At Bonova Advisory we interview C-Suites, Thought Leaders and Influencers from Finance and Banking.

This week I had the pleasure of interviewing Jonathan Nelson CEO HackFund and Member of SEC Advisory Committee for Capital Formation for Small and Emerging Business.

Jonathan founded Hackers/Founders (H/F) a community organization for startup entrepreneurs in 2008. By 2011, he expanded H/F launching the Co-op, a founders’ cooperative program that helps early-stage companies scale globally. Jonathan grew a $9M services-for-equity fund to $600M market cap portfolio in 5 years. He’s maintained an annualized IRR of over 30%.

Jonathan launched HACK Fund, a venture fund on the blockchain, to help solve liquidity problems for investors, and to make it easier for companies to receive funding no matter where they are based in the world.

Can you tell us the story of how you got involved with the Regtech or Crypto markets?

Yes. Several years ago, we had been helping USCIS and the Obama administration on immigration reform for entrepreneurs, and the White House staffers we were working with let is know about the Jobs act, which changed crowdfunding legislation.

Because of that, through a law school, UC Hastings that I advise, we submitted 80 pages of comments to the SEC on how crowdfunding should be regulated. Turns out, not too many people understand the fundraising challenges of tens of thousands of tech entrepreneurs worldwide.

Our comments were quoted by the SEC in their rules, and through that process, I was invited to join an SEC advisory committee on capital formation. I served on that committee ( ref. ) for several years, and we took a deep look at why so much investment into entrepreneurs was concentrated into Silicon Valley and in the coasts.

When a root cause analysis is done on that problem, you end up realizing that investors invest in Silicon Valley, because here is where 85% of the world’s technology companies get acquired. When tech companies get acquired, their investors make a lot of money, and that produces wealthier investors who can invest into another generation of companies.

It was looking at this problem, and needing to solve this problem that let me to crypto and blockchain to build a fund that didn’t have to wait for the companies to get acquired for the fund to make money.

At HACK Fund, we’re creating a system of digital stock certificates where investors can buy and sell their stock on online crypto exchanges rather than having to wait for those startups to make $100M a year and IPO on the NASDAQ or get acquired for the investors to make money.

It’s only because of my deep knowledge of the regulatory environment that I came into to crypto as an internet based solution to startup investing.

Can you share 5 ways that Regulation and Regtech can help stabilize the Crypto Economy?

Investors and entrepreneurs want regulatory clarity. There has been a lot of volatility in the crypto markets around the globe because of regulatory uncertainty. Investors are scared that their investments will shut down because of regulatory concerns, and get spooked easily.

Better to use principles-based regulation as opposed to rules-based regulation. There’s an ongoing debate in legal circles regarding principles-based regulation — i.e., company executives need to protect their investors and be transparent with them versus a rules-based approach — i.e., companies need to file form S10 with the SEC detailing A, B, C and D to their investors every 90 days.

The US is generally thought of as a rules-based regulatory framework, and a lot of crypto entrepreneurs in the US get very nervous when it comes to grey areas, “Is my token, a utility, a currency, or a security and what regulatory framework do I need to follow?” When there aren’t rules in a rules based system, the entrepreneurs and investors get scared.

A lot of the most flexible regulatory environments where crypto companies are being headquartered is because they have principles-based regulatory environments, that have a bit more flexibility and ability to adapt quickly to the changes in the crypto markets. Regulators have more leeway to approve or deny a particular project based on whether or not the entrepreneur is trying to protect their investors.

Regulatory sandboxes are a good thing. Several countries, like the UK, have developed “regulatory sandboxes” where entrepreneurs can work closely with regulators and get rapid feedback on what they are doing, and make corrections based on that feedback rather than running the risk of violating laws and getting punished or thrown in jail.

Good rules make for good markets. Notice that I didn’t say, “lots of rules” or “any rules”, but I said, “Good rules”. When entrepreneurs have regulatory clarity, when investors can understand and rely on applicable laws, they have trust, and more deals get made much faster because a lot of the details in regards to regulation aren’t in question.

We need good rules that are flexible, allow for innovation, do not place an undue burden on the entrepreneurs but at the same time, ensure investor protections and maintain efficient markets. Regulators need to learn about the underlying technologies that are being used an innovated on, and technologists need to learn the government’s rules that apply to the businesses they are working on.

There needs to be an open dialogue between innovators and the regulators/enforcers. One of the things that the computer security industry has done very well, has been to routinely hold events like “DefCon” or “BlackHat” conferences, which are known as a ‘demilitarized zone’, where law enforcement officers and computer security specialists can talk openly, and discuss both problems and solutions in a safe way without people worrying it would in jail time. We need similar events for regulators and crypto entrepreneurs.

What are the top concerns that crypto firms should be considering in order to have a competitive edge?

Consider avoiding US unaccredited investors — don’t let them invest. The SEC has very long arms, and they are friends with the FBI, who have both guns and prisons. It’s important to maintain strong KYC and AML compliance.

There’s been a lot of fear, uncertainty and doubt cast because of the early uses of Bitcoin for money laundering or purchasing illicit items online, when the fact of the matter is that these are terrible technologies to be used to launder money because there is an incorruptible, digital ledger of every transaction that has taken place on a blockchain. But, because of that, be sure to keep compliance and use good KYC/AML providers

Can you share examples of measures you take to prevent internal data breach?

Yes, we use multi-factor authentication for all our communication providers. Any computers that connect to our banking or crypto accounts are “Air Gapped” — i.e. they don’t connect to the internet unless it’s for this specific transaction.

We also use multi-signature wallets, where at least 3 people have to sign off on a transaction before it is made. And it’s important to use long pass phrases as opposed to passwords

What are some things that you do on daily basis regardless of how busy you are?

I read. A lot. I generally spend 2 to 3 hours a day reading news, listening to an audio book, or taking an online class. I need to fill up the mental well with other information and data — not just about my industry, but on many other industries and fields of knowledge.

In the world of technology, we specialize so much that we often can’t see the forest because of there are so many trees. I work hard to learn from other disciplines… history, art, theology, philosophy, music, culture, different sciences and technologies. It’s amazing how often I make connections and analogies from one discipline to another.

What are the top 3 upcoming conferences you are attending and are excited about?

I’ve been asked to participate at the 2018 Concordia Annual Summit in September, which is the largest and most inclusive nonpartisan forum alongside the United Nations General Assembly.

I’ll also be participating in some conferences that hosts in the Middle East. Those are always fantastic.

I’ve wanted to attend and speak at Slush in Helsinki, Finland for years so that is a possibility for December.

I also really want to spend more time in China, Korea and Japan this next year so I’m hoping to be able to attend some event in that region.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

“Never lie to your doctor or lawyer” These are the two people in your life you should always be straight with, that always need to know what’s going on with you so they can give you good advice so you can make good decisions.

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  • Breana Patel

    Founder and CEO Bonova Advisory- Risk and Regulatory Advisory ?

    Founder of Bonova Advisory that specializes in helping companies navigate complex Regulatory, Risk and Operational Environments. Industry expert in Banking Regulations, Enterprise Risk Management and Technology disruptions via RPA, AI and Blockchain. I write on evolving Financial eco systems in this 4th Industrial Revolution