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CONTENTS
CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
Managing Editor: Beverly Chandler, beverly.chandler@globalfundmedia.com
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In this issue…
03 Cryptocurrencies and blockchain move
centre stage
By Beverly Chandler
05 Investing in transformative technology
By Manuel Anguita, Silver 8
08 Veridium offers carbon offsets
Interview with Todd Lemons, Veridium Foundation
11 Kryptoin launches first crypto ETF
Interview with Donnie Kim, Kryptoin
13 The rise of crypto and token business
Interview with Dominic Lawton-Smith, JP Integra Group
16 The emerging world of cryptocurrency
asset management
Interview with Matthew Shaw & Philipp Kallerhoff, Protos Asset
Management
17 Governing the digital asset revolution
By John D’Agostino & Paras Malde, DMS Governance
CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018 www.globalfundmedia.com | 3
It’s a true sign of the times. The two top
performing hedge funds of 2018, according to
data providers Preqin, are both focused on
cryptocurrencies and blockchain.
Silver 8 Capital – read about them further
on in this report – managed the highest
returning hedge fund last year focusing
on financial technology, with a particular
focus on blockchain and the crypto world,
returning 770.74 per cent, while Global
Advisors’ Bitcoin Investment Fund came in
second with returns of 330.08, according
to Preqin.
Further evidence comes from HFR, whose
Cryptocurrency Index was up 155.70 per cent
for the last 12 months to end June, while its
Blockchain Index was up 142.07 per cent for
the same period.
Traditional fund managers may hate the
sector but investors love it. Warren Buffett
has been steadfastly ‘bashing bitcoin’ for a
number of years. During his recent Berkshire
Hathaway annual shareholder meeting, Buffett
referred to bitcoin as ‘rat poison squared’.
The crypto industry has responded with
typical vigour with a billboard response from
Genesis Mining and a huge bet from an
Aussie crypto expert that bitcoin’s price will
beat the Berkshire Hathaway share price by
2023. But all of this is just the theatricals and
pantomime that surrounds an extraordinary
new investment phenomenon that can no
longer be easily dismissed.
A quick summary of the cryptocurrency
industry, for those who have not yet been
exposed, reveals that bitcoin is the best
OVERVIEW
Cryptocurrencies
and blockchain move
centre stage
By Beverly Chandler
CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018 www.globalfundmedia.com | 4
OVERVIEW
known and biggest of the digital – or crypto – currencies,
first named in a paper in 2008 and launched in 2009 by
a mysterious and anonymous figure who goes under the
name of Satoshi Nakamoto.
At the time of writing bitcoin now has a market
cap of around USD131 billion and a value of around
USD7,660 per coin. The power behind bitcoin lies in its
ledger, the register of bitcoins recorded in a distributed
database. This ledger is based on blockchain and even
for those for whom digital currencies are a step too
far, blockchain’s inherent strengths offer a compelling
development. To achieve independent verification of
the chain of ownership of every bitcoin, each network
node stores its own copy of the blockchain which gives
consensus to all who use it and in theory defends it from
potential hackers.
One of the key strengths of cryptocurrencies, or other
systems based on blockchain, is that it has no one
central governing body which controls it and everyone
who is involved in it has some degree of control over it.
The technology used through crypto coins or tokens
creates an investment democracy that allows customers
and suppliers to connect directly, without the need for a
central entity like a bank or a financial institution to make
a transaction, which means that assets can be shifted
safely, swiftly and cheaply.
Interviewed in GFM’s AlphaQ on the launch of his
blockchain and tokenised investment grade diamond
investment, Abacus Capital’s Hogi Hyun explains: “You
can trade bitcoin 24/7 on any one of 200 exchanges and
you are not stuck with the usual fund administrator route
for subscriptions or redemptions. If you cash in a PE or
hedge fund, you are probably looking at 30 to 40 days
from redemption to get your money, but settlement is 10
minutes on a crypto exchange.”
The strength of the blockchain has led to the launch of
a huge number of cryptocurrencies. The top three in terms
of being closest in form to an actual currency (bitcoin has
its own cash machines, for instance) are bitcoin, ethereum
and ripple but just the process of stepping away from a
fiat currency – one that is backed by a government – has
enabled investment creators who are on a mission to
create a currency that supports their goals.
Within this report, we interview Veridium which has
developed a token and used blockchain to develop
its carbon neutralisation programmes for corporates
and in the past GFM’s AlphaQ title has followed the
fortunes of Swarm. This is a firm that uses blockchain to
democratise traditionally institutional investments such as
private equity, giving the retail investor of all sizes access
to institutional investment funds.
Swarm CEO Philipp Pieper says: “We are building a
regulatory compliant exchange for asset-backed tokens
designed around true cooperative ownership. So, in
the end, when someone buys security tokens of one of
the assets on the platform, there is a real ownership of
that entity.”
If there is a new financial industry, there must be
a new index and where there is an index, there must
be an index fund or an ETF. The battle to get a bitcoin
ETF launched has been fought long and hard. Global
Advisors, mentioned above, now CoinShares Group, and
its subsidiary Swedish firm XBT Provider AB, have been
offering ETPs on cryptocurrencies for some time.
In 2015 XBT Provider started by launching Bitcoin
Tracker One and Bitcoin Tracker Euro on Nasdaq in
Stockholm, which, it says, became the world’s first bitcoin
tracking ETPs to be offered on a regulated exchange. 2017
saw XBT join CoinShares and launch Ether Tracker One
and Ether Tracker Euro. XBT saw asset growth for their
products grow by a factor of 36 in 2017, finishing the year
with assets under management of USD1.06 billion, having
peaked mid-December at USD1.53 billion.
Figures for April 2017 – March 2018 from NASDAQ
Stockholm reveal XBT Provider ranks as the second
largest issuer by exchange traded volume (USD6.5 billion,
37.9 per cent), with its four crypto tracking ETPs ranking
in four of the top five spots for total volume traded on
exchange in the same period, out of 1600+ ETPs.
So, the demand is there, even if the products are not
coming out of a major financial centre, such as New York.
And it is in the US that we have seen the bloodiest of
battles in the attempt to create a crypto ETF, with the SEC
firmly fending off all efforts from the great and the good,
saying, most recently, as it knocked back the Winklevoss
twins for the second time: “The arguments submitted in
support of this claim are incomplete and inconsistent, and
are unsupported or contradicted by data.”
However, maybe the first digital crypto index and ETF
from Kryptoin ETF Systems, interviewed in this report,
will be the one to crack it. Donnie Kim, Kryptoin CEO
explains how his patent pending invention sidesteps
equity exchanges to create a digital ETF. n
www.globalfundmedia.com | 5CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
SILVER 8
How did Silver 8 come to invest in
crypto assets in 2015?
Much of the credit must go to my business
partner and Silver 8’s other co-founder, Jose
Suarez, who is responsible for the vision.
Jose has been a serial entrepreneur and
tech investor for the best part of 25 years,
experiencing first-hand the development
of the internet. I have a very different
background as I’m a financial markets
professional, mainly in the hedge fund arena.
We met 20 years ago when I was starting
my career with Goldman Sachs in New
York and Jose was heading Walker Digital,
Jay Walker’s (founder of priceline.com)
innovation lab. I moved back to Europe, but
we remained friends since.
Back in 2014, Jose asked me to take a
serious look at bitcoin and the technology
behind it. I was initially very sceptical as I
really did not understand what the purpose
of this new technology was, but Jose was
persistent and encouraged me to read
the materials he sent across. I followed
his advice and soon became hooked in
an intellectual capacity. I left everything I
was doing and challenged myself to really
understand how an open blockchain could
function as an alternative source of trust to
the traditional financial system. It took us
almost a year to develop a conviction, but
we finally invested the first dollar of our own
capital in the summer of 2015.
What is your investment approach?
Although we initially focused on blockchain
technology, the overall investment aim of
Silver 8 is to achieve outsized returns by
providing exposure to different technologies
that, in our opinion, will be transformational
for trade, finance and commerce. With
this thesis in mind, we designed a flexible
investment strategy that enables us to
express our views via three different
asset classes: digital assets (aka crypto-
currencies), venture capital, and financial
technology related equities, all under the
same investment vehicle. These three asset
classes allow us to get exposure to early,
growth and more mature stages of the
technology development cycle.
In terms of the risk profile, we started
the fund with a very high conviction that
blockchain-based digital assets were going
to develop rapidly. Therefore, our fund had
a bias towards early stage technology
exposure, on the higher end of the risk
spectrum. Although we remain primarily
invested in blockchain related assets, we now
also have exposure to other fintech areas.
We are primarily a research-oriented firm;
we spend time understanding technologies
and companies that can have a material
impact that we can monetise for our
investors. Having said that, in most of our
positions we have an investment horizon
of one to three years; we are not extremely
long term oriented. In addition, a smaller
portion of the book is dedicated to short
term trading, given that digital assets
markets are still imperfect and offer beautiful
trading opportunities. We also have some
venture capital positions that will likely
take several years to realise. Therefore,
our investment strategy is a base layer of
fundamental convictions on top of which
we keep degrees of freedom to be nimble
when necessary.
Investing in
transformative
technology
By Manuel Anguita
Manuel Anguita, Co-Founder
of Silver 8
www.globalfundmedia.com | 6CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
SILVER 8
What are your thoughts on 2018’s retracement
and the current status of the blockchain space?
What are the main potential triggers that could
turn the market?
Digital assets experienced a phenomenal rally
that started in 2016 and accelerated in 2017 to a
level that, quite honestly, nobody expected. In fact,
according to industry publications, Silver 8 was the
top performing technology hedge fund in both years,
and the overall top performing hedge fund across all
strategies in 2017.
Behind this prolonged and outstanding rally there
were a number of reasons, some of them firmly based
on strong fundamentals and others that were derived
from excessive speculation. In 2018, the market has
corrected considerably from the previous indiscriminate
excess. At the time of writing, the overall digital asset
market has a total capitalisation of around USD300
billion, down from the USD800 billion peak reached in
early January.
In our view, blockchain technology remains in the
realms of early stage development, so we believe many
of the consumer-oriented projects being launched are
just a few years too early. We remain convinced that this
technology is going to provide an alternative financial
architecture, primarily for developing regions of the world,
but it is still going to take several years until we see a
consumer facing working deployment. We are still in
the phase of developing a blockchain protocol standard,
for which a number of projects are competing. As a
consequence, we are quite selective on the exposures
we take.
When dealing with assets with 100 per cent realised
volatility, making short term predictions is a fool’s game,
at least from our perspective. We would rather focus
on technological developments, adoption metrics and
market technicals (not so much technical analysis,
but more understanding overall money flows). On the
technology side, we are seeing promising projects and
a very healthy growing number of start-ups and young
engineers building up the necessary expertise. From
an adoption perspective, the space is experiencing
hype and doom cycles that reach higher bottoms after
corrections (measured in terms of overall awareness of
the technology). However, the technology is still lagging
behind in terms of actual users, due to high barriers
to adoption, primarily in terms of usability, security and
regulatory clarity.
In terms of market flows, digital assets remain
mainly a retail phenomenon, larger outside US and
Europe. Nevertheless, the market structure is rapidly
evolving, and we believe it is a question of time before
institutional-grade products are developed. There are
already several contracts for bitcoin futures listed in
the US and a number of ETF and other products are
awaiting regulatory approval.
Setting aside the noise and volatility, we strongly
believe this is a market that is here to stay. Purely from
a portfolio management perspective, digital assets offer
a unique combination of liquidity and exposure to the
asymmetrical pattern of returns of early stage technology.
In our opinion, no other asset class offers this profile.
Certainly, early stage technology is very risky in absolute
terms, but it is also driven by return factors unrelated
to the economic cycle; therefore, digital assets and
traditional assets returns remain uncorrelated.
Does Silver 8 have any institutional investors?
Who is the largest investor?
We have a number of institutional investors that include
insurance companies, funds of funds, investment
advisors and foundations. These currently make up
about 40 per cent of the fund. The principals remain the
largest investors with more than 25 per cent of the fund,
and the balance comprises Family Offices and HWNIs.
The majority of our investors are US-based, followed by
South-East Asia and Europe.
What sets Silver 8 apart from other funds in the
crypto realm?
When we started investing in crypto back in 2015, there
were only a handful of funds with exposure to the
space. Now, there are more than 300, the majority having
been established from mid-2017 onwards. Being early
participants has allowed us to develop deep expertise,
especially in the operational complexities of this new
asset class. With one of the longest track records in
the industry, we’ve directly experienced its tremendous
development, and we’ve had to adapt our procedures to
all of its operational and technical idiosyncrasies.
Secondly, we’ve made every effort in assembling
a product that is as institutionally inviting and friendly
as is currently possible. From our documentation, to
service providers, to legal & compliance, etc, everything
has been prepared with this objective in mind. We
want to offer a sensible approach to exposure within
blockchain and wider financial technologies that is of
institutional ilk.
Finally, Silver 8 relies on the combination of 50+ years
of professional investing experience of our principals
and the rest of the team. The length of tenure, combined
with the mix of backgrounds, has allowed us to apply
the standards of a professional hedge fund management
approach to a new asset class with a strong technology
component. We leave you with a thought that many
funds have either a technology savvy leadership team or
one that has financial markets experience; Silver 8 is one
of the lucky few to have both sides of the coin. n
www.globalfundmedia.com | 8CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
A brand-new social impact offset token has
come out of a 25-year history of creating
sustainable solutions for corporations,
explains Todd Lemons, chairman of the
Veridium Foundation.
Veridium is a collaborative initiative
between a coalition of industry leaders
including IBM, Stellar, Brian Kelly Capital
Management, EnVision Corporation, and
IDEAcarbon (a division of IDEAglobal),
Some 10 years ago, InfiniteEARTH
(also part of the EnVision group of
companies), authored the first forest carbon
accounting methodology, now known as
REDD+ (reducing emissions from avoided
deforestation and degradation), which is now
embodied in the Paris agreement.
The company developed the first
internationally recognised REDD+ project
known as Rimba Raya, which consists of
65,000 hectares of tropical forest on the
island of Borneo in Indonesia. Rimba Raya
was the first REDD+ project to be validated
under the VCS standard and the first to
receive a Triple Gold rating under the CCBA
standard. Today, InfiniteEARTH’s Rimba Raya
project is still one of the largest carbon credit
suppliers, as well as the largest privately
funded orangutan reserve in the world.
The firm sells those carbon credits to
a dozen Fortune 500 companies. These
companies face huge challenges in accurately
and efficiently accounting for their carbon
footprint. No two manufacturing processes
are alike, and measuring the carbon
emissions liabilities on hundreds of inputs in
the complex global supply chain for a single
product, is a resource intensive process.
“To compound the problem, that level
of granularity doesn’t necessarily lead to
accuracy,” Lemons says.
Pressure is coming from governments
and NGOs, but is primarily being driven
by institutional investors who want to
understand their exposure to the emissions
liabilities of their portfolio companies.
Consequently, risk managers at
institutional funds are pressuring firms to
measure and mitigate (offset) their carbon
footprints. The motivations are not just
altruistic, but also because the market has
become aware that failing to recognise
these liabilities will increasingly have a
financial impact on the bottom line. There
is mounting evidence that there is a strong
correlation between high ESG (Environmental
& Social Governance) ratings and financial
performance.
Challenging as it may be, companies are
attempting to map their carbon footprint
throughout the entire supply chain and
then understand the arcane word of carbon
markets. Company CFOs must then buy
carbon offset credits at the corporate level
in order to offset their carbon liabilities,
but then turn around and allocate those
expenses back up stream to specific
operational units.
The stakes are higher and the problem
is even more complex when trying to hedge
against future carbon liabilities, Lemons
explains. “Companies lack the necessary
tools to mitigate future carbon liabilities risks”.
There are two classes of carbon credits:
one that trades on the European Carbon
Exchanges, which are liquid and can be held
as assets, but typically expire within one or
two years so don’t offer a long-term hedge
solution. The second type, such as those
offered by REDD+, have long expiration dates
and have even broader environmental offset
capacity, including biodiversity and water
conservation and positive social impact
value. But, these credits are traded OTC, so
cannot be listed as assets since they have
no public price indicator.
Veridium offers
carbon offsets
Interview with Todd Lemons
Todd Lemons, chairman of the
Veridium Foundation
VERIDIUM FOUNDATION
www.globalfundmedia.com | 9CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
VERIDIUM FOUNDATION
manual arbitration and reconciliation. With
blockchain, the record is preserved in an
open and immutable ledger on a thousand
different servers or nodes. This means that
conflicting data on one is treated as an
anomaly and disregarded because there is
‘consensus’ among the other 999.
“This consensus model is also what
makes blockchain so secure,” Lemons days.
“A hacker accomplishes nothing by hacking
and modifying the record on a single server
or node. They would have to hack all of
them, which is virtually impossible”.
To deliver its solution to market, Veridium
has tokenised the underlying carbon credits
as the CARBON token and tokenised the
utility token as VERDE. The VERDE token
grants access to the EcoSmart-Protocol, the
accounting software that calculates carbon
liability, and then automatically instructs the
purchase of CARBON tokens. The tokens are
then ‘burned’ (taken out of circulation) and
the underlying carbon credits are ‘retired’
(also removed from circulation).
“With regard to offsetting, the distinction
most people don’t understand is that you
are not just letting polluters pollute,” Lemons
says. Carbon taxes and ‘allowances’ issued
by governments are ‘permissions to pollute’,
with little assurance that the revenues are ever
contributed to actual emissions reductions.
“Offsets, on the other hand, pay for direct
emissions reduction in arrears. It takes a
carbon offset project like Rimba Raya a year
to complete its annual audit. So, we are
currently selling 2016 carbon credits, which are
independently verified emissions reductions
that occurred in 2016. So, emissions reduction
is guaranteed since it already occurred,
versus a promise to produce an unquantified
emissions reduction in the future.
“We have prevented 130 million tonnes
of emissions from ever happening by
preventing the conversion of the Rimba Raya
forest to palm oil. That’s the equivalent of
removing four million cars from the roads
every year for 30 years”, Lemons says.
“In the case of Rimba Raya, carbon
credits are a crucial funding mechanism
for forest conservation. Veridium and
blockchain technology make that product
more digestible for corporate users, which
means we can now effect real environmental
change at scale”. n
“We have struggled with our clients to
help find solutions to simplify and automate
the whole process,” Lemons says. “As
blockchain emerged as a viable technology
and companies began to explore using it for
supply chain management platforms, such as
IBM’s Hyperledger Fabric, we found that the
technology could facilitate solutions to these
carbon accounting and offsetting challenges.
“First, we can tokenise the higher quality
environmental assets such as REDD+ credits,
making them liquid, making them liquid and
therefore able to be classified on the balance
sheet as an asset. This makes them the
ideal long-term hedge vehicle for mitigating
future carbon liabilities.
“Secondly, we have developed a completely
unique accounting approach that looks at the
problem differently through the creation of a
library of carbon density per dollar coefficients
based on a fixed set of industry sectors. By
assigning a carbon footprint per dollar of
transaction value in a given industry sector,
we are able to provide an accounting tool
that is more efficient, by several orders of
magnitude, than the current process.
“We know from credible sources that
certain sectors are responsible for X per cent
of total global emissions and we know what
the total revenues for those sectors are.
This unique tool, known as the EcoSmart-
Protocol, allows us, with a fairly high degree
of certainty, to calculate the carbon liabilities
for each dollar of transaction value at very
precise points along the value chain.”
Increasingly companies are using
blockchain for supply chain management,
which provides a platform to execute these
calculations in an open and immutable
accounting ledger, which then simplifies
auditing.
“In the old world, databases didn’t speak
to each other very well, even in same
organisations or among trading partners.
Although we live in a global connected
world, there is still a tremendous amount of
manual reconciliation.”
Blockchain links everything together and,
as the chain builds, it preserves that history
in an immutable, open record.
The ‘consensus’ model of blockchain
technology also reduces disputes. In the past,
when the records of the same transaction on
two different databases disagreed, it required
www.globalfundmedia.com | 11CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
Kryptoin launches
first crypto ETF
Interview with Donnie Kim
The first crypto blockchain ETF to be listed on
digital exchanges by Kryptoin ETF Systems,
is on its way, having launched its Blockchain
10 Index in November of last year. Kryptoin
CEO Donnie Kim explains that the Kryptoin
Cryptocurrency Blockchain ETF systems
is a patent pending platform upon which
ETF tokens can be created to track and
encapsulate indices formulated to represent
the evolving digital currency markets.
“We started off by identifying two big
megatrends,” Kim explains. “We had been
developing fintech applications for four years
and saw a huge trend in the usage of ETFs.
The assets that were going into them had
been increasing for 18 years straight and
then we saw another megatrend, with the
increase in market capitalisation of bitcoin.
When we started we didn’t know it would
take off to this extent but we realised that
people would need access to the crypto
market in the form of ETFs.”
Existing, and, so far, unsuccessful attempts
to create bitcoin ETFs are dismissed by Kim
because they are attempting buy the value of
bitcoin through equity exchanges.
“Our ETF is totally different,” he says.
“We are creating units and indexes from
cryptocurrencies and offering access to
those ETFs on digital exchanges.”
Amongst the team of eight at Kryptoin is a
specialist ETF adviser, Jason Toussaint, former
CEO of SPDR GLD ETF, the largest Gold ETF
in the industry. November 2017 saw the firm’s
first crypto Blockchain 10 index composed
of the top 10 coins by market capitalisation
and, since then, the firm has observed
that the potential ETF closely mimics the
cryptocurrency market capitalisation.
“We have an app that enables the
exchange trading creation and redemption of
the underlying,” Kim says. Currently bitcoin,
ethereum, ripple and bitcoin cash dominate
the index. The path to launching the ETF lies
through the ICO of the KRP token, a process
that Kim is confident will be completed in
a few months. Kryptoin is seeking USD50
million, mostly to purchase underlying assets
(95 per cent) while the balance will go to
marketing & operations and development &
system upgrades.
“Once the ICO is completed, it will be
launched on the major digital exchanges
just like a regular ETF does on an equity
exchange,” Kim says. “There has to be
a mechanism to direct exchange trade
digital currencies so there may be a way to
integrate fiat currencies in the future.
“We have lots of interest from people who
think that this is the future and see a lot of
money waiting to invest in an index of the
cryptocurrency market through a single coin.”
The Kryptoin platform is able to calculate
the NAV of the token and that NAV is the
value of the underlying.
“When we started, the NAV was USD20
and when bitcoin hit 19,000 it went to
USD150 and now it’s down to USD51. It’s
less volatile than buying individual coins.
When the cryptocurrency market is really
roaring it can get volatile but it is a basket so
less volatile than any single one coin.
“The market cap of the crypto market at
the moment is about USD400 billion and that
is projected to increase to USD10 trillion in
the next three years, so we project that the
NAV will go to USD2,200.”
Kim reports that his firm is getting a lot
of interest from people in the ETF industry.
“There is a natural interest to see the
progression of what is going on in the
market and we are early and the first firm to
have created something like this.”
Only 100,000 tokens will be sold in the
Pre-ICO in a Dutch Auction Format on
September 1, 2018. n
Donnie Kim, CEO of Kryptoin
KRYPTOIN
www.globalfundmedia.com | 13CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
The rise of crypto
and token business
Interview with Dominic Lawton-Smith
Dominic Lawton-Smith, Head
of Private Client & Private
Equity at JP Integra
“As a fund administrator and trustee, we
are used to doing the full sweep of anti-
money laundering (AML) checks as well
as know your client (KYC) and other due
diligence type work; for us, a crypto asset
has a lot in common with some of the more
exotic derivatives or options”.
Token or coin offerings can be likened
to private equity style investments, Lawton-
Smith says. “These are very exciting new
structures for raising money to fund exciting
new ideas, often characterised as an
alternative to an Initial Public Offering. The
impact of token offerings internationally is
expected to be huge, they will provide the
capital enabling many of the next generation
of medium to large business ideas to
become reality. However, while the potential
for great new business ideas to be funded
is very exciting, it is important to remember
that a token can convey any collection of
rights or privileges determined by the issuer
which often do not include an equity interest
in the business. For the investor to do well,
the token sale has to be successful, the
management team have to be successful
and the benefits of the token have to be
sufficient to warrant the risk of investment
– if any of these components are missing
the investor/purchaser might be facing a
complete loss.”
“The most in-demand services in the
sector from us are either full service fund
administration for funds investing in crypto
assets or ‘AML/KYC only’ compliance
services for token offerings. The latter is
often a requirement of the bank offering a
custody solution. It is very important not to
underestimate the risk of a project being
used to launder money, it could threaten
the project and help unpleasant people
achieve unacceptable goals. By providing
an institutional quality service level we are
Dominic Lawton-Smith is head of Private
Client & Private Equity at Cayman-based
boutique fund administrator, trustee and
corporate services firm JP Integra Group. The
company is 11 years old, has Cayman trust,
fund administration and corporate services
licences, enabling it to work with private,
institutional and sovereign clients and has
over USD6 billion under administration. It
specialises in the provision of administrative
and fiduciary services to clients with
international investment, offering and estate
planning projects in the long or short term.
JP Integra leverages its offering and its legal
and accounting skills with Cayman’s position
as a key global crossing place for trade.
“When establishing funds and organising
ICOs and token offerings it pays to have a
professional team in a fiscally neutral, high
quality jurisdiction involved,” Dominic says.
“We provide full services in compliance with
the highest international standards of AML/
CFT and CRS/FATCA reporting without
adding an extra layer of entity tax which
would reduce the returns for investors and
originators in their home jurisdictions.”
Cayman is proving a very popular jurisdiction
for ICO, token and cryptocurrency vehicles;
in fact, what is believed to be the largest ICO
to date was hosted on Cayman – the EOSIO
blockchain platform raised USD4 billion over
the six months ending in June this year.
Lawton-Smith reports that JP Integra
has considered a high number of related
approaches during the last two years but
only took their first step into the business
at the end of 2017 after watching the sector
begin to mature, so that the proportion
of well-considered and advised projects
became dominant; at the same time, more
complimentary service offerings were
developed so that it became more practical
to deliver compliant solutions.
JP INTEGRA GROUP
www.globalfundmedia.com | 14CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
enormous discount. Tokens are a crucially
important way to raise money and I can only
imagine that the use of them as a way to
raise capital will continue to grow.”
“In an age where it’s difficult to borrow
money from banks, ICOs and token offerings
are an important financing option for
business; it’s very important that they are
allowed to take place although we all need
there to be safeguards.”
One of Lawton-Smith’s concerns is
that anonymity lies at the heart of the
cryptocurrency and blockchain world and
that this does not fit well with the need for
any participant in the institutional finance
industry (internationally) to know who they’re
dealing with and be satisfied that currency
(fiat or crypto) is from an acceptable source.
“Anonymity is attractive from a ‘privacy
for honest people’ perspective but it’s
no use to us in a regulated services
environment. Blockchain, the distributed
ledger, is revolutionary but it doesn’t include
counterparty identification so there is no
reference as to who is the buyer and who is
the seller.”
“If we are going to make full use of the
enormous potential of blockchain/distributed
ledger technology, it must be fit for purpose
in a compliant setting – how else do we
know we’re keeping the bad guys out of
the system and make the smart contract
revolution possible?”
Lawton-Smith and others in the sector are
aware of initiatives (including some based in
Cayman) that will enable private data, fit for
KYC / AML purposes to be secured on the
blockchain or other distributed ledger system
so that the person who is the subject of the
data will be able to choose to release it to
defined counterparties for defined periods of
time and that this will be a much more efficient
way to exchange the required information.
“Some liken the meeting of the crypto
& token concepts with the international
financial services sector to dragging the
Wild West into the regulated world – or at
least the elements of it that are needed
to do business. There’s still some way to
go before we have a really efficient and
compliant investment process but it is
important that we get there and that good
quality ICOs / token offerings are able to
flourish efficiently.” n
protecting the purchasers /investors as well
as the client company and its directors.”
Cayman is not a retail fund environment
and Lawton-Smith says that his priorities
when looking at token offerings or other
cryptocurrency schemes include ensuring
that the scheme is only open to qualified
investors who have the means and
experience to make their own investigations
as well there being a solid law firm and clear
disclosures about the offering or investment.
Lawton-Smith observes that a lot of token
schemes originate from a team in the US
(often with Silicon Valley connections) who
seeks to raise money internationally. Apart
from Cayman’s reputation for funds and
the high quality and number of its resident
professionals, the trusted court system
attracts businesses to Cayman where there
are concerns about patent trolls and other
frivolous litigation risks.
“Patent trolls send out volumes of
baseless lawsuits which an innocent client
has to either settle (if cheaper) or engage a
law firm to deal with. It would be very difficult
for patent trolls to make these attempts
economic where the legal situs for the claim
is a Cayman court.”
A second strength of Cayman for the token
offering and cryptocurrency industry, Lawton-
Smith says, is that it is the default investment
jurisdiction for businesses from the US
generally, being in the same or adjacent time
zone as well as being compliant with US and
international standards of financial regulation
and reporting.
“If a capital raise is taking place outside
the US on behalf of entrepreneurs based
in the United States, the requirements are
different to a domestic, US capital raise
and so the default is to come to Cayman.
Apart from US anti-money laundering laws,
US lawyers in related sectors increasingly
highlight the potential for US federal wire fraud
charges if enough care is not taken – making
sure the right checks are done is essential”
Lawton-Smith observes that token
issuances are a fast and relatively informal
way to raise money: “You might be funding a
business that is yet to be built, subject to the
nature of the tokens you have purchased;
should the company be successfully
launched, participation may allow you to
buy services for delivery in the future at an
JP INTEGRA
www.globalfundmedia.com | 16CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
The emerging world
of cryptocurrency
asset management
Interview with Matthew Shaw & Philipp Kallerhoff
Drawing on decades of experience, Matthew
Shaw and Philipp Kallerhoff are founders of
Protos Asset Management, a Swiss based
cryptocurrency asset manager that brings
the investing concepts of value, momentum
and volatility to the crypto world in the form
of a fully traditionally regulated Cayman
Island based fund. Protos was set up in 2017
as the pair came out of a crypto investment
business in Canada.
“Protos is an asset manager specialising
in cryptocurrencies, using some of the
traditional tools of hedge funds to manage
risk using classic premia strategies,”
says Shaw.
The first closed-end fund was launched
in mid-December 2017 and is dedicated two
thirds to liquid quantitative strategies and one
third to investments in bespoke blockchain
assets. On the liquid side, the fund applies
proprietary strategies across more than 50
cryptocurrencies, with a minimum of USD100
million in market capitalisation, and uses
long and short techniques to trade traditional
factors such as value, momentum, size
and volatility.
To aid research, Protos has created
and launched protosterminal.com, a
publicly available database of the top 100
cryptocurrencies. The firm has collected
a large amount of historic data including
prices, trading volume on exchanges,
transaction volume on blockchains, news,
active addresses, hashrates, token supply,
github commits and others. The data is used
to create benchmark indices to make sense
of the performance of this new asset class.
The benchmark indices – value, trend, low
volatility and small cap, are derived from the
risk premia topic in traditional finance.
Kallerhoff says: “With equities you have a
balance sheet, analysts crunching numbers
and applying ratios. With cryptocurrencies
you have similar numbers, however one
big advantage is that all the fundamentals
are publicly available in blockchain. Every
transaction is public.”
The fund trades through brokers that
execute trades across digital exchanges that
deliver best prices and OTC trading desks
are used to fulfil larger orders.
“Liquidity in cryptocurrencies is about
USD10 billion a day in 1600 cryptocurrencies
and about USD1 billion is going in and out of
fiat currencies.”
Shaw explains that Protos is focused
on building a scalable, industry standard
investment product for investors.
“We have gone for independent auditors,
good fund administrators, independent
directors, and have separated front and back
office functions. We also use third-party bank
custodians. It’s a slightly counter intuitive
approach, one not adopted by every crypto
fund, as part of the point is to be at a place
where you don’t need a third party to be
involved, but in order to attract traditional
money you have to have good governance.”
Protos has a wide range of investors
including individual accredited investors,
some institutions, some family offices and
professionals involved in venture capital who
have invested personally.
The team is based in Switzerland. Shaw
says: “It’s a very crypto friendly country
which early on clarified the regulatory
infrastructure for crypto and has a good
crypto eco-system. It’s a good jurisdiction
from which to run a fund – we are a
regulated Swiss asset manager.” n
Matthew Shaw, co-founder of
Protos Asset Management
Philipp Kallerhoff, co-founder
of Protos Asset Management
PROTOS ASSET MANAGEMENT
www.globalfundmedia.com | 17CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
DMS GOVERNANCE
Governing the digital
asset revolution
By John D’Agostino & Paras Malde
Crypto 101
Distributed ledger (DL) technology is the
foundation on which crypto-currencies
(or crypto-assets, depending on where
one falls in the debate) lie. Bitcoin, the
most well-known use case for DL, is an
attempt to solve the problem of storing and
transferring value in a digital, decentralised
system. Bitcoin is a means to compensate
people/servers for the effort required to
“mine” (confirm) blocks of transactions
and add them to the global ledger/chain
(block+chain). Bitcoins are gifted to these
miners upon completion of their efforts
(without which the system couldn’t function)
The increasing secondary value of Bitcoin
can then be considered as increasing the
confidence in the long-term viability of
distributed ledger technology as well as the
desire for a store of value that is (a) modern,
(b) easily stored/transferable, (c) secure and
(d) somewhat anonymous.
Put simply, if Sam wants to transfer two
bitcoin to Jennifer, he sends a transaction
request to the bitcoin blockchain – software
running on thousands of computers
worldwide. Miners check to make sure Sam
has the bitcoin, and race against each other
to solve a complex and energy intensive
mathematical formula so they can be the
ones to officially place the transaction in a
block of other transactions. Once a majority
of miners agree a block is verified, the miner
who did the work gets paid in Bitcoin for
their effort. At that point the blockchain has
been irreversibly amended, and Jennifer now
owns those Bitcoin.
The modern-day gold rush
There are over 1700 crypto currencies
in the market today with a total market
capitalisation of USD300 billion+ according
to CoinMarketCap. With more popping up
each day, crypto-currencies are the modern-
day gold rush. The amount of attention that
crypto currencies are generating on a daily
basis has created a “fear of missing out”
amongst investors and consumers alike.
With this level of growth, crypto currencies
have found a place as an asset class in
investment portfolios (mostly retail more than
institutional at this stage) as an alternative to
the traditional alternative assets such as real
estate and commodities.
This has further sparked the rise of crypto
currency hedge funds. Autonomous NEXT, a
FinTech analytics firm, has counted 75 crypto
hedge funds that have raised about USD800
million to date and who aim to raise USD1.2
billion more in the near future. The crypto
funds strategies range from investing in initial
coin offerings, widely known as ‘ICOs’, which
raise money by selling investors digital tokens
in exchange for crypto currencies, to buying
and holding traditional crypto currencies such
as Bitcoin, Ethereum and Litecoin.
Volatility
Much has been made of Bitcoin’s volatility.
Certainly, compared to more established
asset classes like equity long short, the
daily price moves can seem volatile. The
relative lack of breadth and depth in the
Bitcoin market, regulatory uncertainty and
the presence of significant players with the
ability to shift market sentiment no doubt
contribute to this sense of risk.
However, observing the daily historical
volatility of Bitcoin shows that, in general,
it’s daily vol ranges between 4 and 7 – not
particularly shocking when compared to
many options markets. It is the vol of vol
that is striking – with sudden gap ups to 10,
20 or 40 that quickly recede. Until recently,
most of these shocks have been to the
upside, and as actual or short positions
John D’Agostino, Global
Leader, Investor Engagement
at DMS Governance
Paras Malde, Director at DMS
Governance
www.globalfundmedia.com | 18CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
DMS GOVERNANCE
as an Automatic Clearing House (“ACH”) and
hence ACH rules would be applicable.
Regulators globally have been working
on determining appropriate crypto currency
regulations for several years however it
has only been until recent surge in crypto
currencies that they have dedicated large
amount of resources to find appropriate
resolutions.
Service providers & challenges
One thing that the digital asset markets
currently lacks is a vibrant community of
service providers willing to engage with it.
While a few have taken on this business
many are adopting a wait and see approach.
DMS has begun a Digital Asset Working
Group to attempt to formulate industry best
practices around DL strategies, including
crypto. The group includes representation
from all parts of the ecosystem including:
Banking – the transition from fiat currencies
to crypto currencies sounds exciting to many
enthusiasts and hedge funds (somewhat
alike) however the full transition and wide
acceptability of crypto currencies will take
time and will require an entirely new banking
infrastructure. It is imperative that a banking
partner is identified that fully understands
banking rules and regulations and is
committed to ensuring compliance with this
fast-evolving asset class. Fortunately, the
advances in FinTech industry have resulted
in several banking projects that look to
provide crypto currency friendly services. It
has, however, yet to be determined if they
will be widely accepted by global regulators.
Auditor – each of the key areas of audit
focus as with a traditional alternative fund
such as transaction testing, valuation,
custody and existence of assets will have
unique challenges for funds investing in
cryptocurrencies. Funds that will trade in
multiple crypto currencies on multiples
exchanges will have to establish a strong
valuation policy that will support the volatility,
liquidity, treatment of forks and pricing of each
currency. Tools such as Block Explorers may
assist auditors to perform transaction testing
however it may prove to be a cumbersome
process. Funds that will not use a custodian
for crypto assets will need to ensure the
have been impossible until recently, have not
hurt anyone aside from a regretful seller. As
margin and shorting comes into play, this
vol of vol will have greater potential impact,
but should, if the market develops gradually,
recede in magnitude and frequency.
Regulations
Many countries like Bangladesh, Bolivia,
Thailand, and Vietnam (among many others)
have tried to ban crypto currencies like Bitcoin.
Other countries like China and South Korea
have entirely banned ICOs. But there are
some countries like Australia, Russia, Japan,
and Venezuela which have made Bitcoin an
official legal tender and are regulating it.
The surge in crypto currencies has led to
an abundance of scams, prompting global
regulators to warn investors of fraudsters.
The US SEC, UK FCA, Singapore MAS have
all released statements warning investors
of inherent risks involved with crypto
currencies. As part of its effort to fight
cybercrime and protect retail investors from
cyber threats, the US SEC announced the
creation of a new cyber task force. Among
other things, the unit will target ICOs and
other violations involving distributed ledger
technology that run afoul of SEC regulations.
Cryptocurrencies seems to straddle the
boundaries between commodity, security
and currency. Earlier this year the US CFTC
approved the first Bitcoin options exchange.
Subsequent to this announcement, the
SEC issued an investigative report which
concluded that tokens offered and sold by
a “virtual” organisation known as “The DAO”
were securities and therefore subject to the
federal securities laws.
Given the trading and clearing mechanism,
there is also a notion in the regulatory industry
that a crypto currency system may be deemed
www.globalfundmedia.com | 19CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Aug 2018
DMS GOVERNANCE
Compliance – investment manager CCOs
will have their hands full thinking through
the myriad new compliance issues and
regulatory requirements that will arise
over the next 12-18 months. Investment
managers should ensure that they engage
appropriate compliance experience to avoid
a serious regulatory nightmare. To keep
an open dialogue for good actors, DMS is
in active conversations with Cayman, US
and EU regulators either directly or through
representation on industry working groups
Governance – while there are many
governance similarities between a traditional
alternative asset fund and crypto fund,
engaging independent directors with the
knowledge of crypto assets are essential
for crypto funds given the highly specialised
nature of this investment strategy. DMS has
been in the business of governance for over
17 years and can provide a comprehensive
governance solution with the appropriate
knowledge of the crypto industry and
breadth of relevant crypto industry contacts.
Summary – thoughts on the way
forward
With all the unknowns, one has two options:
1) wait for regulatory clarity OR: 2) make a
good faith effort. We have outlined some
options that address option two:
• Selection of the most suitable jurisdiction
to incorporate.
• Carrying out in depth due diligence on the
trading exchanges is pivotal as is ensuring
all necessary document is in place.
• Start with a simple approach of first
ensuring acceptance of fiat currency for
subscriptions and redemptions.
• Avoid crypto in-kind capital transactions.
• Clearly document all research and trading
processes.
• Identify the most suitable key service
providers.
• Clearly understand taxation responsibilities
and ensure correct documentation of
them. Provide sufficient oversight and
governance.
We hope this informational to be useful as
you navigate through this uncharted industry.
If you would like to discuss any of the topics
in more detail, please feel free to please
contact us. n
auditors get fully comfortable with the self-
custody mechanisms and controls. The funds
will rely heavily on the administrator during
audit so it will be essential that the auditor
and administrator have a good existing
relationship or prove that they will able to
work together seamlessly.
Administrator – administrators will be
doing some of the heavy lifting of ensuring
investor and accounting records are
accurately tracked. When selecting an
administrator, crypto funds should ensure
that the technology and blockchain/crypto
experience of the administrator matches the
structure and investment strategy of the fund.
Also, ensuring that the administrator has a
comprehensive AML/KYC programme that
satisfies regulatory requirement in applicable
jurisdictions will be highly essential. Funds
should strongly consider avoiding in-kind
subscriptions/redemption (opting for fiat in/fiat
out instead) to avoid complex AML issues at
least in the current early days of the industry.
Legal counsel – Law firms have embraced
the crypto trend and are rapidly getting
up to speed. It is imperative that a fund
select domestic and offshore legal counsels
that are at the forefront of cryptocurrency
regulatory developments, market trends, and
technology developments. Ensuring sufficient
investment and risk disclosures in a fund’s
foundational and offering documents are
going to be a crucial safeguard against any
future action against a fund. One should
be cautious, however, as legal support
in establishing a crypto is not an implicit
endorsement that the strategy or that the
structure will withstand future regulatory
scrutiny. Everyone here, including lawyers,
are in speculative mode at this point.
Tax advisor – identifying and engaging
a knowledgeable tax advisor will be
important to assist a fund in navigating
the cryptocurrency space full of legal
uncertainties. A fund should amongst
other matters adopt a well-advised policy
on calculation of capital gains, in-kind
transactions and related party transactions.
Funds that have an open and transparent
approach towards tax will be less likely to
draw in regulatory scrutiny.
