Lightning Round: The Future of Crypto Asset Management - TOKEN2049 London

thanks a lot everyone um slight change in topic uh from nfts the metaverse gaming um play to earn uh we're talking about real money now um asset management uh i'm david olson i'm the global head of distribution at blockfi a fintech and crypto financial services company uh we have 900 employees around the world um do more with your crypto i guess is our tagline um and then i'll let uh our honor guest here hi everyone uh yeah ed carlton uh i run the digital institutional sales desk over at flow traders flow traders is really known uh in the market as a technology based liquidity provider really cut our teeth in the etf space been around for some 17 years but i'd say from kind of the last five years really kind of carved out a nice niche for ourselves in the digital asset space arguably now the number one guys to go to when it comes to liquidity for the the crypto etps across the globe and servicing liquidity for all of the digital assets so hello everybody my name is jean-marc bonifu i've been in asset management for the last 15 20 years uh mostly in commodities until recently uh we're launching uh under the brand taylor an exo alpha a systematic crypto hedge fund um so yes it's um it's a something that we feel quite familiar having traded quite volatile assets um in in commodities as you can see with natural gas is even more more volatile than uh than crypto great thanks guys um so first up uh we'll start with you john mark uh if if i'm a would-be hedge fund manager and i want to launch a crypto fund what are the kinds of hurdles that i'll face in launching a fund uh that's obviously not traditional and um what are the considerations would you say so the answer is pretty quick don't do it [Laughter] no without um um joke um i i think it's fair to say that there's been an institutionalization of that business uh used to be days where you could just say you know i'm a i'm a i'm a crypto hedge fund uh you know send me money uh i think those days are long gone uh today um in order to have a uh the the hope to raise uh a significant amount of capital you need to show uh due diligence uh track record uh crucially you need to have infrastructure uh that is robust and scalable uh and you need to have the permissioning uh to be managing money which is in the uk is the fca approval so all that adds up then you need to have your lawyers your operations team your administrator so there's a cost element to it and then once you've done that obviously you need to find the right product mix in a sense that there are a lot of long only product available mostly etps and that's fine but what a hedge fund does it's there to create a market insensitive performance called alpha right whether a market goes up and down you're supposed to make money that's what i call a hedge fund so it means it's a different type of strategy and today if you have probably 40 billion dollars of um investments uh of asset management in crypto you probably only have maybe uh four billion in hedge funds and out of the four billion hedge fund you might have less than a billion in long short alpha type of strategies so you need to find the right product next to to to gather the assets right thanks john mark i guess i you know we'll get into some of the some of the other considerations like service providers and things like that um later and we'll be interested to hear about some of your experiences on the road um but i guess next next up um ed coming from a bit of a different perspective obviously john mark you're from the alpha jet come from the alpha generating world ed um obviously one of the the best liquidity providers of premier liquidity providers in the market in crypto um focusing a lot on passive products you're very involved in the crypto ecosystem and and regulation and market infrastructure when are we going to see a proliferation of crypto passive products that people can invest in and particularly we're in london there's no llc listed passive etf at the moment for crypto which is amazing yeah it's a good question um and i'm not sure there's like a single answer that you know if you do a then all of the you know the hordes of cash will flood into the market or all of a sudden all of the markets will open up i mean what you know a backdrop to that to this is that there's not a shortage of issuers or products uh coming to market um i mean off the top of my head i think we were involved in something like 30 uh different uh products that were that were issued and listed uh in the last month alone um but there's definitely as you mentioned like lsc there's certain pockets of investment sorry pockets uh where there aren't any products being being issued um you know the big focus on the us and i think an overlying theme that i take from that is that at the moment the market is very fragmented uh in terms of geographical acceptance uh a very strong example we can take is look at where the issue is a company based in europe you know in switzerland uh in germany and that and that's because the regulators flindmer and barfin uh have been a bit more proactive i believe in accepting these products working with the the venues so like you know sitra and six uh you know for germany and switzerland respectively to allow these these products to be listed um it may be that when we actually have some form of normalization uh i mean i don't know ever globally but uh we could maybe look at something like mika uh for the european regulation it will then give us a kind of level playing field for europe that uh you know the the the regulators the the venues such as the lsc warsaw italia et cetera can look at and that should um i think be quite encouraging for some issuers to come to the market um the only second thing i think is is is more down to our market infrastructure uh something that's mentioned time and time again it's a very inefficient market at the moment uh it's super capital inefficient without any form of credit intermediary no prime brokers servicing this market um and you know even from a custody standpoint yes that's come a long way in the last kind of two maybe three years but we're still not i think at a certain point where you know the tier one issuers and asset managers of this world that are comfortable necessarily bringing products to market and putting you know billions of dollars behind that uh yeah i totally second that and to go back to the the the sell side the hedge funds are really by side and the service providers are the sell side and the liquidity providers there's clearly been a tremendous improvement on the market infrastructure and structure in terms of delivering pools of liquidity to hedge funds right undoubtedly and it's improving by the month it's not quite perfect yet as you rightly pointed there is not really the the classic pb prime brokerage function available in crypto where effectively you abstract away the credit risk uh because you you uh you have a large financial institution standing and taking the trade for you and md finding you if the exchange or the counterparty default so that's not quite there there are signs of of life they could be a lot of a lot of wealth under the non-bank financials are working on this but the banks crucially are not bringing into the crypto arena what they bring to hedge fund asset management in uh fixed income equity commodities which is the pb function right so that's a big miss however in terms of pools of liquidity it's quite impressive uh how long we've gone knowing that a typical hedge fund in crypto will not trade much of the actual cash but you will trade a lot of the derivative so particularly if it's a systematic hedge fund that churns a lot of volume and obviously we have this kind of regulatory gap still in the missing in terms of the a very clear regulatory framework for derivatives in in crypto which you have to do a few twists and turns to be able to provide the liquidity but when it's all said and done i think it's fair to say today you can really scale uh a a hedge fund type product in crypto and you were not able to do that i would say two years ago so that's a tremendous improvement yep really interesting i think that um i get in a a small plug here one of the we launched our block five prime product and in may the reason why we launched it was because our clients came to us and said actually we need your capital can you roll out something that we can how we can access the markets without having the friction obviously where if you want to if you want to trade you have to put assets on exchange uh and then there's a whole all through the settlement cycle there's capital requirements so that was really to meet our client demand and something that we're still working on obviously next up how do you think investors can get comfortable with an asset class that has such high volatility i think that's you know one of one of the things that we get a lot of pushback we do a lot of evangelizing for crypto to traditional firms trillion dollar plus asset managers that's kind of what part of part of what we do at block fi on the institutional side is a lot of education and they ask a lot about the volatility um and how do we how can we sell this to our investment committee that's a really good point because i think that's crucial in scaling uh crypto for um uh institutional investors a large allocator investing into hedge fund which is the highest risk asset the highest kind of volatility you can find in a larger locator portfolio will not invest into a product a hedge fund that has more than five to ten percent maximum drawdown in one month right and then you look at the crypto market right maximum drawdown routinely 20 to 30 percent so that's the equation and the way to solve it the way we're solving it and a lot of other hedge fund professionals solving it is to basically insert shorts in the mix right because um an only way to basically um you can either deleverage to the max but then you have money wasted away sitting on an account or you are full leverage a full 100 leverage meaning you you have one-to-one leverage but then you have shorts that allow you to do control drawdown to meet the criteria of a large allocator which is again uh you're not going to tick the box and get on the list of a large bank for hedge funds if you're more than 10 so that's basically why we need that infrastructure from brokerage all those services to be able to synthetically create those shorts at the efficient capital cost and not being kind of you know it has to be that settlement so it's all about um this value chain of trading settlement margin to be able to create that synthetic short in a portfolio for the hedge fund again because it doesn't apply to etps and long products i mean my only thing i probably add to that is i get a bit sick of the you know volatility calls um you know i don't think there's a problem to be solved here what you know we're a prop shop we love volatility like you know people trade vic's for fun like you know and look at some of the commodities out there like a lot of time you'd say look historically look at some of the commodities let's look to our near past look at natural gas i can hey like i mean it's like the volatility we're seeing in some of these these these commodities they're no really different comparing realized and actual volatility so it comes down to education as long as you know and you're happy within the tolerances of the volatility of the asset class that shouldn't be a problem volatility isn't necessarily a negative thing there are products there's our derivatives out there which you can help manage those positions with you know the options market should help round some of that off as well um so yeah i'm not really a buyer of this solve the volatility problem it's why is it a problem so sorry i think i think if you do a taxonomy of the investor you can fit that all together because the uh retail investor is okay with volatility right so no problem uh you can go better long only no problem you can take the 20 30 because it's going to a million right it's going to a million right so um now the the family office um is a little bit more conservative right because they have to protect the family money right so um they might they might want to have some mitigants in uh and not go full so uh they might have some long only uh position and then they will add an overlay uh with a more controlled volatility product right and this is what's happening in every other asset you first start with a better meaning full risk up and down on the asset and then you add alpha products and i believe we're in the early stage of that product product range movement where you go up the curve to the institutional because the institutional then will have much more stricter volatility requirements and so it depends really which kind of use case you have and which kind of ultimate investor you want in your product so you need a barbell approach with different products for different investors great i think next question um what are you most excited about and what's happening in crypto right now or what are you most excited about in terms of the future um i think i think my answer is probably not going to be one that would fly well with this audience uh because i provide a slightly different view mine's more around like market infrastructure which is like mind-numbingly boring i'm generally very excited to see some of the developments we're seeing with the market infrastructure around prime brokers around people actually putting their minds capital to work to try and solve the problem like you know we're aware that as i've mentioned before it's very capital efficient we have this problem around managing credit uh and for me when we solve that problem like that's really when the market's going to fly um that that taking a step back and trying to say something a bit more insightful um i think the other thing that does excite me is the fact that we are kind of on this point of inflection we're really really early days i mean people are looking at like the sec and what's happening with with bitcoin futures you look at some of the asset managers coming and and we really are still on on the tip of the iceberg here and that's what's really exciting um you know when products like you know a physical etf gets launched in the us when lsc lists something in the in europe when we have prime brokers that's when the capital inflow is really going to be at its most and you know we're going to see in my view um three five year bull run kind of off the back of that alone and that's what's going to be exciting yeah if i had a wish list i had some small small improvements and some big picture kind of wishes i mean small improvement again um if someone here and david you can bring pb uh prime brokerage to the equation then we can bring more institutional money into the the pot and everybody will benefit from it right so that that is sounds like a small point but it's major if you're in asset management then um i think the um the other um more generally uh trend that i find very exciting is the confluence the convergence of traffic and defy i mean defy is a phenomenal um exercise of style but it's limited to what's in the ecosystem right if you can bring some of the trade fee assets into d5 with the right bridge and the right framework whatever it is i know it's not easy then you have a phenomenal hybrid model that can scale and that space to me is is is is very exciting and the third last point in in to go back to asset management is the emergence of this concept of vc accelerators on l1 blockchains where you can now have some kind of dowels um uh community activated um um investment vehicle that is where the community votes for projects on on l1 blockchains and that are funded by the community and then they accrue to the community by uh um having uh um um uh token uh being given back as incentive so that's a very exciting space for i think the next couple of years also yeah totally agree and um you know hopefully we're you know what i'm excited about building that road map and building uh as you mentioned basically the backbone of of investment investment management uh we have a flight path in terms of going through the different products that you see in traditional assets whether it's synthetic you know prime broker physical prime brokerage synthetic prime brokerage derivatives um and then going through those products but making them much more scalable than in the traditional world and then actually seeing basically the small fish eat the big fish at the end of the day i don't know whether that's gonna happen in in a year but it'll happen in the next couple of years i'm convinced of it um well i think this this has been um fantastic thank you both very much um this is a lightning round so very very quick but speakers are around if uh if you want to chat thanks very much