transcript: stephen mckeon – professor of crypto security … · 2018-09-11 · i hope you enjoy...

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Transcript: Stephen McKeon – Professor of Crypto Security Tokens (EP.69) Published Date: September 17, 2018 Length: 1 hr 9 min Web page: capitalallocatorspodcast.com/mckeon

Stephen McKeon spent six years out of college working in finance for venture-backed startups before returning to graduate school and earning his PhD in finance in 2011. Blending his interest and experience, Steve focuses his research on corporate finance, M&A, security issuance, and most recently, crypto assets, where he has become a leading academic authority in the nascent area.

Our conversation starts with Steve’s first job smack into the teeth of the tech meltdown in 2000 and his subsequent roles at a winery and a drone company. We then turn to his work as an academic in the world of crypto assets, walking through the thesis for security tokens.

Steve presents a case for the future of security tokens that is tangible and achievable. Now that the noise from soaring crypto currency prices has died down, we can learn a lot from Steve about what blockchain technology may bring to investing in the years ahead.

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http://capitalallocatorspodcast.com/2018/06/17/portnoy/

Capital Allocators Podcast EP.69 Stephen McKeon

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Book Links

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond, Chris Burniske and Jack Tatar

Ted Seides: 00:00:05 Hello. I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting CapitalAllocatorsPodcast.com. My guest on today's show is University of Oregon professor Stephen McKeon. Steve spent 16 years out of college working in finance for venture backed startups before returning to graduate school and earning his PhD in finance in 2011. Funding his interest and experience, he focuses his research on corporate finance, M&A, security issuance and most recently, crypto assets, where he has quickly become a leading academic authority in the nascent area.

Ted Seides: 00:01:03 Our conversation starts with Steve's first job, smack into the teeth of the tech meltdown in 2000 and his subsequent roles at a winery and a drone company. He then turned to his work as an academic in the world of crypto assets, walking through the thesis for security tokens. Steve presents a case for the future of security tokens that is tangible and achievable. Bow that the noise from soaring crypto currency prices has died down we can learn a lot from Steve about what blockchain technology may bring to investing in the years ahead.

Ted Seides: 00:01:39 I hope you enjoy this show and if you do, this week, if you happen to be in a married or committed relationship and one night you turn to your partner and say, "Hey babe, what do you think?" And they turn back and say, "Sorry hon, not tonight. I have a headache." Why not turn a lemon into lemonade by responding, "I have a better idea. Let's listen to the Capital Allocators Podcast together." We can snuggle up and share a night of stimulating intellectual bonding. Thanks so much for spreading the word to your partner. Please enjoy my conversation with Professor Stephen McKeon.

Ted Seides: 00:02:20 Stephen, thanks so much for coming and joining me.

Stephen McKeon: 00:02:22 Absolutely. Thanks for having me.

Ted Seides: 00:02:23 How did you get in academia?

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Stephen McKeon: 00:02:25 It was a very sort of non-linear route. I started my career in Silicon Valley. I was always interested in tech. And moved down to Palo Alto, worked at a startup in San Carlos. This was sort of the height of the tech boom, like spring of 2000. Like literally the peak. Of course, we all know what happened. So it all melted down over the next six to nine months, which actually was an extremely educational experience, to be sort of inside one of these venture backed firms and kind of watching everything implode from the inside.

Ted Seides: 00:02:54 How did that feel?

Stephen McKeon: 00:02:55 I had nothing to lose. I mean, I was in my early 20s and no dependents and I had to make rent. So that was sort of my biggest concern. There was a moment where when you first started I was really amped up and excited and go team and everything and then there was this moment, I remember, probably about the summer of 2000 where it was like, "I think this ship is sinking. I think all these ships are sinking to some degree." And at that point it was kind of like, "Do I move on or do I just sort of ride this out and watch it?"

Stephen McKeon: 00:03:23 It seemed like I wanted to carry on to do the best I could, but also really like learn from the experience. So I stayed there not quite to the bitter end, but through several rounds of layoffs. So I guess it felt educational in some ways and also scary just because when you look at a lot of financial crises they are wider spread geographically. They affect an entire nation. They affect the whole globe. This one was so acute in such a small ... To some degree it affected everything, but it really affected the Peninsula. Like everything between San Francisco and San Jose was just in complete meltdown. Almost everybody I knew who was my age lost their job within a six month span. It was actually just sort of surreal. I mean, certainly had never experienced anything like it prior or since, in many eyes.

Ted Seides: 00:04:13 Were you a techie going in?

Stephen McKeon: 00:04:15 I was not a software engineer. I was always studied economics and finance, but always had sort of an interest in tech. So I knew that I wasn't going to be coding software but I wanted to be around that space just because I thought the economics and the finance implications were so vast as we've seen play out over the last 20 years.








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Ted Seides: 00:04:35 Okay. So the bubble bursts. Everyone you know is unemployed hanging out, having fun for a short period of time. Then what?

Stephen McKeon: 00:04:42 Right. It feels like a vacation for about a week. And you play a bunch of video games or whatever. And then after a week you're like, "This is kind of boring. I got to find something to do." So every morning I wake up. I'd go on craigslist. I'd look for whatever opportunities that were apply. Then it was 8:15. And I said, "What am I going to do today?" So I just started walking. So I actually got to see a huge swath of the Peninsula. I would say, "I'm going to walk west today and I'm going to walk north." And I walked miles and miles and miles. Obviously that doesn't pay well.

Stephen McKeon: 00:05:10 So eventually I said, "I've got to start looking outside this little geographic region." So I really wanted to stay in the Bay Area, like the Bay Area a lot. So I just sort of widened my scope. Then I came across a winery up in Napa Valley that was hiring for a cost accountant. So that was the move I made. It's about two hours north of Palo Alto. So I moved up to Napa, just sort of dove in. I had this idea that I would go back to school. That was sort of always a long term plan. I wasn't sure whether it would be MBA or PhD but I felt like I would go back to school.

Stephen McKeon: 00:05:40 Of course, I'd only spent about six months working down on the Peninsula and so I knew I had to do something else for like at least another year. And I thought, "Oh, the wine industry is fun." I wasn't hugely into wine but I enjoyed wine and I thought it'd be fun to learn more about it. So I started up there.

Ted Seides: 00:05:56 And what was that experience like?

Stephen McKeon: 00:05:57 I could have never planned the way it worked out in the sense that I started at the lowest rung, sort of cost accountant. I was not excited about being a cost accounting. I actually told them that in the interview, which was not, in retrospect, not a good strategic move, but I did end up getting the job eventually. And what happened is the winery was moving from one end of the valley to the other. So Napa is kind of a north south valley. So you've got kind of Calistoga up at the top and the winery was located up there when we started, but it was moving from sort of a beautiful picturesque, but very small winery, down to a giant warehouse sort of production facility because they had way outgrown the facility they were in.








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Stephen McKeon: 00:06:35 It was about 45 minutes south of the original location, which was perfect for me because as they're making that move, I located down in Napa, which is at the south end of the valley, but many of their employees were living up in Calistoga or even further north. So what happened is there was a bunch of turnover that happened over my first about a year to two years at the winery and it happened in such a way where it was always the person right in front of me that left. And, again just sort of being in the right place at the right time, I'd always go to the CEO and I'd say, "I think I can do that job." And they'd give me the job on an interim basis and then pretty soon I was hiring someone into the job behind me.

Stephen McKeon: 00:07:16 That happened four times all the way up to CFO. And so I was the CFO of this relatively large winery in Napa at the age of 24, largely just because I was there and sort of negotiated my way into each step along the way. Obviously, huge steep learning curve. I remember when I first started they were very concerned that the bank would accept somebody as young as I because we had a huge line of credit. So the wine industry is largely debt-financed because huge amounts of inventory, lots of working capital needs.

Stephen McKeon: 00:07:48 I remember the owner was suggesting that I go get some glasses. So I got some glasses. I looked a little bit older. And that was great living, great life, a home in downtown Napa and so on and so forth, but I remember around maybe my fourth harvest I was thinking, "Am I just going to do this sort of 30 more times and call it a career?" And I said, "Probably not." And so I started thinking about like what's the next move. And eventually decided I would try going back to school. So went to do my PhD at Purdue University. They had a really strong group that was focused on the stuff I was interested in.

Ted Seides: 00:08:27 Which was what, at the time?

Stephen McKeon: 00:08:28 So corporate finance. All the things that CFOs think about. Like how much debt should we have? What happens if we take on large debt issuances? How should we pay our employees cash holdings? All of those types of things. All the things I'd seen in practice, some of which didn't make sense to me, I just wanted to dive in deeper to really try and understand them in a more fundamental level.







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Ted Seides: 00:08:49 What were some of those differences and what didn't make sense and then maybe what you learned?

Stephen McKeon: 00:08:51 The thing that was interesting is that the common path to PhD is to go straight out of undergrad or maybe a very brief experience. So in that sense it was a really non-traditional path to have worked and risen up to sort of a C-level position and then gone back. So what I did is I took those experiences and they actually formed the basis of most of my early research. So my first paper that I wrote with my advisor David Dennis was basically let's look at companies that take on large debt issuances because I've been thinking about large debt issuances through the wine industry.

Stephen McKeon: 00:09:26 And then the second paper was, what happens when a CEO is sort of innately risk taking or innately not as risk averse. Because the wine industry attracts a lot of characters. And one of the things I noticed was that when we came across ... Our winery was sort of an incubator. There was about 30 different brands that were started out of our facility because we're just a large production facility and we did services for other wineries. One of the things I noticed was that the personality of the CEO really imprinted on the company. So when I got to school I thought, "Well, was that just sort of like a weird phenomenon in the wine industry that's happening because these are relatively small companies or was this sort of a larger effect?"

Stephen McKeon: 00:10:06 And so we went out and we said, "Well, we want to find CEOs that have sort of a risk taking personality, but not necessarily in a financial sense." We don't want to take some variable from the firm. We want to try and find an external variable that indicates that they're risk taking and then study the impacts on the firm.

Ted Seides: 00:10:25 How did you do that?

Stephen McKeon: 00:10:27 We were hung up on driving records for a long time. So if somebody had done a similar study around not CEOs, but investors and in Sweden, in Scandinavia, they have data on everything. So they're able to get driving records and look at speeding tickets and this type of thing. And so that was kind of where our minds went initially. But of course, you can't just go pull driving records. There's privacy laws in the US and so on.








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And then one day it struck us that pilot's records are openly available on the internet.

Stephen McKeon: 00:10:54 So you can't download the database but you can query the database. And so we took this huge database of CEOs and then we had to go out and find birth dates to kind of triangulate ... Because you'd find Brian Smith in one place and the other and you can't really be sure it's the same guy. We eventually triangulated about almost 200 public company CEOs there were also private pilots. So we used that our-

Ted Seides: 00:11:17 Was that self selecting, that those that are pilots are maybe more likely to be risk taking than others?

Stephen McKeon: 00:11:21 That's the idea. It actually goes back to the psychological trait called sensation seeking, which is not synonymous with risk taking, but they are definitely highly correlated. It was a risky project because it took us forever to collect all this data. We had to kind of like teach ourselves Python, like write a script to scrape this database. And in the end, it was like, "Man, I hope something comes through." And when we finally got this data it came through everywhere.

Ted Seides: 00:11:47 And what was the finding?

Stephen McKeon: 00:11:49 Essentially the CEOs that had higher levels of risk taking than their private lives, we saw the same attributes in the firm. So everything from higher leverage, higher prevalence of M& A activity, higher equity return, volatility. It was almost like everything we looked at, it came through.

Ted Seides: 00:12:05 That's really interesting. And then were those was all public companies?

Stephen McKeon: 00:12:08 Those were all public companies. Yeah. Our database with CEOs was from public companies because we needed their financials to be able to test all these.

Ted Seides: 00:12:16 So you had this great experience in corporate finance and presumably you could have taken that and gone to a different industry and you go back to school and it sounds like you're walking down this academic path. So what was the spark that sort of led the direction of where you'd head?










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Stephen McKeon: 00:12:31 Essentially I went through the program, studying corporate finance. One of the promises I had made my wife was that we would try to get back to the west after school. And a job opened up at Oregon. So I took the job at Oregon. So I started there in 2011. So I basically rode out the entire financial crisis in the PhD program, which again, was a really interesting place to be while that was going on. Because just all of these people, they had spent their lives thinking about economics and finance or kind of trying to make sense of what happened and it was fascinating.

Stephen McKeon: 00:13:03 So started at Oregon, continued on this sort of path of research and in 2012 ... So the first time I taught an MBA class I had a student named Jonathan Evans and Jonathan was a commercial pilot. So he had flown Black Hawks in the military. He had flown Air Ambulance. He was as accomplished as you could get as a helicopter pilot. And he came in and I remember him saying very early, like maybe week one or week two he said, "I'm going to start a drone company." And as a professor you get pitched a lot of stuff. We have a reputation for entrepreneurship at Oregon and so we get a lot of people with entrepreneurial aspirations.

Stephen McKeon: 00:13:43 I thought, "Okay, we'll see." And didn't really think much of it. And he linked up with another student in class who was an engineer, like a mechanical engineer, who actually worked on helicopters. And so now they had the pilot who knew airspace and they had the guy who kind of understood the machines themselves. And we just started talking about it and I was like, "I think they might have something here, but they understand the technical aspects much better than I ever will, but I'm not sure they understand the building a business part because they were first year MBA students."

Stephen McKeon: 00:14:13 And so I said, "I want to help these guys. I think they genuinely have something here." So we ended up co-founding a company called Skyward, which was essentially made drone software. So for commercial drones operated by ideally large corporations. So when we started the company, there was no commercial drone market. It actually was illegal to fly drones commercially in the US and so every conversation we had was about regulatory risk, when we were pitching VCs and so on. Eventually the company got funded. It started to grow. I was on






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the board there and that was the experience through which I actually bumped into bitcoin and blockchain.

Ted Seides: 00:14:51 I don't really see the bridge from drones to blockchain.

Stephen McKeon: 00:14:53 I guess I was just being close to emerging technologies. So I'd started my career in tech, but I'd really moved away from tech through the wine experience and then of course the PhD program wasn't sort of intimately involved in tech. This is what brought me back close to the bleeding edge of the space. And I think when you're there, regardless of what piece you're currently occupying, you're seeing a lot of other stuff that's going on. Whether it's AI or machine learning or cryptocurrencies, drone technology. That's kind of all pushing the edge in different directions.

Stephen McKeon: 00:15:26 It wasn't something that made sense for what we were building. So that was early, I mean like 2013 is when we first came across it and I was like ... I remember as soon as I saw it I was like, "This is fascinating." This is fascinating to me because this is like the perfect merger of all of my expertise. So all of this sort of history in tech and emerging technologies and then this sort of formal training in finance, I was like, "This is the intersection of these two pieces. I'm very uniquely suited to kind of look at this." I remember as soon as I saw it I thought, "I am going to dive into this at some point." But we were so busy with the drone company like any startup, you're kind of running 100 miles an hour plus I was a professor, which was my main job.

Stephen McKeon: 00:16:09 And so I just had no time to dive into it. And it wasn't until 2015 when I left the board of Skyward as we went through our second venture around, that I was sort of freed up to dive into these other topics and that is really when I dove into crypto.

Ted Seides: 00:16:25 So I want to dive into crypto. Before we do that why don't you just tell the story of what happened with Skyward?

Stephen McKeon: 00:16:31 So when we first started we actually thought we would be more of an operator. And so there was a company out of the UK who was inspecting oil rigs. And it was an enormously profitable business because normally to shut down an oil rig, it costs something like a million dollars an hour or a million dollars to do one of these inspections because you've got to shut the whole thing down. You've got to cool it down. You got to send a








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person up there to kind of look inside the stack and determine whether everything's okay or not. And they have to do this by regulation on a continual basis.

Stephen McKeon: 00:17:03 So with the drone, with the right sensors, infrared sensors, you don't have to shut the thing down. You can fly it up there, fly it around. So you can charge huge margins, which is still a massive savings to the drillers. And so they were doing this in the UK, where it was legal to fly commercial drones. But of course, the giant market was the Gulf of Mexico. So that's where you've got thousands of these oil rigs. Everyone knew that eventually the US would open this up and there would be sort of like this land grab to do these inspections. And of course, that's just one use case within drones. But it was a big one. It was one that was proven out as being really profitable.

Stephen McKeon: 00:17:41 So initially we thought we'll be the US subsidiary of this British company and kind of hang out until the regulations come around but then it was like, "Well, I don't know. We're really interested in the software aspect of this and there's a lot of uncertainty." It could be years before these regulations and like are we really going to sit and just incubate us for years while we're waiting. And so in the end we decided, what is it that we're better at or that we have a unique competency in that no one else is thinking about? And so Jonathan, we go into a lot of these conferences and he said, "There's a lot of people in computer science that are attacking this from very technical angle. How to write the software, how the drone moves and all the sort of like flying software."

Stephen McKeon: 00:18:25 And then he said, "There's a lot of engineers that are attacking all the mechanical stuff around the machines themselves." He said, "I don't really see anybody paying attention to the regulations." He said, "In the end, if you envision that there's going to be thousands or hundreds of thousands of these things in the air someday, these are going to have to fit into national airspace. There's other participants up there." And so he said, "I don't think anybody's thinking about that piece of it." And so we decided to form the company around that idea, around regulations.

Stephen McKeon: 00:18:56 And the idea that these large corporations that have fleets are going to need to know who's flying, where they're flying, potentially get FAA approval. The insurance company, of course,






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is going to be involved in some of this information flow. So we wanted to build that platform. It was really hard to get funding initially because of all this regulatory risk. Eventually we got some venture funding from Voyager and several others and then eventually, Verizon actually started participating, I believe, starting our second round. And at one point Verizon decided, "We're going to need a drone division and this company already has all these relationships." And so Verizon acquired US in February of last year.

Ted Seides: 00:19:37 And what happened with the regulations?

Stephen McKeon: 00:19:39 It was fascinating. It actually informed a lot of the way I think about crypto because initially it was illegal. Everyone was sort of scared off and everyone said, "All we need to know are the rules. We're happy to comply." Or at least there was a contingent of people who were happy to comply. But there was just so much uncertainty about what they were going to look like. And I really think the FAA did it the right way because what they did is they convened a lot of industry leaders. They did a lot of listening, both to people that were on the side of managing airspace, as well as the people that wanted to put machines into this airspace.

Stephen McKeon: 00:20:12 And they eventually came out with something called Part 107. Part 107 was sort of a pivotal moment in the drone industry because it really set down the law for how you could operate commercially legally. And it's interesting because a lot of people look at regulation as constraining innovation to some degree. This is a friction. This is making it harder to do what we want to do. In the case of Part 107, I think it was actually an enabler of innovation because as soon as everyone knew what the rules were you had all these large companies that wanted to invest in the space, but they had held out.

Stephen McKeon: 00:20:48 And so Verizon never would have bought Skyward pre-Part 107. It was only after Part 107 was laid down that they said, "All right. Now here are the rules. We're going to know how to comply with them. We're going to start investing in this space."

Ted Seides: 00:21:01 When was Part 107 enacted?

Stephen McKeon: 00:21:03 Part 107, I want to say it was like 2016.

Ted Seides: 00:21:08 So it took a couple of years.









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Stephen McKeon: 00:21:11 It was definitely not early on in our history.

Ted Seides: 00:21:13 So let's turn to crypto. Where did you start your research when you first had time to get exposed to it?

Stephen McKeon: 00:21:20 As soon as I had time, I started reading everything I could. And then of course, I'm an empirical researcher. So I said, "I need data." There's not many academics looking at this space and so I'm going to just cold-email everyone I can think of. So I cold-emailed like Brian Armstrong, the CEO of Coinbase and I cold-emailed Patrick Byrne of Overstock and a bunch of others. Anyone who was kind of using Bitcoin in commerce in some way. And what was amazing is back then the industry was still so small that they actually got back to me. Today it's hard to even get a response from customer service for a lot of these companies.

Stephen McKeon: 00:21:58 And back then it was a high ranking people were getting back to me saying, really the pivotal one I guess was Adam White from Coinbase. He got back and he said, "Look," so he was the number two guy there and he said, "we can't give you data. We're just not in a position to release data to you, but you should really call this guy Chris Burniske." Chris Burniske was an analyst in an ETF here in New York called ARK. And Adam said, "He's the only guy I know that's thinking about this the way you are in terms of like really trying to think through like why do these things have value, how does value accrue, how are these networks going to develop." Sort of like a lot of the economic fundamentals behind these assets.

Stephen McKeon: 00:22:38 So I called Chris or Adam connected us and that was really a pivotal moment for me because we just started doing a series of calls. And Chris, I have to credit him with really educating me on the space. Of course, he wrote a book called Crypto Assets. He's gone on to found a firm called Placeholder Ventures with Joel Monegro from USV And it was really that series of calls with Chris that I sort of ramped up. That plus, of course, a lot of self study.

Ted Seides: 00:23:07 How did that take hold? What were you researching and what were you trying to produce?

Stephen McKeon: 00:23:13 Yes. Initially we were really interested in how price volatility impacted consumers? How does the volatility of Bitcoin impact









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its use in commercial transactions. So were really interested in sort of on-chain volume and it turned out that's actually pretty difficult to parse out, which transactions are commercial and which are sort of exchange in nature. I mean, you can separate off exchange volume, but when you look at the on-chain volume we kind of get a mishmash of a lot of different stuff.

Stephen McKeon: 00:23:42 So then we moved on and really started looking at ICOs. So of course I've been studying securities my whole career, have thought a lot about IPOs and equity issuance. ICOs are sort of this equivalent for the crypto industry. And so really just started going through IPOs and thinking about all the different attributes. Is there a vesting period? What's the background of the founders? What sorts of things kind of contribute to success?

Ted Seides: 00:24:11 And have you written any papers on that?

Stephen McKeon: 00:24:13 Well, that project. It turned out that that was sort of the obvious paper to write. And so it turned out that actually lots of people started working on that topic.

Ted Seides: 00:24:21 What are the consensus conclusions of the ICO market? Because I think a lot of people have heard about it, but don't really know.

Stephen McKeon: 00:24:29 So I don't know if there's consensus on anything in terms of academia in this market, because it obviously was just sort of crazy in 2017. I mean, one of the things that we found was there definitely was sort of updating by the projects. So in the early part of the rush they were leaving a lot of money on the table. And we saw this with IPOs as well, like in the tech boom. They'd issue at $10 and it closed at like 127 or whatever. One of the things we saw is that as we moved through 2017, the projects got better at capturing more of that value. So we weren't seeing as a large of sort of pop on day one of trading.

Stephen McKeon: 00:25:08 The other big theme was that regulations became much more important. So initially everybody was ignoring securities laws entirely. And then there was this idea, "Oh, maybe we need to comply with these things." And so then there were all these other mechanisms like the SAFT that were invented. So I'd say that was the other big theme, is that everyone started trying to,








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or the legitimate projects, I guess, started trying to comply with regulations in some way.

Ted Seides: 00:25:34 How did you get from ICOs to security tokens?

Stephen McKeon: 00:25:38 The epiphany was really Blockchain Capital. So Blockchain Capital in, I want to say, April of 2017. So they're a VC fund, they had had prior funds raised in the normal way and they said, "We're going to take a portion of our fund and we're going to tokenize it. So instead of just LP interests, we're going to," I think they did 10 million dollars, "we're gonna issue 10 million tokens. We're going to sell them for a block each." You've got to be accredited investor. The regulations require that it be 99 investors max. So I applied for an allocation. I got it. I invested in this BCAP Token. And everyone knew like it's going to be locked up for at least a year and there's sort of no infrastructure to trade these things when they did it. They were really sort of a pioneer.

Stephen McKeon: 00:26:22 But the reason it was epiphany is because I said, "Wow, I, as an individual, investor is, sort of an angel investor, I can't get access to the best deals. I have no opportunity to invest Coinbase. I have no opportunity to invest in Bitmain or all the big names that were kind of raising back then." VC funds, they don't want to take money from a bunch of individual investors through the traditional LP stance because it's just going to be a massive headache. It's going to be a massive paper headache and they don't want to deal with redemptions.

Stephen McKeon: 00:26:53 This was sort of a new form of an ownership claim that allowed the investors some liquidity when they started trading and allowed access to a much wider pool of market participants. So it was just really eye-opening to me. I said, "I think a lot of things are going to move this way." So I wrote a paper called Traditional Asset Tokenization and that was sort of a maybe a year or a year and a half ago. Then people started talking about security tokens and people got excited about the different use cases and real estate and private funds and various other things.

Stephen McKeon: 00:27:29 I went to Consensus this last year. So Consensus is one of the largest crypto conferences. It's actually held right here in New York. It was like 6,000 people, I think, or 8,000 people this last year. And everyone had all these ideas about security tokens and what the benefits were. I just realized at that conference I







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was like, "I need to write something that kind of puts all of this in one place, sort of form out the entire thesis." It's actually not my thesis. It's sort of the thesis of all the people that were thinking about this. Everywhere I was going, like all these dinners and everything I was asking people, "What do you think the benefits of security tokens are?" And sort of collecting their thoughts and then synthesizing them.

Stephen McKeon: 00:28:11 I guess the way I came to security tokens was that I've spent my whole career studying securities. That's what I've studied as a professor, whether it's debt, equity, all the different sorts of facets of securities. And so of course, when it comes to blockchain that's naturally where my mind is going to go. What if we could represent these types of ownership claims on-chain?

Ted Seides: 00:28:31 How do you define a security token?

Stephen McKeon: 00:28:34 I don't think there is any agreed-upon definition. The one used in the article was any representation of value on-chain, so on a blockchain, that is subject to security laws. So that would include all-

Ted Seides: 00:28:48 Subject is regulated.

Stephen McKeon: 00:28:50 Exactly. So there certainly are network assets, so-called utility tokens, that are going to try and make the case eventually that they should not be deemed securities because they're sufficiently decentralized and they don't pass the Howey Test and so on and so forth. And so not all blockchain ... Like bitcoin is very clearly not a security. They've said as much. It's going to be regulated by the CFTC. So not all of these assets are securities, but most of the network assets at least start their life as securities before the network is active. Of course, all the traditional assets, real estate, equity, bonds that we might represent on-chain are going to be deemed securities for their entire lifecycle.

Ted Seides: 00:29:33 I want you to walk through the thesis.

Stephen McKeon: 00:29:35 Sure. I kind of just laid out ... It was a bullet point list. There was maybe eight items and some of them were not that revolutionary, like the idea that markets might be open longer than the traditional hours we see today.

Ted Seides: 00:29:48 Right. So 24/7 trading of markets. Is that a good thing?




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Stephen McKeon: 00:29:53 I don't know that it is a good thing for all assets. I actually, I'm not sure all assets are going to trade 24/7 because it's a liquidity issue. You don't really want to spread the liquidity out over all of those hours. And even if you look at like extended hours on the New York Stock Exchange you get lower liquidity. I remember like when I first traded on extended hours, I had to sign a little disclaimer that said, "Hey, you might not be getting the best price, but trading in this lower liquidity environment."

Stephen McKeon: 00:30:21 So I think what you're going to see is a spectrum. So some assets are going to trade 24/7. I mean, many assets already do. Bitcoin is traded 24/ 7. Ethereum is traded 24/7. For traditional assets maybe the larger issues will trade 24/7, but you'll find others that will trade on restricted hours. Maybe you'll find others that only trade on certain days of the week. That's something that we're going to discover as we go through this.

Ted Seides: 00:30:45 So that's sort of the first point of the thesis.

Stephen McKeon: 00:30:46 That's the first point of the thesis. And then I go through things like people talk about immediate settlement. So Bitcoin settles in 10 minutes. Many of these other crypto assets settle in minutes or seconds even. And this idea that when I buy a share of stock it's not actually in my account for over a day or two. Seems like this thing out of sort of antiquity relative to the way the digital age, but works today.

Stephen McKeon: 00:31:09 So one of the points I make in the paper is that I think there is a lot of promise in terms of really reducing settlement time, but these are more complicated transactions than just the way cryptocurrency works. You've got custodians involved. You've got regulators involved. You've got shorting. You've got buying on margin. You've got sort of all these extra pieces and I think a lot of that will be able to be automated, but it's not as simple as saying, "Bitcoin clears in 10 minutes. Stocks should clear in 10 minutes." But I do think the prospect for really shorting the settlement time is there but it's going to take some work.

Stephen McKeon: 00:31:43 So let's see, next point, if I remember correctly was probably fractional ownership. Fractional ownership is just the idea that you have high unit value assets whether it's like a skyscraper here in New York or a company. Obviously we've been doing fractional ownership for a long time. This is not something that's unique to blockchain, but this was kind of the idea behind








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this BCAP Token or this Blockchain Capital. One of the reasons we don't fractionalize ownership as much as we could is because it's sort of a headache, from just like a logistical paperwork standpoint.

Stephen McKeon: 00:32:14 So by infusing a lot of that stuff into a token, it just makes managing a cap table with a lot more participants a lot easier for the issuer. And you already see this to some degree with real estate. We get all these sites, Cadre and RealtyShares and RealtyMogul and CrowdStreet. There's probably a dozen others where you can go and fractionalize real estate right now, but they don't work quite the same way as tokens, which I'll get to in just a moment. I think the more important pieces of the thesis are really liquidity, automated compliance, interoperability and what I call design space. So I'll kind of walk through those things.

Stephen McKeon: 00:32:50 So liquidity is this idea that when you raise a VC fund, you're investing typically in illiquid assets and so you're investors are locked up for seven, eight, nine, 10 years. And this idea with the BCAP Token is that they can lock up the capital without locking up the investors. So that's a line that Josh Stein from Harbour often uses, is this idea that what the VC fund cares about is that the capitals locked up. They don't really need the investors to be locked up. They don't mind of a secondary market develops. So that I think is one of the promises of tokens, is this idea that funds or various types of assets can raise capital and the capital is locked up, yet the investor can achieve some degree of liquidity through a secondary market transaction and not through redemptions to the issuer.

Ted Seides: 00:33:41 [inaudible 00:33:41] there's a difference in an asset. Say there's a skyscraper where the cash flows can flow through to all the investors and a partnership where there's a dynamic flow of capital. So the GP draws down capital. How does that work, say in that example with blockchain, in the token?

Stephen McKeon: 00:34:01 The way that Blockchain Capital did it is a full raise upfront. And so that is different than the traditional model. You could imagine scenarios where we could start to see a migration towards capital calls as opposed to a full upfront raise but we're not there yet. I mean, the way I view this is the initial versions of security tokens are going to be plain vanilla issuances. We're going to take the simplest version of representing an ownership



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claim in one of these assets and represent it on-chain and those will be kind of the test cases. And we'll see how that works and then over time we'll start integrating more and more complex features.

Ted Seides: 00:34:39 So why does that need to be on blockchain?

Stephen McKeon: 00:34:43 That's a great question. I think it's one that I thought about for a long time and I think the idea is that when securities are programmable, you get a lot more features. Now, you don't necessarily need to be on-chain to be programmable, but the thing that you get with blockchain is interoperability. So let me tell you what I mean by that. Maybe I'll use an example of RealtyShares and Cadre. So in those models you already can fractionalize ownership. So you can take a building and put it out one of these platforms. Sell 1,000 shares or whatever and raise millions of dollars for a skyscraper.

Stephen McKeon: 00:35:18 What you can't do is take that asset. First of all, there may not be any secondary market because what would happen there would have to be built by that platform because their business model is keeping the assets on platform. They get a percentage, a management fee for all the assets that are on their platform. They don't want the assets to leave the platform. So many of them have not built out secondary trading models. But even if they have, you're then locked into whatever liquidity exists within that one pool. So whatever investors are on that platform.

Stephen McKeon: 00:35:50 What you can't do is take something you bought on RealtyShares and move it over to CrowdStreet to access a different pool of liquidity or just if you like their interface better. So in a sense, although we have a lot of these things already, what we don't have as interoperability between different platforms. So that is one of the things the blockchain gives you. So blockchain really is their protocols. The internet itself is just a set of interoperable protocols. HTTP, that P is protocol. IMAP, the thing that allows me to write an email in Gmail and send it to you maybe an Outlook and both of the interfaces can make sense of the information, that's because we have an interoperable protocol that sort of dictates how that data moves and is interpreted and is exchanged.






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Stephen McKeon: 00:36:37 What blockchain offers us are protocols that are specifically built to move value. So that is the thing that we've been missing. Until really the Bitcoin blockchain was invented is that most of the protocols we have today have been good for moving various types of information, but not necessarily for moving value. So that really is the big innovation, is this idea that digital wallets will be able to hold all different kinds of assets. You'll be able to hold shares of stock and bonds and pieces of real estate, maybe the mortgage to your home. All these different sorts of assets, if they can be represented as a token that's interoperable with all the other pieces of software that's out there.

Stephen McKeon: 00:37:20 You may have a different wallet than I, just like you have a different email client than I, but to the extent they both adhere to a standard. So like ERC-20 is an Ethereum standard. And many of the wallets you see out there today are all ERC-20 compliant. The reason they are is because everyone knows that if you just build a token and make it ERC-20 compliant, it's already going to work with all of the software. That's the thing that we've been missing until blockchain came around.

Ted Seides: 00:37:46 The liquidity that you're talking about. We're talking about a building, an LP interest in a fund. These are all illiquid assets generally thought of as today. Where does liquidity come from?

Stephen McKeon: 00:38:00 I think it comes down to market depth. I often use this analogy of this baseball card I had when I was a kid. When I was a kid I got a Darryl Strawberry Rookie Card. I was so excited. It was worth a lot of money. I used to tell the story like I looked up, back at Monthly was kind of where you got the prices of these cards and I looked it up and there was maybe 50 bucks or something. It would seem like a fortune when I was a little kid.

Stephen McKeon: 00:38:23 And so I went over to the card shop and the guy there's Calvin. I said, "Calvin. I'd like my 50 dollars. I want to turn this in and buy Snicker bars or whatever." And he said, "I'll give you eight bucks." And I said, "Well, that sounds terrible. This thing says it's worth 50." Maybe I negotiated him up to 10. I got my 10 bucks. And then next time I went to the store it's on the shelf for $50. So that's like the bid-ask spread in finance. And I didn't understand that terminology when I was a kid. But it was very impactful in the sense that there was no other market other than Calvin. I couldn't walk to any other card shop. None of my







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friends had 50 dollars. So there was just very, very little market depth.

Stephen McKeon: 00:39:06 So when we think about illiquidity or liquidity as academics, we don't think about as like ability to trade or inability to trade. We think of it as costliness to trade, price impact or bid-ask spread. These are the measures you might use to measure how illiquid an asset is. Then eBay came into being later in my life, but of course, if it had been around when I was a kid I probably could have gotten a lot more than 10 bucks for my Darryl Strawberry Card. Because what it did is it created a lot more depth in the market for those types of assets. Now all of a sudden you had this asset and it didn't only have to be your local market or a very small number of buyers. You could literally access everyone in the world who might want that Darryl Strawberry Card. And it was a much more robust market, much more bid-ask spreads, that sort of thing.

Stephen McKeon: 00:39:55 I guess you could draw that sort of analogy to a lot of these private securities, is if your buyers are only large institutions and there's certainly a number of those in active markets exist, even secondary markets exists, but they're sort of one-offs and they're also characterized by very large discounts, is my understanding. So to the extent you can start opening that up, even setting retail aside for a minute. If you could just open those assets up to all accredited investors all across the world. That's an enormous increase in market depth. So you have to believe that that is going to impact liquidity. It's going to impact some of these price impacts and spreads.

Ted Seides: 00:40:35 Do you see that eventually, instead of having just the Blockchain Capital Token, that's someone will create a platform where you have interoperability of all of these different illiquid assets in one place so the accredited investors could sort of create the marketplace?

Stephen McKeon: 00:40:49 Yes. I think there's going to be a few things that happen. The first is that you're going to see a bunch of these assets tokenized. They're going to adhere to standards so that they can be held by any wallet. So wallets are a really important piece of this ecosystem. They're kind of like your interface to this world. It's where you hold the assets. It's where you can trade the assets under centralized exchanges. It's probably your interface for where you'll vote to the extent they're voting






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rights with some of these things. It's probably where you'll receive your distributions, like dividends, lease payments, whatever. So the wallet is really, really important.

Stephen McKeon: 00:41:24 And so that's where I think you're going to see the interoperability, is that as these things are issued, they're going to make sure they're compliant with all of these wallet interfaces that are out there. The other thing I think you're going to see happen is that there are already people building protocols to bundle these things, almost like homemade mutual funds. So there's a group called SET protocol for example. And what you can do is you can create your own basket. So say we had a bunch of buildings tokenized here in Manhattan and you wanted to build a Upper West Side basket, you could do that presumably using the set protocol.

Stephen McKeon: 00:41:59 So what you'll see is almost like an explosion in investible assets, not only at the underlying individual level, but in sort of like any basket you could possibly imagine. So like an Upper West Side basket or you make a basket with all the VC funds that are focusing on AI or some specific strain of biotech or whatever.

Ted Seides: 00:42:20 The more depth you get and the more breadth you have of these assets. In theory now you have price discovery by buyers and sellers of the liquid assets. And I just think forward of more trading, more price discovery, does that end up changing the incentives of the people managing assets in the same way that say corporate CEOs are more shorter term than everyone believes they should be because of information and price discovery?

Stephen McKeon: 00:42:49 I guess if you're thinking about sort of been myopic or sort of short termism. It's interesting because one of the things, I guess this goes to really that last point I made in the security token thesis, is that I think you're going to see the nature of what a security is begin to change or at least what features can be included. So right now, we have two basic rights that we see in like an equity security, a cash flow rights, voting rights. There's kind of like the typical things you'd see in a common share of stock. What I think you're going to see is that there will be both bundling and unbundling or maybe just those rights in and of themselves we can start to sort of alter.






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Stephen McKeon: 00:43:28 So I'll give you an example is a lot of people are talking about this idea of tenured voting. So tenured voting is the idea that the longer you hold a share of stock the more voting rights you get. And if you look at kind of what a lot of founders do, recently some of the tech issues we've seen come to market, what did the founders do? They created a class of shares that has 10 votes and then everyone else gets one vote. That's kind of the same idea as tenured voting, it's just a very crude mechanism to accomplish it. It's like the people that are involved the longest are going to get the lion's share of the voting rights.

Stephen McKeon: 00:44:03 So maybe you are worried about kind of like being myopic because that is something that might be able to counteract that particular issue. If you give the votes to the long-term shareholders they can sort of empower management to take long-term actions. So you could program that into the security relatively easily with smart contracts, where you look at the length of time that a particular asset has been hold by a wallet and allocate voting rights in that way. But as it comes to money managers, I don't know ... I think the options they will have to deploy assets will increase substantially. I think people are still going to need advice. Large pools of capital are still going to be managed. So I mean, I think there are some things that won't change, but I think the particular assets and the manner in which they invest in them will change.

Ted Seides: 00:44:55 What are some more examples of use cases of where you'd see bundling or unbundling?

Stephen McKeon: 00:45:02 So I guess another unbundling example would be, just going back to this cash flow and voting rights. Say a holder share of Microsoft. He has these two rights. The voting rights are almost inconsequential to me if I hold 100 shares. However, they might not be meaningless to an activist. So to the extent, we could unbundle the voting rights from the cash flow rights, you could actually sell off the voting rights separately while retaining the cash flow rights. It's kind of like non-voting stock. And that's perfectly legal. You can't sell your vote for president. You can sell your vote on a corporate action.

Stephen McKeon: 00:45:36 And in fact, some of that does happen. There's a famous example Carly Fiorina and buying votes. When things get close, those votes actually become valuable when there's particularly







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contentious issues. To the idea that you could sell your vote or lease your vote or sell it for the next six months or at lease for the next six months. That's something that potentially we could build in to these smart securities or programmable securities.

Ted Seides: 00:46:00 You also touched in the paper about access right, partnership interest, which I found fascinating. I want you to talk some about that particular unbundling potential.

Stephen McKeon: 00:46:11 Sure. So access rights could take a lot of different flavors. So right now when I buy a share of Microsoft, I get these two, cash flow on voting rights, I don't get the right to ... I mean maybe other than the shareholder meeting, like go visit the Microsoft campus or why invest in Sequoia's current fund that does not typically ... I mean, there may be sort of an informal arrangement. There's not formally endow my ability to participate in their follow on fund, but that's actually considered a very valuable ... That allocation. Take Benchmark. So Benchmark, I just read an article the other day. Their recent fund is-

Ted Seides: 00:46:48 25 times.

Stephen McKeon: 00:46:48 ... crushed it, yet they're not going to raise a bigger fund. This is what the article was saying. They're actually got to raise the same size fund they did the last time. Of course, it'll be massively, massively oversubscribed. They could raise of substantial additional amount of capital, but they're going to choose not to, which means that the people that have allocations into that fund, presumably that's a valuable asset. And to the extent that Benchmark could formally include ... Say they actually tokenize that fund and it not only gives you a right to invest in this fund, but it also gives you a right to invest in say every subsequent fund or at least the next fund.

Stephen McKeon: 00:47:29 Well, all of a sudden to raise a dollar of capital somebody might pay a $1.25 because not only are they putting the dollar into this current fund. They're also buying the access rate to the next fund. It actually would allow Benchmark to raise more capital yet retain the same size fund because what they're also selling are access rights to follow on offerings. I think it's an interesting idea. I haven't really seen anybody do it, but I guess I'm always interested by items of value that people aren't monetizing.







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Access rights are clearly something that people value highly, yet they're not explicitly monetized.

Stephen McKeon: 00:48:06 Another example, if we step away from funds, is if you look at like the Green Bay Packers, a public company. That one's interesting because there are no cash flow rights. There are no voting rights. There are only access rights. The only thing they're selling with that share of stock are access rights. You can access, I don't know, probably memorabilia or a gear that maybe isn't access to the public. You get to go to this giant party every year. And maybe you get access to this community. So the only thing people are paying for when they buy a share of stock in the Green Bay Packers are these access rights, which indicate that there is some value there that's probably not really being taken advantage of by all the other sports teams. So I wouldn't be surprised to see other sports teams try to access these models to some degree.

Ted Seides: 00:48:56 And again, you come back to this question of the concepts are innovative. That there is value, there's financial value into things that aren't being ascribed value today. To what degree does that need to be on the blockchain or is it just an innovation that someone should take advantage of?

Stephen McKeon: 00:49:17 The place where I always went with this when I was thinking about it is ... Because we'd always ask this questions like, "Why blockchain? Why can't we just do this with databases and stored procedures?" We have a lot of technological tools at our disposal already. The place that I always come back to is, well then why don't we have this already? This is something that seems really interesting, that people are interested in. Why don't we already have all these things we're talking about with tokens? I guess I always come back to this idea of interoperability.

Stephen McKeon: 00:49:47 The Green Bay Packers share, there's no real market to trade that. With these fractional real estate offerings there's no real market to trade that. We need to create a system where we've got markets and wallets and all the pieces you need to build a market that all work together. And that's kind of the piece we've been missing. I think part of the reason we've been missing it is because it's very hard to create standards in a centralized entity. If you're Google, you don't want to sign on to Microsoft's centralized standard and vice versa.






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Stephen McKeon: 00:50:23 So it's very hard for sort of a for profit corporation to create a standard that's going to be widely adopted because of course, everyone knows that a lot of value is going to accrue to that corporation. So you get all these sort of strategic forces that prevent that from happening. When you look at something like Ethereum and this ERC-20 standard, it's a public chain. Anybody can buy Ethereum tokens. It's sort of maintained by a for-profit entity. And so everyone is just sort of adopted the standard is the way to build something that isn't going to work with everything else. It's like this idea behind network effects. At some point you have more incentive to adopt the standard than you have to deviate the standard.

Stephen McKeon: 00:51:05 That is the tipping point. That is the tipping point where you say, "All right, everyone's just going to build on top of this thing, which is then going to create these huge markets." And I think it's been very difficult to do that in a centralized manner, which is why these sort of decentralized public chains have captured everybody's attention.

Ted Seides: 00:51:24 And when you circle back to your history of stock issuance. Earlier this year you had like the Spotify non-IPO, IPO or whatever they refer to it. And what I found fascinating was in doing this direct listing, they nevertheless decided to pay all these investment bankers mostly to create effectively marketing for the stock. And is that just part of the evolution, that in the early stages you still need, I don't know if it's a centralized or middle man, to create the market, but maybe down the road the network effect takes off on its own?

Stephen McKeon: 00:52:01 No question. People always ask me about cost reduction. How much cheaper is it going to be to issue a token versus go through an IPO. And the answer is that today I'm not sure it is cheaper because if you look at the costs around an IPO. Yeah, there are some legal costs, there's some accounting costs. There's some things you could probably automate, but the really big cost are the bankers that are selling it. So they're saying that securities are sold, they're not bought. So that doesn't change in the short run. You're still going to have to pay people to market the issuance. Now in the longer run, who knows.

Stephen McKeon: 00:52:37 It's almost like the paradox of information. The more information we have, the harder it is to sort out the wheat from







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the chaff. I think there's definitely still a role for people marketing these issues. In the short run, like I said, things are going to be sort of plain vanilla. We're going to do things the way we've done them, but on-chain and then in the longer run maybe we evolve new ways to market these things through targeted advertising. And of course, the regulatory things we have to think about when we go through those as well.

Ted Seides: 00:53:06 Let's touch on compliance, which I know is the other big piece of the thesis.

Stephen McKeon: 00:53:10 Yeah. The very first article I wrote I said, "Hey, this Blockchain Capital thing happened. It's really interesting. We might be able to increase liquidity and market depth." And then I went through some sections towards the end of the article kind of like trying to be balanced. What are the reasons this won't happen? One of them was compliance and this is, in many ways, the most intriguing part of the whole puzzle to me because, as I said, if you look at my background through Skyward all we did was think about the intersection of emerging technology and regulations.

Stephen McKeon: 00:53:43 So it was something I've been thinking about for a long time, even before I got into crypto. And then I got into crypto I'm like, "Oh my gosh, it's the same thing again. This really interesting, new emerging technology kind of bumping up against regulations that haven't really been formed yet." So securities have a lot of rules, as we all know. And so when Blockchain Capital issued that BCAP Token they went through, they did [REGD 00:54:08], they did KYC/AML. The thing that wasn't built, we didn't have the exchanges that were regulated in order to trade these things, so that the ones that had all the right broker dealer relationships had come up with all the ATS licenses and so on and so forth.

Stephen McKeon: 00:54:25 The other thing we didn't have is something that could keep track of the compliance regardless of where the token traded. Shortly after I wrote that thing, a guy named David Sacks reached out to me. So David Sacks is famous from PayPal and Yammer. He's had a lot of really important roles in the tech industry. And he said, "I'm thinking about the same things. We've already started work on this project around this regulatory piece." Because the idea is that regardless of where the token trades, you want to be able to keep track of who






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owns it. This is like one of the really important pieces that sets tokens away from the way we do things now.

Stephen McKeon: 00:55:04 Is that if you look the way we do compliance today, we do it within walled gardens. So like I got an account at Merrill Lynch, they do KYC, they make sure I'm not doing bad things. You have an account at E-Trade or whatever and they do the same thing to you. And then we trade through these sort of two-walled gardens and everything's on the up and up because each of those entities has sort of done their piece to maintain compliance. What's very hard, though, is for me, peer-to-peer, to transfer shares of stock to you. So the example I often use is ... I make charitable donations every year and typically I'll donate shares of stock because, of course, there's a tax benefit.

Stephen McKeon: 00:55:46 So it's such an onerous process. I have to go online. I have to find some form. Print it out. Go get it notarized to prove that it's actually me sending this transmission message. Eventually mail it in to some PO Box in North Carolina and in like two weeks later the charity actually gets the share of stock. And I've actually had a situation where the price moved pretty substantially against me during those two weeks. So the donation ended up being a lot less, which is not good for the charity. It's obviously not good for me from a tax standpoint. And so I look at it and say, "Why is it so hard to transfer assets peer-to- peer?"

Stephen McKeon: 00:56:30 Well, partly it's a compliance issue. So Harbor is the company that David Sacks started and Josh Stein is the CEO now and there are others. But the basic idea is that we want to infuse compliance into the security. This is one of the benefits of securities being programmable, is that now we can put logic directly into the securities. When I want to transfer it from me to you, so I go ahead and I send it from my wallet to your wallet. Except now, because we have some compliance language programmed in there, it's going to check off against a white list or what we call a regulator service and it's going to make sure that whatever the attributes of that security is ... So maybe it's something that can only be traded among accredited investors, it's going to make sure that my wallet is associated with accredited investor.

Stephen McKeon: 00:57:17 It's going to make sure your wallet is associate with accredited investor. We're not doing compliance at the exchange level






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anymore. We're now doing it at the level of security, which is actually a fascinating concept and I think one of the major sort of innovations we're going to see with programmable securities. Regulators should be thrilled about this by the way, because it's going to be much easier to maintain compliance.

Ted Seides: 00:57:41 That's super interesting. Are there other key obstacles in eventually seeing all of this happen over the coming years.

Stephen McKeon: 00:57:50 So I would put the largest obstacle are just the interfaces right now. If you look at the internet. So the internet existed for like 30 years before we all started using it. I don't know if you remember the first time you got on the internet. For me it was like-

Ted Seides: 00:58:06 I do. It was in college, some video game my roommate was playing and I was too worried about bugs affecting my computer.

Stephen McKeon: 00:58:13 Mine was in like maybe 1994. It was through AOL. The Internet's been around a long, long time before that, but what had not existed were the interfaces. The nodes were kind of off. It was very hard. You'd almost be a computer scientist to actually log on and access these things. But with the advent of AOL and then Hotmail, which is sort of like the first free, completely free. I don't know if it was absolutely the first. It was early one that would had a large rate of adoption, where anyone could go on. They could get an email address. Now all of a sudden they could send messages to anyone else who had one of these things.

Stephen McKeon: 00:58:50 Kind of like wallets. So anybody can go on and get a wallet today. Absolutely free to go set up a digital wallet, but they're still sort of intimidating to people. This idea that like, "If I lose my key or if I make a typo, the thing's gone forever and then I've lost all this money." And it's scary. Probably in the same way that the Internet was scary and in the '80s. Like bugs. You just mentioned it. People had all these concerns about using the technology and bad things that might happen. We're still kind of in that stage. We've certainly seen more adoption. Things like Coinbase have a nice interface that feels like logging on to Fidelity or whatever.

Stephen McKeon: 00:59:30 And that stuff is going to help a lot, but I think we just need ... You've got this intersection of crypto investors and they're








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looking for venture like returns and then you've got all the traditional investors that might invest in things like real estate and the intersection between those two is not as large as it will be one day because many of the traditional investors are intimidated by the technology or just the interfaces. But I think, as they start moving up that learning curve, that's when you're going to see more and more assets tokenized because there's going to be a larger and larger market to sell into.

Ted Seides: 01:00:05 I'm kind of curious, in a lot of these illiquid assets, the nature of the flow of information, say between a GP or an LP here or the owner of a building and the people who are participating in it, tends to be information that's contained within its own network. How does that happen on this type of securitized token where there might be more anonymity if the relationship between the sort of manager of the asset and the owner of the cash flow.

Stephen McKeon: 01:00:37 So I would argue it is visible. If a public pension invests in it, it is visible because Prequent can go into through Freedom of Information Act and access all this information and they do. And they sell it to people like me. So academic researchers and others can go in and actually buy much of this data-

Ted Seides: 01:00:58 In terms of performance data or is it the underlying information of it's happening?

Stephen McKeon: 01:01:03 It is primarily performance data, but it also does have their holdings. We can see everything that they've invested in. It probably doesn't have the same level of disclosure like the vacancy rate of this building was eight percent or whatever in this month. I don't think it gets that fine, but I do think disclosure systems are one of the other things that need to get built. And you've got various teams working on them. It's something that all of the compliance platforms are thinking about as well. Like what is the information that a building is going to have to disclose if they tokenize the asset. Lease rates and how intricate are we going to have to get into the leases and so on and so forth. So I would say that is not completely figured out, but it is a need that everyone recognizes and will need to be met.

Ted Seides: 01:01:48 Well, Stephen I really enjoyed the thesis and talking about this because it's probably the first time, other than the notion of







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Bitcoin as a digital currency that I actually could understand, "Hey, this may have a use case that makes sense down the road." So I want to thank you for that. And let's turn to some closing questions.

Stephen McKeon: 01:02:09 Sure.

Ted Seides: 01:02:09 What was your favorite extracurricular achievement?

Stephen McKeon: 01:02:13 So I played sports and I was like ... I grew up in Minnesota. So the big sports there are hockey and wrestling and I played both. Now sadly, they're in the same season so you can't play both simultaneously, but started in hockey kind of as soon as I could walk and played up until high school and I was a goalie. So I have lots of memories like kind of like big saves and that type of thing. But my favorite moment was probably from wrestling. I wrestled all through high school and I was good, but not great. I was good enough to be captain of the team, but I was not like state tournament level.

Stephen McKeon: 01:02:47 I remember there was a regional tournament and I matched up against a guy. He was one of the best wrestlers in the state. State champion level. And there was sort of no question I was going to lose to this guy. But at the same time, I thought, "Well, maybe I can use some ..." He was much stronger than I was. I thought maybe I can use his strength against him. So I sort of watched and I knew he had this one move that he favored. I'd sort of hatched this entire plan. Like he's going to do this move and here's like the exact thing I'm going to do to like carry his momentum against him, get him all the way on his back.

Stephen McKeon: 01:03:22 So the match started. Of course, he did this move and it worked. I flipped him over. I had him on his back. Sadly, I could not pin him so I still lost the match. But this idea of sort of like hatching a plan and then successfully executing it, that was sort of like one of my earliest memories of that really working in sports-

Ted Seides: 01:03:43 It's fantastic. What's your biggest professional pet peeve?

Stephen McKeon: 01:03:47 Well, I'll give you two. Within venture investing a pet peeve is when we look at raising capital or when a portfolio company looks at raising capital as success. And as a venture investor, you're always trying to explain to them, "This is not success. This is an ingredient for success, but really getting traction,









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really getting users, that's success." That always is irritating, is that we celebrate fundraising to the extent we do. I think the other one is sort of misrepresenting luck as skill. This is a common one that you'll often find financial academics complain about is like, is it skill or is it luck?

Stephen McKeon: 01:04:26 And maybe it's even bigger than investing. If you look at, and going back to this example of the winery, I became CFO at a young age. That wasn't really skill. I mean, that was certainly luck. I guess the way I look it is like Seneca had this line about, "Luck is when preparation meets opportunity." So preparation is the internal part. That's the part you can control. You can be prepared. But opportunity is often an external force and that is the luck part, is like you need both. You need the internal preparation. I don't want to discount that people can sort of make their own luck, but that always needs to be coupled typically with external events that are outside your control. And I think recognizing that piece of it and acknowledging that it's not all skill, there's always these things that have to break your way, is really important.

Ted Seides: 01:05:13 What teaching from your parents has most stayed with you?

Stephen McKeon: 01:05:16 Don't quit, which sounds very cliche. Maybe the right term is don't rage quit. So it was sports or there always were like, I would have a bad game or whatever and I'd be like, "I want to not play hockey anymore." And they'd say, "No, you're finishing the season. You can transition at that point, but other people are relying on you. You're not quitting mid-season. You're not quitting mid-course. You're going to see it through to a logical transition point." And that's always stayed with me. If you look at the winery, I transitioned out of the winery but I did it in a way that was well-planned. It wasn't like I just walked in one day and quit and said, "I'm going to go and join a PhD program." So every transition in my life I've always tried to approach it that way.

Ted Seides: 01:05:59 What information source do you read more than any other?

Stephen McKeon: 01:06:05 I would say probably Twitter, which is interesting because I never used to use Twitter before I got involved in crypto. But it's just so much of the conversation is happening there. I'd say the other sources are Medium. So again, something I never used before crypto and now I'm on it literally every single day. There







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is so much good content on Medium that's out there for free. And I mean, they also have a membership, you can access even more content. But both, as somebody who has pushed content, as someone who's digested it, I'm really enamored with Medium. And then I guess the last piece is all the academic literature. SSRN. SSRN is a free resource. Now, I think that's kind of one of my advantages in this space, is that a lot of that stuff is hard to approach. You need some training and econometrics to kind of get through the math and whatnot, but there's, of course, a lot of great research on SSRN.

Ted Seides: 01:07:00 All right, Steve. Last one. What life lesson have you learned that you wish you knew a lot earlier in your life?

Stephen McKeon: 01:07:07 I guess one of the guiding principles has been ... There's this quote from Maya Angelou. It says, "People forget what you did and people forget what you said, but they'll never forget the way you made them feel." And that has always stayed with me. I use it everywhere. I use in the classroom. I use it when pitching investors. Students, if you can make them feel something, will remember the lessons so much more vividly. If you can make an investor feel something during a pitch, it's so much more likely that they're going to buy in and invest.

Stephen McKeon: 01:07:39 And there's something called the spotlight effect, which is that people always think they're in the spotlight. That everybody's kind of paying attention to them but because everyone's kind of caught up in their own spotlight, they're not always sort of taking note of everything else that's happening around them. And so I think the way to kind of break through that and really get retention and memory and buy in is by really making people feel something when you're speaking to them.

Ted Seides: 01:08:05 Fantastic. See you soon. Thanks so much for taking the time. Really enjoyed it.

Stephen McKeon: 01:08:09 No, it's an honor. Thanks for having me.

Ted Seides: 01:08:12 Before we get going, I'd like to invite you to join the Capital Allocators Think Tank. A premium content subscription service where you can discuss each episode with me and the guests alongside allocators of sizable pools of capital. You'll also gain access to the library of transcripts of past episodes. Visit CapitalAllocatorsPodcast.com and click the Premium Content








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transcript: stephen mckeon – professor of crypto security … · 2018-09-11 · i hope you enjoy...

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