Hamburg, 7 February 2024 - Frictionless Markets, formerly known as DEFYCA, is one of coinIX portfolio companies which enables GPs and Managers to structure and administer funds, run capital raising and distribution by leveraging huge the efficiency and global distribution power of seamless tokenization. Mahsa Doorfard, the sales and marketing manager of coinIX has interviewed Pat Hourigan, the Co-founder and CEO of Frictionless Markets. In this article, we will share his insights from the interview.
Mahsa: Would you please introduce yourself and tell us how did you end up in the blockchain industry?
what is your story?
Pat: I’m Pat Hourigan, the founder and CEO of Frictionless Markets. I began my career in finance and spent 20 years in various technology roles, for example at IBM. My interest in blockchain started around 2013–2014, initially with curiosity about bitcoin and later Ethereum. I conducted research with hyperledger and observed the crypto bull run, becoming fascinated with the technology behind it. Regarding the 2018 security token offering (STO) craze, I concluded it didn’t take off due to the lack of a formed market and participants, primarily because of the absence of a regulatory framework. Over the past five to six years, significant changes occurred. The technology improved, and regulatory guardrails emerged. Entering the space early allowed me to witness the market’s ups and downs.
Mahsa: I noticed that DEFYCA has gone through a rebranding and it’s known as Frictoinless markets now.
would you please explain about it?
Pat: This was always our intention, driven by a structural decision within our Luxembourg-based business, operating as a full Luxembourg structure with two main components: DEFYCA Labs (the IP company producing technology) and Frictionless Markets (the trading company managing securitization structures and cash custodian accounts).
Our transition to Frictionless Markets was completed about a month ago. Moving forward, as we tokenize different manager portfolios in Q1 next year, you’ll notice increased activity under the Frictionless Markets brand. Essentially, DEFYCA still exists but serves as the parent company of Frictionless Markets in our corporate structure.
Mahsa: How would you explain your project to your grandma?
We operate in the private markets, which consist of private equity, private infrastructure, private credit, and real estate. Private markets are not public and are typically reserved for institutional investors. Private equity involves investing in private companies, such as coinIX. Private infrastructure focuses on financing projects like greenification, wind farms, solar projects, and long-term infrastructure like elderly care homes. Private credit encompasses sponsored and non-sponsored lending, providing loan facilities to private companies. Real estate is another asset class within the private markets.
These markets have been rapidly growing since the global financial crisis, with private credit alone currently at $1.5 trillion, expected to add another trillion dollars in transactions per year. Private markets are crucial for institutional investors, contributing significantly to pension funds. The current trend, known as democratization, seeks to involve individual investors in these markets, allowing them to invest alongside large pension funds through platforms like Moonfair.
Our focus at Frictionless Markets is on making the private markets more efficient. This involves addressing inefficiencies in deal origination, fund structure operations, and capital calls — the process of drawing in cash from investors.
What we do with our technology and fund infrastructure is make it more efficient in several ways. Firstly, we reduce the cost of onboarding investors by simplifying the KYC process, ensuring compliance with regulations, and providing a unified identity across different funds. This streamlines day-to-day operations and makes onboarding more cost-effective.
Secondly, we tokenize funds, creating digital representations of shares that facilitate the cheap and easy transfer of value within a regulated space. This tokenization principle allows for efficient distribution of the store of value while maintaining compliance.
Finally, we recently launched our institutional deposit token on Avalanche, addressing the challenges of handling cash operations within a fund. By representing real fiat currency in token format for eight currencies; including euro, dollar, pound, Swiss franc, yen, Singapore dollar, and Hong Kong dollar. we automate processes like drawing in capital, reconciling transactions, issuing securities, and settling transactions. This automation, facilitated by smart contracts, improves efficiency, reduces transaction costs (about twenty-five cents per transaction compared to 80–90 euros with existing systems like SWIFT), and speeds up transaction execution.
Additionally, the tokenized format of currency reduces the burden of KYT (Know Your Transaction), providing instant and efficient transaction validation within our permissioned network. It also enhances reporting capabilities by consolidating data onto a blockchain, providing a single source of truth for transaction records and increasing forensic audibility for reporting functions.
Mahsa: When was the first moment that the idea of Frictionless Markets came into your mind?
Pat: I have 2 answers for this question, one professional and one personal.
The professional answer is simple: our business began with legal research, not technology. Instead of creating technology first and then figuring out its usefulness, we started with legal research. With my partners Alex and Brendan, we spent about seven to eight months researching jurisdictions where fund tokenization and distribution were legal. Luxembourg became our choice due to its blockchain laws, an extension of securitization laws established in 2004. These laws grant token holders the same legal and economic rights as traditional investors in a securitization vehicle, a crucial legal parameter for any tokenized securities project.
This legal breakthrough was the catalyst for our journey. We set up companies and fund infrastructure in Luxembourg, navigating the complexities of opening fund clearing accounts. Despite the challenges, we now have the necessary infrastructure to carry out our activities atop the technology we’ve built.
From a personal perspective, the onset of Covid brought about a unique time. While working for an Indian consultancy firm, the sudden shift to remote work left me with more time at home. Living in the countryside, boredom led me to a moment of decision. One morning, I decided to take the plunge and proposed the idea to Alex and Brendan. Over the course of a year, we went through a process of iteration, focusing on learning about the market and technology aspects of our chosen area. Conducting thousands of hours of interviews with competitors and potential clients, we delved deep into understanding the problems at hand. Once we had a clear understanding, the solution became evident: building a fund network to allow GPs to issue funds and attract global investors inexpensively. It was a challenging journey, requiring extensive footwork and hours of effort, but that’s the genesis of our venture — it started with boredom and the unique circumstances of Covid.
Mahsa: During the COVID period, many people, including myself, took the opportunity to learn new skills and explore the blockchain industry.
Moving forward to the next question, What problem is Frictionless Markets solving?
Pat: The private markets are vast, comprising thousands of firms in private credit, private equity, and more. The first challenge lies in choosing the specific segment to target, and for us, we focus on private credit and private infrastructure.
In the current market, challenges include the difficulty of raising capital, especially for differentiated products, and the high operating expenses for many fund managers. Additionally, distributing products to a broader range of investors is a hurdle, especially when dealing with smaller investment amounts.
Frictionless Markets addresses these challenges by providing an efficient market solution. Our focus revolves around three major functions: onboarding investors with reduced costs, structuring funds efficiently (launching a fund on our infrastructure for less than $30,000), and managing day-to-day fund inefficiencies, including cash operations, settlement, and KYT (Know Your Transaction).
Efficiency improvements in these areas result in lower operating expenses for funds, making it more cost-effective to distribute to smaller investors. This, in turn, enables fund managers to reach a wider audience and execute more quickly.
Mahsa: Would you mention some of the recent updates, partnerships, and advancements?
Pat: A recent partnership with First Avenue, a UK placement agent specializing in private credit and infrastructure deals, is a significant step in expanding distribution capabilities. First Avenue, with a track record of placing around $30 billion worth of such deals globally, trusts Frictionless Markets to handle their customers and represents an exciting collaboration for both parties.
They’re very structured; they work within a regulatory parameter, and they also operate within accepted standards. Most crypto companies will find that quite shocking — the pace at which it runs — and it’s not necessarily a bad thing. It’s quite a good thing because it’s through an abundance of caution that things are done. So, we started to formalize the relationship around the middle of the summer. In September and October, we signed off on a deal.
The deal is straightforward. First Avenue introduced us to their GPS and the mandates they handle, giving us an opportunity to pitch for GP and fund business. On the distribution side, First Avenue, being skilled and experienced, will assist in distribution. They won’t handle all distribution, as there’s a fit for every course.
That’s the general parameter of the deal. First Avenue is also an investor in the company, holding a minority stake with an interest in growing the company’s value. Kazuhiko Yasuda, who has around 30 years of experience in private markets and the pension fund business, has joined frictionless markets from First Avenue as the head of institutional sales. His role is to articulate our value proposition, help us win business from GPs, and set up the necessary distribution networks to distribute tokenized securities and credit infrastructure funds.
In terms of recent updates, we’ve just completed our audit with Hacken Finance yesterday, which took about seven to eight weeks. We invested heavily in our smart contracts, and now the entire protocol is live on Avalanche. Our tokenized securities will be launched on Avalanche, and the first set of tokenized institutional deposit tokens went live yesterday. We’re also finalizing the remaining currency ledgers, including Diram, Singapore dollar, Hong Kong dollar, yen, British pound, and Swiss franc.
The infrastructure behind this involves establishing all the cash custodian accounts in Citibank. On top of that, we build down a service, an FX service from Alpha Group. Then we have all the infrastructure around fund accountants that ties in with that to provide attestations. When you have a deposit token from frictionless markets, you get an independent attestation from a chartered accountant in Luxembourg, ensuring that your cash is fully backed. We’re not like a stablecoin; we don’t invest your deposits in treasuries or anything like that. It’s simply a pass-through, and your cash is always secure within the fund accounts under securitization laws of Luxembourg.
So, this week, we’re starting to utilize the financial infrastructure we’ve built over the last year. Institutional deposit tokens are now fully backed one-to-one by fiat in those cash custodian accounts, independently attested by a chartered accountant in Luxembourg. This ensures that investors are certain the cash is there, and we’re excited about completing this before Christmas. In Q1 of next year, you’ll see us tokenizing funds from some of the best GPs and managers in Europe in credit and infrastructure. It’s been a year of hard work, and we’re excited about what’s to come in the next quarter or two.
Mahsa: Can you name some of your competitors?
What makes your projects stand out among your competitors?
Pat: There are various companies providing tokenization solutions. They generally fall into two categories: technology providers and those offering all-in-one solutions. Frictionless markets fall into the latter category, having built on top of a specification by Tokeny ERC 3643, a Luxembourg company. The open ecosystem and source underpinning our solution have allowed us to quickly develop our technology. While there are other firms in Germany, what distinguishes us is our comprehensive approach and the unique specifications and infrastructure we bring to the institutional technology space.
All good firms, including those in the crypto cohort, have been providing crypto lending solutions with varying degrees of success. Personally, I don’t believe their solutions are suitable for the institutional space. In our space, we operate as an all-in-one shop. Whether you approach us or we approach you, we offer to tokenize your fund, handling fund structures, cash accounts, manager appointments, legal structuring, and more, be it a feeder fund or actively managed certificates.
We manage the tokenization function, handle cash capital calls and operations, and provide reporting, CRS factor, and all the usual necessities. Think of us as a hybrid between a traditional fund administrator and a tokenization solution. A significant advantage is that many GPs and managers lack technologists and technology operational staff, which is where we come in to digitize and distribute their fund in token form.
We believe our all-in approach will be a winner, especially with managers and GPs still navigating the space and deciding whether to build solutions in-house or find a partner. We’ve encountered GPs building their solutions, realizing the market is forming with many companies providing solutions externally, which is where we step in, aiming to pick up business over the next twelve to 18 months.
Mahsa: Frictionless Markets is indeed a one-stop-shop, covering everything.
Is there anything else you would like to share about Frictionless markets?
Pat: We’re excited and privileged to have investors like coinIX, grateful for the early support. We plan to do another fundraise next year, continuing to build strong solutions with the support of backers and partnerships.
Mahsa: We’re proud to have Frictionless Markets in our portfolio.
What is your message to people who have not invested in the blockchain industry yet?
Pat: That’s a great question. Look, when I left university in the late ’90s, there were only two financial products available as I entered the workforce: a deposit account and a pension fund. Fast forward 25 years, and there’s an incredible array of financial products available, not just in the public markets. Opening an eToro account and investing in public equities, stocks, and bonds is simple. We also have the crypto markets, and now private markets are becoming accessible through blockchain.
Blockchain, from my perspective and likely anyone working in this area, is the catalytic technology that will enable markets to spread globally. There are still billions of underbanked people with no access to financial services, and blockchain can provide a solution. You see amazing technologies and solutions being provided in African markets, and without blockchain, the pace of execution of these solutions wouldn’t be the same.
Looking ahead, I believe that in 10–15 years, the vast majority of financial infrastructure will run on some form of blockchain technology. It might be a slow process compared to the rapid emergence of the crypto markets, but institutional capital markets follow a predictable path, and adoption is happening. Major players like Morgan with Onyx and Citibank with Avalanche are testing the market and technology, and once the benefits are clear, mass-scale adoption of tokenization will follow, albeit gradually.
If anyone is interested in getting into this area, they need to understand the power of blockchain and focus less on the volatile crypto markets. Blockchain technology addresses many issues within the markets today, and understanding its capabilities is crucial. Do your research, get into it, and don’t ignore it, as ignoring it is not a wise decision.
Watch the video of our interview on coinIX YouTube Channel:
About coinIX
coinIX GmbH & Co KGaA, based in Hamburg, is a listed In company and has been investing in the broad spectrum of blockchain innovation since 2017. This includes the next level of digitalization in traditional industries, as well as new fields such as Decentralized Finance (DeFi). For this purpose, coinIX invests in equity of startups, early token projects and liquid cryptocurrencies. It offers a listed share that is traded on the open market of the Düsseldorf Stock Exchange.
(WKN: A2LQ1G | ISIN: DE000A2LQ1G5 | Ticker: XCX)