>> Announcer: Live, from San Juan, Puerto Rico, it's theCUBE Covering BlockChain Unbound, brought to you by Blockchain Industries

(Puerto Rican music playing) >> Hey, welcome back everyone This is theCUBE's exclusive coverage here in Puerto Rico for Blockchain Unbound I'm John Furrier, the co-host of SiliconANGLE Medias theCUBE is our flagship product We go out to the events and extract the signal from the noise

My next guest is Christian Ferri who's with Block Star, doing investments, ICO advisor, he's been in the space, great to see you, nice to meet >> Absolutely, thanks for having me John >> Thanks for joining So, okay, some people are saying that we're the top of the bubble, some people are saying that it's the beginning of a revolution Some people are, like, staying away, "Oh my God, what's going on?" Some of those investing both in equity and token deals

What's your take on this? I mean, how do you explain this? Because it is a global phenomenon, I mean, what's your take? >> Yeah, I think we're at a very early beginning right now It's definitely, I would say 1996-97 of the internet bubble if you will We're seeing some amazing growth, right? So, things are picking up real fast I think You know, the moment that Bitcoin hits $10,000 a lot of people got interested in all this phenomenon ICOs are becoming the standard for fundraising for startups

It's an interesting model, you don't have to give up any equity, you don't have to give up any board seats, it's much easier, much simpler But there are definitely some legalities and regulatory aspects that put some concerns in a lot of people's minds >> What are the, I mean obviously if you're an investor, you got to get a pound of flesh somewhere, the old days was equity and that was a long game, it had a different gestation period How are you making money now on the investments? Is it just getting on the discounted tokens? Is there a little liquidity going on? So, if there's no dilution, you got to make money somewhere, so, where is the secret? >> Yeah absolutely, great question So I think if we're looking at security tokens, to finance investment vehicles, the way you make money is by the value increases of the token, right? So, as you buy a $1 and the token goes to $1

50, you have your 50% increase, right, return There are new companies in the ICO space, they're thinking about leveraging the equity side of things, but it's fairly new Right now it's merely a token deal, so when you think about private sale, pre-sale, it's 99% a token deal, right? Although equity's coming in because a lot more venture capital is coming in and they're demanding a piece of the action from a company in equity perspective >> Yeah, and some of the ICO's, because we've outlined this on theCUBE many times, Blockchain, I call it the Crypto-stack, Blockchain, Cryptocurrency, and the application on the financial is ICO, >> Christian: Right >> But that ICO also translates into the application dynamics of token economics, tends to value creation

>> Christian: Right >> Hence what you were talking about token value going up, kind of like how equity investment would go up if it got sold on valuation, etc >> Christian: Right >> Okay, ICOs are hot Now the market is pretty aware of the scams, the scams out there

Young kid puts a fake white paper out there, raises 20 million, >> Christian: Right >> Next thing you know it's like, "where's the money?" >> Christian: I've heard that before >> And then you've got legit ICOs going off the blocks which a really legit, going great, how do you make sense of it as an investor? Is it classic word of mouth? >> Yeah >> What kind of due diligence are you doing? What's your filter? >> I think what you said, word of mouth definitely plays a big role in it, I had to trust that toward your network

Having a research team kind of helps understand the technology behind it, if it's actually feasible I go through 250 white paper a month >> So you're a white paper reader >> I am not, my research team oversees actually >> Okay

>> But as an investment and advisory firm, we have a lot of inflow of companies that want to get advised on or invested in And a lot of these white papers are total moon shots, it's like build a YouTube and it's 1982, you have a dial up, you can't do that, you need a broadband, right? >> John: Yeah >> So, you have to have a very diligent process and team that does that And then think about 99% of the white paper you'll see are going to be crap or junk Only one or two percent are going to be good

And so that selection process is very key On top of that, there are a few things in the tokenization process that can raise red flags For example, if they're too aggressive on the discounts on the private sale, like 70% discount, 80% discount, it's not a good indication, it's a red flag >> Really, why not? >> It shows that the product is not that great, right? If you have to give somebody an 80%, if you're buying a Ferrari that is discounted at 80%, would you buy it or would you say, "well I'm not sure"? >> Well you could be, it's like giving warrant coverage on a equity deal, >> Christian: You could >> You could go up to someone and say hey I'm going to give you 80% discount because I want you in my deal, and I want you to make more money than the other guys

>> And what we see >> I mean that's the counter argument >> Yeah and what we see >> I guess what you're saying is there's two vehicles >> Yeah

>> Desperation >> Christian: Yep >> I got to discount the shit out of it to get attraction And what I'm saying is it's kind of like a hot deal you want the right people in, I've seen both >> Christian: Yeah it's a good point, usually what we've seen in the past four and a half years is that the good deals don't get discount more than 35%

That's usually the max they get discounted, especially just because you said you need strategic partners to back you up, to help you out since the beginning These people should be invested in the project, they should not be incentivized by the discount that you're giving them on a private sale But they should be incentivized because they believe in you and believe in the product >> So it's a judgment call >> Yeah

>> You shouldn't have to drop your drawers, so to speak >> That's right >> Good feedback, that's great, now token sale economics, I'm the entrepreneur, how should I be thinking about going to you, and I have a good deal, I have a great product, I've got token economics, I'm a growing company, this is an opportunity for me to scale my business at an unprecedented level I can get more capital than I can on the private market because it's flowing faster here What do I got to do to get your attention? >> Well, first of all, from an advisor perspective, we only take usually established companies, they have a minimum of 10 million in ARR, so annual recurring revenue

We make a few exceptions, if there's a very strong team, a very strong advisory board, or they have a few characteristics and qualities that we look for We kind of trying to wave that 10 million ARR, but we're looking for like stellar team, rockstar teams, with a good advisor board, with technologies actually feasible to be built in the next two or three years And that can actually be deployed on the market >> So they want to see product, you got to see product >> Absolutely, absolutely

>> So you don't investing in the moon shot, as you said >> No >> Not really because that's essentially a seed deal >> Yeah, exactly, there are circumstances when you have a very amazing team, that've done some crazy amazing things in the past, and they're talking about moon shots, right? They're, I'm not going to say a name but there's a big ICO right now raising billions of dollars >> Telegram

>> Right, well I'm going to say a name >> Telegram, are you in Telegram? >> Sorry? >> Are you in Telegram? >> Yeah I'm a user, right? >> Not a buyer of the ICO >> I have not invested >> Okay >> I have lot of people that want to invest in an ICO, but I personally have different opinions on it

But there's a lot of moon shooting over there, right? >> John: Yeah >> So you want to make sure there's a fine balance between what you're promising and what you can actually do >> Great, so what's your advise to entrepreneurs when they're at the stage of, "I really want to do a token sale, I think we're ready" What's your advisory role? How do you come in and help? They might not be ready for capital but they might want some advisory, maybe throw in a little bit of token cash, not token cash in there, but legit cash via tokens >> Christian: Absolutely

>> How do you engage? What's your, you mentioned some of the 10 million, but what do you bring to the table? >> So the way it works usually is that they come in with a white paper and an idea on an established business that they want to tokenize, and then we basically have a conversation, we start having a conversation to figure out what they want to do But the first advice that I give my clients is to stop This business has too much FOMO in it >> John: Yeah >> The fear of missing out

So not just because everybody's out there doing ICO you should be doing an ICO, right? >> John: Yep >> So this is the first thing to take a step back, figure out what really makes sense for you, and your situation in your company And number two, I always provide the example where, thinking of going ICO in a three step process You start with the business, right? >> John: Yep >> So back in the 90s and I think you were around back then

>> John: Yeah, I was >> When you were asking somebody, when you were saying, "what are you doing?", it was like "oh I doing a startup, "I'm building a company, I'm building a startup", right? >> John: Yep >> Everybody was talking about startups You go just about anywhere in the world talking about Blockchain, and somebody stops you and says, "what are you doing?", an ICO, right? >> Everyone's doing it >> Everybody's doing it, but an ICO is an investment vehicle and not a company, right? >> John: Yeah

>> So, start with the business, got the business mechanics down right, so free cash flow, unique value proposition, product-market fit Once you've done the business, think about the token model >> John: Yeah >> The token model has to go in hand in hand with your business model and revenue model And don't settle for the first one to come to mind

There are over 50 business, I'm actually writing a book about it, The First ICO Playbook coming out later this year >> John: Okay, great >> It's going to have some new token models in it, and once you figure out the business and token models, now it's time to think about compliance And compliance can actually enable the rest, and, when under the right jurisdictions, they're a match for the token and the business model >> John: Alright so the token playbook, great job, I'm glad you're writing that book, I think we need to get a good playbook down

Alright so here's a playbook question for you we're going to go to the playbook on this one Security token, or utility token, okay, we've got that figured out We got to have utility I'm going to raise money in the US and abroad, I've decided to go with the security token, hypothetical instance, what do I do? Security to equity? Security for future cash flows? What is the playbook for the security token? >> Well it's more simple than it sounds, in a sense So the first this is if you're not sure whether it's a utility or a security, just file it as a security

And from a security standpoint, I think you're covered whether or not you're selling to the US or are a US resident citizen, you still have to comply with the SEC regulations just because you're in the US And so a security can actually have different terms just like you said, a security to equity, a security to token and so forth That depends on what your revenue model is and what your structure of your company is, and so a lot of people are doing security equity Other are doing security token, just because they don't want to give up the equity of the company or the board seats >> John: So what's the biggest thing that you're scared of in this market, as an investor? Are you worried about regulatory? You worried about too much money chasing not enough good deals? What's your fear? >> One of the initiatives I started last year is called the BlockChain Compliance Alliance

It's a no-profit independent initiative to develop a standard for ICOs >> John: You started that? >> Yeah, I founded it last year with a few other folks, and then five or six people, >> Trying to build some stability around the process? >> You got it, yeah, it's almost like a self regulating standard, or an SRO, right? >> Yeah >> And we had the opportunity to engage in some regulators, some folks at the SEC and some other government agencies, not just in the US but also in Europe, and they're very open to have a self-regulating standard >> We need self-regulating standards, the community's got to take care of business, there's a lot of scams out there >> Yeah, absolutely, so they're open to say to have an industry of self regulating from the top down, the kind of choke innovations

>> John: Yeah So I'm not really concerned about too much regulations coming in the regulators >> John: Well the SEC's just been signaling, they've taken a few obvious scammers down, but they really haven't overreached, in my opinion, I think signaling has been good, but they're signaling >> They are signaling >> They're not looking the other way

>> Absolutely, and I think it's they're job, they have to be signaling >> But then they don't know what they're talking about either so the communities got to step up to your point >> Correct, right, so we're trying to kind of be that, basically that intermediary, if you will, right? >> How many people are involved in that? Just take a quick minute to explain, URLs or like a website >> Yeah we do, it's blockchaincomplianceallianceorg

>> John: Who's involved in that? >> It's five or six people we're getting on, volunteers, it's a nonprofit, so volunteers We're looking for additional volunteers, donations, and a board of advisory We have a few high level advisors >> Whales, whales >> Yeah, well

>> They're called whales, are they whales? >> Well, whales don't want to be known, it's hard to find a whale, but I said that we have a few high level advisors that would like to come onboard, we're going to make that announcement soon >> Us minnows out there >> But it's going to be exciting >> That's awesome, okay now back to the token economics, I'm fascinated by the token economics Again, you can't just whitewash a business in saying, "hey I'm tokenizing now", there really has to be a dynamic

What do you look for, what do you observe, and what's your thoughts on how to actually think about the token economics alignment with the business model? Where does that have to line up for you? >> Yeah, good question, I think there are different aspects of it, first of all, you need to define what a token is Is that for you an incentive mechanism? In which case, you can use an airdrop model, you don't necessarily have to ask people for money Or is it a fundraising mechanism, or both? So let's just start with these basic questions You can think of it, you can move on to say, "who's going to be my user?", right? Who's going to use this token? Think about are they going to be moms, dads, hospitals? Like what's my target? And then how they're going to use it, are they going to hold it? Are they going to sell it, are they going to trade it? So all these different things define the token model, right? And the token model, as we said, needs to go hand in hand with the business model, the revenue model as well So for example a lot of companies are using the token as a fundraising mechanism, but an incentive mechanism as well to incentivize this behavior

>> So talk about the dynamics of an airdrop and a token swap We're starting to see airdrops are well known, just take advantage of explaining to folks who don't know And then, I'll get to the token swapping, we're seeing some synergistic keiretsus for me, so airdrops and then token swaps >> Yeah, airdrops are becoming, basically the new standard, I would say, they're a way– >> John: Outside the US? >> Even the US, actually >> John: Are they doing it in the US? Okay, explain what it is

>> There's a company, I think it's called Earncom, where you can actually launch your airdrop campaign for free or you have to pay something but >> John: What's the URL? >> Earn, Earncom >> John: Earncom, okay yeah I see that >> E-A-R-N, yeah

>> Explain what an airdrop is, just define it >> So, it's a very simple term, you basically airdrop tokens, you basically give tokens to users, to people, right? So basically people sign up on your site, and you white list an address, and then you basically send those tokens to that address So it's a way to circumvent a public sale >> So get free tokens out? >> Christian: Yeah >> To generate community activity, marketing buzz

>> Christian: Correct >> So you're just going to airdrop it, kind of metaphorically >> Right, there are some ways that people do private sales with airdropping >> Where's the gotchas on the airdrops? Where are people getting in trouble? >> Well, if the token is a security, depends on if they're giving it to you for free, but the value increases, the token increases in value, that delta becomes dubious From an IRS perspective, from an SEC perspective, from a CFDC perspective, that we still haven't figured out, but ideally if we give out free tokens to incentivize the community, >> Yeah that's normal marketing usage, in the SEC you view that as a utility, a legit utility

>> Yeah we see that with the new bill that passed in the past couple of days, that's how they define utility >> Alright now let's talk about swaps, token swaps, because starting to see some activity around, self-forming, which is natural in communities, adjacent businesses saying, "hey I'll swap "two million dollars worth of tokens "for two million dollars of mine" Kind of a Barney deal, you love me, I love you back, kind of thing, but it's trying to cross pollinate communities and share value, basically a Bus Dev Bill >> Christian: Yeah, absolutely >> What do you think about that? >> It's great, I've seen that a lot of that in forming new partnerships between ICOs

So, let's say there are two ICOs that definitely want to have some IOJV or some partnership together, they have some qualities that they'd like to have of each other, and that's how they do it, they do a token swap It's almost like an equity swap from a regular traditional company standpoint It's almost like you want to have an action in the company, and I think it's a great model, it's a great incentive mechanism >> A great legal bill too in all this, someone's got to pay for it, lawyers are having some fun with it >> Yeah

>> Kind of new progressive laws being figured out, lawyers generating new dockets for the first time, final question for you, I know you got to run, appreciate your time spending it with us Puerto Rico, you're observation here, you're from the bay area like we are, what are you doing here? Why are you here? What's your observation, what's the hallway conversation? Share some color commentary about BlockChain Unbound >> So, I'll start with why I'm here So, it's beautiful place, the weather is amazing, the water is amazing, it's a great place to take some time off I'm speaking at a bunch of conferences, and meeting a few people

And I'm part of the movement of the Puerto Rico Crypto Movement I think it's great, I had the opportunity to meet with some of the government officials that came here at BlockChain Unbound today, and talk a little bit about what's happening, how can we actually make sure that, create some sort of a system that is made for ICOs and BlockChain, and what I like about it is that it's very open to accept new ideas, very open to try out new things, which not always happens in the government space, so I'm very excited about >> And they're really active to open arms >> Absolutely, absolutely So, I have very high expectations and very good sense that things are going to pan out here >> You do any deals here? Write any checks? Sign any commitments? Verbal MOUs, handshakes, what's happening? >> There's been some of that

I'm a big believer that you need to do enough due diligence on the process, so have a cool off period, a honeymoon period kind of cool off but I think there are some very interesting people here, I met some very interesting brains, very interesting products And the energy, you can feel the energy People want to try their risk and invest >> I see a lot of people doing deals, I saw one VC, I'm sorry, VC, investor, token investor, he's done six deals already here >> Christian: Yeah

>> He's buying tokens, handshake, verbal commitments, and MOUs >> Yeah there's a lot of that going on >> And a lot of money coming it, a lot of international too >> Absolutely >> So great to see not just here in Puerto Rico, not just US, this is a global phenomenon

>> It is, this is one of the things that BlockChain is about It's ubiquitous, it's everywhere, and that's the beauty of it >> Well, Christian, thanks so much for coming on theCUBE, we really appreciate it, thanks for sharing the data and advice The BlockChain Playbook is coming out at the end of the year check it out, Christian Ferri with BlockStar I'm John Furrier with theCUBE, SiliconANGLE Media

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