Interview with Radoslav Albrecht, CEO of Bitbond
The Berlin-based startup Bitbond made headlines this February when they announced the approval of the German financial regulator (BaFin) for their security token bonds on the Stellar Blockchain. Since the kick-off of Germany’s first regulated STO on March 11, Bitbond has managed to collect € 2 million on the first day alone and aims at collecting € 3 million until July.
In this interview, Bitbond CEO Radoslav Albrecht answers questions about his inspiration for founding Bitbond, specifics about the ongoing STO and why Germany is the right place for Blockchain startups.
Please introduce Bitbond: Who are you, what do you do?
Bitbond is a global lending platform. We provide working capital financing to business owners around the world. We use blockchain technology for efficient cross-border payment processing and developed our own machine learning powered credit scoring. Bitbond is live since 2013 and is a regulated financial institution based in Berlin, Germany. So far we originated over EUR 13 million in loan volume.
What inspired you to found Bitbond?
I used to work as a consultant with Roland Berger and did many banking related projects. When I saw how inefficient their lending processes were, especially regarding small businesses, I thought this is a great entrepreneurial opportunity. Back then online lending platforms like Lending Club already existed and so I thought I’d like to apply the same concept to SME lending.
Why do we need Bitbond, what problem does it solve?
The World Bank estimates the funding gap of small businesses around the world to be around 2 trillion USD. This is a huge number and shows that those businesses who typically build the backbone of any economy around the world have a really hard time to get funding. This has negative implications on most economies. Bitbond solves this problem by making lending to SMEs significantly more efficient than banks who typically don’t provide loans to SMEs and if they do the process takes a long time.
What's novel about Bitbond's business model? Why blockchain?
Bitbond is the first lending platform that operates globally. This is great because we have a huge addressable market as a company. At the same time we reach many business owners in remote locations who otherwise wouldn’t have access to capital. In order to make this happen we need an efficient way to send money across borders. When we launched Bitbond in 2013 we started by using bitcoin for payment processing. Today we primarily rely on EUR denominated tokens that are issued on the Stellar blockchain. Stellar is more scalable and more cost efficient for our use case than bitcoin and by using the EURT we eliminate all foreign exchange risk versus the Euro.
Do you think Germany is the right place for Blockchain startups?
Definitely, the ecosystem is constantly growing and a lot of people are interested in the space. At the same time, blockchain is an extremely broad technology platform, just like the internet itself. I think that going forward different industries will use blockchain in many different ways and many German companies in general will be involved.
About the Bitbond STO
Why an STO now and why did you decide to raise money with an STO (in contrast to an ICO or equity investment by an VC)?
Bitbond as a platform grows the more debt funding we have available to deploy into SME loans. So far we had institutional investors on our platform. Our goal was to diversify the types of investors we have and one obvious thing to do is to go to the public markets. Since we have a lot of experience with blockchain and we follow closely what happens in the tokenization space, we believed that tokenizing a bond is a great idea. We remove a number of intermediaries from the issuance process and become more independent. At the same time the issuance become more cost effective and easier to launch.
In February 2018 we started to evaluate what steps would need to be taken to issue a tokenized bond. We got in touch with the German financial regulator and presented them with a legal concept for our token. After multiple rounds of Q/A and feedback we drafted our prospectus with the help of our lawyers from Lindenpartners. We submitted the prospectus in October 2018 and it was approved in January 2019. We launched the STO in March 2019.
Since this is a debt instrument, it’s not relevant for VCs. ICOs on the other hand have gained a really bad reputation, despite the fact as a tool themselves I believe they are a good idea. One thing that’s also important here is the fact that Bitbond itself is a regulated financial institution so we can’t issue investment products that are unregulated.
Why did you aim for a BaFin regulation?
Since Bitbond as a platform is regulated in Germany by BaFin we have most of our expertise in the German regulatory environment. And as a German company the natural thing to do was to issue a security as a German issuer.
What were the biggest hurdles you had to overcome on the way to the STO?
One of the biggest questions at the beginning of the project was whether the legal framework that we suggested for our security token would be approved by BaFin. We got in touch with the regulator early in the process to gather feedback. This was very valuable when drafting the actual prospectus. Time was also a big uncertainty as we did not know how long it would take BaFin to come to a conclusion on our concept and to eventually approve our prospectus. Before Bitbond, over 130 other companies submitted security tokens prospectuses to BaFin and none of them was approved so it wasn’t clear whether we would be successful.
What kind of investors are you targeting with the STO? Will a regulated product such as a bond be attractive to the crypto community?
We have over 1,000 investors already. Most of them have previous crypto experience. However, they are fairly sophisticated investors. They understand the different risk and return profiles of different asset classes and typically manage their wealth themselves. They want to have a diversified portfolio of assets comprised of stocks, crypto, real estate and bonds – which is what the Bitbond token represents.
What regulations exist for the token and is it tradeable (if yes, where)?
From a legal standpoint the token is a bond and all securities regulations that apply to bonds apply to our token in the same way. If we as an issuer want to proactively work together with an exchange, we have to make sure they this exchange is either regulated as a MTF (multilateral trading facility) or as an asset broker. Currently were in advanced talks with two such exchanges and we plan to make an announcement soon.
Which blockchain is your token built on and why?
We are issuing the Bitbond token (BB1) on the Stellar blockchain. The protocol is highly efficient, has low transaction fees and is more scalable than many other protocols. At the same time, it’s one of the biggest blockchains and has proven to function in a very reliable fashion since 2014. Stellar has in fact been built as a platform for payment processing and token issuance. Unlike Ethereum, it’s not a decentralized computer and therefore has limited functionality. In our case this is really beneficial because it also reduced the room for technical errors in the token issuance process. The low transaction fees are extremely important to us because we pay out interest to token holders on a quarterly basis. Since we pay the transaction fee on every single transaction, it’s important that the fee is just a fraction of a cent like is true for Stellar.
Why do you only settle in Lumens (XLM)?
Stellar Lumens (XLM) are the native currency on the Stellar blockchain. Everyone who holds the BB1 token can receive Lumens without any technical changes or special settings to their wallet. Therefore we decided to pay out coupons and the token repayment itself via Lumens. However, the value of payments is Euro-denominated as the face value of 1 BB1 token equals 1 Euro.
You can buy the token with EUR, ETH, BTC and XLM. What is the reference unit for the interest coupon?
The token is Euro denominated and all payments to token holders represent Euro values, despite the fact that we pay out via Lumens.
What's a ballpark figure of additional return than investors can expect from the variable coupon component according to your profit projections?
The investments that we make with the proceeds from the token sale have a target return of approximately 10% p.a. For the sake of simplicity, let’s assume the issuer entity had no operational costs (actually there are some of course but they are considerably low), then the pre-tax profit after the 4% fixed coupon would be 6% on the invested capital. Since we pay out 60% of the pretax profit as a variable coupon to token holders, this would be 60% x 6% = 3.6%. These come on top of the 4% fixed coupon, so the annual yield would be 7.6%. Please note that this is a simplified calculation of the mechanics and real numbers might deviate from this.
In terms of the final repayment, investors are subject to XLM price risk in the future. How do you protect your investors if Stellar is discontinued or goes to zero?
The payouts are always Euro-denominated. So even if the Lumens value was really low, the amount that we pay out will still represent the same Euro value. After token holders receive their payments, they are free to convert Lumens into fiat or other crypto-currencies immediately in order to not be exposed to Lumens. If Stellar as a blockchain disappear, something we regard as extremely unlikely, the claim of investors towards Bitbond would still exist. We would most likely define a new blockchain where tokens are being held.
How does Bitbond hedge Lumens (XLM) volatility and price risk, especially with respect to the bond's redemption date?
Bitbond holds only relatively small amounts of crypto and does therefore not bear a big price risk.
Why should someone invest in the STO and not buy Stellar Lumens instead (buy & hold)? Which risks do you anticipate for investors in relation to the STO?
The risk and return profile between the Bitbond token and Lumens is hugely different. Lumens are a highly volatile crypto-currency while the BB1 token is a bond that pays interest on a quarterly basis and will be bought back at its Euro denominated face value after ten years.
How did you decide on the 4% annual nominal yield plus a variable component as a sufficient compensation for the various risks (default risk, XLM price risk, early redemption risk) borne by the investors?
We compare the Bitbond token to other high yield investments. Corporates in the segment pay around 5-6% interest per year. We wanted to be a bit above that. When we combine the 4% fixed coupon plus the variable component as described in the answer above the return should be in the 7-8% range.
How does the bond rank in terms of seniority and collateralization?
The issuer of the Bitbond token is a dedicated company, Bitbond FInance GmbH. The bond is junior to other creditors, however the company does not take on any other debt. The proceeds are being invested in a diversified portfolio of business loans via the Bitbond platform which are effectively the collateral for bond holders.
Any recommendations for other (German) blockchain startups which want to run on STO? Which startups should NOT do an STO?
STOs are a great way to raise money if the company already is up and running for one or two years. You need to have a functioning team to manage the entire issuance process. At the same time it’s leaner than to issue a conventional security and therefore more accessible to early stage companies.
What is your fundraising goal? On your website you current run rate is 2mn, however your hard cap according to your whitepaper is 100mn. Which final number would you consider a success?
We have eight more weeks to go. If we reach 3 million in total proceeds the project is a huge success for us. Everything above would be a plus.