John Pigott, CEO, ABE Global on Innovating Capital Markets with Auctions and Distributed Ledgers (S1, E11)

John Pigott, CEO, ABE Global on Innovating Capital Markets with Auctions and Distributed Ledgers (S1, E11)

This week on the Encrypted Economy, our guest is John Pigott, CEO of ABE Global. ABE is an acronym for A Better Exchange, which is exactly what John has set out to build. John and I met years ago when he responded to a market structure article I had published, which I knew would take a special kind of market nerd to appreciate. John fit the bill, and we instantly hit it off. His appreciation for markets is unique and persistent. It even managed to define his years long motorcycle trip through Asia, which inspired the values he seeks to change the market with through ABE Global. Make sure to tune into this episode to hear about John’s vision for the marketplace, desires to help the common investor, and how distributed ledger technology can be the basis for it all. Keep an eye on ABE Global to follow his journey, and of course stay tuned to the Encrypted Economy for more great episodes!

Topics Covered

  • John’s Background
  • Learning Markets on the White River Jade
  • Why Do We Have Markets?
  • What Makes ABE, A Better Exchange?
  • Why the Market is Ready for ABE
  • Integrating Tokenized Securities into the Market
  • Why Blockchain is a Regulator’s Friend
  • How ABE Uses Distributed Ledger Technology
  • ABE’s Experience With Global Regulators
  • The Need for a Common Market Language
  • The Promise of Real Estate Investment Trusts
  • ABE’s Rollout Timeline

Resource Links

Show Transcript

Eric Hess: [00:00:00] In today’s episode of the Encrypted Economy we have John Pigott, founder and CEO of a new company called A Better Exchange or ABE. John and I are both equities market structure nerds. We met years ago when I published an equities market structure article that I knew few would really appreciate, but I didn’t care. I published it anyway. John was one of the few. He reached out, we instantly hit it off. He’s very bright. He’s an active mind focused on markets that can’t stop. Even when he unplugs to pursue a lifelong dream of motorcycling through Asia, as he shares. John was very successful in founding an automated bond trading platform, Bond Point. It’s still successful, even following its acquisition years later. He built a franchise that endures. Post his motorcycle, hiatus he’s been building ABE. He’s worked really hard to launch it as a global marketplace and it’s coming up. He shares some key points about his vision for that market and what they’re trying to accomplish. But this episode, isn’t about ABE. This is about one man’s quest to solve a very real problem in capital markets and in a way that squarely fits within the digital asset narrative. To truly enable you to appreciate what John talks about, I’ll provide a bit of review in some context. Equities market structure as noted was transformed in the mid two thousands by reg NMS or the SECs Regulation, National Market System. Its intent, was to ensure that all investors could take advantage of trading large to mid cap securities at the fairest price’s possible and it worked. It really did. But there was a consequence for early stage companies that could not build early trading volumes or as we call it, liquidity. 

John delves into that trade off in this episode. But Reg NMS had the right idea. Force markets to make sure investors get the best prices. If I issue a security in my company, I love this. Best prices create trust and more buyers. Less liquid securities don’t really fit that well into Reg NMS. SEC has tried to fix this with various regulations, but we’re still not there. Abe exchange leverages an old idea, mini auctions, in a new innovative way. Collect orders and a willingness to trade, but match them in time periods that are set by the issuer. The issuer can make a determination of how much liquidity can collect before everything executes. 

As he explains, it levels the playing field. John also talks about DeFi and distributed ledger technologies and how those innovations are enabling markets to cut out all the layers of infrastructure. Infrastructure that also has the effect of limiting capital formation and less liquid trading instruments. 

I know, I say that every episode was a great one and this is certainly no exception. And I really think you’re gonna like it. And if you do, share the love. I need the shout outs. We’re still trying to build this thing. And so, I bring to you, the episode with John Pigott.   

This is Eric Hess with the Encrypted Economy and I’m really excited to have John Pigott on the show today. John is working on the better exchange., designed to bring the auction markets to  lesser liquidity and across all asset classes. It’s a very exciting project, John and I talked a number of years ago about it when he was first starting out, and he’s got a wealth of information and he’s done a ton of work on this, and he’s also, incorporating some more distributed ledger technology and technological advancements to make the market’s something really exciting going forward. John… so excited to have you on the show. 

John Piggot: [00:03:44] Great to be here Eric. Great to reconnect after all these years. When the whole direct edge market structure gang gets back together it’s a fairly small crowd. And so you reconnect people who have some kind of historical framework for what’s going on now, because it’s very exciting times.

Eric Hess: [00:04:00] Yeah, it sure is. And I can’t wait to hear more about it and bring it to our listeners. Let’s talk a little bit about your background and your journey to Abe. 

John Piggot: [00:04:09] I think the phrase from a Jerry Garcia is,  “what a long, strange trip it’s been?” My first gig… I’m from the South ,and so my first gig out of law school was… I was the public defender in the poorest county in the United States. And then I went from that to being  in a large law firm in the New York,  DC area. As I went from representing crackheads who had problems to representing coke heads who had problems… in 1999, when the SEC passed reg ATS, which created a new  type of securities exchange, I founded a company called Bond Point. It was an original idea for about three days. By the end of the first year, there were 92 competitors trying to do the same thing, which was basically at the time bonds were traded believe it or not over fax machines and telephones and people were FedExing documents around. This was a very obvious idea. I get zero credit for the idea,  put it all screen-based trading and electronic trading. And like I said, 92 competitors at the end of ’99. Seven years later, there were two of us left. We sold the company. The company was eventually bought by ICE, Intercontinental Exchange. It is now known as Ice bonds, and my old team is still running it, which is super exciting to see them succeed in it. Since then, since selling that, I was so burned out, frankly Delta airlines told me I was averaging 128 flights a year for eight years.  Used my points, which was a major asset in my portfolio at the time, I put everything I owned into storage, gave a bunch of stuff away, one way ticket to Bangkok. My only plan was to buy a motorcycle and see how far I could get. And that’s when I actually became if possible, more fascinated by markets. Because over that next two years of the journey, I allowed myself to find out, what do you really enjoy? And within a couple of months, it became obvious.

I was redesigning my trip to be nearest, to the Yak market in Tibet and the rug market. Every week. I had to go to a different market and I got even more obsessed.  The journey had been one to the purpose of which was to escape market structure, it dragged me deeper and deeper into it.

Eric Hess: [00:06:11] That’s really, that’s an interesting story. I spent some time tooling around Southeast Asia and Asia as well. It’s an incredible experience. So to learn a little bit more about John, the person, can you tell us about one singular event in your life experience that captures, that stuck with you in terms of the values or who you are or your view of the world?

John Piggot: [00:06:32] Yeah, actually I can.  I was standing on the banks of the river in Hotan, China, which is out in the Xianjang area, which is the very primarily Muslim Turkish tribal descendance area. And it’s the source in the world for the most valuable Jade, which the Chinese love Jade. And there are these little rocks and it’s the White River Jade, and the Uighur tribes were digging up the rocks, but there was Chinese merchants that were buying them. And if it’s a real rock, you can’t… the problem is you can’t tell what it really is until you polish it. So it’s either a piece of quartz, which is worth about a dollar a ton, or it’s White Jade, which is worth at the time about $800 per ounce.

The Uighurs would dig the rocks up, take them to marketplace, show them to these Chinese tradesmen and the Chinese tradesmen were very smart, they would buy a bunch of junk so that they could for a dollar, a piece so that they could buy the real stuff for a dollar and make a profit. It’s a market price, it’s a marketplace problem, it’s a market information problem. So I took a quick flight down to Hong Kong, bought some equipment, came back and set up my little table at the edge of the river with the equipment to run an electrostatic charge through the rocks, to tell them whether this is jade or quartz, which is the only way you can do it typically. There was an episode with Chinese authorities for a couple of days, but it worked out after a while when they released me and I brought home, actually I didn’t start learning, really learning what I consider to be the essence of a marketplace at a fair marketplace until I had built one of the largest securities exchanges in the global bond market. My education to me began that day. And went forward and the importance of , in terms of the community, of price discovery, of having some kind of transparency to the process, because as a culture that one issue, whether you could tell one white rock versus another white rock had completely broken down trust in the community.

And that, by the way, that’s still the case out there down in Hotan.  There’s no trust in the community and it’s all around this white rock. 

Eric Hess: [00:08:32] That’s a fascinating story. So that’s a great segue too, into the project with a better market. So you came back and you had a new vision for a marketplace with price discovery and allowing these sort of less liquid, cause obviously if  you’re digging rocks out of a river it’s a liquid in that it’s a river, but it’s not like trading Google or Apple. And so you came back with this vision. And so why don’t you talk a little bit about your journey into a better market and to a better exchange?

John Piggot: [00:09:01] Sure. We were and by the way, that trip took two years and I just got completely probably to an early healthy degree, very obsessed by markets and market structure. So what we came back with is a realization or really a deeper understanding of what do we have markets for? What are they supposed to do for the community?

And to me they’re supposed to do two things. One is they’re supposed to form capital for an enterprise where the community can invest and have some kind of participatory connection  with commerce, with commerce going on to their community. Secondly, is price discovery. Somebody wants to find out what something is really worth right now in terms of cash. They take it to the marketplace, engage in price discovery, and they find out exactly what it’s worth at this point in time in a specific unit of trade. Coming back into the US markets, in our view, both of these functions have somewhat broken down. All right, first of all, talk about price discovery. Price discovery depends on people actually putting thought into what they think something is worth. Contrast, now we have a more us stock market where 90% of the orders are price agnostic. It’s weird, right? Nobody cares about the fundamental price of something. So that’s a lot of beta index investing and a lot of HFT’s on it. So in terms of capital formation this all tracks back to a decision made by the regulators in the US and Europe. About 2005, they implemented a new market structure and their thoughts were, and it was very well meaning, and it has accomplished a lot of positive things. The thoughts were all the chicanery, all the damage to investors happens in these small cap IPOs this growth capital investing. So if we just basically raise the bar and essentially eliminate them from the capital markets, it would be a lot easier for us to do our jobs and regulate it. So basically they eliminated and shot in the head, very purposely the small cap IPO. From 1950 to 2000, we did between 400 and 1100 small cap IPOs every year. And the common investor, the  non-accredited regular investor got a chance to participate in this wealth creation. One example, in 1985, a little company out of Seattle called Microsoft does this IPO, the day of that IPO it’s priced at about $200 million. Yesterday it closed at  a value of 1.7 trillion. Okay, that’s an 8,500 X return, not percent, but X return on it. Over 100 million Americans got to participate in that wealth creation. Contrast that to the Shopify IPO. Day number one, the IPO price, $30 billion. And the only ones that really participated in that wealth creation were the 3% of Americans who have a million dollars or more in investible assets. So we sacrificed mass access to capital growth and capital formation rather for cleaning up the markets. And for that it worked all right. It worked brilliantly. We’re delivering beta style returns to investors. What Vanguard’s doing is just astonishing what the marketplace is doing around that for passive returns is amazing.

But we sacrificed capital formation. And I really think that’s important for a community, for people to understand how financial capital is formed and that they have an ability to participate in that. And we may think that a capital formation, reserving capital formation for  people who are already wealthy is a good idea. But honestly Eric, I don’t even think it’s sustainable as a social policy. We need to connect people, reconnect people with their financial lives. And so we set out a couple of years ago to do a couple of things. One is to address those problems in the US market and European market. But as we got more and more down, further and further down the road, we’ve realized that the changes that we wanted to make would also enable us to do some things that we think the capital market has needed to do in addition to that. And so we set out three years ago, formally with Abe, A-Better-Exchange creative, but it’s easy to spell. That’s important. So we set out to do something kind of fundamental shift in a new idea of securities exchange and capital formation trading. And that is to make a stock exchange operate less like an Italian opera or 19th century men’s club and more like email. So global, 24 seven, purely transparent. We have  absolute transparency. And one in which everybody on the planet with one of these, a smartphone, which is a lot of folks, has the exact same treatment by the exchange as everybody else with the hundred millions of dollars or billions of dollars of trading infrastructure build-out.

So that has resulted in us building what we call the adaptable auction market. And if a company, like say  an owner of timber properties which nobody needs really needs to  day trade a $400 million market cap timber property. You don’t day trade in trees that live 14 years before you can harvest them. So they’re probably going to be better off if they choose to do, and they can on our platform, to do a weekly or monthly auction. Five minutes, whatever they choose. Everybody comes, everybody knows that it’s scheduled at that time, everybody gets the same price, the smallest order, and the biggest order, all clear at the same price.

On the other hand, there are companies that need that second by second liquidity. If you’re going to have a Microsoft, you’re going to have liquidity needs in microseconds. So we allow the issuers on our platform to adapt their market structure to their needs and their investors needs in two ways.

One is to choose the frequency of the auction and secondly, the duration of the auction. So for a small cap company that does not have a lot of daily trading, maybe a five minute once a day or once a week auction is fine. For a big company whose investors need a lot of liquidity second by second, we can run that auction five minutes once a month, or we can run the auction 1000 times per second. And what that does is a couple of things. Number one, it cuts out the race for speed. Right now, these equity markets are really dominated by high frequency traders who… they’re not doing anything wrong this is completely legal. And when there’s legal money on the table, not only is it allowable for a trader to pick it up, they better. They have a fiduciary duty to pick it up. So we don’t think they’re doing anything wrong. But the cumulative effect is to really give a unfair advantage to somebody who can afford to spend two or $300 million a year on trading technology. We want to end that. So in our market, everybody, is on a level playing field, you can register in one jurisdiction one time and then trade in 57 countries in Asia, Europe, the and the Middle East and Northern Africa and trade 24 seven so that the market is always on. 

Eric Hess: [00:15:33] And auction markets, aren’t new. I remember we were talking about it before the call, Arizona stock exchange. God I’m really dating myself here, but I remember that came out. It was an auction based market. It had similar qualities, ran mini auctions or auctions, no… I think they ran it a couple of times a day if I recall, like it was set times, but they would use it for, and they didn’t do it based on security,  but  they had an auction based model… it didn’t succeed, and how has the auction market for all asset classes evolved since then?

John Piggot: [00:16:05] Yeah. So I remember, was it Steve Krach or Karsh? I can’t remember his last name, but Steve who championed the ACX and it was a great market structure person. Here’s the big difference between the current footprint of the marketplace and what Steve was involved in when he tried to launch the auction market twenty-five years ago. At the time, there was a duopoly in the US of listing companies and all trading. So if you listed your IPO on the New York stock exchange, 100% of your trades had to be executed on the New York stock exchange. So each of the two exchanges had a monopoly on trading of all their listed stocks. About between 15 to 20 years ago, the SEC completely changed that marketplace structure. So now , basically the two listing exchanges we have in the US, NASDAQ and the New York Stock Exchange NYSE, do not have any, not only do they not have a monopoly on trading of their listed companies, they don’t even have the slightest preference in it. 

So in the current market structure that the SEC made for us, and I think they did a great job on it. This is one of the benefits of Reg NMS in 2005 is that they decoupled the listing of a stock from the secondary market trading of it. So now if you were in the sixties, seventies, eighties and nineties, and you traded a stock that was listed on New York stock exchange, when you got your ticket back, it said this order was filled at the New York stock exchange every single time. Now you don’t know where your order is crossing till you get your ticket back saying you just completed a trade and it crossed in Chicago or Omaha. Or Kansas City, so that decoupling of the functions of exchanges of the primary market and secondary market functions allows us to address each one of those separately.

And so now we’re going to be able to trade these stocks regardless of where they’re listed, but in an auction format. And the second big thing that has changed is the globalization of the capital markets. There was really not a big need for investors outside of the US to access the US markets or US markets investors, to access other markets 25 years ago, when the Arizona exchange existed.

Now, it is the dominant force in global finance and curiously for the first time, the first half of my career in capital markets, everybody in the world was trying to get their deal, into the United States, because this is where capital formation took place for the world. Now for the first time, about five years ago, I started hearing issuers and entrepreneurs saying, I don’t want to go to the US markets. It’s a hassle, it’s a mess. They beat our price up if it’s a small cap, the AFT’s front run, all of our trading. We don’t care anymore. That is very different. And as a citizen, I really want our country to be able to catch up and be again, once again, the logos of a large part of capital formation.

So it’s the globalization, which is an organic movement, but also a gap in market structure that allows us to do now on a global basis. Something that the Arizona exchange tried to do 25 and 30 years ago. 

Eric Hess: [00:19:00] So the SEC has tried to implement a number of regulations, reg A plus, crowdfunding to encourage a smaller entity capital formation and to make it easier. One of the things that they’re also trying to do is make sure that  what was formally known as the ICO’s initial coin offerings, and, going back to 2017 and 2018, even though they claim they weren’t securities, SEC said no  these are securities and they should be listing. And so there are a few companies out there. I think obviously Securitize is one of them and there’s others as well that are… realto exchange, trying to bring  securitized tokens or token securities, both right? Onto their marketplaces. And, has the SEC gotten it right? Has it done enough? What’s it going to take to bring the small cap and even some of these token offerings that may not have a ton of liquidity formed into the securities, the equities trading markets? 

John Piggot: [00:19:59] The blockchain technology is really fascinating. It’s a essentially. In organic terms, I would describe it as a self authenticating data packet. So if you break down what we do in financial services and capital markets operationally, not the trading part, but what goes on behind the scenes about 90% of what’s going on is checking databases. So when you sell a stock to me, the system checks is this. Eric is Eric an actual human? Does he own this account? Is this account authorized? Is this really a security? Is it authorized to trade? Is, all the things are done by the system’s referencing an outside 3rd party database, and there are easily, if you sell a stock to me over an exchange, there’s probably 50 to a hundred of these third party databases that are checked. With blockchain technology, there’s truly no need to check a database, if you will. Among other things, I think one of the more powerful attributes it has and really unique is that it can literally self authenticate, and express and capture information and programming inside of it that we’ve never been able to do with securities before. So I think it’s a fascinating development. It’s something that had been theorized about for 20 or 30 years. And they finally broke through about 11 years ago.

And I do think it’s the future of not all the capital markets, but a large part of it. That said, when the regulators see this thing coming, they look at it and see it as a bearer instrument. If you can self authenticate that’s like a bearer bond, which if you remember  for thousands of years, we operated trade and commerce based on bearer certificates. So if you remember, nobody remembers what they are now, the kids, the young people Eric they don’t know what they’re talking about. My favorite Christmas movie, Die Hard… what Bruce Willis was battling against,  what the bad guys are trying to get at is bearer bonds locked in the safe, and they had this unique attribute where you could take this piece of paper and just show up at a bank or a brokerage firm and say, this is a value. I own it, and I would like cash for it. And they would not even check your ID most of the time. They would only go to the document itself to say okay, this is an authentic bearer instrument, then here’s your cash.

As you can imagine that became the locus and the means of a lot of nefarious activity. So the regulators see blockchain and Bitcoin come and they’re like, look, we just spent 50 years purging the global capital system of bearer instruments. And you guys want to bring it back? No, it fundamentally doesn’t fit. So we’ve been through this, about a five-year journey between the regulators and the market saying, this is super useful we want to use it. And the regulators saying no it’s a bearer instrument. We can’t have a bearer instrument because our whole system is based on everybody checking these databases and we control the databases, we license them. We’re breaking that impasse by doing two things, which we think are necessary for the growth of tokenized assets to really come into the compliant, the larger capital markets. First of all as a CSD. So in the US we have a company called, or non-profit basically… it’s a cooperative called DTCC, and that is our  central securities depository.

So all the brokerage firms deposit the securities there, they keep a record of who owns what. We have a license in two other jurisdictions outside the US, one in Europe, one in the Middle East, and one in Asia, actually three to have our own CSDs. So we’ll be running our own CSDs so we can record ultimate ownership and value. That allows us to do some interesting things, which is we can allow an issuer and trader to trade  the same stock whether it’s in a tokenized form, a legacy form, an ADR or a GD R. So no matter what type of form that asset, that financial asset is in, it all goes into the same auction, they all get the same price. 

Eric Hess: [00:23:50] I’m actually going to interject   for the listeners an ADR is American depository receipt. A GDR is a global depository receipt. Just a bit of translation. 

John Piggot: [00:23:57] It’s about a hundred year old mechanism that basically allows the investor in one country to trade in shares that are registered on an exchange in another country. And JP Morgan himself invented it by the way it’s like really a fascinating story behind ADR. So we’re using that as automating all of that process in a way that allows us to register in one country, trade globally 24 seven. Right now there’s this log jam kind of a Mexican standoff if you will, between portfolio managers and issuers, the issuers want to issue tokenized securities, because there’s a lot of benefits to it. The recordation of value, it automates a lot of the back office function. It’s much more transparent, et cetera, et cetera. The big portfolio managers, looking at it saying, look for me to hold that asset, I have to go open up a digital wallet, start a new portfolio management, so I have to enter all the data by hand, this is not automated. It’s not worth my market. When we launch, we will break that log jam. So the portfolio manager will be able to say, you know what? I would like the tokenized form or I would like the legacy form of the security and that’s what they engage you in. If it works for them, fine. But more importantly, the issuer will not have to convince every buyer of the security to engage in the tokenized economy. And we think, and hope that will lead to a lot of liquidity and break this impasse. 

Eric Hess: [00:25:14] Yeah that’s actually pretty exciting because my theory is that, even though there’s a lot of AML issues raised today around tokenized assets in within five years, and five years is probably long, there’s going to be a view among the regulators that the best way to actually manage AML is if you have a tokenized asset. That any other form is inferior and it’s actually going to start to penalize securities that aren’t tokenized because the ability to monitor it, to enforce AML is actually less. And  that’s going to be an interesting transition where the regulators are actually going to find themselves in the position of pushing tokenized assets.

But, that’s obviously going to take a few years, but it’s probably going to happen a lot quicker than it, it would have, 10 to 20 years ago, as the acceleration of technology continues to pick up. 

John Piggot: [00:26:01] I think I could not agree with you more. The truth is when properly articulated blockchain technology is the best thing that ever happened to compliance and regulation. So this was the first regulator, to really understand this was Katie Haun, who was the assistant US attorney that prosecuted the Dread Pirate Roberts case, the silk road case. And she first prosecuted the guys running this drug and crime marketplace using Bitcoin to pay for it.

And then she turned around and prosecuted three FBI agents that had stolen the Bitcoin seized in the first prosecution. And the reason she was able to do that is that it literally keeps an immutable record of everything that happens to one of these assets and it keeps it outside of any third-party databases. As I was referring to earlier, this is a self authenticating data packet that carries  a long, very detailed irreversible non changeable, immutable record of who touched that thing, what’s it been programmed to do? At what point in what day was it transferred and everything else . That attribute, we think will… and through what you just said in terms of improving compliance and transparency  will cause this thing, we think to hit an inflection point and then just soar in adoption. Right now, the entire crypto market Bitcoin, Ether, all the tokenized investments, everything together is 400, 500 billion all right. Okay 500 billion. It’s a lot of money Eric, if it’s yours or if it’s mine. But in terms of capital markets, that’s not even an asset class yet okay. Capital markets are around the world in terms of the formal capital markets. Investible capital market is about 760 trillion dollars value. So  it’s almost not even on the radar, but when the impediments are removed and when the basic structures are put in place, and we think we’re gonna be doing that, to allow this to be incorporated into the compliant capital markets, we think it can take over at least a third, if not more than a half of that $760 trillion of value is in compliant, legal capital markets. And we think, look, I think Bitcoin will continue and DeFi is fascinating. All of that will continue to exist. I think it’s going to be good for a hundred years from now. I bought my first Bitcoin in 2010, bought some more, about six months ago, I’ve never sold any . I’m a long-term holder and total believer. And so amazing things will be built in the DeFi universe completely outside of the record. But what we’re here to do is bring the benefits of this technology to the compliant capital market and go after that 760 or so trillion dollars of capital.

Eric Hess: [00:28:40] Now in terms of the backend of your marketplace and your technology. I think we talked about that you’re leveraging the distributed ledger technologies first and foremost. Which is truly the innovation for these capital markets. Blockchain is a component of it, but getting DLT right is actually the driver the priority. 

John Piggot: [00:28:59] Absolutely. And it really becomes what with DLT, because you have, and sorry to  keep re-using this phrase,  because it’s a self authenticating data packet. You don’t have in the first instance, the issues that create 99% of the work to integrate financial systems around the world, which is developing a way for them to communicate, or developing a way for them to pass information over transom, to be able to access data on different security levels, all that stuff that we spend time doing, the plumbing of the capital markets on is already  done when you can program in a token and have it basically tell any system who it is, what it is, what’s done, what to it when, and what will it do in the future. So for example, a couple of ways we’re implementing DLT Distributed Ledger Technology in the background, plumbing of our system, RCSD, our version of PVCC is built on 100% DLT technology. So  we have three tiers of membership in our exchange for the tier one members who choose to do this, every one of them will be running a node in our private network. And so each one of them will have a full record of everything that’s owned in the market, by whomever, that’s owned it. Now they have different levels of security  they don’t get to see the ultimate beneficial owner, but it solves a big problem that most recently popped up and did massive damage in October of 2008. So I had just sold my bond exchange. I was in a motorcycle running across the Himalayas at the time. It’s not, 2008, not my fault, I was not on this continent.  When the liquidity crisis hits, which is inevitable, it’s going to happen, market seizures are going to happen. The problem they had was that nobody could find out where their bonds were, where their biggest institutional investments were because it was taking a couple of days to clear. It may have, there was different ways to record  who’s holding what asset as collateral for what other trade. And so if you don’t know where your trades are in the system, and you see a liquidity crisis happening, you immediately go dump what you do have what you can control so you can get to cash. That’s what sets off the selling cascade, a tumbling of market cap values. And that’s something that we can solve that once and for all. We won’t solve the future problems, but that’s a set of issues that we can absolutely solve. 

And we have a great technology now that about allows us to do that. So instantaneously on our system, using distributed ledger technology to build this out, to run the, or taking it to SCSD, any investor, any collateral holder, any lender, any market participant can in real time ping and  get ontological proof that where the asset is, what has happened to it, who has a collateral interest in it, and how to get it back if they need to. And that we think, it sounds like a small esoteric plumbing problem, but as when the declanation hits the air rater, that is extremely important because we need to be able to stop this cascading self-feeding declanation of value in portfolios. And we think that can be important part of it.,

Eric Hess: [00:32:08] We also talked about the global nature of the business now , at one time you had all those Delta miles racking up, but in some ways the global nature of your business is probably even more important now,  it really is a global capital market more and more than just a US. You can’t be US centric.  Let’s talk about  the jurisdictions  which you think are some of the  more intriguing prospects for the, Abe exchange.

John Piggot: [00:32:34] The most important thing from our end, I always tell our team that there’s only two ways we fail. All right. We either fail to execute and that’s 100% in our control or we allow negative deal selection to poison the platform. And that’s the matter of, just being very careful about the quality of securities and financial assets that you allow to trade on your platform. And we are fairly obsessive about both those things, both negative selection and execution. The reality is every time you open up a new pathway to raise capital in the global capital markets, it’s like that bar scene from the original Star Wars movie, the Mos Eisley bar, all those freaks and jerks show up where there’s shocky scammy deals to try to engage in business on your exchange.

So a lot of it is just setting the bar pretty high in terms of disclosure and compliance and leaving that out of it. For that purposes, and for a lot more I’ve done business with securities exchange and regulatory environments all over the world, Botswana to Singapore, whatever, all over the place.

There’s some things we always beat up on the SEC, I tell you, there’s a lot of things the SEC and the American system get right. And one of them is the disclosure requirements.  We really think  US-based disclosure and filing is accepted as the gold standard around the world. So we would encourage people to submit to the regulatory authority the SEC and the US government, but not list here.

That doesn’t mean you have to list on the US-based exchanges. So complying with the U S standards and then list on other exchanges that allow you to access global investors. Now, when we go to other countries and say, look, we want a bit, we want to encourage your entrepreneur to, we want to allow them to access global capital market. There are innestors in Omaha and Botswana and Thailand and who would be very interested in it. And here’s all you have to do. All you have to do is to recognize and give reciprocity for US-based registrations and they’re happy to do that. Actually that’s an easy trade for them because the SEC standard is that gold standard around the world.

So importantly, we are not trying to figure out some backdoor mechanisms, some regulatory arm, some loophole that we can slide in access to the US system and capital markets without having to avoid the SEC. We like SEC disclosure, it’s not all great, but it’s the things that get right is very important. The impact and relevance are that we see in what’s recently happened in the last three or four years with the Chinese companies that are listed in the US markets, their accounting system is, shall we say flexible and creative? And a lot of US investors who got taken for billions of dollars because the company that said they own the manufacturing plant, it literally never even existed.

So it’s important to have credibility with that. Again, everything we do in our exchange is optimized for one goal, and that is trust. If we can build and reaffirm trust in our capital community around the world, everything will work. Trust is literally the lifeblood that runs the system.

 Eric Hess: [00:35:38] You raise an interesting point. I remember years ago Jim Angel over at Georgetown did a paper about examining the emerging markets and small caps that list on smaller exchanges, that there was an adverse selection problem. That the successful compliant companies would graduate. They would do their little stint in the smaller market, and then they would graduate to NYSE they would graduate to NASDAQ, and then the ones that didn’t graduate, the flunkies would stay in school, they had to stay behind. You’re in high school, you graduate, you go to college, but if you can’t pass the test, you just keep staying in high school and staying in high school. And over time you just have this accumulation of flunkies and obviously in the real world, people just drop out of school altogether, but in the capital markets. They may stay in  as a flunky in these markets and drag down the overall quality as more come in, the cream rises to the top gets skimmed off and you keep feeding it in.

John Piggot: [00:36:26] Yeah, we see regulatory structures and this is a little bit of a… not a loop.  This is one of the weird ways we see the world let me just disclose, full disclosure this is a very different way. I see the US legal system. As basically like the TCP IP protocol that will allow a global system to build up because it has a common standards of communication about, what is depreciation? What is an asset? What is an audit? What does it mean to have earnings taxes accrue? What did all these words mean? And we need common definitions of these words that we use in finance because we have to have a common language for us to be able to do business together.

And so in keeping with our theme and our motto of making the capital markets work like everything elsethat works in our life like email, like cell phones, like when you use a cell phone or mobile phone, Do you even think about what towers it’s signals are bouncing off of, or when you send an email, are you thinking about, okay, I hope I’m going through that router in,  Whyhegan?  No,  you don’t care and because it has a common communications protocol and common standards of what signal means what, we can communicate via email all over the world. So when I was backing across the stands and Tibet, I was able to get into a little cafe and email back friends back in New Orleans and New York and London. And we want, we think the capital market should work like that. There should be common communications protocol, and that’s how we see the regulatory footprint in the US. 

Eric Hess: [00:37:58] So before I baited you and you didn’t take the bait fully about jurisdiction. When I look at  the tokenized market , the market for our digital assets, I look at a number of jurisdictions and, we talked a little bit about Abu Dhabi, which certainly has done a lot to try to get their regulatory structure in line. Singapore is certainly one of the more intriguing jurisdictions in Asia.  And in terms of digital assets, at least, Switzerland and some other jurisdictions, but I just wonder what your view is as jurisdictions, whose regulatory structure, the regulators are getting it right, and are particularly apt for adopting, or adapting into the Abe exchange.

John Piggot: [00:38:37] There’s a lot of frill, like we talked about earlier, I think these are basically digital bearer instruments. So this extremely doesn’t fit at all in the regulatory system that the world has evolved over the last 50 years. And it was always going to be a heavy lift. It was always going to require years of foundational change. All right, so we knew this ahead of time, people who had been experienced in capital markets and had a traditional background in traditional capital markets, when we saw the crypto world, it was fairly clear that the regulators were going to take  time to process this stuff. What we’re seeing, and this may sound odd, but what I think we’re seeing is almost the re-emergence of the old British empire. One of the great gifts that the British gave to the world was a common and very functional system of laws. And so if you look at the jurisdictions around the world that are, that are really putting the pieces together in a competent way, it’s Singapore , India , Malta , the UAE, the United States, it’s basically the old colonies of the British empire. And while I’m glad my forebears got on a boat and left that place, there were parts of it in terms of a common legal system that enabled global commerce in a fairly unique way. And so I think that the old British jurisidictional Jasper the archipelago, if you will of British jurisdictions are going to get it right again. We’re seeing Singapore, which Singapore, one of the three great ports or isthmuses of the world.  Typically if you were shipping spices or opium or whatever from Europe Africa or India into China, if you missed the turn through the Singapore ports, you had another three weeks of sailing to do. Singapore is an a, on a map in a hugely strategic important place. Same thing with the Bosphorus Straight outside of Istanbul, right? These have certain geographical points of commerce. Malta, historically, whoever controls Malta is able to cut the Mediterranean into halves.   And that’s why the British one of these places, that’s where we took their system of laws there. And I don’t think that the coincidence that those are the ones that are being progressive about the idea of global commerce, which they understood for hundreds of years and also the importance of having a common language, if you will, of what means what? So there have been a lot of experiments around the world. The three track process that Singapore started on four years ago is fascinating. It hasn’t really produced a lot of positive innovation on it, but it was an early attempt to responsibly grapple with this new asset class. The Malta jurisdiction tried a shot at it, did not really work well.

Lichtenstein has done some interesting things. Switzerland has done some really very bright regulatory and  more of an economic development point of view. The cutting edge as always is in those jurisdictions that don’t really have a geographical reason to exist, right? There are no natural resources really in Switzerland or Singapore or Malta. So they have to innovate. If they don’t innovate in a way that makes them a trading center, then their countries will not exist. 

Eric Hess: [00:41:44] Don’t forget Bermuda has done a lot of work too, 

John Piggot: [00:41:47] Same thing, former British colony. They  run the global insurance market because they got super intelligent and committed to putting a regime in place and putting a common lingual franca, if you will, of establishing common standards in the insurance and capital markets industry.

And so that’s been a way for these tiny jurisdictions to punch way over their weight. And they understand the benefits of that. So they’ll continue to innovate on it.    I am absolutely fascinated by these small countries that have a giant footprint on the global commerce. And it’s interesting to see, but what did Bermuda do to basically own the re-insurance market globally? They don’t grow crops there. They’re not at one of these strategically important spots of sailing or merchant, shipping. They just created a system of laws and went out there and created a common language for everybody to engage in. So I see the  regulatory regime as is almost the way that technology, communications technologies think of TCP IP or the fixed protocol. Like they establish these protocols via regulation that made a difference. And, Nebraska produces a lot more stuff, physical stuff every year than Bermuda ever will. And yet, if you want to go into the re-insurance market, you’re not going to go to Omaha. Even if you’re working for Berkshire Hathaway, you got to Bermuda a couple of times a year. 

Eric Hess: [00:43:12] So you mentioned Malta. Are you engaging with authorities about a market there?

John Piggot: [00:43:17] We did. We were engaged in actually in shaping three years ago, their original virtual financial asset act and the two things that we urged on, which they did adopt, which I think are going to be very important is first of all, a clean line between the traditional compliant capital asset market and this new thing, whatever it is. All right. The regulators are terrified mostly of encroachments. That if you allow the bond market to start trading as tokens, then that will subvert all their policy on AML, CFT, KYC, and everything else. So we held them draw a really clean line. If an asset qualifies as a financial asset, which is the European way of saying how we test security, then it’s not a virtual asset, so really clean bar on it. And if it’s not, then it can be treated under the virtual financial asset act. The other thing was to create  kind of a new form of corporation, which the market hasn’t really is not there yet, but when it gets there to really articulate and express these,

the full distributed autonomous organization model, the Dao model. That is going to be absolutely fascinating.  It’s always, we have these predictable phases of the adoption of new technology. First of all, we see, how can we incorporate it into our existing system to make things work faster, better, cheaper, more compliant, more transparently. But then eventually once that’s installed on the system, you start to see emergent properties. Business models that could not have existed until everybody had adopted the technology itself. So Amazon, for example, E-bay, email Twitter, all these companies who, which literally could not exist until the internet or had substantial adoption.

The next phase, and I think it’s not going to really kick in for another two years, but it’s going to be fun to watch and prepare for, the next phase out there’s going to be all of these companies and business models that could not exist without tokenization in the same way that a lot of companies could not exist without mobile telephoney or the internet, there will be an entire group of industries that will be overhauled by business models that had not been able to exist until we had tokenization. So we need to prepare for the groundwork for that, but there’s a lot of work still to be done, to prepare for that. 

Eric Hess: [00:45:35] And I think you’re particularly excited about REITs, right? Real estate investment trusts and  the opportunities there 

John Piggot: [00:45:41] We’re looking for companies, targeting companies that are poorly served by current capital markets. And  that brings us to two ends of the alpha or the risk spectrum. One is these low risk, low volatility, low turnover, low trading stocks and assets that are, they may be valued at 200 million to $2 billion, which is how we define small caps, but they may only trade a hundred times a day.  Nobody’s going to day trade a $400 million REIT. There’s 20 trades an hour, you could do all of that capital market on that’s not even an iPhone app. You could have a guy answering the telephone  with a pencil and paper. And that’s where a lot of small caps are. And so there are tens of thousands of these companies who would like to be able to access regular investors and funds, but who can’t because the current market structure is just too expensive, too cumbersome, and it destroys their pricing because of information leakage. We can bring through our adaptive auction technology and allow them to roll their own market structure so if they want a five minute once a day auction, or one minute per hour, 24 seven, however, they can optimize it to be able to create the optimal and maximum organic liquidity. At the other end of the spectrum is the other group we see being poorly served by current capital markets. And that’s the high, alpha small cap growth companies. So we have a lot of companies that are interested, particularly the ones that have a business model whose purposes and functions and goals are very globally appealing. So a lot of companies operating in the space are coming to us saying, we don’t want to be a billionaire’s science project anymore. There’s gotta be a way to access investors around the world. We know they’re interested in it and we believe that’s true. And so we can create a market structure just for them and create spaces and asset classes. Also, frankly a lot of the blockchain infrastructure companies, not the crazy cowboy stuff, but the basic, the mining companies, the basic infrastructure companies, investors would love access to that. They would love access to investors. The ICO model has been destroyed by the regulators, and I think properly so. I think that was always a mess. And so having them get into the capital markets on a global basis is very attractive to them and that’s what we can bring to them.  You would think that timber companies,  companies that just buy timber and sit on it for 10 years and satellite launch companies wouldn’t have anything in common, but the thing they have in common is they can’t get access to individual investors on a globalized basis with today’s market structure. And that’s where we want to fix it. 

Eric Hess: [00:48:17] It’s interesting that you raised timber companies.,because I have a client who actually has very large forestry holdings and they’d be very excited if there was a marketplace where it could enable that kind of trading . But sticking on the REITS for a moment,  and even with the forestry company, and  we’re talking about not a company that actually, is in the business of this, but like a holding company they hold vast tracks  of Woodlands and that’s their asset value.  But what would it take for these markets to onboard into a more liquid free trading market? What’s the gap between where they are today to get , to Abe? 

John Piggot: [00:48:52] Let’s take a subset of those that would be easiest. We have about 220 companies in the US that are REITS. Some of them own timber, some of them own shopping centers, malls, office buildings, whatever. And they filed their  S1 S11 with the SEC to go public. So they did an IPO. They just never listed on an exchange because they know that the current market structure will damage will tear apart the value, the actual fundamental value of the company. And it’s because if you’re only trading 50 times a day, our current market structure enables trading firms, specifically the high-frequency trading algo to recognize that order from a mile away and they can essentially front run it and just destroy the price of that stock, because it’s so obvious.

On the other hand, if you have 50 trades a day  that need liquidity, and you put all those into a five minute auction where everybody gets the same price, that’s simple. That’s where you have zero information leakage for those 220 or so companies that are SEC compliant right now, they filed their P’s and Q’s like Apple and Microsoft,  and everything else they’re just not traded on an exchange. We’ve negotiated with all of our jurisdictions around the world, reciprocity agreements. So they can take their SEC listings and simply file up five page form to list on our exchange. They can choose which our exchange licenses to list on and start trading the next day. It’s that easy. So no new audits, no new legal fees on it. Small legal fees in filling out that form, no new disclosure, no new regulatory authority, nothing. It’s simply that US REITs that are currently effectively prohibited from taking an investment from non US citizens, if you’re not a US citizen, the REITS really can’t take capital in from you because they have to do with under FACTA. Tax withholding is very cumbersome, it’s just not economically viable. They can list on our exchange and all of a sudden they can raise capital in. London Geneva Frankfurt Abu Dhabi, Dubai, Singapore, Hong Kong, all throughout our system And there were a lot of investors around the world that would very much like access to the US commercial real estate model. That’s an asset class that is, they have a reasonable value, it’s very different from US investors. They see for their portfolio purposes that they’re getting a return in US dollars. They’re getting  a financial asset that is protected by the US legal system. The gold standard around the world. And that has tremendous value for them. That really is not attributed to it by US investors in US markets. 

Eric Hess: [00:51:29] Interesting. So my last question is, what question did I not ask you that I should’ve? 

John Piggot: [00:51:36] Well, in terms of when all this craziness is going to happen, we’ve spent three years and I know this is as fun as it sounds, but we spent three years grinding through a technology build and grinding through 57 regulators around the world to get them to sign on for this. And we are there finally, I’m in my 27th month of pregnancy and it’s, I’m ready to get this thing out.  We’re going to be launching this spring in Q2 and we’ll launch with a couple of dozen REITs. We’ve got some super exciting, I think, very high quality growth companies. They’re going to be listing and raising capital on it. And so by this time, next year, we will have the ability for regular investors around the world to access the global capital markets from their smartphone, with the knowledge and trust that their orders are going to be handled in the exact same way everybody else’s is. 

Eric Hess: [00:52:27] Great, we’ll even post it on the podcast,  we’ll do an update. But John, it’s great to have you on the show and  it was just fun even like in the pre-calls for this, John and I would just talk  for a very long time, I was like, Oh my God, what time is it?  It’s when you get a couple of geeks that are market structure, geeks, like us together have been seeing the different iterations in the industry and I’ve been through it all. It’s just a, it’s almost like coming home. It’s it’s just the way we both think.

John Piggot: [00:52:49] Yeah.  I am so excited. You’re doing this podcast, Eric, because  what I’ve urged my People from the traditional capital markets to do is get engaged with the crypto economy, really get engaged with the technology. You’ve got a lot to offer, but you experience with Direct Edge, seeing it from the trading and compliance side, , seeing it from the cross-matching, the tier one exchange side and the legal background, and now diving into the crypto economy and the blockchain technology is a unique set of background kind of talent stack and experience deck you’re bringing to it. So I am always super excited that people from the traditional capital markets are getting in the game now and really exploring what can be done now that we’ve never been able to accomplish before. About when you really peel back what we’re doing, capital markets for financial services, at least half of it is work around solutions. Because we were not able to directly solve the original problem. This technology allows us to solve a lot of original problems directly. And that is going to be a lot of fun to see that play itself out. 

Eric Hess: [00:53:55] Yeah. It’s like a reboot. Like when I first got into this space, I wanted nothing more than to be a market structure lawyer, and to get dig into the technology, electronic trading and NMS, and then, it was still exciting  but really the excitement in terms of market structure and what’s happening is occurring in how we’re addressing digital assets. In that migration and there’s also a lot of technology and on the data side too, is something, data and security those are very, very important elements to the economy. So it’s more complex. There’s definitely more elements, but it  for a lawyer who’s got a real technology and security bend like myself, , it’s an exciting time. So John, once again, thanks so much for coming on the show. Definitely, we’ll do an update as you guys launch  we’ll highlight it on our episode and  thanks again. It was great having you. 

John Piggot: [00:54:38] Great. Good to talk to you, Eric. Thanks.