Author: Kiran Garimella

Building Trust in the Private Capital Markets

Tuesday March 19, 2024

The Importance of Trust in Financial Transactions

Trust is the foundation of modern financial transactions. Without it, the intricate spider web and rabbit warren of financial processes that form the global financial system would collapse. Every financial contract, whether it is a legal contract or a social contract would be uncertain and suspect. The type of deep and universal trust is hard to build and easy to break. The financial world, with its high stakes and complex dealings, has seen its fair share of trust-shattering scandals and thefts.

Trust is lost when there is unchecked risk-taking, outright deceit, or complicated and opaque financial instruments. The 2008 financial crisis, Ponzi schemes (topped by Bernie Madoff’s scandal), and more recently the SBF fiasco don’t exactly inspire trust. These events are stark reminders of what happens when trust is violated in financial transactions. Bad as the financial losses are, the worst effect is the pervasive sense of betrayal among investors, consumers, and even regulators. Some financial losses may be recouped, but loss of trust can last a lifetime.

Building a Chain of Trust with Blockchain

But what if there was a way to incorporate trust into the very foundation of financial transactions? That would make them transparent, secure, and immutable. Moreover, that would provide the foundation for creating a Chain of Trust. Imagine a scenario where every transaction in a business process is not only connected to the ones before and after it but is also recorded in a way that cannot be altered or disputed. This is not fantasy or sci-fi. It is possible with a correctly engineered permissioned blockchain.

At a very fundamental level, blockchain is a distributed ledger that records transactions immutably after forming consensus among all the appropriate parties. A transaction recorded on the chain is trusted, provided the participants have been verified and vetted. Moreover, the transaction must be compliant with all applicable regulations. Finally, the transaction must conform to contract law. These requirements lead to a new paradigm in the private financial markets: the Chain of Trust. Not only are transactions on the chain technically linked, but they can also be proven to be compatible with regulation.

Unveiling the Power of Permissioned Blockchains

All of the above presumes that the blockchain architecture does in fact support such compliant transactions. Not all blockchains are created equal. In the context of financial transactions, where privacy and regulatory compliance are paramount, permissioned blockchains emerge as the right vehicle to implement this Chain of Trust. Unlike their permissionless counterparts, where anyone can join and participate in the network, permissioned blockchains restrict access to trusted entities only. This setup provides a safe and controlled environment where transactions are recorded and accessed by authorized and mostly regulated participants.

A permissioned blockchain serves as a digital ledger that only pre-approved members can access, ensuring that each participant is known and accountable. This is crucial for investors, broker-dealers, companies raising money, and regulators, who need assurance that their transactions are secure, compliant, and verifiable. By leveraging this technology, we can create a financial ecosystem where trust is not just expected but embedded in the system itself.

Building Momentum for Change

The value proposition of a rightly architected permissioned blockchain and the Chain of Trust it creates is not just in its security features. It’s also about efficiency and speed. Traditional financial transactions, especially those crossing borders, can be slow and fraught with red tape. With blockchain, these transactions can be streamlined, reducing the need for much of the manual intermediation, and cutting down on manual follow up and reconciliation.

Of course, no system is without its challenges. Implementing a permissioned blockchain has the challenge of creating a sufficient base of applications that work seemlessly with each other. Think of these as reference solutions that others can adopt and on which they can build and innovate. This does not require a significant overhaul of existing systems, since the goal is to completely comply with regulation. It also doesn’t require interoperability. If there is no other game in town, interoperability is moot. However, an open-ended architecture and the willingness to work with all the participants in private capital markets goes a long way in creating momentum.

So, to our investors, broker-dealers, companies looking to raise funds, and the diligent regulators keeping watch: the future of financial transactions is not a distant future or a sci-fi fantasy. It’s here now. It creates a future where trust is not a luxury but a given, thanks to the transformative power of permissioned blockchains and the Chain of Trust they enable. The road ahead may be long and winding, but the destination – a more trustworthy and efficient financial system – is clear.

Do Stablecoins Bring Stability to Digital Assets?

Thursday March 14, 2024

Risk in the financial markets, whether the underlying assets are cryptocurrencies, tokens, digital securities, or traditional instruments, continues to be an ever-present challenge. Risk is related to stability. Most investors prefer stability to provide a reliable store of value. Let us see what that means and the ways in which stability can be achieved.

Understanding Volatility and Stability in Financial Markets

Stability is the absence of fluctuation in the price, value, or some other metric. Metrics that measure risk in terms of volatility compared to the general market or adjustment for various types of risk include standard deviation, beta, Sharpe ratio, Treynor ratio, etc. While all these have mathematical roots and technical nuances, the retail investors just see the sharp rise and fall in the prices of digital assets (or in their values, if the digital assets have fundamental metrics). Bitcoin, for example, plummeted from $61,283.80 on March 12, 2021, to $31,576.20 on July 16, 2021 (a four-month span), from $64,400 on Nov 12, 2021, to $16452.20 on Nov 25, 2022 (in a span of one year). As of this writing (March 14, 2024), its price is around $73308. This is the type of volatility that can wreak emotional havoc for investors.

Stability in tradable digital assets is important for investors’ peace of mind in order to avoid panics, market manipulations, and periods of reduced liquidity. For those digital assets that represent securities that have a value (and not just a price), stability is important to assure investors that the digital assets (or tokens) represent consistent value.

The Rise of Stablecoins

Stablecoins were an innovation in response to the wild price fluctuations seen in early cryptocurrencies such as Bitcoin and Ethereum. Tether (USDT), launched in 2014, was one of the first stablecoins. It maintained a 1:1 peg to the US dollar, which provided investors a reliable alternative to volatile price movement in cryptocurrencies. Since then, various stablecoins—such as USDC, DAI, and BUSD—have been launched. Each of these have different pegging mechanisms, ranging from the US dollar to a basket of currencies and commodities, and to algorithmic rebalancing to maintain the peg ratio.

While stablecoins seem to be innovation, they have borrowed the idea form traditional financial tools used to stabilize currencies and assets. For example, some central banks peg their national fiat currencies to a basket of other (hopefully stabler) currencies, or to a basket of commodities, or some such combination. Stablecoins ideally maintain reserves of the underlying base to ensure stability, somewhat like the fractional reserve banking, where banks hold reserves to cover deposits.

Stablecoins and Beyond: Exploring Applications

The principle of stablecoins can be applied to financial instruments beyond cryptocurrencies. One example is tokenized real-estate to represent fractional ownership of real-estate which, over a large and diversified portfolio of real-estate in multiple (ideally, uncorrelated) markets, is relatively stable over an extended period of time. Stability, of course, does not imply stagnation and does not preclude an appreciation in the value of the assets. The concept of stablecoins can be applied to supply chain finance as well. This helps with consistent and reliable cross-border payments and reduced currency exchange risk in global trade. The implementation of the principle of stablecoins in these and other use cases is specific to each use case and requires careful economic engineering. These mechanisms could include the techniques that are currently extant in stablecoins for cryptocurrencies, such as algorithms to maintain stability, collateralization, or pegging to a stable base.

Foundations for Stablecoin Functionality

Stablecoins, or other tokens designed to maintain stability, can only be successful when there is credible transparency, unrestricted liquidity, and regulatory compliance. These are the three legs of the stability stool.

Credible transparency includes full disclosure of the algorithm, the collateral, or the peg (of the stable base), as applicable. Moreover, there should be independent and third-party audits of the correctness of the technical implementation of the algorithm, the reserves, or the composition of the collateral (as, for example, the proportion of the components of the pegged basket).

Unrestricted liquidity implies that there are no artificial incentives to throttle liquidity of transactions. Examples of throttling include proof of work consensus, which is highly dependent on energy prices, and fluctuation in gas fees, which can ramp up significantly in times of low volume. Each of these throttling examples are perhaps unintended consequences of the economic incentives of operating the blockchain. Consider, by way of a contrary example, how public stock market trading is reasonably stable in transaction pricing and is independent of energy prices and volume. A similar independence in liquidity would support the argument for stability.

Regulatory compliance is the final leg of the stability tool. Stability is dependent on perception of risk. Risk, in turn, is lessened when the underlying assets and transaction involving those assets are conducted in a manner that is fully compliant with regulation. There is enough uncertainty and perception of risk from macro-economic factors; what the retail public does not need is additional unnecessary risk from non-economic factors such as non-compliance, fraud, and unverified parties to the transactions.

Final insights

Stablecoins are an important tool in the quest for stability. Their adoption will continue to grow with the maturity of the participants. The scandals and scams so far, and their continuation for some time, will weed out the gullible, the incautious, and the imprudent speculators. What remains is the ecosystem of informed investors. They will seek better transparency of risk, assurance of liquidity, and adherence to regulatory compliance. Even if every financial instrument or use case does not have an explicit stablecoin associate with it, the principle of stablecoins (namely, the quest for stability) may be incorporated into the tokens or digital securities. In this way, stablecoins or their principles forge a bridge between the volatile past and a more stable future for digital securities.

Real Estate and Blockchain: How to Ride the Wave

Tuesday March 12, 2024

Real Estate and Blockchain: beyond the hype

In the ever-evolving landscape of private capital markets, the intersection of real estate and blockchain technology presents an unprecedented opportunity for innovation and compliance. My goal today is to demystify the concept of real estate tokenization and outline how it can transform the sector in a way that is 100% compliant with regulatory frameworks, particularly the U.S. Securities and Exchange Commission (SEC). Through this exploration, we will delve into the mechanics of blockchain technology, the tokenization of assets, the JOBS Act, and the pivotal role of platforms like KoreChain in navigating these waters safely and effectively.

The Foundation of Real Estate Tokenization

The buzz around blockchain technology is well-founded, with its potential to revolutionize various sectors, real estate being one of the most promising. However, the term “revolution” might not fully capture the essence of what blockchain can do for real estate. Instead, I prefer to use “transformation.” This distinction is crucial because revolution implies “rip-and-replace”, while transformation implies a comprehensive improvement in processes, enhancing efficiency, security, and transparency for all parties involved.

Tokenization in real estate isn’t merely a novel method for raising capital; it represents a fundamental shift in how properties can be owned, managed, and invested in. By breaking down assets into digital tokens, blockchain technology offers a level of flexibility and accessibility previously unimaginable in the traditional real estate market.

Navigating the Regulatory Landscape

A pivotal aspect of implementing blockchain in real estate is adherence to regulatory standards. In the U.S., the JOBS Act has been a game-changer, offering a framework for crowdfunding and securities regulation that aligns perfectly with the ethos of blockchain tokenization. Regulations such as RegD 506(b) and 506(c) have opened the doors for raising capital with fewer constraints, provided that compliance with SEC guidelines is maintained. Furthermore, the introduction of  Regulation A+ (RegA+) and Regulation Crowdfunding (RegCF) has significantly expanded the scope for who can invest and how much can be raised, democratizing investment in real estate projects.

The Role of KoreChain

Central to navigating these regulatory and technological complexities is the use of platforms like KoreChain. As a trusted partner in the realm of real estate tokenization, KoreChain facilitates the process of making offerings fully compliant with the SEC. From the initial stages of choosing the right blockchain technology to managing cap tables and engaging with investors, KoreChain and similar platforms are indispensable tools for real estate companies and sponsors looking to leverage blockchain technology.

Challenges and Solutions

Despite the promising horizon, the path to successful real estate tokenization is fraught with challenges, primarily stemming from a lack of understanding of the regulatory landscape and the technicalities of blockchain technology. Many ventures stumble not because of a lack of vision but due to a premature commitment to a specific blockchain or tokenization strategy without full consideration of the regulatory implications.

Educating and Empowering through Compliance

The key to overcoming these hurdles lies in education and strategic planning. Real estate companies must begin with a thorough understanding of the regulatory environment, particularly the nuances of the JOBS Act and SEC compliance. This foundation will not only dictate the choice of blockchain technology but also ensure that the process of raising capital is conducted efficiently and legally.

A Seven-Step Framework for Success

To assist real estate companies and sponsors in this journey, I propose a seven-step framework designed to streamline the tokenization process:

  1. Comprehensive Regulatory Review: Start with a deep dive into the JOBS Act regulations to understand which ones best fit your project.
  2. Technology Selection: Choose the blockchain technology that aligns with your regulatory strategy and business goals.
  3. Partner with Experts: Engage with trusted partners like KoreChain who can guide you through the complexities of compliance and technology implementation.
  4. Tokenization Strategy Development: Develop a clear strategy for how your real estate assets will be tokenized, considering factors like fractional ownership and investor accessibility.
  5. Investor Engagement Plan: Create a plan for engaging with potential investors, emphasizing transparency, and compliance.
  6. Cap Table Management: Implement robust technology solutions for managing your cap table and ensuring ongoing compliance.
  7. Continuous Education and Adaptation: Stay informed about regulatory and technological changes to adapt your strategy as necessary.

Embracing Change with Confidence in the relation between Real Estate and Blockchain

The fusion of real estate and blockchain through tokenization offers a future where investment is more accessible, transactions are transparent, and compliance is integral. The journey requires a blend of technological savvy, regulatory compliance, and strategic partnerships. By educating themselves and working with trusted advisors, real estate companies and sponsors can navigate this landscape confidently. Remember, the key to riding the wave of blockchain in real estate is not just about embracing new technology but doing so in a way that respects the regulatory framework and safeguards the interests of all stakeholders. In doing so, we can unlock the full potential of this transformative union.

 

KoreChain’s KoreProtocol: Safe & Compliant Management of Digital Securities

Tuesday March 5, 2024

Introduction to KoreChain Infrastructure

The KoreChain infrastructure provides a digital securities protocol for a permissioned blockchain that enables fully compliant securities transactions in multiple jurisdictions. The KoreProtocol is a specificaton for managing securities throughout their complete lifecycle phases, the main ones being issuance (birth), trading, corporate actions, and dissolution or exit.

The KoreProtocol has been specifically designed to handle financial securities. It is not a protocol for tokens or cryptocurrencies. It does not require mining by a decentralized community of unknown miners who must be incentivized to perform mining. The selection of Hyperledger Fabric as the base on which to build the KoreChain was dictated by the requirements of securities law, corporate law, and the need for flexibility and richness of securities transactions in the private capital markets.

Diverse Securities Types and the KoreProtocol

The KoreProtocol handles many types of securities, not just equity. It includes options, warrants, units, bonds, debentures, promissory notes, loans, SAFE, commercial paper, etc. All of these are represented as digital securities implemented in accordance with the specifications of the KoreProtocol and based on the underlying KoreContract, as designed in cooperation with securities lawyers.

Authorization Basis for Securities Transactions

Every securities transaction has a source that authorizes that transaction. The authorizing basis can be securities law, corporate law, offering documents, shareholders’ agreements, directors’ resolutions, voting results, or any contract. There can be more than one authorizing basis.

Example of Dividend Authorization

For example, a dividend payment derives its authorization from two documents: the shareholders’ agreement that contains a clause that the company may pay a dividend and a directors’ resolution that a specific dividend shall be paid.

KoreContract and Ricardian Contracts

Here is an example of a clause in a shareholders agreement stating the company’s dividend policy:

3.2.2. The Shareholders are entitled to the distribution of the profits of the Company for each Shareholder in proportion to the number of Shares that the Shareholder holds.

An accompanying directors resolution that declares dividends might be (ignoring preambles and other clauses):

NOW, THEREFORE, BE IT RESOLVED, that this corporation declares a dividend of $[Amount] per share of Common Stock to holders of record as of [Date], payable on [Date], subject to compliance with applicable provisions of law in [Jurisdiction(s)].

The KoreChain converts each authorizing document into a Ricardian contract, the KoreContract, which codifies deep references to clauses, variables, and data. The KoreContract is then digitally signed to make it tamper-evident. The term ‘contract’ is used here in the sense of legal contracts and not as ‘smart contracts’ (which, ironically, are neither smart nor true contracts). This implies that KoreContracts must be able to prove that they adhere to the legal doctrinal principles of contracts.

Transaction Integrity and Referential Integrity on KoreChain

The KoreProtocol, therefore, provides the functions to support a sound legal basis for KoreContracts to the extent that is possible in an electronic contract. Obviously, the structure and terms of a KoreContract are provided by the originating parties and their legal counsel; the ability of the KoreProtocol to prove the legal soundness of KoreContracts is dependent on the actual legal clauses and data within the contracts as well as the accuracy and integrity of subsequent transactions.

All securities transactions include references to the associated authorizing documents, parties involved in the transaction, and regulatory filings where required. The diagram to the right shows how immutable referential integrity is achieved on the KoreChain.

Continuing the above example, a dividend payment is not one simple transaction. It contains a number of sub-transactions such as board of directors’ approval of the dividend payout, notification of dividend payment to the company’s transfer agent, disbursement of funds from the company account to transfer agent’s account (with references to the wire or other means of money transfer), and for each shareholder, validation that they are a shareholder of record as of the record date as stipulated in the directors resolution, computation of dividend, confirmation of money transfer to shareholder’s account, and record of acknowledgment if any.

Finally, the company is notified of the completion of dividend payments. Since the KoreConX platform is fully integrated, the company’s dashboard as well as the individual dashboards of each shareholder are updated in real time.

 

Each of these sub-transactions as well as the full transaction (which may be thought of as a ‘use case’) contain immutable references to immutable and authorizing documents. The KoreProtocol provides for numerous use cases and the complex transactions that implement those use cases. 

Use Cases for Financial Instruments

Below, we identify the major use cases for some of these financial instruments.

For equity securities, the main use cases include (details here):

  1. Issuance
  2. Trading (incl. trading restrictions)
  3. Transfers
  4. Exercise of rights
  5. Financial participation
  6. Corporate actions (such as AGM, M&A, exits, etc.)
  7. External actions (such as regulatory actions)

Other securities also have their own collection of use cases.

Options and warrants

Options and warrants are equity derivative instruments. Use cases of options include granting, vesting, acceleration, exercise, and conversion. Warrants are similar to options, except that they are usually issued in a financing transaction to brokers or investors while options are generally issued to staff, advisors or consultants. While their use cases are slightly different, warrants and options transactions will be quite similar.

Debt securities

Debt securities are more varied and include bonds, debentures, promissory notes, loans, SAFE, and commercial paper. Each of these have similar use cases, such as issuance or grant, potential trading on a secondary market, and finally exercise through payout or conversion to equity at a pre-defined ratio or premium to the price of equity at the time of the grant.

Bonds and debentures are both debt instruments used by companies that wish to raise money without the dilution of issuing stock in the company. Most commonly and in the US, bonds generally refer to debt secured against specific assets while debentures are generally unsecured debt (and therefore carry higher interest). From the perspective of securities transactions, bonds and debentures are issued (or granted) and exercised upon maturity. The treatment of interest payments (installments or lump sum) or redemption of face value of the instrument (as in the case of a zero coupon bond) varies based on the terms of issuance. Further, issuers may issue bonds and debentures that are convertible to equity. These instruments may potentially trade on secondary markets.

Included in the arsenal of debt securities are promissory notes, loans, and commercial paper. All these differ from each other and from bonds and debentures in the level of formality, well-known and defined terms and conditions, and the nature of risk. Commercial Paper is a short-term debt security, with a maturity period that does not exceed 270 days. Commercial paper can be rolled over upon maturity. These debt securities can also have convertible components, making them convertible into equity using defined conversion rates and under various terms and conditions.

SAFE stands for Simple Agreement for Future Equity, designed to replace convertible notes while being compliant with securities regulation. It is similar to a warrant, except that it does not specify a price for the shares. It is also not a traditional debt security, since no interest payments are provided. Conversion to equity happens based on pre-defined events such as future investment rounds. 

The KoreProtocol for Capital Raising and Securities Management

Raising capital is a complicated process. It requires a sound understanding of the various avenues open to issuers in both equity and debt. Raising capital is also not a one-time event. Any serious startup should plan for multiple rounds, where each round could focus on one type of capital or even a combination of them.

Each of these types of securities impacts the captable in different ways during issuance, transfer, trading, payments, exercise, conversion, and redemption.

The KoreConX all-in-one platform deals with the changes to the captable, while the KoreChain creates immutable records of these transactions. The value of the KoreChain lies in the independent validation of these transactions and their results by nodes that are parties to these transactions, have subject matter expertise, or have fiduciary responsibilities to the parties to these transactions.

The results are available on the DLT for future reference, verification, auditing, and reporting.

Conclusion: Comprehensive Management of Securities Lifecycle

The KoreProtocol is designed to handle the complex use cases of capital raise and the numerous sub-transactions that implement these use cases, while remaining compliant with securities regulation in multiple jurisdictions. It is important to note that the KoreProtocol is not restricted to just the issuance or even just the trading of these securities.

In fact, the KoreProtocol handles the complete lifecycle of the various types of securities. It provides for the effects of corporate actions, regulatory actions, and other external events (such as, for example, temporary halt on trading by a secondary market operator due to extraordinary circumstances).

At a deeply granular level, the KoreProtocol ensures immutable referential integrity to satisfy transparency and audibility.

 

What is the Chain of Trust in Private Markets?

Tuesday February 27, 2024

In the context of private markets, the concept of  “Chain of Trust” refers to a network of trusted relationships among participants involved in private market transactions. It encompasses the various parties and intermediaries, such as investors, companies, brokers, and regulators, who rely on each other to ensure the integrity and security of transactions.

The Chain of Trust is crucial in private markets because these transactions often involve substantial amounts of capital, sensitive information, and complex agreements. Establishing a reliable Chain of Trust helps to foster transparency, mitigate risks, and build confidence among participants.

Here are a few key aspects of the Chain of Trust in private markets:

 

  1. Investor Trust: Private market investors, such as institutional investors, venture capitalists, and private equity firms, place significant reliance on the information and representations provided by the companies seeking capital. They need to trust that the financial data, business projections, and other relevant information are accurate and reliable.
  2. Due Diligence: Investors and other participants in private markets perform extensive due diligence to evaluate investment opportunities. This involves conducting thorough research, verifying information, and assessing the credibility and track record of the parties involved. A reliable Chain of Trust ensures that accurate and up-to-date information is available for evaluation.
  3. Intermediaries and Service Providers: Various intermediaries play a role in private market transactions, such as investment banks, law firms, accounting firms, and regulatory bodies. These entities help facilitate the transaction process, provide expertise, and ensure compliance with legal and regulatory requirements. Establishing trust in these intermediaries is crucial for maintaining the integrity of the Chain of Trust.
  4. Regulatory Compliance: Private markets operate within a regulatory framework that aims to protect investors and maintain market integrity. Regulators play a vital role in enforcing rules and regulations, ensuring fair practices, and overseeing compliance. Trust in regulatory bodies is necessary to maintain confidence in the overall Chain of Trust.
  5. Data Security and Privacy: Private market transactions involve sensitive and confidential information. Participants must have trust in the security measures implemented to protect their data from unauthorized access, breaches, or misuse. Robust cybersecurity protocols and data privacy practices are essential for maintaining trust in the Chain of Trust.

 

In all business transactions, trust requires not only the provable trustworthiness of individual participants and entities but also the provable trustworthiness of transactions between them.

A Chain of Trust allows the dissemination of information for verified Issuers (Companies) and their live offerings and removes all risks associated with the fraud.

 

Chain of Trust  

The Chain of Trust in the Infrastructure of Trust collects trusted and regulated information about the participants and their transactions with investors and partners in offerings. This information is cryptographically secured on the KoreChain to bring Trust to the Private Markets.

Each participant can view the information and see the source that is now hosted on an immutable infrastructure.  

As the information is collected from regulated sources and verified it now becomes part of the chainlink as it creates TRUST in the private capital markets.

 

  • Verification of information
  • Verifies each of the participants
    • The Issuer with CIK#
    • FINRA Broker-Dealer CRD#, CIK#, SEC#
    • FINRA Registered Funding Portal CRD#, CIK#, SEC#
    • SEC-Registered Transfer Agent CIK#
    • Escrow Bank
    • Law Firm
    • Auditors
    • SEC Offering Link

 

KoreID

KoreID revolutionizes trust in private markets by providing a digital identity to essential entities, ensuring all participants are verified and transactions are secure.

By enabling a seamless verification process, KoreID ensures that each participant and transaction adheres to the highest standards of trustworthiness and compliance

All of the following entities are provided a KoreID after verification:

  • Issuer
  • FINRA-registered Broker-Dealer
  • FINRA-registered funding portal
  • Law Firm
  • Audit Firm
  • SEC-Transfer Agent
  • Escrow Bank
  • The Offering by an Issuer

 

KoreID Verified

KoreID Verified offers an extra layer of security, specifically verifying transactions and participants in private market offerings, enhancing the ecosystem’s integrity.

The issuer is provided KoreID Verified for this specific offering and regulated participants

The KoreID and KoreID Verified play an important role when the Issuer wants to use Newswire Dissemination to reach the general public.

Resources in Focus

Newswire

By accessing the KoreID of the Issuer (Company), the Newswire team will be able to see if the company is real and review the principals, management, and board members. This reduces the risk of disseminating news to fake Issuers.

If the Issuer announces financing, the Newswire can view the KoreID Verified and review all the necessary information

 

Media Outlets

The KoreID and KoreID information is provided to the media outlets who can include that in their content. This enables the general public to view the information about the company and its offering, verify it, and have confidence in the information posted on their media outlets. The Chain of Trust is navigable so that the investor can trace the origin of the information and review the trustworthiness of the information handlers and disseminators.

 

General Public

The general public will see the KoreID and KoreID Verified which will provide information for them to view, similar to an SSL Certificate. This transparency gives the general public confidence in the company and its offering.

 

Overall, the Chain of Trust in private markets is built on transparency, credibility, due diligence, and regulatory compliance. Establishing and maintaining a strong Chain of Trust fosters a healthy and vibrant private market ecosystem where participants can confidently engage in transactions and allocate capital effectively.

 

Asset tokenization explained: opportunities & effects

Thursday February 1, 2024

Asset tokenization explained

Asset tokenization is a powerful use case for the blockchain. But what exactly is tokenization, what happens when we tokenize, and what are the benefits? Why tokenize and not leave well enough alone?

Tokenization is the process of representing an asset, physical or virtual, real or imagined, as a digital instrument, and housing it on a blockchain.

Examples of real physical assets include commercial real estate, paintings, sculptures, literature, printed music scores, gold master records of songs and movies, paper certificates of shares in a company, etc. Real virtual assets include audio and video files (of songs and movies), images (of art and sculpture), ebooks or pdf copies (of books and articles), and electronic shares in a company. Imaginary assets are those that do not have a real-world basis, such as crypto kitties and game characters.

 

What exactly happens when we tokenize an asset?

Representing an asset as an abstract digital representation is the most trivial form of tokenization, which begs the question, why bother? More sophisticated forms of tokenization would include other attributes that are not overtly or explicitly present in the original asset.

Here is a description of the increasing levels of sophistication in tokenization, offered merely to provoke some thought:

     0. No extra attributes or properties in the token besides being a simple representation of the asset.

 

  1. The token includes some basic information such as the name of the owner and timestamp of creation of the asset and the representing token(s).

 

  1. The token includes all or most of the information in Level 1, plus details about the owner, provenance of the asset, mechanism for verification of the owner’s ID as well as the authenticity of the asset, and mechanism to validate the authenticity of the representation of the asset by the token.

 

  1. The token includes all or most of the information in Level 2, plus valuation of the asset and price basis of the token. Valuation can be quite complicated, as in the case of company shares, bonds, real-estate assets. Pricing can point to the price history of trades (and possibly other data such as volume).

 

  1. The token includes all or most of the information in Level 3, plus the rights and restrictions on transfers and trading of the token. For example, tokens that represent company shares may include voting rights, dividends or revenue share, right of first refusal, tag along rights, drag along rights, and effect of corporate actions, etc.

 

  1. The token includes all or most of the information in Level 4, plus support for defending regulatory challenges about compliance with any applicable laws.

 

KoreTokens are designed to function at Level 5.

 

Final insights

When it comes to what is asset tokenization, a lot of issues come into discussion. One of them is that tokenizing assets transforms both tangible and intangible assets into secure digital tokens via blockchain, revolutionizing traditional asset management.

It not only enables fractional ownership and expands investment opportunities but also enhances market liquidity and transparency.

From simple digital representations to meeting regulatory standards, each tokenization stage reinforces the digital identity of assets, securing trust and authenticity.

KoreTokens stands at the vanguard of this progress, showcasing the comprehensive capabilities of asset tokenization.

Blockchain Security: 3 Steps to Protect Yourself

Tuesday January 30, 2024

Let’s talk about blockchain security, an essential discussion between technology users and enthusiasts.

Blockchain is no doubt a revolutionary technology for distributed and decentralized systems, especially when immutability of transactions and trust through consensus is critical in a wide ecosystem. Blockchain opens up new dimensions in business security and transparency in various industries, but especially so in the financial sector.

However, every innovation attracts bad actors who look for ways to find loopholes, security gaps, and innocent victims. What can you do to protect yourself? We will see how prevalent the problem is, how scammers operate, and how to protect yourself.

Introduction

Blockchain and cyber security are topics that demand attention, especially when technology can evolve so fast.

The numbers are startling. According to several reports, blockchain-related scams resulted in losses of about $2 billion globally in 2023, with losses on Ethereum alone accounting for about half of those losses.

These losses are not just numbers, but represent hard-earned money of individuals who got duped while exploring and investing in blockchain-related projects. This alarming statistic underlines the need for heightened awareness and education about blockchain security.

Innovations in Deception: issues with blockchain security

Every innovative technology brings with it corresponding innovation in deception. Blockchain transactions themselves are very secure, especially in the most widely distributed networks such as Bitcoin and Ethereum.

Hacking into and modifying transactions in such blockchains is economically infeasible. However, it is much easier to exploit the endpoints which are the ‘last mile’ of blockchain technology. The endpoints that are most susceptible to scams are people’s accounts and wallets. These scams target the account holder, not the technology directly.

Here are some of the common scenarios:

  • A scammer creates a fake website that mimics a well-known crypto exchange. Unwary users log into it (the authentication is faked) and conduct transactions, thereby losing their holdings.
  • Another method is the phishing scam. The user receives an email from what looks like a legitimate wallet provider or a crypto exchange. The email asks the user for their private key for security verification. Or, the email gives the user a fake story about the account being compromised and that the user’s private key is required to recover the stolen funds.
  • Exit scams were quite common in the early days of the wild west cryptocurrencies. The perpetrator creates a project that attracts investment from unsuspecting users. The scammer collects the funds and then disables the website and vanishes with the stolen funds.

Other exploits are more sophisticated and exploit security gaps in the blockchain technology itself, such as the batch overflow bug and improperly coded smart contracts . 

The irony of blockchain scams is that once the scam is pulled off successfully, it is virtually impossible to reverse it and recover the funds because blockchain transactions are immutable! In this sense, blockchain security is a double-edged sword.

Public Chains vs. Permissioned Chains: A Security Perspective

The situation with blockchain security can change dramatically between public and permissioned blockchains.

Permissioned chains are restricted to known participants. They require the participants to register and even go through detailed verification procedures that may include KYC. This makes them inherently more secure.

This controlled access in permissioned chains significantly reduces the risk of scams, particularly in financial transactions. The environment under which permissioned chains operate is usually regulated.

Some of the types of participants may require regulated licenses to operate. They may also have fiduciary responsibilities and run reputational risk.

As a user, you may participate in both public and private chains. What are some of the ways in which you can protect yourself from scams on public chains and ensure that the private chain is also secure?

3 steps to protect yourself now

  1. Educate Yourself: Knowledge is your first line of defense, not just for blockchain technology, but in general. You cannot remain ignorant and operate on the blockchain as if it is an ‘idiot box’. Invest some time to understand the basics of blockchain technology, how different chains operate, and the common scams in blockchain. Be alert to unsolicited requests for your private keys or pitches for investment opportunities that seem too good to be true.
  2. Use Only Trusted Platforms: Always use reputable and well-established platforms for your blockchain transactions. Investigate who is operating these platforms. A red flag is the absence of any names of the management team, their pictures, and their social media links (especially LinkedIn). Check for reviews, the platform’s history, and its security measures. If the platform is not familiar, stay away, no matter how attractive their offers might seem.
  3. Secure Your Private Keys: Your private keys are named ‘private’ for a reason. Your private keys are meant to keep your hard-earned money secure. Never give your private key to a third party. Never share them with anyone. These measures are easy to follow. However, it is much more difficult to store them securely. Don’t store them online without adequate protection or in places that could be easily accessed. Consider using hardware wallets, which are offline and provide an extra layer of security.

In many cases, especially with Bitcoin and other cryptocurrencies, the platforms ask you to write down your private key or passphrases on paper. Needless to say, keep this paper locked away very securely; for good measure, make a copy and store it in a safe-deposit box at the bank.

Blockchain security: Actionable Knowledge is Power

Blockchain is a revolutionary technology with its full potential yet to be realized. You will most likely use it increasingly as it matures and more use cases emerge. As in all innovation, knowledge is critical. However, just theoretical knowledge is not enough. You should know how to use it. The more you study how scammers operate, the better equipped you will be to spot them and avoid their tactics. 

Finally, remember that scams evolve; new ones emerge, the old ones become refined. This is especially true with the power of AI. So, you must continually educate yourself. With education, awareness, and self-defense techniques, you will be able to navigate the world of blockchain confidently and safely.

Blockchain and private capital markets

Thursday January 18, 2024

The private capital markets have long been complex and challenging to navigate.

However, the emergence of blockchain technology offers a potential solution to these issues.

In this blog post, we will explore key aspects of blockchain and private capital markets. Including a closer look at aspects such as transparency, democratization, and liquidity.

Blockchain technology has a lot of particularities, including the creation of an immutable and transparent record of all transactions, which enhances security, and reduces the risk of fraud.

In this guide, you’ll get a practical overview of the area and learn about different particularities involved in the processes.

The private capital markets in many ways are very similar to the public markets when you see all the participants involved.

Below is the list of all the participants for the public and private capital markets.

Regulators RIA
Lawyers IRA
Auditors Bank/Escrow
Broker-Dealers Payment Rails
Issuers Media
Investors Marketing
Shareholders Intermediaries

The private capital markets have typically been unclear, ineffective, and challenging for both investors and issuers to navigate. However, the emergence of blockchain technology offers a potential solution to these challenges.

 

 

Keep reading and learn more.

Building Trust and Security

Firstly, blockchain can provide increased transparency and security in the private capital markets.

By leveraging distributed ledger technology, blockchain can create an immutable and transparent record of all transactions in the market.

This means that investors and issuers can track ownership and transaction history, reducing the risk of fraud and enhancing the overall security of the market.

Improved transactions with Blockchain

Secondly, blockchain can improve the efficiency of transactions. Currently, private market transactions are often cumbersome and time-consuming, with significant delays between operations.

By using blockchain, investors and issuers can streamline the process by automating settlement and clearing processes.

This can significantly reduce the time and cost associated with this type of operation.

Empowering investors

Thirdly, blockchain can democratize access to private capital markets. Traditionally, only accredited investors were able to participate in private market investments due to regulatory requirements.

However, blockchain-based platforms can facilitate fractional ownership of private assets, allowing smaller investors to participate in these markets.

This can create a more inclusive and diverse investor base, potentially driving innovation and growth.

From Stuck to Sold: Blockchain Unlocks Liquidity in Private Markets

Lastly, blockchain can enhance the liquidity of private capital markets. Currently, private market investments are often illiquid and difficult to sell.

However, blockchain-based platforms can provide secondary trading markets for these assets, allowing investors to buy and sell private market investments more easily.

This can create a more liquid market and potentially attract more investors.

Blockchain’s Future in Private Capital

In conclusion, blockchain technology has the potential to revolutionize the private capital markets by providing increased transparency, efficiency, democratization, and liquidity. As the technology continues to evolve, we can expect to see more blockchain-based solutions emerge in this space, creating a more accessible and efficient ecosystem.

We cannot overlook the obvious which is that blockchain technology can transform the private markets. However, compliance acts as the key that unlocks the door to blockchain’s potential. For this to happen it must be 100% compliant otherwise there can be no use for it in the private capital markets.

AI and Blockchain: Divergence at the Entropic Boundary

Wednesday August 2, 2023

To begin our journey on AI and Blockchain, let’s look up into the night sky.

If in this nocturne period, you look in the direction of the constellation Ophiuchus, you won’t see the nearest (as of this date) black hole called Gaia BH1 (aka Gaia DR3 4373465352415301632), which is a mere 1560 light years away (i.e., practically in our backyard). If you get to within 17 kms from it (please don’t try this at home), no power in the universe can save you from its clutches. This point of no return is called the Scwharzschild radius. From our human perspective, that’s  nothing to worry about.

Now, look up 38.8987° N latitude, 77.0056° West longitude on the third rock from the sun in the Milky Way galaxy. There, you will find another black hole called the SEC (Securities Exchange Commission). Its physical Schwarzschild radius is not really a “radius”, but its physical event horizon (another name for the S radius) is the U.S.A, while its virtual event horizon is the planet Earth (i.e., there’s no escape!). From our private capital markets perspective, this is definitely something to worry about.

Blockchain and SEC

Public blockchains in the financial markets today have one leg within the SEC’s event horizon while, with the other leg, they are trying very hard to escape its clutches. Any guesses who is going to win this tug of war? The SEC has far more resources and staying power than the advocates of the public blockchains. The SEC’s event horizon is the JOBS Act and securities regulation in general.

Now, imagine a bright blue luminous star. Stars don’t have the equivalent of a “clutching” boundary like a black hole does (you can thank Newton for that). But, there is a boundary beyond which there isn’t enough energy or influence to sustain life. Think of it as an “entropic boundary”. Beyond that boundary, there are no laws, no order, no life, just a frigid waste. Inside the entropic boundary and way closer to the star is the hot crucible of innovative hype that can destroy wealth, demolish dreams, and diminish hope.

It is only at or close to the entropic boundary that responsible and game-changing innovation is to be found. The public blockchains were spawned far outside the entropic boundary of investor-centric responsible innovation, out in the dark, frigid, lawless, and wild space, wandering dangerously close to the SEC’s event horizon. 

Beyond Decentralization: AI and responsability

At KoreChain, we believe in the power of a distributed ledger and subscribe to the benefits of decentralized data and processing. But, we stop far short of decentralizing intelligence and common sense. Unconditional freedom is the hunting ground of crooks and free-loaders.

Surprisingly, artificial intelligence (AI) has had a much more responsible evolutionary path. For decades, AI could only be found in the halls of academia. With increasing computational power and availability of massive amounts of transactional data, AI found another home in the corporate world. Because the corporate world values monetization over privacy and ownership of data, it was inevitable that AI stepped over the entropic boundary. With the dramatic Cambrian explosion of large language models (LLMs) such as ChatGPT and hundreds of other AI tools (numbering at the present time to over 100 and rapidly growing), AI clearly broke free of the protective fence of the entropic boundary.

Watch in the evolution of AI and Blockchain: Insights and Considerations

On the other side of the entropic boundary there are dangerous black holes lying in wait for the unwary users of AI (let’s call these the ‘dark’ holes to distinguish them from the blameless astronomical black holes). Some of these dark holes are independent criminal organizations and terrorists, others are state-sponsored hackers, yet others are the misanthropes and misfits whose motives are death, desolation, and destruction. Like black holes, you can’t spot them easily.

The difference between these dark holes and the SEC is that the dark holes are out to catch the good guys while the SEC tries to catch the bad guys. Unfortunately for us, there is no equivalent of the SEC in the AI world. I doubt there will ever be one. Putting any guardrails around AI at this point in time is like smoking a cigar outside in a hurricane and trying to stuff the cigar smoke back into the cigar. Any bets on how this will play out?

At KoreChain, we focus exclusively on using AI for good within the strictly defined universe of the global private markets. We use AI to help, to protect, and to guide. The KoreChain empowers the convergence of AI and blockchain around the right side of the entropic boundary.

Chaos in the Private Markets

Thursday January 5, 2023

Innovation typically follows a standard evolutionary path: it starts with excitement, goes on to fever-pitch inflated expectations, then drops down into the trough of disillusionment; if anything is left standing, it goes on to plateau out into competitive jockeying, innovation by pivoting, and then into the boring plateau of productivity and commoditization. Gartner, the technology research and advisory firm, formalized this as the Gartner Hype Cycle.

The crypto markets went through the excitement during the 2009-2017 period, culminating in some feverish inflated expectations (everything on the blockchain) in the next few years. 2022 may be remembered as the trough of disillusionment with the collapse of FTX, the most notorious of all crypto scams.

FTX, the world’s largest cryptocurrency exchange, went from $32B to a freezing 32° F, ushering in a crypto winter. What is worse, if that is possible, are the people—many who should know better—who compared SBF to J. P. Morgan and Warren Buffet. Clearly, the concept of making money by first creating value is an alien concept to these people.

Other high-profile scams, scandals, and “bugs” include Celsius ($4.7B), $2B in various bugs (Nomad, Wormhole, and so on), Day of Defeat, Orfano (which tricked the BBC into covering it not once but twice!), and Quadriga (where the founder apparently died in India).

Buried under the noise of the cryptocurrency chaos is the more serious situation of conflating crypto with digital assets and believing cryptocurrency (and related smart contracts) to be the only financial instrument. Assuming that a small percentage of the ICO scams of 2016-2018 era were motivated by genuine business models, they contributed to the chaos by completely misunderstanding what constitutes a securities instrument and the role of the regulators. 

Compounding the problem was the confusion over smart contracts which were supposed to power these financial instruments. Smart contracts are neither smart nor legal contracts; they are closer to simple stored procedures in traditional databases.

How to come out of this turbulence and chaos into clear and sunny skies? While the efforts to catch the crooks will continue for some time, the immediate fallout is the suspicion of the technology that powers the crypto world. There is confusion around risk, recovery, settlement, and finality of transactions. These problems are not new to blockchain; they were faced by merchants and financial institutions for about half a millennium. Many of the regulations and financial processes today are the result of considerable experimentation on how to protect all the parties involved in financial transactions. The fact that these regulations and processes are onerous and cause friction is no reason to throw them away and move to entirely untested, technology-based solutions. The cure is worse than the disease.

The process of recovery from the chaos starts with a clear understanding of the technology of blockchain, its legitimate use cases, the various types of financial instruments, and methods for managing risk.

That’s a subject for another blog.

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$4.5 trillion

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$2.1 trillion

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