DH Kim's journey back to the future
Inside the Finhaven CEO's plan to harness blockchain technology to return the capital markets to their roots.
It was around 2018 that DH Kim noticed two major changes to the reactions he received when he told people his background. The fact that he was Korean hadn’t mattered most of his life, and then almost overnight, after he’d introduce himself at conferences, people became eager to know which Korea. (It’s South, by the way.) At the same time, reactions used to be muted when he brought up his mining company. But then he’d mention his mining business and people’s eyes would light up—everyone assumed he meant crypto mining, not mineral mining.
He says these instances are illustrative of the transformation the world’s seen over the last few decades, politically, socially, technologically. “These two identity questions certainly show the world is changing really fast,” he told an audience at a fintech conference in 2018.
While Kim, a serial entrepreneur, doesn’t own a crypto mining firm, he does believe in the promise of blockchain—the technology that’s core to crypto-currencies—and he’s harnessing it to build his current venture, Finhaven, a company that’s in many ways at the forefront of the change Kim refers to.
The company, which has raised $7.9 CAD million in seed and Series A funding, recently launched as Canada’s first private securities marketplace to operate in multiple provincial jurisdictions in Canada. The marketplace works similarly to a stock exchange, however, only deals with private securities.
Through Finhaven, Kim hopes to combat what he says is the increasing complexity and burdens (read: regulations and costs) being put on companies trying to engage in the capital markets.
“I sometimes say that these regulations will kill people,” he told me in a recent conversation over Zoom this year. To save CEOs and investors from ruin-by-red tape, he’s trying to bring the act of transacting back to its roots, where there are as few intermediaries as possible, where you have a buyer, seller and a witness. “What we’re trying to deliver is simplicity in capital markets,” he says.
It’s an opinion and vision that was not fashioned overnight, but over decades, and it’s the culmination of years of experience working across multiple sectors in the US, South Korea and now Canada.
Kim grew up in Seoul before moving to the US to do a bachelor's degree in international affairs, law and political theory. His degree was split into two parts because he travelled home mid-way through to do mandatory military service. Once he finished his final two years, he registered to do his master’s degree at Columbia University in New York, once again, with a focus on international affairs. But when the economies of multiple Asian countries, including South Korea’s, collapsed in 1997, he was forced to travel home to support his family, and he once again split his degree up into two parts.
That financial crisis saw South Korean banks suffer from defaulting loans, successive days of losses for the Korea Stock Exchange, and an emergency loan bailout to keep Kia Motors afloat. Many businesses went under—including Kim’s father’s company. “With that, I learned that I had to really understand the world about finance and business and accounting,” Kim says he realized. He then decided to change his studies to focus on finance and business. Once complete, he got a job at Merrill Lynch around a decade before the 2008 global financial crisis precipitated its collapse and eventual sale to Bank of America.
Following his adventure on Wall Street, Kim returned home where he lectured at Korea University, built an investment banking firm, ran a mining company, and advised the government on fiscal policy. His corporate journey, which has led to Canada and specifically, Vancouver (“The time zone is better than in Toronto.”), has brought Kim to a point where he feels compelled to talk about the issues he sees plaguing public and private markets, and why he believes tokenized digital securities could be the solution.
The way he sees it, the current market system most people are familiar with is top-down with centralized power and multiple intermediaries—and that structure does not necessarily serve buyers and sellers.
The growing hardships of market participants
“When you trade, the person who really trades is your dealer. They trade for you,” he says. Dealers are not evil, but they create needless fiction, he says. They’re not his chief concern, however. “We need to think about all the market participants. Things seem cheaper nowadays for investors because commissions are going down. But the burden on the issuers is growing every day,” he says.
For example, if a company wants to IPO, it must fork out underwriting fees, legal fees, accounting fees, securities exchange registration fees, and other costs. “Unless you’re very sizable, it doesn’t make sense to them,” he reasons. “The burden is getting bigger in terms of the liabilities that they have to carry, the fees that they have to pay, and the requirements that they have to meet.”
The result is an increasing amount of companies staying private, he believes. (Indeed, according to a Globe & Mail report, the number of public companies has declined by 35% in Canada since 2008, and by 50% in the US over the last 20 years.) This reality has multiple implications and introduces a whole host of other issues that he’s been exposed to. The first of which, according to Kim, is that private companies are not always well-managed from a corporate finance perspective.
“Let’s say I invest in a private company,” he explains. “I want to hold the securities. I may not get anything [format]. I may get some share certificates, or maybe the company has just a spreadsheet for managing their investors… There is an uncomfortable feeling as an investor,” he says. “Let’s say I have a piece of paper. Well, what if I lose that? What's going to happen? You know, when I go back to them are they going to honour my ownership there?”
The problem is bigger, in his view, and the challenges with private securities start with an issuer’s or investor’s ability to effectively find a buyer in the first place. “When I want to find a buyer basically, I’ve got to forget about it,” Kim insists, speaking about the lack of reasonable avenues for private share sales. And even if a buyer is found, Kim is frustrated by the countless professional services firms that must be involved to do private transactions like lawyers and accountants. And then there are the practical elements of a transaction to consider such as the exchange of information, contracts, and funds.
“You’ve got to have a kind of reasonable infrastructure around these private securities, you know,” he continues. “It’s fundamental from an investor's perspective.”
The condensed version of Kim’s thesis is that there are countless inefficiencies in the markets, which prevents investors and companies from participating fully in it—and the situation is even worse in the private sphere.
Simplicity in capital markets through tokenized securities
His solution is the tokenization of digital securities. What does that mean in theory? What does it look like in practice? In theory, it allows for the buying and selling of tokens (that represent securities) on a blockchain, which could eliminate the need for transfer agents, custodians and clearing agencies through secure digital settlements.
In practice, it’s Finhaven Private Marketplace (Finhaven PM), which has gone through various iterations, but today closely resembles what’s viewable online in a demo video from the 2019 Finovate Conference, which features:
A woman named Anna who owns shares of Vancouver FC, a women’s football club. She’s on the Finhaven PM digital dashboard and decides she’d like to sell some shares of the private business. She posts an RFQ (request for quote), indicating a quantity, price and expiry date. She wants to sell 100 shares at $10 a pop. She chooses to have her offer expire in 24 hours. This only takes a few clicks.
An investor, Edwin, is also on Finhaven PM and wants to see if there are any exciting company shares for sale. He discovers Vancouver FC in the marketplace and reads what they’re about: “Be a part of BC’s first professional women’s football club,” a description begins.
Vancouver FC has been promoted through the Canadian leagues to become a major force in the game, reaching Series A in 2015 and 2018. Following this capital raise, Vancouver FC plans to use funds to finance a new training facility in Metro Vancouver. This is an opportunity to invest into the facilities that will directly benefit Vancouver FC’s players, fans, and communities.
Edwin is interested. With a few clicks, he starts the negotiation at $8.50. Anna rejects it. In a few clicks, he then ups his bid to $9.00. Anna accepts. She clicks a button that reads ‘Make trade contract.’ She confirms quantity and price again and chooses an expiry date for the contract. She enters an authorization pin that cryptographical signs the transaction with the private key of her digital securities wallet. Because of that security feature, there’s apparently no counterparty risk in the transaction.
The contract is sent to Edwin. He accepts by entering his pin. The trade is concluded and the shares and funds settle immediately. There is an immediate update to Vancouver FC’s cap table.
Buyer. Seller. Finhaven.
The video is for a pitch competition. But the key demo takeaway is that it demonstrates the striking simplicity of the Finhaven platform. Of course, under the hood, it’s not so simple. And in fact, getting to the point where anyone is using Finhaven was anything but straightforward. In the same way that the problems Kim talks about were decades in the making, his company’s solution relied on layers of innovation that’s both technical, and more recently, regulatory, in nature.
Riding a wave of technological and regulatory progress
First came securitization of assets. Then the digitization of securities. Followed by the tokenization of securities, which is what makes up the essence of Finhaven PM—and what Kim says “is a cornerstone of the big innovations in capital markets.” But to legally create the Finhaven marketplace, Kim worked for over two years with the BC Securities Commission (BCSC) to ensure he wasn’t breaking any laws.
His patience paid off last year when Finhaven was granted an exemption through the federal Canadian Securities Administrator (CSA) Regulatory Sandbox. This ultimately put Finhaven on the path to their recent launch.
Provincial regulators were surprisingly open-minded Kim recalls. “I didn't feel that they had any kind of a preconception of certain things,” he remembers. “They really had a kind of service mindset, and wanted to listen to our story.” That was important for Kim’s company, as it's the provincial regulators, not the CSA, that ultimately grants regulatory relief.
In a move to deal with the growing number of companies inquiring about the use of emerging technologies for financial services, BCSC created a Fintech and Innovation Team and corresponding advisory board, which Kim sits on. “I have no hesitation in going out to a particular industry stakeholder, sounding dumb and asking very dumb questions if that helps us as a regulator to understand exactly what’s happening with a particular innovation or particular business model,” Zach Masum, manager of legal services at the BCSC told Business in Vancouver last year.
Finhaven benefited from BCSC’s eagerness to understand new innovations. He also had the advantage of having come from the traditional finance world. “We were from the capital markets, so we understand regulations, probably better than, you know, others in the crypto world,” he thinks.
With the marketplace up and running and an initial issuer on the platform called Solarpark, which manufactures solar panels, the company has announced an ambition runaway ahead of itself. It plans to solicit 30 unique issuers by Q4 2022, build up its community of accredited investors, and begin secondary trading in the marketplace once the initial issuers have met their capital raise targets. The company wouldn’t share the number of investors currently on the platform.
A chance to create value by subtracting instead of adding
Throughout our conversation, Kim discussed his early career moves and the types of businesses that he wanted to run and how he could contribute to a better world. He said, “When I was doing that mining business, it was exciting, because I could see the value—but in financial markets, sometimes you play with numbers, but you're kind of curious what kind of value you're creating, right?”
After his time at Merrill Lynch, it’s a question he’s continued to ask himself. And ironically, through his current mission to bring trading back its roots, Kim has found himself back where he started, working in finance.
Except for this time around, he’s traded the Wall Street mentality of more of anything is always better for a more virtuous mindset and approach, which says the opposite. Exactly how that relates to Finhaven and their platform? “If things get simpler, then the risk profile gets simpler and lighter, and therefore, potentially, we can reduce the burden of regulations,” he hopes. “In the world, we get more and more, but more is not always better. Most of the time, less is better.”