Sep 17, 2018 · 1h 15m · capital-allocators
Stephen McKeon – Professor of Crypto Security Tokens (Capital Allocators, EP.69)
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Finance professor and startup founder Stephen McKeon joins host Ted Seides to explore the economic mechanics, structural advantages, and regulatory landscape of crypto security tokens. McKeon details how open blockchain interoperability, programmable smart contracts, and embedded compliance can solve private market illiquidity and modernize institutional capital allocation.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 17.6% of the talking time here. How this is scored →
Ted as informed peer 3.9 Guest teaching 5.9 Guest disagreement 1.0 Ted pushing back 1.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 34:27 Tempering the 24/7 trading assumption
Stephen gently counters the blanket premise that continuous 24/7 trading is universally beneficial, explaining liquidity fragmentation and spread widening.
Hardest push from Ted ▶ 40:20 Challenging the necessity of blockchain vs traditional databasesTed directly pushes Stephen on why programmable asset benefits require distributed blockchains rather than existing relational databases.
Biggest teaching moment ▶ 1:02:45 Walled gardens versus smart contract regulatory complianceStephen clearly explains the difference between institutional walled gardens and embedding automated whitelists and regulatory logic directly into tokenized securities.
Ted holds their own ▶ 57:42 Spotify direct listing and the persistent need for market makersTed introduces the Spotify direct listing example to demonstrate that disintermediated listings still rely heavily on traditional investment bankers for marketing.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Surviving the 2000 Dot-Com Meltdown in Silicon Valley | 3 | 4 | 1 | 1 | Ted prompts Stephen with open questions about entering academia and starting in Silicon Valley during the tech bubble. Stephen recounts his early career experience during the dot-com crash without tension. | |
| Rising to Winery CFO and Transitioning to Academia | 2 | 4 | 1 | 0 | Ted asks narrative transition questions while Stephen explains how he progressed from cost accountant to CFO of a Napa Valley winery before pursuing a PhD at Purdue. | |
| Empirical Research on CEO Sensation Seeking and Risk Taking | 4 | 6 | 1 | 1 | Ted inquires about corporate finance research methodologies and CEO traits. Stephen shares empirical findings linking CEO sensation-seeking via private pilot licenses to corporate risk-taking. | |
| Co-Founding Skyward and Discovering Blockchain | 3 | 5 | 1 | 1 | Ted observes the unconventional jump from commercial drones to crypto. Stephen explains co-founding Skyward with MBA students and encountering Bitcoin at the technological frontier. | |
| Commercial Drone Regulations and Verizon Acquisition | 3 | 6 | 1 | 0 | Ted listens as Stephen details the regulatory development of FAA Part 107 and how standardizing rules enabled Verizon's acquisition of Skyward, drawing parallels to crypto regulation. | |
| Academic Exploration of Cryptoassets and Initial Coin Offerings | 4 | 6 | 1 | 1 | Ted probes on the consensus findings from academic studies on the ICO wave. Stephen explains the shift toward value capture, compliance mechanisms, and the SAFT structure. | |
| The Security Token Thesis and Blockchain Capital's BCAP | 4 | 7 | 1 | 1 | Ted asks for definitions and genesis of security tokens. Stephen explains participating in Blockchain Capital's BCAP token and categorizing on-chain assets under securities law. | |
| Core Benefits: Settlement, Fractionalization, and Liquidity | 4 | 6 | 1 | 2 | Ted questions whether 24/7 trading is genuinely advantageous. Stephen gives a nuanced breakdown of settlement times, fractionalization, and secondary market liquidity. | |
| Ridgeline Front-to-Back Investment Management Platform Sponsor Message | 5 | 7 | 1 | 2 | Following the midroll break, Ted pushes on why tokenization requires blockchain rather than traditional databases. Stephen explains protocol-level interoperability and standardized digital wallets. | |
| Market Depth, Illiquidity Premiums, and Trading Frictions | 4 | 7 | 1 | 1 | Ted asks where liquidity originates for illiquid assets. Stephen uses an analogy of a Darryl Strawberry rookie baseball card and eBay to illustrate global market depth and narrowing bid-ask spreads. | |
| Evolving Ecosystems: Wallets, Bundling, and Governance | 5 | 6 | 1 | 2 | Ted asks whether continuous price discovery will induce short-termism among asset managers. Stephen counters by suggesting programmable tenured voting can incentivize long-term ownership. | |
| Unbundling Economic, Voting, and Access Rights | 5 | 7 | 1 | 1 | Ted highlights Stephen's paper on access rights. Stephen outlines unbundling voting from cash flows and tokenizing follow-on fund access rights or fan club privileges like Green Bay Packers stock. | |
| Standard Adoption and Direct Listing Marketing Realities | 5 | 6 | 1 | 2 | Ted references Spotify's direct listing and asks why investment bankers remain necessary. Stephen agrees that securities still require marketing and network adoption standards take time. | |
| Embedded On-Chain Regulatory Compliance | 4 | 7 | 1 | 1 | Ted invites Stephen to explore compliance. Stephen explains moving compliance from walled-garden intermediaries directly onto the programmable smart contract whitelist layer. | |
| User Interface Bottlenecks and Disclosure Frameworks | 5 | 6 | 1 | 2 | Ted asks about information flow and disclosure bottlenecks for private assets. Stephen compares current UI hurdles to early internet friction and discusses platforms like Messari. | |
| Reflections on Sports, Career Transitions, and Core Philosophy | 3 | 4 | 1 | 0 | Ted wraps the interview with standard reflective questions. Stephen shares anecdotes from high school wrestling, distinguishing luck from preparation, and life lessons on empathy in communication. |
Statements from this episode (18)
McKeon: Risk-taking CEOs run firms with higher leverage and volatility
“So essentially the CEOs that had higher levels of risk taking in their private lives, we saw the same attributes in the firm. So everything from higher leverage, Higher prevalence of M&A activity, higher equity return volatility. It was almost like everything …”
McKeon: Later 2017 ICOs priced better, reducing day-one trading pops
“One of the things we saw is that as we moved through 2017, the projects got better at capturing more of that value. So we weren't seeing as large of sort of the pop On day one of trading.”
McKeon: Early ICOs ignored securities laws before adopting compliance tools
“Initially, everybody was ignoring securities laws entirely, and then there was this idea, like, oh, maybe we need to comply with these things, and so then there were all these other mechanisms, like the SAFT that were invented, and so I'd say that was the othe…”
McKeon: Crypto network assets begin as securities; tokenized assets remain securities
“Most of the network assets at least start their life as securities before the network is active. And of course, all the traditional assets, real estate, equity, bonds that we might represent on chain are going to be deemed securities for their entire life cycl…”
McKeon: Tokenized assets will trade across a spectrum from 24/7 to restricted hours
“So I think what you're going to see is a spectrum. So some assets are going to trade 24 seven. I mean, many assets already do. Bitcoin is traded 24 seven. Ethereum is traded 24 seven. For traditional assets, maybe the larger issues will trade 24 seven, but you…”
McKeon: Shortening traditional asset settlement via automation is promising but complex
“And so one of the points I make in the paper is that I think there is a lot of promise in terms of really reducing settlement time, but these are more complicated transactions than just the way cryptocurrency works, right? Like you've got custodians involved, …”
Tokenization offers secondary liquidity for locked-up fund capital
“And so that I think is one of the promises of tokens is this idea that funds or various types of assets can raise capital and the capital is locked up, yet the investor can achieve some degree of liquidity through a secondary market transaction and not through…”
McKeon: Initial security tokens will be plain-vanilla asset representations
“The initial versions of security tokens are going to be plain vanilla issuances. We're going to take, like, the simplest version of representing an ownership claim in one of these assets and represent it on chain, and those will be kind of the test cases, righ…”
Digital wallets will eventually hold stocks, bonds, and real estate
“That really is the big innovation, is this idea that digital wallets will be able to hold all different kinds of assets. You'll be able to hold shares of stock and bonds and pieces of real estate, maybe the mortgage to your home, like all these different sorts…”
McKeon: Academic finance defines liquidity as costliness to trade, not tradeability
“When we think about, like, illiquidity or liquidity as academics, we don't think about it as, like, ability to trade or inability to trade. We think of it as costliness to trade, right? So, like, price impact or bid-ask spread, like, these are the measures we …”
McKeon: Opening private assets globally to accredited investors will compress trading spreads
“Even like setting retail aside for a minute, like if you could just open those assets up to all accredited investors all across the world, that's an enormous increase in market depth. And so you have to believe that that is going to impact liquidity. It's goin…”
Smart contracts could grant tenured voting rights based on holding time
“So you could program that into the security, you know, relatively easily with smart contracts where you look at the length of time that a particular asset has been hold by a particular wallet and allocate voting rights in that way.”
Smart securities could allow investors to unbundle and sell voting rights
“So to the extent we could unbundle the voting rights from the cash flow rights, you could actually sell off the voting rights
Separately, while retaining the cash flow rights.”
Top VC funds could monetize future access rights via tokenization
“Well, all of a sudden, to raise a dollar of capital, somebody might pay a dollar 25, because not only are they putting the dollar into this current fund, they're also buying the access right to the next fund.
It actually would allow benchmark to raise more cap…”
McKeon: For-profit corporations struggle to establish widely adopted industry standards
“It's very hard for sort of a for-profit corporation to create a standard that's gonna be widely adopted, because, of course, everyone knows that a lot of value is going to accrue to that corporation, and so you get all these sort of strategic forces that preve…”
Crypto security token issuances are not cheaper than traditional IPOs
“Today, I'm not sure it is cheaper. Because if you look at the costs around an IPO, yeah, there's some legal costs, there's some accounting costs, like there's some things you could probably automate, but the really big costs are the bankers that are selling it…”
Programmable securities will embed regulatory compliance directly into assets
“We're not doing compliance at the exchange level anymore, we're now doing it at the level of the security, which is actually a fascinating concept, and I think, like, one of the major sort of innovations we're gonna see with programmable securities.”
Tokenization will surge once traditional investors overcome intimidating crypto interfaces
“Many of the traditional investors are intimidated by the technology or just the interfaces, but I think as they start moving up that learning curve, that's when you're going to see more and more assets tokenized because there's going to be a larger and larger …”