have to pay for the service, they just pay less. We also charge investors for access to these investments. It’s cheaper than you would pay in fees if you were investing directly, but there’s still a cost to investments. Cost to investments will always exist. That’s it, it’s really that simple. The profit model is not this fancy algorithm that we have. BlackMoon is a very traditional model, it’s just that we have cooler technology. •