tZERO: How to revolutionize Wall Street

Stefan Perlebach
Stefan Perlebach

Jan 9, 2019

Saum Noursalehi is the CEO of tZERO - the world’s first SEC-regulated ATS (alternative trading system) for Security Tokens.

The FinTech company and subsidiary of digital retailer Overstock aims to tackle the inefficiencies of Wall Street and thereby revolutionize the financial markets. Making the trade of Security Tokens user-friendly, easy and compliant is one of the key goals of tZERO.

We are pleased having Saum Noursalehi as our interview guest.

What problem is tZERO trying to solve?

Our goal is to make capital markets more efficient, accessible and transparent, and we believe blockchain technology has the power to do this.

What was your biggest challenge launching your Security Token exchange so far?

In addition to building an alternative capital markets system on the blockchain, we have been laser focused on ensuring that both the Security Token Offering (STO), as well as any secondary trading exchange or platform that follows, are compliant with U.S. federal securities laws and other applicable regulations.

Can you tell us about the legal process it took you to launch an exchange for tokenized securities?

We have not yet launched an exchange or trading platform for tokenized securities. We are currently targeting to go-live with a secondary trading platform in Q1 2019. To that end, we have been working proactively with our partners and regulators, including the SEC and FINRA.

How does the transfer of Security Tokens work, both technically and legally? Are my ownership rights “just” stored on the blockchain or is there a “offline copy”?

The transfer of Security Tokens on the tZERO platform will require that both the “from” and “to” addresses are whitelisted in the tZERO Global Registry, if both addresses are whitelisted, the token sender will sign the transfer transaction with their private key and the tokens will be sent to the recipient. All transfers must also be done within compliance with applicable laws, which is enforced by our Compliance Interface Smart Contracts. For the purposes of trading, the tokens will need to be deposited into the custody of a designated custodian in the tZERO ecosystem.

Whenever a Transfer of Security Tokens takes place, the transfer and ownership will be recorded on chain as well as on the books and records of the issuing company, and the share registry maintained by the custodian. There are several redundant copies maintained offline.

What is an investor’s advantage to buy/sell securities via tZERO?

I will answer this question through a couple of examples. As a private company you will be able to raise capital more efficiently (e.g. lower fees) and have access to a global investor base. It also allows issuers to provide their investors, employees, and other shareholders with a mechanism for secondary liquidity without bearing the costs associated with being a public company. Secondly, as a fund, you will be able to execute your investment strategy without having to lock up investors, especially for longer term investment vehicles like venture capital or real-estate funds.

This platform helps democratize investment access that has historically only been available to institutions and the wealthy, with a structure that also allows for secondary liquidity.

When will I be able to trade Security Tokens on your exchange and who will be eligible to buy and sell them?

We expect to launch the Security Token Exchange by mid to late 2019 to all investors for publicly filing companies, subject to the technology being completed and regulatory approvals. We are however, aiming to have our own token trading on our Alternative Trading System (ATS) in Q1 of 2019, initially for accredited investors only.

In the future, the ATS will allow both accredited and non-accredited investors to trade private securities.

What kind of Security Tokens / asset classes will I be able to trade on tZERO?

Technically tokens will not trade on tZERO. They will either trade on our exchange, which is our JV with BOX Digital Markets, or our ATS, which is a wholly owned subsidiary PRO Securities.

Initially we will support the trading of equity securities, with a primary focus on private companies, funds, and investment vehicles backed by historically illiquid assets. In the future, we envision supporting debt instruments, real-estate, bonds, or even art, music and film. Essentially anywhere we can help democratize access, bring transparency, increase efficiency, or create liquidity.

Will I be able to sell Security Tokens I bought via tZERO on other exchanges?

At the moment, we don’t know of another venue we’d be comfortable letting our tokens trade. We would like to see a world where tokens are portable and interoperable across exchanges, ATS’s, and registered market centers that comply with securities rules and regulations. As other platforms come online, we look forward to working with them.

How does your Due Diligence process for Security Tokens that want to be listed on tZERO look like?

Security Tokens representing equity in public companies will need to meet the listing requirements of the JV Exchange. As for issuers in the private sector, we have developed guidelines for qualification that encompass business, legal, and technology requirements in an attempt to build a strong market place and protect the underlying investors.

Where do you see the Security Token Ecosystem in 5 years?

It is difficult to project, with how quickly, blockchain technology, and technology in general, are advancing. However, it is safe to say assets of all types will have fractional digital representations and will be globally available to average investors.

What are the biggest upcoming challenges for tZERO?

Market adoption, which we believe will come once Security Tokens and Security Token market places receive necessary guidance and approval from regulators. We appreciate the fact that regulators are taking a measured approach to allow for progress while protecting investors first and foremost.

Thank you for the interview.

You can learn more about tZERO here

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