Well, I'm very happy about this opportunity today. Um, we have some really good questions that I'll probably try to ask Ruben, challenge him a little bit . But, um, in some cases, I think we want to make sure that you all get this understanding of what it takes to transition digital assets from a new technology to a robust financial infrastructure. Um, and why the firms and countries that develop the right approach to compliance now will be the ones who will actually shape how this infrastructure is implemented. Um, so before I get into the question, um, I want to do a little introduction for Ruben, which is: he is the founder and CEO of Architect, a global investment firm regulated in Switzerland.
The Architect team has been actively working with digital assets since 2017, supporting some of the most prominent companies in the industry, including Khi, Privy, Worldcoin, and Zama. And prior to his career in digital assets, he worked with Rocket Internet and Delivery Euro on some of the largest technology IPOs in Europe, as well as with BCG Pipe in New York, advising on some of the world's largest balance sheets, including multi-million and multi-trillion dollar stocks like GSC. Yes, what an opening statement. So, uh, our questions are focused on three areas. What is the situation now?
What challenges can we see in the future, and then what are the prospects, if you will. So the first question I have for Ruben is that most firms in this space build first and remain unregulated, but you all have consciously chosen the opposite. Uh, what does it take to be what is licensed, allows you to do what unlicensed competitors structurally cannot, and who is the customer that only appears after obtaining a license? Perfectly. Yes, thank you for the question.
Uh, and it's an absolute honor for me to be here. Uh, you know, we've been attending these events for a long time. Um, I see a lot more lawsuits today than we saw in the past. So it's amazing to see this industry mature. Um, so to answer your question, um, listen, for us, getting an investment management license was both a strategic, um, and an economic decision economic decision .
I think it's pretty obvious that this is a strategic decision. As a management team, you need to make decisions about which pools of capital you want to use. Um, it's just a fact that you know that most of the world's capital is behind regulated walls, meaning the big pension funds, the funds pension funds, the funds , um, the big insurance companies, they can only really deal with regulated counterparties. Right? So when we, as a management team and our advisors, got together and asked ourselves together and asked ourselves how do we position the architect, um, in terms of getting licensed, it was, um, very obvious.
Um, the second part of this puzzle is what is the economically sound solution, right? Um, if you think about the value of an investment management company, um, you know, a regulated company has a much, much higher value. You need to run an institutional level system , from storage to, you know, the way it's distributed, the way it's certified in each country, and that institutional level system is factored into the price because the big asset managers, the funds, the institutional allocators are making the decisions, right? So, for us, it allows us to, um, charge a higher price, um, and, um, you know, um, higher management fees, um, than what management fees, um, than what you would see, you know, for your typical, um, you know, prop shop, um, that's not regulated and just runs an offshore operation. Perfectly.
Then the next question is for you. Um, so what does a billion- dollar due diligence process look like then? And what questions are institutions asking that most cryptocurrency founders don't even see? Yes. So, wow.
So we could go into some details. It's actually quite boring. Um, but, you know, think of it as a bunch of red tape around where you can do marketing, vetting regulators in, you know, individual jurisdictions where you want to raise capital. And once you do that, um, then you actually get to the fun part fun part . Um, the initial stage where you encounter, you know, the big distributors, is called, you know, some people call it, um, prelude, right?
So you, um, actually encounter, um, you know, the investment team, they often go to these events go to these events , they want to meet with, um, the investment management company, and the conversation is mostly about the firm, how are you structured? What is your track record? Um, how do you feel about space X? What do you think about vertical Y? And so on.
Very little of the conversation is product-specific product-specific , right? However, let's say you go through the foreplay, um, you're all good, and then the conversation, um, exchanges, right? The conversation suddenly becomes much more structured, much more serious much more serious . You are no longer just facing an investment team; you face scrutiny, you face risk management teams. There's a deep check of, you know, your network, people who know you well, recommendations.
There is a large data room that just keeps growing and growing and growing and growing. Hmm, and yes, it just depends quite a lot on the product and how your counterparty can conduct the verification. Hmm, to answer the second part of your question, which is about what types of questions people don't expect? Hmm, so I was on the other side, I was on the other side, uh, invested a lot in funds, and the types of questions that family doctors don't expect, uh, you know, business continuity planning, right? For example, what happens if you die, right?
Hmm, who is your deputy? How are you being represented? Reserves, right? How much capital does the company actually have if something goes wrong, right? Hmm, how are you insured, huh?
All these long-term risks long-term risks , very, very few people, um, and very, very few young firms think about them in advance. Fantastically. So now we'll move on to a few questions to address some of the issues in this area right now. Hmm, the first question I have is about some institutional barriers, and I should also point out that the next two questions really draw on my own experience working with the Ministry of Finance a few years ago. So, the first question is this.
The standard institutional objection to digital assets is not necessarily volatility. This is actually the fight against money laundering. This is a screening for sanctions, its source of funds. However, what you all did is very interesting. I think you have created a licensed regulated firm based on an open blockchain blockchain infrastructure, where the other party to the transaction can be just a piece of code.
So how do you actually solve the challenges of KYC and transaction monitoring in this environment, and where does it still continue to break down? Wow. So, um, I think the first step is to take KYC obligations seriously in terms of anti- money laundering. If we take a big step back and look at where these fields are right now , you know, let's say we look at the default space , the blockchain asset management space. The reality of what we're seeing is that there are a lot of offshore operations that, you know, have discretionary authority over quite significant amounts of money on some of them, such as lending pools, lending platforms, and so on.
So the first step and so on. So the first step is to really take this seriously. There is a divide between those who structure themselves around compliance, isn't there? And those who structure within or against compliance. And we obviously consider ourselves a firm that structures within compliance.
So, what do you want, right? What do you want? What, after all, does the distributor expect from you? After all, you want to be a good steward of your clients' funds, right? And for this, KYC must occur at several levels.
Level number one is KYC at the capital formation level. As early as possible, you should know who the person is who is investing in your vault fund, whatever the structure, SMA, right? Is there a politically significant person there, etc.? If there's one bad sheep out there, all the other allocators in your fund can get stuck, right? You are facing an investigation.
You know, your former colleagues came, called, called, and suddenly, um, you know, you faced a nightmare, right? The second element is, um, KYC at the market level. So, once you have capital in one of your funds or any other vehicle you manage, you want to make sure that when you put that capital into the market, it doesn't get mixed with potentially illegal assets illegal assets . We must realize that we are experiencing one of the highest levels of global conflict since 1946. So, um, you really want to make sure that, um, there's KYC at the market level , and that's been one of the biggest frictions for a lot of the biggest protocols, especially Oiler and a few others, um, um, because in a lot of cases it's been, um, just, um, impossible, or just terrible UX or just terrible UX .
So what does your risk function actually protect against, and what can't it protect against when something goes off-chain or breaks in the chain, I should say? So okay, risk, um, maybe, sorry I'm saying it again, but I have to take a step back again. So, um, risk is not your enemy, so again , as an asset management company, the first thing you want to be is a good steward of your clients' money. The second thing you need to do is create a high risk-adjusted return. The magic lies in the name risk-adjusted return.
Right? There is no reward without taking the appropriate risk. Right? So for every unit of risk you take on, you want to create a corresponding return for, um return for, um , your investors. So what does the risk management department do then ?
Well, the risk management department essentially maps the entire risk surface, the entire universe of risks that you and your firm face. It's cybersecurity, operational, investment, concentration risk, you know, it goes on and on. You create a big matrix and then think about mitigating those risks. Mitigating these risks mainly means formulating policies formulating policies , um, you know, creating automation, and ensuring proper screening. I'm talking about halittic, hypernative, elliptical, etc.
Um, and making sure that in the event of a long-tail event, you have appropriate legal remedies or, ideally, preventative measures in place so that you know what you're distributing, um, or you're not exposing yourself to, um, catastrophic risk, um, for your investors. Perfectly. So the last wrap-up question, if I may, before we move on to our last one, is actually more about the strategic states involved here. So there's a real debate, as I think everyone in this room knows, there's a real debate in Washington about whether cryptocurrencies and the dollar, or stablecoins, are extending the dominance of the U.S.
dollar, or are they undermining it? So I'm wondering, Ruben, from your perspective, does this technology strengthen the financial primacy of the United States? Um, does it actually hand over the leverage to whoever writes the clearest rules first? Um, and then, as a follow-up to that, how does the architect see it now? Um, I think this question probably has two parts.
Um, and usually this question is one part, but since you're here, there are two. So, uh you're here, there are two. So, uh , the first part of this question, if you look at what's happening in blockchain, if you look at where the U.S. stablecoin flows are right now, I think they're north of 95, probably even 98% probably even 98% of the total global flow.
I'm mainly talking about USDT and USDC. Uh, so dominant so dominant , aren't they? Uh, is this great for the US dollar as a currency? Yes. This creates demand for the dollar.
This creates demand for its fiat implementation. Uh, which in turn is great for, you know, in the area of brilliant clarity, uh brilliant clarity, uh , you know, short-term government debt. Right. Fantastically. Right.
However, uh, the fact that stablecoin assets are packaged in fiat US dollars does not mean that the global financial rails that control the issuance and flow of stablecoins serve US interests. Right? And that's the part that's being extremely contested right now, uh, you know, mainly in Washington. And that's why , you know, Jamie Diamond just came out and called Brian Armstrong, you know, called him a complete piece of [ __ ], right? Um, like here, there's a lot of controversy about who's going to control it, right?
And I became very familiar with this secondary part when I was servicing the multi-trillion dollar balance sheets of GS E. Um, as capital funds grow, the conversation becomes increasingly politicized, right? Um, if you're raising funds from an institutional investor, you need to take a step back and ask yourself whose money you're currently putting into crypto storage, right? Whose money is this? For example, if you raise funds from an insurance fund, if you raise funds from a large institutional investor, we're talking about pension funds, right?
We're talking about people We're talking about people as insurance companies that have actual liabilities, right? So liabilities, right? So , um, I think that's something that , um, I think that's something that we as investment managers shouldn't take too lightly, and actually, you know, take responsibility and mature just as the industry is maturing, and you're wearing suits now. So, I would like to hear briefly from you about your decision to register in Switzerland. You made this decision very thoughtfully, and perhaps you can provide the audience with a little more information on this .
Yes. Listen, when we worked here, we met a lot of friends. I see a lot of old friends here in the audience. Many of you know that, uh, we've been working with Palo been working with Palo Alto for the longest time, right? Uh, and the problem that we faced, frankly , in the Gensler era, was that, uh, the environment was hostile to our operations, right?
Uh, we felt like we didn't have a clear regulation to, uh, make the most of our talents, make the most of the opportunities that we had in front of us. Um, and so we were looking for a jurisdiction that would allow us, you know, first of all allow us, you know, first of all , to be expressive, authentically neutral, but expressive, um, about our American, um, identity, um, but still fulfill the global mandate that we have as architects because we feel that, you know, the opportunities are, are global, and we're going to, you know, um, highlight them, um, wherever they are, right? Part of the team is in Rio, part of the team might be in Switzerland, a lot of them are in, um, um, the United States. Um, but yes, a really, really, really global mandate. Very interesting.
So that brings us to our last question or two that really pertain to the future. Um, and I'm curious about your point of view. What does coming of age look like for digital assets? Um, what specific milestones do you think we should keep an eye on? Um, what would have to be true in three years for a pension fund or sovereign wealth fund to be able to distribute significant capital without it becoming big news.
Good. So, I think you all know that, um, over the last few months and years, we've seen an increase in institutional implementation, I think that's the implementation, I think that's the wrong word, but at least we've seen an increase in institutional participation institutional participation . The great nine-digit division hasn't fully arrived yet, has it? Um, there are a few reasons why. I believe reasons why.
I believe that there are three waves that we, you know, will go through. I think we are part of the first wave. This first wave is, and you've heard this many times, but unfortunately I have to say it again, you know, continuing education, um, institutions. Yes, they're hiring people, but yes, they're still pretty naive about what's really going on, um, but they're also starting to educate us. Right?
So some of the points that I talked about, about what full due diligence looks like, um due diligence looks like, um , you know, it's still small, and very few managers that you know have had that kind of institutional experience institutional experience , um, you know, in the cryptocurrency market. So continuous education, um, and continuous testing of concepts. These proofs of concepts will increasingly lead to things like the BlackRock Bitcoin ETF, hmm, Janice Henderson, hmm, some of the things we're seeing in securitization. Hmm, and these successes, these pockets of success will create competitive dynamics, especially with large asset managers competing with each other on very, very, very low margins. They have been suffering from commission squeeze for many decades.
Hmm, this will lead to a competitive dynamic where asset manager A, say Blackstone, yeah, can no longer afford to be out of the market where, say, Apollo Global Management, their main competitor and private credit, hmm, is raising capital, stablecoin-based capital, hmm, at a lower cost of capital, right? So this underlying competitive dynamic, I think, is what attracts asset managers. However, asset managers are not allocators, right? So what will cause the distributors to fall? What will cause the world's largest balance sheets to fall ?
And I think it will be osmosis. They're gathering, they look like they're in this comfortable position where the entire investment universe is knocking on their door Monday through Friday. Hmm, they're not in a hurry to get them not in a hurry to get them . Our industry is still in its infancy . Hmm , and they can just wait.
The key element that will make them take this seriously is our resilience, right? Number one. And then more and more osmosis through the alpine systems they sit on, through the investment reports of the big investment managers who let you know that they are familiar with the field themselves. So, looking ahead five years, what will the winners build that today's market leaders haven't? Hmm, track record, resilience.
They won't take...I think this is important for all the builders here, right? Because it's like a pause point, right pause point, right ? Hmm, they'll avoid cuts, right? So one of the most important things you want to do when you're you want to do when you're building here, because you're a rare commodity, is understand what's going on, you don't want to get on the radar of people like Shannon, right, and her former colleagues, right?
You want to make sure that when institutional review looks at you, looks at you as an advisor, looks at you as a key person in a fund, whether you're managing or trying to build, it comes back crystal clear, right? Your reputation is built over many years, but it can be destroyed, you know, in a few, let's say , ill-considered steps. And with that, I think we'll eventually...Okay. So thank you very much.
Thank you thank you very much. Thank you , Shannon. Thank you very much to all of you. It was a great conversation, I think. Thank you.
Perfectly. Rock and Thank you. Perfectly. Rock and roll.
Automatic transcript — names and jargon may be misspelled.