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Critique of STO platforms – Not making old mistakes

November 10, 2018

Now that there interesting in STO projects, I’m seeing a lot of people looking for services for STO’s, and some of them are making the same mistakes that I’ve seen in the past.  It’s natural to make the same mistakes, because there are some things that seem simple and logical, but just don’t work.

A lot of my thinking on STO platforms have to do with two sets of failed attempts:

  • Otonomos – This was a failed effort to put corporate filings on the blockchain.  The people involved were motivated and very will meaning, and I have personal experience as a client.  But it turned out to be a mess, and I had to spend a lot of time and energy unwinding the mess that it caused me, but it was good experience because I learned what doesn’t work.
  • Asset tokenization platforms – There are a lot of asset tokenization platforms that raised money via ICO.  Right now, it looks like the one that is heading in the right direction is polymath.

The fact that I end up spending a lot of time with tech that doesn’t work is useful stuff, and I don’t mind too much.  A few years back, the Company Registry had a pretty nifty interface for entering in corporate filings.  It turned out that after six months, the CR found out that their system had giving them garbage, and I had to refile.

So the natural effort is to provide a single end-to-end solution that’s easy to use and integrates with everything and saves time and energy.

Here is why it doesn’t work…

  • Vendor lock-in.  What happens if the platform goes down, or is abandoned?  In my case, Otonomos went out of business, and then I had to spend the effort finding another corporate filings company, and do transfers.  Also, because I’m busy, it turns out that my filings were late, so I had to pay a lot of late fees.  One of the situations is that if I could keep track of my filings, I wouldn’t need to pay a vendor to do it.
  • The importance of human beings – A lot of these services try to remove the human element.  However, with financial services (even minimal ones) you want to increase the human element.  I’m now using a corporate filing service (ask me which one if you are interested) that consists of one human being during everything by hand with paper.  The important thing about having a human being is that he knows me, and knows when to ping me that something important needs to be done.
  • System integration.  Having an integrated system with an “easy to use” front end, in fact causes more problems.  The problem is that people have existing systems, and it turns out that trying to integrate your new system with old business practices causes more time and effort than anything this can possibly save.  For example, Otonomos had a corporate dashboard which allows the board of directors to do resolutions online.  Great.  What happens if you have one director that just refuses to do that?  It turns out that even getting someone to fill out a form or log in is not a minor thing.  And if you *require* people to use an interface, then it’s impossible.
  • Lack of flexibility – The cool thing about paper is that it’s flexible.  If I have to do something different, I take a pen and write something.  Most every system that I’ve seen tries to optimize a single workflow, but if you have to do something outside that work flow then you are gone.  For example, Otonomous couldn’t handle Chinese company names.  Opps

One important thing about security tokens is that the “thing” that is being traded is not the actual object being traded.  Suppose I give you a bar of gold.  You now possess the thing of value.  Now suppose I give you the keys to my apartment.  You have possess the keys, but you don’t possess my apartment.  If I hand you a bar of gold, I just hand you a bar of gold.  Now if I’m handing you keys to my apartment, since the thing that I’m giving you is separate from the key, I can and should be able to rekey my apartment.

If someone hits me over the head, and takes the bar of gold in my bag, they win.  If someone hits me over the head, and they take the keys to my apartment, I’ll just immediately rekey the apartment.  If I can’t rekey the apartment, or if I can’t just throw out the old lock and get a new security system, then I have a problem.

So one thing about STO’s that makes it different from cryptocurrencies and ICO’s, is that any platform that I put the STO’s on are like the security system for an apartment.  I should be able to move everything off system A, and completely reissue the tokens, and then everything goes forward.

The other mistake that people are making is that they aren’t generalizing the tech.  Now suppose I want to type up a private placement memorandum.  I just bring up Microsoft Word and start typing.  If I want to calculate stuff, I just use Excel.  The thing is that I have a program that can *only* type PPM’s or calculate cap tables, this is sort of useless.  I might have a PPM that I want to fix in some random way, and I can do this with Word.  If it turns out that someone needs to print something, I can do it.

Now as far as *why* people are doing it.  It’s because of business model.  Every VC wants to become the next youtube or google.  The problem is that for anything business critical, you don’t want to get locked into youtube, and you can’t do everything on google.  The trouble is that if you decentralize, then it becomes hard to figure out where the toll booth is.

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