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CityBlock Capital using blockchain to improve asset liquidity

Tony Zerucha

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Jon Avidor and Rob Nance saw an opportunity for cryptocurrencies to introduce new investor groups to the world of venture capital, and after taking time to check the boxes they are ready to introduce CityBlock Capital to the world.

A venture capital platform, CityBlock Capital tokenizes limited partner interests in early-stage funds. Participants purchase CityQ tokens, the proceeds from which are provided to a local CityBlock partner to invest. Those partners are former entrepreneurs who have run successful businesses in the community in which they invest, successful venture capitalists, and active investors who deploy the funds in blockchain and blockchain-adjacent startups. Current opportunities are based in New York, with Los Angeles and San Francisco in the works.

Mr. Avidor is an attorney with a background in mergers and acquisitions, securities, and venture capital in Silicon Valley. He said last year he saw strong opportunity for security tokens within the new and emerging cryptocurrency space, so he set to work to understand  existing securities laws and how cryptocurrency could fit within them.

Mr. Nance comes to CityBlock Capital with a traditional finance background in banking. He also ran a venture fund.

Rob Nance

“Venture capital is interesting,” Mr. Nance began. “When people invest in a venture capital fund, it’s locked up for eight to ten years. The average venture fund lasts twice as long as the average US marriage.”

For Mr. Nance the question became how to solve the problem of liquidity in some asset classes.

The answer was to utilize blockchain technology to take a piece of the $700 trillion in assets from their current ownership structure and recreate them in a digital format in a regulatory compliant way.

But let’s begin with VC funds, Mr. Avidor said.

“There’s a way to create digital ownership of VC funds whereby individuals can sell their interest on a secondary market.”

I asked both Mr. Avidor and Mr. Nance what they thought of the early days of the ICO era. Both weren’t impressed.

“My first thought is this isn’t rational,” Mr. Nance recalled. “Whatever they’re buying it’s not ownership.

“It’s like buying a token at Chuck E. Cheese. There may be use cases for some of these networks but the vast majority were a result of people making money in cryptocurrency pointing out what they thought the future was.”

“I was blown away by the hubris of the cryptomarkets,” Mr. Avidor said.

He saw many people planning ICOs who viewed their product as its own mini economy with its own GDP. They paid others to build these utilities while thinking they were changing the world. Instead most were getting others to buy into something with no inherent value.

“There has to be a better way of doing this,” Mr. Avidor recalled thinking.

Jon Avidor

He began analyzing the demand and the entire marketplace by talking to its participants and quickly learned there was strong interest in a more liquid version of assets which were not publicly traded.

“There was a market for a more liquid version, where we could take the great things from the cryptocurrency markets, such as their ease of transfer and immutability and apply them in a similar way to secondary markets but with less red tape and fewer intermediaries,” Mr. Avidor said.

Mr. Avidor began talking with lawyers experienced in dealing with the SEC, and knew regulators were interested in promoting capital formation growth but were also confident in rules set in place as far back as 1933.

“That framework has been in place and it has worked,” Mr. Avidor explained. “It has predictability and structural trust.”

Mr. Nance has been pushing for changes to the accredited investor laws, so they are based on more than net worth and income. Let people show their knowledge by passing a test.

I mentioned the conversation has a similar tone to the thought process behind the formation of alternative lending.

“Alternative lending 10 years ago, one purpose was to democratize venture investing and from that aspect it failed,” Mr. Nance said.

Back then it was hard for people in developing regions to conceptualize investing anywhere in the world, but cryptocurrency has broken down those barriers so now more people understand they can invest anywhere anytime, he added. As long as issuers follow the laws where they are listing and selling we should be good to go.

Mr. Avidor said CityBlock Capital has several innovative aspects. By keeping future efforts into small, sub-$10 million funds they can take advantage of a recent Dodd-Frank rollback that allows up to 250 investors in the United States. Through the use of some tax and legal entity structures they can access up to 2,000 global investors.

“A traditional VC couldn’t accept this many investors,” Mr. Nance said.

And, to be honest, if you had to had to manage communications the old-fashioned way, you wouldn’t want to deal with 2,200 either, but because the blockchain allows you to digitally track ownership and communication and smart contracts streamline enforcement it is now much easier to do, Mr. Nance said.

“In five to ten years I would not be surprised if regulators demand digital ownership as it is more proactive and not reactive,” he added.

Tokenization allows people to actually control the shares they own instead of them sitting with the DTCC, Mr. Nance said. The tokens represent physical certificates, so owners can easily move them and companies can track who actually owns their stock. In the future that might even allow people to buy everyday items with shares should they wish.

When it comes to sourcing good companies the old principles remain -good founders and good products, people who are building the key infrastructure needed for a larger ecosystem to flourish in the future, Mr. Avidor and Mr. Nance said. Think of 2018 as the Internet in 1990 – if someone asked you to invest money in a company streaming movies online, you’d say they were nuts. Look for those building the servers, switches and cables for the blockchain right now.

The timelines might not necessarily be the same as they were for the Internet, they warn, as movement like positive SEC guidance could accelerate things some.

“Think of this as the third wave,” Mr. Nance said. “The first was the microprocessor, the second was the Internet and blockchain the third. Look back over the past 20-25 years and this cycle will be the same and we’re two years into it.

“What we’re trying to do is not only invest in the ecosystem but we also want to be a part of it.”

“The exciting piece for me is the opportunity of looking forward to growth in a similar fashion to what was happening in the 1990s,” Mr. Avidor added. “Apple, AOL, Cisco, Microsoft…Would you if you had the opportunity to buy shares in a fund that allowed you to be a part of that?”

The material is not to be construed as an offer or a recommendation to buy or sell a security. See full Terms of Service.

Tony Zerucha

Tony Zerucha is an alternative finance journalist with more than seven years experience in the space. The author of more than 1,000 articles, Tony was named LendIt's 2018 Journalist of the Year.

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