This story is published in cooperation with Token Report, which operates Blockchain News.

Most transactions between humans function more efficiently without a crypto token. An exception is when the transaction occurs over a decentralized network, where a token can be used to manage behavior through incentives.

“The world seems fine,” Naval Ravikant wrote in 2014, and he was right.

In other words, most “utility” token issuers would probably have done better to raise funds by issuing a security token, and to simply use ether, bitcoins, litecoins, daicoins–anything but a novel token nobody has ever heard of or held. The hurdles to getting users to adopt a new network are high. They are higher when there’s an esoteric financial instrument the user must acquire. It’s as though Uber or Lyft had required its first customers to first buy a fare card, like the subway.

Take SelfKey, which proposes to deliver self-sovereign identity, like Civic. It’s focused on banking, with a network of notaries, banks and individual account holders. It held a successful ICO in January, raising $21.9 million USD by selling a novel token for use on this network. Buying a token might be a hurdle for individuals and notaries, but it’s a brick wall for retail banks. SelfKey was one of the pre-ICO “momentum” picks at Token Report last quarter, so I interviewed CEO Edmund Lowell to ask him how he plans to get over it.

SelfKey entered this venture with an existing business, providing KYC services for token issuers and customer onboarding software for banks. Its largest banking customer is Standard Chartered Bank in Singapore, where SelfKey is also headquartered. If you’ve set up a business bank account in an off-shore jurisdiction, you may be aware that the KYC and onboarding are a complicated process involving a combination of online forms, digital documents, paper and wet ink. It’s wise to have someone in charge who possesses project management skills.

For now, SelfKey will be transacting with banking customers in fiat, and moving tokens on the back end—an awkward dance. The service that awkward work-around supports is based on notarized documents and paper forms. SelfKey is biding its time with this, CEO Edmund Lowell says, until regulators and banks can adapt to allow individual identity stored on a blockchain.

“We want to build the technology that kind of gets us across that chasm where it’s both compliant with today’s laws but is building an opportunity for tomorrow’s future which is safer, better and more secure,” Lowell said.

Here’s an edited transcript and the video of Token Reports‘ talk with Lowell, which took place in January. I’ll leave it up to you whether SelfKey needs its token.

Q: Alright, we’re recording now. So, Edmund, tell me a little about SelfKey.

Edmund Lowell: Sure. Selfkey is a decentralized identity platform that aims to make KYC easier. Pretty straightforward. That’s in one sentence. I can tell you more.

Q: You guys just wrapped up an ICO.

Lowell: We did. We like to call it a token sale… I think IPO and ICO sound too similar and there were no rights conferred in our ICO other than the rights to use the token. $21.9 million USD was the amount targeted.

Q: And you raised that amount I believe right? The sale sold out pretty quickly.

Lowell: It did. The public sale sold out in 11 minutes. We were happy with that result.

Q: I want to ask you about that in a minute. But you guys have built out a reputation in the crypto industry. You have a number of partners and customers who use your product for KYC (know-your-customer), is that right?

Lowell: Yeah, that’s correct. In particular we’ve done a few token sales in Q4 2017. That was a nice business that developed over the course of 2017. At the beginning of the year we were just only doing B2B SaaS.

We worked with some partners such as Standard Chartered bank to develop kind of the third version of our platform. So we’d been building since around 2014. Over the course of 2017 decided to go B2C as well. We’ve helped some partners such as Gatcoin (GAT) to perform KYC on their customers during the token sale in order to comply with the regulatory requirements.

Q: So tell me about the partnership with Standard Chartered because that’s your main banking partner, right?

Lowell: Yeah, we’ve worked with them quite a bit. I think that they’re a very innovative bank and that they’re trying to improve. They have a center of excellence in Singapore … and they work with different startups. We worked with them through the Supercharger program. Standard Chartered is headquartered out of Singapore so very easy for us to work with in Asia, they’re headquartered in the same time zone, and yeah, learned a lot from that project and really I think grew up a lot as a company.

We’d worked with some smaller banks in the past, but having to have that institutional rigor of working with a tier 1 financial institution was a whole new level of security and audit-ability and corporate governance and all the things that go along with it. So, really learned a lot in that process from them.

Q: How likely is it that you think you’ll be able to convince other banks and governments to go along with what you’re doing?

Lowell: We have two other banking announcements that we’ll be releasing in the coming weeks, one of which is really exciting and innovative—a bit of a smaller bank. I think that smaller banks are able to move much quicker and have a decision maker who can move much quicker than a GFC.

Your second question was what about governments. We are in talks and negotiations with several governments to build an identity system. It’s tough to talk about because you never know until the project’s signed whether you win or not. I mean, obviously there’s a lot of companies that are out for these tenders. But, if you look globally, the way that we manage identity right now is clearly broken. It’s largely not digital. The user doesn’t have a whole lot of control. Even countries that are well known and reputed for having a lot of due care for their citizens such as Sweden have undergone a massive data breach and had a lot of identities compromised. The Equifax event in the U.S. sort of springs to mind.

So I think that governments and companies and institutions are all looking for a new solution to identity and there’s a lot of evidence that blockchain is a great solution for that, and a lot of great and innovative companies working in that space, us being one of them.

Q: I still think of it through the lens of KYC and it seems to me that governments have to be willing to—jurisdictions have to be willing to accept that kind of identity in order prevent money laundering, in order for that to work. It seems like a long road to go before a lot of jurisdictions will get there.

Lowell: The way that I kind of think about it is twofold. It’s where we are today and the regulations that we have to meet today and what’s possible with the technology and where we can go tomorrow. And so today we do require the notarized certified true copies of physical documents and our system can handle that.

But in the future we’ll have something called verified claims where I can prove that I’m over 21 without revealing my age or I can prove that I’m an American citizen without revealing my passport identification number. And that’s really the world that we’re heading towards because the technology is there. It’s very possible with blockchain to create this immutable record trail of someone’s identity. Whether that’s acceptable under the current laws and regulations is another story.

So we want to build the technology that kind of gets us across that chasm where it’s both compliant with today’s laws but is building an opportunity for tomorrow’s future which is safer, better and more secure.

Q: I guess the risk is that you end up too far ahead of the curve on something like that, given that it depends not just on consumers wanting it but on governments being agile enough to adopt it.

Lowell: Maybe. I mean the way we’ve tried to design our system is actually so that it can be useful today and better than the current market solution. So let me give you an example. A bank that we’ll be announcing a partnership with currently right now is using a completely non-workflow, highly manual process of on-boarding customers where the customer has to fill in their company name about four times in the application.

So even right now I think we provide a much better, quicker solution that’s more efficient for the user, but under today’s circumstances they are required under their regulatory regime where they’re incorporated to collect physical copies of the documents. So that is an encumbrance. However, with education and with multiple players in the market kind of driving I think that we will see that regulatory regime change. And when you’re building a startup it doesn’t really make sense to build towards a solution that’s relevant today, this week.

You have to skate to where the puck is going, you know the Wayne Gretzky analogy? You have to move the market sometimes as a company. It’s better to create a category sometimes than it is to try to overcome and take an existing pie. So I think that’s kind of what us and other companies are trying to build, especially in the blockchain space. And I think that’s not really unique to identity. There’s a lot of other analogies there as well, you know, for different blockchains and different sectors, whether it’s currency or bonds or securities or what have you, a lot of it might not be a hyper-relevant, multibillion-dollar market today. It’s a niche offering, but it’s much better and I think over time it will grow and become the norm rather than the exception.

Q: What you’re offering today is almost more like a SaaS on-boarding application for bank clients, is that right?

Lowell: That’s definitely part of it and another part of it is we’re offering an identity wallet that the user owns and uses to hold their data and that’s something that enables the user to have full control and autonomy.

Q: Tell me a little bit about the token. It’s used for payments in the system, to notaries and others who verify identity, and it’s staked by the financial institutions?

Lowell: I think that for a financial institution to stake the key will be something that’s difficult for the financial institution to do themselves today. What we’ve sort of done is set aside a rather large part of our token allocation to do that on behalf of the banks. To kind of get it over the line within their organization and also so that it’s not an impediment where it’s something that they have to buy it. It’s just realistically going to be very challenging to get a large bank to buy cryptocurrency in today’s environment.

However, it is possible that we can stake it for them. But I think where most importantly this can be used is for the certifiers. And I’ll give you an example of how we think that can be really relevant and an analogy to the current situation. So if I want to be a notary in the US, I have to go to the government and I have to pay what’s called a surety bond. And once I have that surety bond in place with the government I am then free to make money doing notarizations, but if I ever incorrectly issue a notarization then I would lose that bond and we kind of envision the same type of thing on chain within our system.

Q: So, the notaries are the ones staking, not the financial institutions.

Lowell: It could be a notary, it could be a translator, it could be somebody who does a certification.

Q: Other than that, the token is a payment. I mean given what you said about the barrier to entry for tokens, is the token really worth having? Does it perform a function that overcomes that tax on the user?

Lowell: I absolutely think it is a useful mechanism and I thought very, very hard about whether we wanted to tokenize this system, because remember we were an existing company that had a nice business and this was a conscious decision to move into this space. I think what we’ll see is the staking mechanism within the SelfKey ecosystem actually makes this more reliant and better for all parties as opposed to not having it. When you’re looking at doing a token sale or tokenizing your business you have to think very carefully about a couple of things. One of them is the velocity issue: is somebody just going to trade into this token from Ethereum and then trade right out. If that’s the case, then your token really has a lack of long-term viability.

Q: I think your token might suffer from that problem. I mean, wouldn’t people prefer to transact this in ETH or some other more liquid currency?

Lowell: I think the staking mechanism is really the key and core component. So you’re right, the general payments will prefer to be done in Bitcoin or Ethereum because the market’s more liquid and its price will generally tend to be more stable than a new token. However, Ethereum and bitcoin won’t rise in value or decrease in value based on how many people are on the SelfKey network.

Whereas if we’ve gotten the token economics correct and if we’ve designed our system correctly we can’t promise that the token would appreciate and that’s by no means what I’m suggesting here, but I think that it’s reasonable to assume that if you can have more relying parties, claims issuers and certifiers using the system that KEY needed to be staked for those parties, that the token would be reflective of the network growth or decay in that network. And in that way you’d be able to create an incentive for people to use the token and participate in this network and build the network in that way.

Again, I’m not suggesting that there will be any return if you buy the token, but the way it’s been designed and the way most tokens should be designed is that it has utility and the network as it grows and becomes more useful is reflected with that token, so that’s generally what we’ve attempted to do with our token economy.

Q: Did you guys restrict the sale?

Lowell: We did. We did not offer to US persons. We also restricted China and New Zealand.

Q: That’s another huge dent in the market you can get into given you have a tokenized business. Do you hope to get across that gap some day somehow?

Lowell: We do. We’re a company that right now has a regulatory license to provide the services that we provide. So we’ve gone preemptively to a regulator, gotten them comfortable with our business model, they’ve given us a sandbox license for the services we provide. And I think in 2018 and beyond one of the core elements that a token project will have to prove is that they’re in compliance with the laws and regulations because the users of the system will be quite frankly at great risk if they can’t prove that. And the burden of proof is really on the project.

So, if we were going to operate in the U.S., we’d probably look to obtain some kind of licensure or work alongside companies that were regulated. In any event, that’s kind of generally speaking. Right now we’re not so much focused on the U.S. market. The U.S. is a tremendously large and interesting market, but also very challenging, very competitive, and a lot of very smart, large, agile companies and people working there. It really is a tough market. So in any event we hope that we can prove this in a pilot in some of these quote-unquote easier markets and make our beachhead there and then look towards larger markets later.

Q: Tell me a little bit about the token sale because you guys sold out in…11 seconds?

Lowell: 11 minutes. I wish it was 11 seconds.

Q: So, what was the distribution? That was about a $6 million USD float in the crowd sale, right? How many people bought that?

Lowell: Boy, I’d have to look. It was thousands. I don’t want to say the wrong number. I’d have to dig that up somewhere. But we restricted the total amount of contributions for one person to $3,000 USD just to get a wider distribution.

Q: And you are now listed on KUCoin, is that right?

Lowell: Yes, they made the decision to list us and we had a good day of trading in the markets yesterday.

Q: I’m just looking at it now. It started up quite a bit over the token price, didn’t it?

Lowell: Yeah, the token price in our our pre-sale was 1 cent and the token price in our public sale was 1.5 cents and now it’s trading around 4, up to 8 cents, so, yeah, that was nice, but we’re not really focused on that. We’re focused on delivering a product which is amazing and useful. And, I think if we can do that the rest of it will take care of itself.



Q: Great. Anything else?

Lowell: Yeah, I just always like to, when I’m asked that question, probe the user with a question. If you’re watching this, one question that you should be asking is, “Why should I care?”

I think that’s always a good question to ask when you’re evaluating a project to put money into or spend time with or even look at: “Why should I care?” Listen to me right now, why should you care what I’m saying? And my response to that would be: I think what we’re trying to do is solve one of the most important problems of our time.

The question and the problem we’re trying to solve is, who owns your identity? As our lives move increasingly into a digital space, we’re posed with this question of: Where is my data? Where are my identity documents being stored and held, and what is it being used for? Who has access to this? And right now there’s not really a clear answer to that question. In fact, the answer might be there’s a lot of companies that are using it to profit off of you and honestly they’re sometimes a little haphazard with your documents and your data.

So I think answering that question of who owns my data is a really important question and it’s one that we’re trying to solve by giving the answer that you should be the owner of your data. And we’re trying to approach that with a system of identity management that’s self-sovereign, which means that the identity owner is placed at the paramount position in the identity system.