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Similar to Etheralabs_Vaultbank_WhitePaper (20) More from Etheralabs (17) Etheralabs_Vaultbank_WhitePaper1. Vault Bank Whitepaper V. 1.6 REVISED DRAFT
Abstraction
Vaultbank brings together financial industry expertise, machine learning talent, and
revolutionary blockchain technology
Vaultbank.io is a cryptocurrency based bank and exchange with a trading terminal, debit
card capabilities, and offering tokens backed by secured credit assets with quarterly
Ethereum dividends. Vaultbank tokens enable industry leading foreign exchange rates
and asset management with a portfolio of lucrative secured credit assets, insured, and
robust returns translating into stability for investors.
Executive Summary
Vaultbank tokens stand to revolutionize banking with cryptocurrencies by tackling the
four essential hurdles of the securities distribution market; (i) Lack of ability to use a
security position as a fungible form of payment, (ii) Low liquidity and high transaction
costs, (iii) Uninsured portfolios (i.e. hedge funds) and (iv) Low yields from safe security
investments (i.e. Bonds)
Crypto Compatible Debit Accounts
Vaultbank through a series of strategic partnerships will provide debit cards that will be
accepted worldwide, and allow for you to pay with crypto through traditional plastic debit
cards. Account Holders will be empowered to select from multiple cryptocurrencies for
use as tender, and when they initiate a transaction (e.g. a dinner that costs $83.65),
either prepaid debit cash will be used or the holder can elect to use Ether, Bitcoin, or
Vaultbank tokens totaling that amount, which will then be sold at spot price to complete
the transaction. Because Vaultbank debit cards will be accepted at all point of sale
terminals – for the first time cryptocurrency will be able to be used as tender for
purchases. Furthermore, Vaultbank will also be providing transaction services for other
partner tokens - thus enabling other tokens to be used as tender.
Lowest Fees in the Market
Historically buying in and cashing out of cryptocurrencies was prohibitively expensive;
limiting much of the functionality of tokens to the domain of speculators. Because
Vaultbank will hold both cash and an array of cryptocurrencies at all times, it will be able
2. to facilitate seamless exchange of cash in cryptocurrency to facilitate transactions, and
will enable Vaultbank to compete with Coinbase on both service and fees.
Underlying Credit Portfolio to reduce Token Volatility
Vaultbank seeks to minimize the volatility of the token via producing a cryptocurrency
that is backed by secured credit assets - in turn, the yields of these credit assets will be
then reinvested back into the portfolio of credit assets to ensure a constantly increasing
underlying fundamental value to each token. Further, Vaultbank will maintain a liquidity
reserve to enable supporting the token price in times of market volatility.
The portfolio of credit assets will further be secured by a Surety Wrap to enhance foe
credit portfolio by CBL Insurance (an A-, publicly traded insurance company).
Vaultbank, in a strategic partnership with Random Forest Capital, which uses artificial
intelligence and machine learning, and various other off-line strategic partners will build
a portfolio of secured credit assets. Vaultbank intends to lever the portfolio with a
warehouse line of credit, secured by the portfolio of between 4:1 and 10:1 leverage,
depending on the class of assets.
Vaultbank is Launching into a Growing, Stable and Maturing Market
The cryptocurrency market has grown by 1600% in the last 12 months. Financial giants
including J.P. Morgan and Central Banks alike have invested in blockchain. The main
street investor is likewise seeking more exposure to these markets (Bloomberg). Large
and small investors alike seek a more regulated market that allows for the safety nets
and insurance coverage offered in any registered security market.
3. Offering Summary
The Fund
The Vault Bank fund (the "Fund") is a Cayman partnership, wholly owned by VaultBank,
PLC (the Singapore PLC, which is issuing the tokens) and is designed for sophisticated
investors, and expects to commence investment operations in the fourth quarter of
2017. Participation in the Fund is conducted through the Vault Bank Token (the
“Token”). The token represents a non-voting share in the Singapore PLC, and provides
each Token holder an equitable interest in the underlying performance of the portfolio of
credit assets described in this document. The Fund will be managed by a General
Partner comprised of experienced senior credit officers and bankers as well as industry
leading technology engineers (the “General Partner”).
The Fund may enter into an arrangement with other investment funds managed by the
General Partner with the same or substantially similar investment objectives as the
Fund’s to either allow other funds to contribute their assets to the Fund to invest, or to
pursue its investment activities by investing all or a portion of its assets in a “Master
Fund” that will conduct the investment activities described in this White Paper.
Investment Objective and Strategy
The Fund’s investment objective is to provide attractive returns on invested capital
through a proprietary quantitative approach to underwriting credit assets. The Fund will
adhere to an investment strategy driven by data science, in which machine learning
within fully non-parametric statistical models are applied to the problem of expected
gains in financial investments. The General Partner seeks to identify “optimal” loans to
invest in and utilizes a multistage approach to purchase such loans. The Fund seeks
diversification of its assets through investments in loans of varying sizes and maturities,
based on the type of loan. The Net Income earned by the Fund during any given month
shall generally be retained for reinvestment. The Fund may use additional strategies to
achieve its investment objective, and also intends to employ leverage, as further
described below. There can be no assurance that the Fund will achieve this objective or
that substantial losses will not be incurred.
The General Partner
Vault Bank, PLC, a Singapore company, is the general partner of the Fund (the
“General Partner”). The General Partner is responsible for the business and affairs of
4. the Fund and the management of the Fund’s portfolio. Austin D. Trombley, Stuart
Shelly, and Christopher Cummock are the founders and Managing Members of the
General Partner.
The Offering
The Vaultbank Security Token will be governed by the securities laws of both the US
and Singapore, where the Tokens are being offered in the Initial Coin Offering (“ICO”).
The Fund is offering Tokens to certain qualified investors as described herein and in the
Subscription Documents. Admission as a Token holder in the Fund is open to the
general public as applicable outside the US and solely to accredited investors within the
US. Moreover, in compliance with the securities laws of the US and Singapore,
investors/participants from countries that are on the “No Export” or Ban lists in multiple
jurisdictions and the are prohibited from inclusion. The list of Banned countries include
but may not be limited to: Cuba, Iran, Syria, the Sudan, North Korea, and the Crimea
region of the Ukraine.
Interests in the Fund are offered on a basis in reliance upon exemptions contained in
the Securities Act of 1933, as amended (the "Securities Act") and the rules and
regulations promulgated thereunder for transactions involving public offering defined in
Rule 501(c) of Regulation D promulgated under the Securities Act. Each Token holder
will be required to represent and warrant to the Fund in connection with its subscription,
among other things, that the Token holder is acquiring its Token Interest for its own
account for investment purposes only, and not with a view toward resale or other
distribution in whole or in part, that it will not transfer, sell or otherwise dispose of its
Interest in any manner that will violate the Securities Act or other applicable laws, rules
or regulations, and that it is an “accredited investor” as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act, and a “qualified client” as
defined in Rule 205-3 under the Investment Advisers Act of 1940, as amended. The
General Partner may, in its discretion, reject any Capital Contribution.
Offering Mechanism
The Fund will initiate an Initial Coin Offering (ICO). This mechanism entails a finite
number of tokens being sold over a defined period of time - The ICO Period - during
which all tokens will be sold. The Tokens represent a defined and immutable stake in
the Fund in the form of non-voting shares of equity. During the ICO Period, the Tokens
will be sold through the Orderbook platform, an online exchange headquartered in
Singapore and compliant with the securities laws of Singapore and the United States.
5. The Token is a security offered in reliance with public offering exemptions defined in the
Rule 501(c) of Regulation D promulgated under the Securities Act. Orderbook thereby
bears the responsibility to record the identities of US persons seeking to invest in the
The Fund and gather reasonable proof of their status as an “accredited investor.”
The “accredited investor” definition is a central component of Regulation D. It is
“intended to encompass those persons whose financial sophistication and ability to
sustain the risk of loss of investment or ability to fend for themselves render the
protections of the Securities Act’s registration process unnecessary.” Qualifying as an
accredited investor is significant because accredited investors may, under Commission
rules, participate in investment opportunities that are generally not available to
non-accredited investors, such as investments in private companies and offerings by
hedge funds, private equity funds and venture capital funds. Under the accredited
investor definition, US persons are accredited investors if their income exceeds
$200,000 in each of the two most recent years (or $300,000 in joint income with a
person’s spouse) and they reasonably expect to reach the same income level in the
current year. US persons are also accredited investors if their net worth exceeds $1
million (individually or jointly with a spouse), excluding the value of their primary
residence. Certain enumerated entities with over $5 million in assets qualify as
accredited investors, while others, including regulated entities such as banks and
registered investment companies, are not subject to the assets test. (SEC)
The ICO will be conducted through an online portal hosted by Orderbook. Once a
potential investor logs onto the Orderbook they are asked for their nationality and
domicile. If the person does not live in the US or is bound by US law it will not be
possible for them to make an investment without going through an accreditation
process. For an investor who is a US person, their accreditation will require
demonstration. For such investors intending to demonstrate their accreditation, the
name, address, date of birth, and other identifying information will be collected.
Furthermore, each potential investor will be required to provide a proof of income
satisfying the requirements for individual or household income over the two most recent
years, or a notarized document from a bank, financial representative, legal
representative, or other credible financial institution demonstrating a household net
worth exceeding $1 million, net worth herein defined as excluding the value of a primary
residence. As part of this process, the investment will be frozen for a year and a day
(the “accreditation period”), and is subject to being revoked during that time. The data
collection process will be automated via a secure software platform, and stored in an
encrypted database compliant to applicable data privacy standards.
7. Risk Factors
The investment program of the Fund is speculative and entails substantial risks. There
can be no assurance that the investment objective of the Fund will be achieved and that
investors will not incur losses.
VaultBank may not be able to grow its portfolio of credit assets at the rate it desires, nor
may VaultBank be able to achieve the average yield on its’ portfolio that it desires,
accordingly, there exist risk that VaultBank may not achieve its targeted results.
Further, VaultBank may not be able to achieve its’ desired levels of leverage on its’
portfolio at the desired cost of debt.
VaultBank Token Security
VaultBanks’ partnerships with insurance firms may be used to mitigate risk of total
capital loss as the Fund is intended to benefit from a surety bond. However, use of
these financial instruments do not constitute a guarantee against any and all
eventualities.VaultBank is unique in many ways. Firstly, we intend to provide Token
Holders with a recurring dividend which will be reviewed and announced by our
seasoned Board of Directors. Secondly, VaultBank will be investing proceeds from the
ICO in credit assets, thereby creating a stable, growing and cash flow yielding base for
the Token. Thirdly, VaultBank intends to use modest leverage to further enhance the
returns from its credit portfolio to facilitate ongoing and continued reinvestment to grow
the credit portfolio underpinning the Tokens. Fourthly, VaultBank will enhance its ability
to establish its’ credit portfolio with leverage by providing its’ warehouse lender (and in
the future its’ depositors) a credit surety bond. Finally, VaultBank intends to maintain a
cash, securities and token reserve at all times to ensure liquidity for Token Holders.
The VaultBank approach to building a credit backed Token is similar to the asset
backed securities viewed today as some of the best quality and stable securities
investors can acquire, like Residential Mortgage Backed Securities (RMBS), or
Commercial Real Estate Mortgage Backed securities (CMBS).
In each case of RMBS and CMBS, the securities are typically tranched, into risk
categories, with each tranche being independently evaluated by rating agencies such as
S&P, Moody’s or Fitch. In the context of such securities a system of preferential
tranches is established such that investors are paid out in an established order often
8. according to the risk involved. Each tranche will have a coupon aligned with the risk
profile of such tranche.
Typically banks or other risk-averse institutions will opt for the lower yielding and safer
higher tiers tranches, such as BB - AAA. Average bank portfolio yields are between
4-7%. The higher risk segments of the tranched security will be typically sold to
institutional investors such as hedge funds whose model relies on maximizing the yield
of risky assets. Average Hedge Fund yields can be between 12-20%.
VaultBank intends to lie between the risk profile of a typical bank and the risk profile of a
typical hedge fund, with a target portfolio yield of between 8-11% on an un-levered
basis.
The VaultBank ICO enables qualified investors to purchase the equivalent of Limited
Partnership interests (in Singapore, known as a Private Limited Corporation, “PLC”) in
the enterprise, which owns the portfolio of loans and other credit assets, thereby giving
retail investors the ability to participate in a diverse credit portfolio, much like an
institutional investor or private hedge fund.
The Portfolio composition is designed by Vaultbank management, with oversight and
guidance from its seasoned board of directors, and further optimized by the industry
leading team of quants at Random Forest Capital. The current estimated performance
at Random Forest Capital is about 12.5%, unlevered. Vaultbank intends to invest in a
diverse portfolio of credit instruments ranging from 6% mortgages to 20% factoring
contracts, with an average yield of between 8% and 11%. As Vaultbank will ultimately
benefit from leveraging its portfolio at a cost of about 5%, Vaultbank expects its net
levered portfolio yield to be between 15% and 20%.
Unlike a traditional security however, the immutable ledger of the block chain is used as
a legal vehicle to obtain, store, and transact the investment or any portion of the
investment in the security. Vaultbank allows investors to participate in the income
generated by the portfolio of credit assets. The Token Holders will receive both regular
dividends as determined by our Board of Directors and benefit from reinvestment of
portfolio returns into growing the underlying portfolio of assets securing the VaultBank
Token.
While investment in equities provides for speculative upside for investors fixed income
investments typically do not, as they provide investors with a predictable yield. The
9. Vaultbank Security Token is intended to provide investors with both upside and a
predictable yield.
Fixed Income and Capital Markets
There are few safe harbors in the financial system. Asset categories such as highway
bonds, treasury bills, and ETFs resist all but cataclysmic collapses of the kind
experienced during the Great Depression. It is largely due to regulations that came out
of that period that we owe the fact this type of event has not occurred again. Rules for
security investment, corporate governance and reporting, and federally insured banking.
However, one of the side effects is that these assets are often comparatively low yield.
The bond market is one of the largest and most stable markets globally, particularly US
government debt securities, which total $38.1 Trillion as of Q4 2016.(BfIS) This market
primarily is composed of assets with very low liquidity, where terms are frequently over
a 15 to 30 years period. Yields are currently in the 2% range. As investment vehicles,
they are primarily designed to offset inflation. The advantages of such debt vehicles as
illustrated during the crisis of 2008 when they offered a rare source of stability. During
this time many of the portfolios of Wall Street were in a crunch due to a wide variety of
asset classes being significantly devalued simultaneously. For a high net worth
individual or institutional investor with low risk appetite seeking investment options, few
available options offer the safety of bonds, and no options at 4% or above with
insurance on the yields.
For many investors, the primary problem with bonds is their liquidity limitations.
Financial markets dynamically and dramatically change through the passage of time, so
much so that a wise/sound investment in a bear market for instance may seem
relatively insufficiently lucrative in a bull market.While ETF Bonds might have shorter
terms comparatively, they are in general terms of a period of years and remain subject
to suffering the effects of macroeconomic downturns. It is a smaller market in
comparison, but still quite significant at $273B as of 2015. The ETF Bond market grew
as a result of the 2008 crisis because it was viewed as a safe haven.(BlackRock) The
difference in yields between US Debt securities and ETF Bonds is not very significant,
as most ETF Bonds offer little over 2%. They might have shorter terms but they are
generally over a period of years and remain liable to suffer from macroeconomic
downturns.
In the case of many securities a prior relationship of at least 30 days on the low end is
required before the investor can be made aware of the the potential investment. This
10. encourages long term relationships between brokerages and their clients. At times this
can prevent the awareness of certain investment bank created securities from reaching
the client of competing firm’s without the use of an intermediary institution that deals
with all the intuitions involved, resulting in increased fees associated for the investor.
Even then often the only opportunities the client may have acess to learn about are the
potential investments they can research in secondary sources or the ones they are
recommended from their individual brokerage firm.These restrictions are often
contributory to the inefficiencies of the system and can leave many busy investor at the
behest of their individual brokers to make them aware of potential investments. This in
part is caused by the limited channels many securities are allowed to be advertised to
potential investors. While in a pre-digital age when secondary sources were hard to
come by often due to their expense, these inefficiencies were less burdenful to the
system. Today the Internet allows for potential investors to access a myriad of avenues
to investigate potential investments(both registered with the SEC and not) and the
opportunity to become knowledgeable about the investment opportunities outside of
traditional channels. Generally the fee structure of traditional brokerages means being
charged at every step of the process, from inquiry, consultation, investment, buy in,
liquidation etc, in addition to the prospect of a monthly fee being assessed. This can
result in the diminishment of the liquidity of the investment overall(sometimes through
the adding of financial barriers at each step of the process) of certain kinds of
investment for certain kinds of investors on certain time scales.
Normally a financial institution in the case of an asset-backed security such as a
mortgage-backed security would be “securitized” or bundled so that investors can buy
them. In some cases the assets are bundled into what are called tranches which have a
weighted priority in the repayment system. While most of this securities are bundled by
federal organizations some are implemented by private banks and are called
“private-label.” Most of the federal organizations issue these initially on the most
common short term bills (3-6 months) released weekly and the slightly less common
longer-term notes(1-10 years) released monthly. They then can be bought and sold on
the secondary market although their functionality for fractionalization of the security
comes with added expense as it is often handled by a separate desk that keeps the
security and structures a payout that is equivalent to the fraction the investor desired to
liquidate. Leaving the secondary market primarily limited by caps as well as the size of
the bill or note. Who holds what is currently kept track off by a series of databases to
determine who owns the security in order to direct the payouts, the existence of the
secondary market makes this a difficult organizational task. In can serve to decrease
liquidity during the time delay between the investor wanting to liquidate and the
11. database processes required to conduct the trade. But before anything can happen, a
investor must become interested in the security.
12. The Vaultbank Credit Portfolio
The Vaultbank portfolio investment strategy is led by Stuart Shelly, Christopher
Cummock and Austin Trombley. The primary assets are credit assets purchased from
non-bank originators. The assets range from mortgages, second line mortgages, real
estate bridge loans, auto loans, equipment loans and leases, commercial mortgage
loans, asset based loans and factoring contracts.
The financial institutions originating and holding the credit assets VaultBank will
purchase, make them available to investors on a regular basis, either in pools, discrete
whole loans or participations in whole loans. The typical originator will continue to be the
primary servicer of the credit assets originated, charging the buyers of the credit assets
a nominal servicing fee for performing the billing and collecting function as well doing
any special servicing in the event of a default to ensure the loans are current and fully
repaid. This function is known as “Servicing Retained”. In addition to the servicing
function provided by the loan originators, VaultBank has engaged Portfolio Financial
Servicing Corporation (PFSC) to be a “back-up” servicer in the event one or more of the
originators fails to perform their duties in any way, thereby further ensuring the
continuation of cash collections and repayments of the credit assets. PFSC is one of the
most highly regarded institutional independent servicing platforms, providing servicing
for all major banks and a large number of securitizations.
Today, 60% of U.S. mortgage credits are held by non-banks, up from 30% in 2013.
Over $4 Trillion in US mortgages alone are available to select from hundreds of
non-bank credit platforms. Mr. Shelly, along with the Vaultbank board is tasked with
approving the solvency and risk associated with the platforms themselves and
identifying the credit profiles of originated assets, from regulatory compliance on
originations, volumes, collateral, duration and rate, to quality of management and
servicing. Mr. Trombley, along with the analytical team from Random Forest Capital, is
tasked with selecting the highest performing assets available within these platforms for
the Vault Bank portfolio, as well as purging the highest risk assets from the Vault Bank
portfolio.
Due to the number of credits available, VaultBank employs machine learning (ML) and
artificial intelligence (AI) rather than having humans look at each individual loan
marketplace. ML employs statistical algorithms over thousands of variables and millions
of observations that are capable of detecting persistent effects across all aspects of
data. The Vaultbank asset selection strategy is seeking the mathematical intersection of
risk mitigation and maximum yield for each loan selected for the portfolio. Vaultbank
13. utilizes a wide array of known and proven machine learning methods as well as
proprietary methods developed in house to optimize returns.
Random Forest Capital has access to data pools that allow it to create a more complete
profile of each credit thereby creating a more accurate risk assessment. Through the
Random Forest platform, Vaultbank is able to identify the lowest risk and highest yield
credits available on the vetted platforms. VaultBank, further has developed a unique
rigorous origination platform due diligence program, wherein VaultBank identifies the
best of breed origination engines from which it will buy loans.
14. The Vaultbank Card
The Vaultbank card is a physical/virtual prepaid/debit MasterCard and mobile app which
allows for the use of 120 Foreign Currencies from a single card. In the marketplace for
similar lifestyle cards, in addition to a per transaction fee most cards charge a
percentage of the market rate of the spread of the currency exchange. Customers who
travel to multiple countries with various forms of currency will inevitably run into the
“Cash Withdrawal Fee” and “Currency Transaction Fee.” These charges are often a
percentage of the transaction plus a flat fee, industry-leading fees are between 2.75% -
2.99%, as seen in the table below.
Vaultbank can save customers up to seventy percent on these fees. Vaultbank for
example in GDP to EURO will charge a 1% flat fee for “Non-Sterling Transaction Fees,”
this is equally valid for any currency pairing. Funds can be exchanged at point of sale
(industry average 2.75% versus Vaultbank 1% fee) or currencies can also be
exchanged via the app. Additionally, on ATM withdrawals, no fee is assessed versus
the industry average of 1.5%. The VaultBank mobile app contains additional
functionality to transfer funds in any currency between merchants as well as friends and
family accounts resulting in a zero percent money transfer fee. Paypal offers similar
functionality for transfers in multiple currencies between accounts but charges a 4.4%
fee for these transfers between accounts in various countries. Vaultbank will launch with
the ability to operate and exchange in 120 global currencies at the lowest rate on the
15. market for customers. In addition to these 120 traditional currencies all leading
cryptocurrencies will be supported for seamless transactions and exchanges and at the
same rate.
Vaultbank ensures its’ processes and procedures exceed the regulatory obligations
applied by the FCA and HMRC and to ensure our high standards are maintained,
regular audit processes are in place. While the problem of payment card fraud losses
remain an industry wide problem Vaultbank employs the EMV standard i.e. the chip &
PIN solution. While the EMV standard is not a total solution as it does little to prevent
card data from being captured, stored and reproduced in “card not present”
environments (typically key in CVV code i.e. the 3 digits on the back). Contactless
Payments are now being employed to reinvent (and remove) the card number. In the
case of contactless payments a randomly generated value used to replace sensitive
information. This system protects card and account data by substituting the 13 to 19
digit number on a payment card and encodes a unique sequence of numbers or
alphanumeric characters on its magnetic-strip.
As with other lifestyle cards in this product category certain perks and rewards are
associated with the Vaultbank Card. These perks include, but are not limited to, room
upgrades upon check in at 2,000 hotels globally, early/late check in at these hotels,
complimentary wifi, full breakfast, in addition to $100 which can be used for hotel
services such as food & beverage or spa etc. At 1,500+ participating restaurants a 50%
discount is offered when you use your Vaultbank card. Additional benefits include
access via the mobile app to F1 Competitions / Events, Yacht Charter, Days out, Retail
stores, Theatre and concert tickets, and other exclusive competitions.
The Vaultbank card is an Alliance Partner with Concur for expense management. This
allows integration from a mobile app to facilitate management of travel itineraries and
links to many travel partners for e-receipt management. Managers will have access to
reports to be able to track what is being spent on travel within the business. In addition
managers can approve and manage these travel requests. By partnering with Concur
managers will also have access to database of negotiated and published prices, direct
connects and web-only prices on travel from a series of multiple global distribution
systems.
In summation, the Vault Bank card will provide liquidity, in any of 17 global currencies
as well as cryptocurrencies, to all investors. This will provide a level of convenience
comparable to a Debit Account without any maintenance fees. While this account
16. represents a stake in a security with a yield comparable to a hedge fund, the user
experience through the app and card will be that of a retail banking customer.
Blockchain Background
The cryptocurrency market developed out of a perceived need for decentralized finance.
The crisis of 2008 resulting in a deeply felt and widespread loss of faith in the financial
establishment. With the fall of Lehman Brothers and Bear Sterns it became known that
even the largest players in the insurance industries are susceptible to suffering the
consequences of over investment and unsound portfolio management practices. The
decentralized and thereby trust-agnostic nature of cryptocurrency gave people
worldwide the tools to hold and transact unique digital goods and their associated value
without any centralized intermediary.
Cryptocurrency was designed as method for decentralized transactions with value held
in scarce digital goods. It appeals most strongly in societies where their own
governments have made currency worthless through hyperinflation. Today 50% of
people globally have bank accounts, and cryptocurrencies are taking greater footholds
among the unbanked. In the first world, the banking system is designed and regulated
to create an international insulation against volatility. While the new boom in
cryptocurrency is spawning tremendous value. The US retail banking industry is
currently not prepared to provide a fluid exchange mechanism to customers with
exposure to this market at present. Investment banking interest, however, is already
notable and is steadily rowing.
The total market for cryptocurrencies has grown past $160 billion in the last year. This is
roughly equivalent to half of the value of the US ETF Bond market. A phenomenal rise
for an asset category where not only are virtually all securities unregistered, but
exchanges themselves are subject to little or no regulation. While unregulated market
are an inherently high risk proposition, the mechanisms of value transactions inherent in
the technology continue to draw remarkable investment, resulting in a more mature
system. The advent of major financial institutions as participants in this market brings
pressures across the industry to comply with established financial infrastructure
standards mitigating volatility and making risk assessment easier for investors
interested in exposure to this market.
The market for fiat currency to cryptocurrency has only been operational for a few
years. Illustrative of the current level of maturity of the industry are the relatively large
differences between prices in fiat currency of BitCoin on the various major exchanges.
17. Opportunities for arbitrage between these exchanges exist on paper, but frequently
cannot be realized due to high costs of transaction between various crypto assets and
fiat currency. In other words, the best prices will come from vendors with the lowest
liquidity, and where the order may not be realized quickly, or at the price it was placed.
Even the largest and most established providers charge fees as high as 7% for fiat
transactions.
Along with fiat transaction offerings, the Vaultbank card offers the ability to hold funds in
the major cryptocurrencies with the same liquidity and transaction costs. The business
model is not based on revenue derived from spreads on these transactions, unlike any
other exchange operating today. The VaultToken is intended to offer investors exposure
to a portfolio of other assets, but does offer unique liquidity to customers with existing or
desired exposure to cryptocurrency assets.
Much like the technology boom of the early 90s, many of the pioneers in this field were
amateurs and hobbyists, and the infrastructure to support the demand for their
innovations is taking time to build. The remarkable capital influx shows a widespread
market consensus around the overall value of the technology in the economy long term.
While a future correction is likely as with any emerging technology, the players
establishing themselves in the market using today’s capital availability and a clearly
sustainable and stress tested strategy are likely to dominate what is becoming a
significant sector of the global economy. With the VaultToken operating as a binding
stake in a security, in the event of a capital crunch in the cryptocurrency market, and
few providers of liquidity, the Vaultbank Token will be uniquely positioned as a liquid
and secure investment in that market.
Despite many token being purely speculative, the emergence of Ethereum and Smart
Contracts has enabled securitization of assets through blockchain technology, along
with many other applications. One of the most regulatorily contentious issues is the sale
of company equity or rights to a real estate or other portfolio through a token sale.
These applications are remarkably close in form and identical in spirit to shares or
mortgage backed securities but are currently not registered or regulated by the SEC.
This is changing rapidly, first with the ban of such “Initial Coin Offerings” in China, and
followed by sternly worded warnings from the SEC in the US.
Much as with Silicon Valley and the tech boom, the true transition from technology
concept to economic segment happens in partnership with the establishment. Venture
Capital and Investment Banking were instrumental not only to financing the explosion in
internet technology, but also in identifying the most promising value propositions. While
18. a capital crunch was experienced in the market, the more established, conservative,
and regulated players in the industry were remarkably successful in the long term, and
new giants such as Silicon Valley Bank continue to thrive.
The authors propose a Bank that is founded on the sound foothold of the established
financial industry and provides the institutional guidance, regulatory compliance, and
market liquidity currently lacking in the cryptocurrency sector.
19. Technology
Blockchain technology is still young but it has already proved its capability as an
immutable ledger. Bitcoin is a purely speculative token, and its value much like
diamonds or gold, outside of industrial uses, is entirely driven by scarcity and the
guarantee for the holder that this good is unique and transactable. While unregulated
crypto currency exchanges may not have implemented the best internal security
policies, the integrity of the block chain has never been compromised. The advent of
smart contracts enabled this technology to be used for more than the creation of scarce
digital assets with purely speculative value. Today we can create crypto currencies that,
unlike Bitcoin, offer a legally binding stake in a venture, a company, or a portfolio.
Companies seeking capital traditionally use a venture capital or public offering
mechanism to raise the needed funds. Blockchain technology allows firms to issue the
equivalent of shares through an initial coin offering which is a smart contract that
registers the equity stake of every investor through the immutable ledger of the
blockchain. The smart contracts representing equity stakes or other forms of
participation in the project raising capital are distributed in the form of tokens and
offered on a platform that investors can access from anywhere in the world. The cost
advantages of this method of financing compared to an Initial Public Offering, combined
with unfettered access to international capital markets offer a compelling value
proposition for firms seeking to raise funds. This approach has garnered significant
market validation as firms seeking capitalization conducted through Initial Coin Offerings
have already raised more investment in 2017 than combined US Venture Capital
investments for 2016.
Blockchain technology found its success largely from the crash of 2008 and the
subsequent lack of confidence in mainstream finance created an ecosystem ripe for the
adoption of concepts as “Trustless accounting”. Fiat money derives its value from the
faith of a consumer that the tender will be honored by a bank, government, or other
centralized authority.
20. Reporting
In the manner of a traditional security, Vaultbank will be issuing quarterly and annual
reports on Vaultbank. As per regulatory guidelines, these reports will include such
things as analysis on portfolio holdings as well as the underlying Vaultbank token.
These reports will provide the investor the knowledge which allows them to judge the
present state of risk of their investment. Through the employment of these financial
industry standards and protocols, investors will be able to evaluate the status of their
Vaultbank Tokens within their wider portfolio. The regular quarterly and annual reports
posted to our website shall conform to the SEC guidelines for 10-Q and 10-K reporting.
In addition to financial reporting, VaultBank will provide Token Holders details on new
features of the security. Our continuous improvement, financial transparency and
information regarding our upgrades and continued enhanced utility, will allow the holder
of the tokens information on how their feature set might be expanded in the future.
VaultBank will also proviode Token holders examples of possible/popular use cases for
the tokens. VaultBank also intends to report on details/charts on the current
distribution/usage of the tokens and underlying portfolio composition.
The annual report, conforming to guidelines for a securities 10-K will include detailed
information in several key areas. The annual report will describe in detail the business
practices and actions over the previous quarter. The reports will provide a basic
overview of how the organization functions as well as any current known risk factors.
Quarterly and annual reports will provide substantial financial information including
traditional financial statements as well as detailed data on the performance of the
portfolio, as well as statistics on the Vaultbank Token.
Industry standard stress testing by our warehouse lender shall be performed on a
regular basis further ensuring the security, safety and soundness of the VaultBank
portfolio. Details and analysis of these rigorous stress tests shall be reported in the
reports posted to our website. The regular portfolio reviews are used by our warehouse
lender to determine the interest rate at which they will as well as the advance rate and
any additional requirements for the surety wrap.
While most cryptocurrency firms tout the transparency of the blockchain as a cure-all to
the ills of financial statements much of the operations of an enterprise still occurs
through traditional channels i.e. off the blockchain. Most companies involved in the
blockchain lack the stress testing and other evaluation tools commonly applied
throughout the financial industry to verify the safety, solvency and sustainability of
21. investable assets and institutions. Coinbase, the largest exchange on the market, offers
no accounting transparency.
In keeping with traditional securities requirements, Vaultbank will have an independent
audit annually by an outside accounting firm. These independent audit reports of the
financial statements will appear in the annual report.
Because every tool can potentially be used for illicit purposes Vaultbank will become
registered as a money services business with the United States Department of the
Treasury Bureau of Financial Crimes Enforcement Network (FinCEN). As a part of
maintaining its FinCEN protocols, Vaultbank will follow the guidelines established to
conform to the USA PATRIOT Act section 314 (c), that provides financial institutions
with the ability to share information with one another under a safe harbor protection
from liability. This voluntary program of information sharing allows for enhanced
compliance to the federal anti-money laundering/counter-terrorist financing (AML/CFT)
requirements.
As a part of Vaultbank anti-money laundering policies, Vaultbank has established a
Know Your Customer (KYC) policy. Implementation involves the formulation and
creation of KYC compliant policies. Upon the ICO Vaultbank will maintain a KYC
compliant customer acceptance policy which includes: (i) risk assessment for identity
theft, (ii) money laundering terrorist finance, and (iii) identification of Politically Exposed
Persons as part of anti-corruption/anti-bribery efforts. A policy for customer identity
verification will be implemented with the requirement of presentation of fundamental
identity documents. Once the client is correctly identified and entered into the Vaultbank
system, their transactions will be monitored and analyzed for money-laundering and
other financial crimes. With the features of the blockchain namely that all transitions are
available for analysis in the immutable blockchain independent/secondary anti-money
laundering software can be run at any time. Furthermore because Vaultbank will be
dealing with credit card transnational data they will conform to the payment card
industry data security standard which will be annually analyzed for compliance by a
Qualified Security Assessor who will generate reports which will be made available in
the annual report.
TenX, one of the successful companies in the cryptocurrency financial services market
segment have a decidedly different approach. Rather than registering their tokens as
securities with all the benefits therein, they have instead chosen to treat them as a
license. This license is analogous to a taxicab medallion in that they are purchased in
order to be granted a license to the rights, privileges, and features of participating in the
22. marketplace of running a taxi. In addition TenX has not registered as a money services
business.
While the market for cryptocurrencies has grown up to $160 billion dollars, financial
institutions offering liquidity for holders of cryptocurrencies are widely unregulated. Even
the largest cryptocurrency exchange Coinbase does not provide FDIC insurance to its
holders. Recently the SEC has issued warnings that make it likely that regulators are
actively scrutinizing this market. Vaultbank has taken the proactive stance of registering
not only as a money services business but posses an international banking license to
comply with regulatory guidelines in the United States, European Union, and most other
jurisdictions.
Compliance
The SEC continues to set forth a multitude of regulatory guidelines for the exchange of
securities. The Vaultbank token is being submitted to the SEC via Form D under rule
506(c) of Regulation D, which is an exception from section 4(a)(2) of the Securities Act.
This particular section of regulation D allows for Vaultbank to “broadly solicit and
generally advertise the offering…” While under other rules and regulations securities
1
are controlled by various types of brokers and brokerage firms which have their own set
of strengths and weakness particular in how potential investors can be solicited. One of
the primary strengths of 506(c) is that it allows for the direct advertisement of the
investment on platforms such as social media channels. In recent years much interest
has been paid to 506(c) and how it applies to raising investment via crowdfunding
platforms. While there are separate provisions for crowdfunding platforms which allow
them to reach non-accredited investors the SEC guidelines also cap the size of the
funding being raised to $1 million dollars. In deference 506(c) allows for an unlimited
amount of funds to be raised via crowdfunding platforms but it does require accredited
investor verification so that only accredited investors can participate.
In the case of Vaultbank all the tokens will be distributed during the initial offering. The
blockchain system Vaultbank will allow for several key improvements. The Vaultbank
system allows investors to liquidate their tokens at any time for their full market value
without the normal fee’s associated on the trade. With the powerful functionality of a
blockchain based system the Vaultbank token is easily fractionalized allowing for further
increases in liquidity. Fractionalization allows for partial withdrawals of investment thus
reducing some of the rIsk on the part of the investor. By making use of the Blockchain
1
https://www.sec.gov/fast-answers/answers-rule506htm.html
23. for keeping track of who is in position of the Vaultbank tokens the monthly costs
associated with maintaining the database are minimized thus benefiting the investor.
The secondary market also benefits from being able to safeguard against two people
mistakenly believing they posses the same token. Fractionalization also allows for
smaller investors on the secondary market than normal would be possible for a security.
PRIVACY NOTICE
VaultBank strives to enact a supreme standard of confidentiality for the purpose of
paying deference to the privacy assumed between a client and financial institutional
relationship. With this in mind, VaultBank is making available in a clear and
conspicuous manner this Privacy Notification to our clients by Title V of the
Gramm-Leach-Bliley Act of 1999 and its implementing regulations included but not
limited to Regulation S-P. This notification serves as a supplementary material to any
all privacy policies, statements, notices, directives, notifications, etc. that VaultBank
may make available in association with individual services, features, and products.
On the Information VaultBank collects on the client.
Account applications and other forms submitted to VaultBank are the primary avenues
for the collection of “non-public personal information” from the end user(customer,
consumer, client, etc...) Although Vaultbank's data collection is not limited to
original/primary collection and may also include for example: non-public personal
information from consumer reporting agencies Non-public personal information may
also be collected by VaultBank about experiences with VaultBank, and its affiliates
within the scope of VaultBank(and its affiliates) products/services in addition to
transactional data.
On Disclosure Policies.
VaultBank does not disclose/release the end user’s non-public personal Information to
anyone, except where permitted by law. VaultBank's disclosure of non-public personal
information may include but is not limited to sharing the end user’s(customer,
consumer, client, etc…) Information with nonaffiliated companies tasked with support
services for the end user’s(customer, consumer, client, etc…) account or with the
processing of transactions with VaultBank and its affiliates. Additionally, non-public
personal information may be disclosed to comply with relevant laws and regulations, as
well as in cases where the end user(customer, consumer, client, etc…) gives
24. permission or instructs that non-public personal information be disclosed.
Conclusion
It is your right to participate in the system of tokens. An individual token is a license to
participate in the token market system much like a taxi medallion entitles one to
participate in the market for cabs. The token does not give voting rights, but does
provide direct ownership over the entire system itself, as well as the privilege of access
to the opportunities/features of the token market system.
Corporate Governance
VaultBank is managed by its core team of senior executives with oversight from its’
active Board of Directors, which has been assembled based on their specific experience
in what VaultBank believes to be core and critical success factors for VaultBank.
Team
VaultBank has assembled and industry leading technical and financial services team.
Austin Trombley, CTO
Austin Trombley, MBA, is an avid Data Engineer and Data Scientist, with a
decade of consulting and leadership experience at 7 Fortune 500 companies. He
recently ran the data strategy at Prosper - which upended banks from credit, and
co-founded a Quantitative Credit Hedge Fund, Random Forest Capital.
Stuart Shelly, COO
Stuart has 30 years of finance and banking, with experience in large institutions
(KPMG, BofA, BMo, GE) and entrepreneurial situations. As head of Transitional Capital
Management, he serves as a Merchant Bank to identify, structure, and finance
investment opportunities in specialty finance. His specialties include debt, equity, and
structured finance products.
Christopher Cummock, Managing Director
Christopher has over 10 years of experience in investment and portfolio
25. management, investment banking, syndicate calendar trading, and corporate finance.
He holds two master's degrees from Florida International University including an MBA
and Masters of Science in Finance, and an undergraduate degree from USC.
John Castaldo, Managing Director
John joins the Vaultbank team after over a decade as CEO and Owner of Raven
Global Security Incorporated. John is also a specialist, entrepreneur, and consultant in
foreign market entry strategies, including global payments and transactions services. He
holds an undergraduate degree from Pace University.
Phil Guertin, (title)
Phil joins the VaultBank team as part of the acquisition of Express Cash Flow
(“ECF”). Phil, built ECF over the past two years, and as part of VaultBanks ICO, ma
portion of the proceeds will be used to acquire 90% of ECF, with Phil retaining the
remaining 10%, which he will exchange into VaultBank Tokens at pre-ICO valuation.
Phil has over 20 years of experience in unique specialty finance asset classes ranging
from specialty and traditional mortgages to factoring contracts.
Stefanie Shelly, Senior Director
Stefanie has over 20 years of experience in specialty finance and
entrepreneurship in the financial services sector. Stefanie, is an owner of Transitional
Capital Management, with her husband Stuart, previously she had sales leadership
positions with several mortgage and other specialty finance lending platforms.
Board
Tony Leng
Tony is a Managing Director at Diversified Search and over the years has
headed up the Technology, CIO and Private Equity practices for the firm. He also leads
the firm’s San Francisco office. Previously, Tony was Managing Partner of Hodge
Partners and a Partner at Heidrick & Struggles. Tony’s clients include public and private
companies where he has placed Board Members, CEOs, CFOs, CIOs and other C-level
executives.
The core of Tony’s consulting has been with senior leaders who are seeking to
transform their organizations as they face a future of rapid change, digitization,
regulation, shifting markets, and increasingly connected and informed customers.