& SPECIAL REPORT 2019

EVOLUTION FOCUS SECURITY Blockchain advances digitisation of Fund managers’ views on crypto/ Crypto custody solutions drive funds industry digital investing institutionalisation

Featuring BVI Finance | Copper | Eversheds Sutherland | Harneys | RSK | Silver 8 Capital Imagine lawyers who eat crypto for breakfast.

Blockchain, crypto currencies and digital assets are changing the financial landscape. Our clients trust Harneys to understand not only the law and regulation of blockchain, but the underlying technology too.

We’re Harneys, a global offshore law firm with entrepreneurial thinking. harneys.com CONTENTS

INSIDE THIS ISSUE…

04 BLOCKCHAIN TECHNOLOGY – A BEDROCK FOR DIGITISING THE GLOBAL FUNDS INDUSTRY By James Williams

12 , MONETARY INNOVATION AND THE BUSINESS CYCLE By Manuel Anguita, Silver 8 Capital

15 BUILDING A WALLED GARDEN Interview with Boris Bohrer-Bilowitzki, Copper 18 TURNING INFORMATION INTO CASH: PRACTICAL 04 ISSUES WHEN SETTING UP A CRYPTO-FUND By Ben Watford & James Burnie, Eversheds Sutherland

20 DIGITAL ASSET SPACE DEVELOPING AN INSTITUTIONAL IMAGE By James Williams

25 BVI TARGETS DIGITAL ASSET SPACE AS KEY GROWTH DRIVER Q&A with Simon Gray, BVI Finance

27 ROOTSTOCK’S RIF: THE FUTURE OF BLOCKCHAIN TECHNOLOGY Q&A with Diego Gutierrez Zaldivar, RSK 28 DIRECTORY 15

Published by: Global Fund Media Ltd, 8 St James’s Square, London SW1Y 4JU, UK 25 www.globalfundmedia.com ©Copyright 2019 Global Fund Media Ltd. All rights reserved. No part of this publication may be repro- duced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Investment Warning: The information provided in this publication should not form the sole basis of any investment decision. No investment decision should be made in relation to any of the information provided other than on the advice of a professional financial advisor. Past performance is no guarantee of future results. The value and income derived from investments can go down as well as up.

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 3 OVERVIEW

Blockchain technology – a bedrock for digitising the global funds industry

By James Williams

he digitisation of the alternative funds custodial solutions coming to market, insti- industry has the potential to usher in tutional-focused exchanges, and myriad Ta new investment paradigm; one that provenance tools developed by innovation labs offers fund managers and investors a chance and global financial institutions. for capital preservation by investing in compa- One of those innovation labs is Deloitte’s nies, real estate, infrastructure projects, and EMEA Blockchain lab in Dublin. crypto currency-backed projects that are free “At Deloitte, we collaborate globally with cli- of the influence of central bank intervention. ents, across every industry, on how blockchain For hedge fund managers, this could open is changing the face of business and public up new opportunities to invest in blockchain services,” comments Amy Pugh, Manager, companies that eventually go public, and Strategy, Innovation and Ventures. “Right now, change the way they run their funds, not to new ecosystems are developing blockchain mention , which are likely to solutions to create innovative business models continue to expand in number. and disrupt traditional ones. We help our cli- As we head towards 2020, there are signs ents understand the evolving momentum of that the digital asset space is beginning to blockchain use cases, prioritising blockchain become more institutional with more robust initiatives, and managing the opportunities and

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pain points associated with blockchain adop- tion efforts.” Both asset servicers and fund managers are looking at ways to use DLT technology to automate a range of operational activities, especially those in the back-office including trade reconciliation, regulatory reporting, inves- tor onboarding to name but a few. When asked how CFOs should be thinking about this technology, Pugh says it can be used to reengineer or innovate a wide range of finance processes: intercompany transac- tions (when there are multiple ERPs), rebates, warranties, financing (such as trade finance and letters of credit) in addition to upstream and downstream financial processes like:

• Issuance • Trade • Post trade (clearing and settlement) • Asset Servicing

Pugh outlines the following key steps for CFOs to consider: • Assign a blockchain champion Blockchain should be a business-led ini- Right now, new ecosystems are developing blockchain tiative, requiring strong sponsorship and solutions to create innovative business models and leadership provided from the ranks of disrupt traditional ones.” finance executives. They can start to envision how the various functions might Amy Pugh, Deloitte benefit from implementing blockchain, iden- tify value drivers, and build business case • Think big, start small, and iterate often frameworks. Understanding the “art of the possible” is • Invest in talent creating a lot of excitement, but where to Pull together a focused cross-section team start? Blockchain’s capabilities may be put from supply chain, customer/channel oper- to more efficient use in the external world, ations, service, and finance to identify and but as an introduction to the technology, it prioritise pain points that could be targeted may be best to focus on an internal issue, and develop a hypothesis around how the such as intercompany transactions. use of Blockchain will solve the business • Launch a pilot problem. Having identified finance / investment man- • Forget the technology agement pain points, select a use case Focus on how blockchain will potentially where blockchain will likely produce a disrupt or shift your operating model. The real return on investment (ROI). Track the process involves understanding the trans- results, especially transaction times and formative nature of blockchain, then talking costs, to judge the technology’s suitability with customers, suppliers, and C-suite peers for larger scale iterative processes. to identify potential use cases. Given that Deloitte’s EMEA Blockchain lab not only deliv- blockchain’s value proposition relies on ers value to clients via blockchain strategy multiparty transactions, select external part- design and technical implementation but also ners who share the business challenge you develops propriety solutions that are designed are focused on and are therefore likely to to accelerate its clients’ blockchain journey. be receptive to participating sometime in As Pugh adds: “Our multi-disciplinary team the future. collaborate to develop solutions that solve

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 5 OVERVIEW

Some blockchain technologies are likely to become so important that we have to prevent certain entities from failing because the knock-on effect to global markets would be too great.” James Burnie, Eversheds Sutherland

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complex commercial problems and trans- Blockchain technology akin to first iteration form the way our clients do business across of iPad all industry sectors. Such solutions include; In Burnie’s view, we are only just at the start a blockchain enabled qualification and certi- of understanding the true potential of block- fication platform, a Track and Trace platform chain and how it could be applied to the asset portable for multiple industry sectors and a management industry, in particular for oper- blockchain enabled regulatory reporting solu- ational tasks. It’s a bit like the launch of the tion, plus more.” iPad: you get the first innovation and everyone This is certainly an exciting time for all gets excited by it. key service providers within the hedge fund “In terms of the application of blockchain industry, including law firms. One of those is to the asset management industry itself, it is Eversheds Sutherland, which has built a lead- clear that there is a role, in particular in rela- ing practice covering the digital asset space. tion to repetitive operational tasks, such as “We advised on the first ICO in the UK and automation of distribution. In terms of where from there we’ve grown,” states Ben Watford, we are at in the development of this technol- Partner, Financial Institutions. To clarify, an ogy, at first there was the stage where it was Initial Coin Offering (ICO) is a process for a bit like the launch of the first iPad: there is selling cryptocurrency “tokens” in exchange the first major innovation and everyone gets for conventional or “fiat” currency or other excited by it. cryptocurrency. “The next step is adapting blockchain tech- “We’ve advised a range of firms in the FCA’s nology so that it is used in a way that best regulatory sandbox and we are advising every- works for a business and has proper commer- one from crypto-funds to token developers, cial scale. This is roughly where we are at the blockchain platforms, crypto-exchanges, cryp- moment, with businesses testing out ideas in to-custodians and crypto-brokers. We were a large professional setting: similar to when also the first law firm to give evidence to the all the different applications were introduced UK parliament on blockchain developments.” to the 2nd and 3rd iterations of the iPad to The FCA’s sandbox launched in 2017 to pro- improve the user experience. vide businesses with a secure environment to “In 10 years, it’ll be more a case of con- test-run their new products and services. In stantly tweaking the blockchain technology,” April this year it confirmed that 29 new compa- says Burnie. nies had been added into the fifth cohort of its Banking was the first key focal point for sandbox, eight of which plan on using block- blockchain developers but this is now starting chain-enabled technology including Standard to widen out to asset managers. Part of this, Chartered Bank. says Burnie, is because asset managers are James Burnie is a senior associate in looking at the value for money they are giving Eversheds Sutherland’s financial institutions investors “and if they can introduce new tech- group specialising in financial services regula- nologies to generate greater value for money, tion, as well as fintech. He confirms that there and improve efficiencies, that is likely to play are a wide variety of companies using differ- out well in the current climate”. ent structures within the FCA’s sandbox. One “Blockchain allows you to service clients such firm is 20|30, a start-up company that in a way which is cheaper and easier. Take has investigated tokenisation of equity within MiFID II for example. That legislation is based a compliant legal framework. on the assumption that the technology would “There are a lot of new concepts coming exist in order to enable entities to implement it. out, and we have coined a new concept of Transaction reporting creates an onerous et of ‘Too Important To Fail’,” explains Burnie. obligations on firms. Blockchain enables firms “Some blockchain technologies are likely to to automate compliance with these obligations become so important that we have to pre- in a way that is much quicker and more effi- vent certain entities from failing because the cient than previously,” comments Burnie. knock-on effect to global markets would be too According to Ben Marzouk, Counsel at great. The next stage of regulation in the UK is Eversheds Sutherland, distributed likely to be this recognition of certain entities technology “has the potential to massively dis- being Too Important To Fail.” rupt the traditional methods of clearance and

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 7 OVERVIEW

In its Guide to Crypto Custody report, , a next generation and custodian, points out that access to custodial infrastructure will be a growing need for hedge funds, high-net-worth individuals, and financial institutions as they expand their cryptocurrency holdings. Already, there are 150 active crypto hedge funds who collectively have USD1 billion assets under management (AuM), and 52 percent of those funds use an independent custodian.1 Gemini is able to provide investors with a qualified custodian solution, Gemini Custody™, and is one of several firms offering institutional-grade security. At Copper Technology, for example, they have built a state-of-the-art infrastructure to There are now third parties who will custody a Fund’s protect fund managers when trading crypto assets across multiple exchanges, in addition assets and in the process guarantee, with a to the Copper Unlimited custody application: registration and a balance sheet, the integrity of the an offline server-less, optically air-gapped whole process. Until recently we didn’t have these application. “Our custody application is part of the solutions.” Walled Garden trading infrastructure we’ve Manuel Anguita, Silver 8 Capital built, which provides full protection of LPs assets,” says Boris Bohrer-Bilowitzki, Partner settlement, matching buy and sell orders, and and Head of Business Development at Copper. recording ownership through registered trans- “A fund manager might have their bitcoin fer agents – the “plumbing” underlying much custody address with Copper whitelisted on of the US securities markets. We are excited various exchanges and if they want to move to be advising these cutting edge investment assets away from one of the exchanges, and products through various US securities regu- into custody, all they do is click a button. latory hurdles.” “Therefore, you don’t have to physically log in to the individual exchange; everything is Improved custody done on Copper. The Walled Garden removes One area that has seen significant devel- the risk of someone being ransomed, and opments in the last couple of years is potentially losing their assets on an exchange.” safeguarding the custody of crypto assets. He believes that the usage of custody needs From a technical perspective, there are now to be flexible but at the same time offer inves- many options available to fund managers but tors a high level of security. “If I have assets it is not just a case of better security; it is also locked away, how quickly can I access them? about third party risk. And when it comes to the Walled Garden, how “There are now third parties who will cus- can I be sure that various security issues that tody a Fund’s assets and in the process arise when trading on exchanges can be mit- guarantee, with a registration and a balance igated? By combining these two aspects into sheet, the integrity of the whole process,” our solution, I think we’ve gone some way to explains Manuel Anguita, co-founder of Silver solving the problem,” adds Bohrer-Bilowitzki. 8 Capital, a US-based fund focused on finan- He says that currently, fund managers still cial technology. “Until recently we didn’t have have to physically hold assets on crypto-ex- these solutions.” changes but plans are underway to move to Anguita goes on to confirm that Silver 8 a position where trading will become possible Capital does its own self-custody using a cold using a centralised book; at which point, man- storage protocol that it designed early in 2015 agers will not need to physically hold assets when setting up the fund. on exchanges.

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It will be an out of custody trading environment, just as we see in the traditional fund space. Everything will be locked away in custody. I think we are three to six months away from this happening.” Boris Bohrer-Bilowitzki, Copper Technologies

“It will be an out of custody trading envi- things like risk disclosures for investors in ronment, just as we see in the traditional fund each jurisdiction, to make sure the right inves- space. Everything will be locked away in cus- tors are coming in to the fund, etc, and the tody. I think we are three to six months away blockchain would tend to allow for that. The from this happening,” he says. investor onboarding process still involves Such a development should help reduce the jumping through a lot of hoops, as shown by risk of asset misappropriation by hostile actors the fact that subscription documents can be targeting the exchanges. 90 pages long. The more you can automate the process, the more it will make life much Digitalising fund distribution easier. Moreover, as crypto-custody becomes more “The problem is that the initial set-up of the institutional, fund managers wishing to blockchain platform can be risky and expen- launch digital asset funds could also reduce sive. The question then becomes whether, operational risks by availing of blockchain rather than funds individually setting up technology. blockchain solutions, we will see new market Take fund distribution, for example. entrants that specialise in these solutions Historically, this has often been a time-inten- being set up. I think this is one area we are sive manual process requiring compliance going to see development, and it raises the teams to ensure their funds are being mar- further questions of how the funds using such keted correctly to investors in different platforms perform effective oversight over jurisdictions, all the while adhering to coun- them.” try-specific regulations. Another consideration is if a specialist third Blockchain has the potential to radically party entity stores investors’ details, for exam- improve how this distribution process is ple, as a central validator to meet AML / KYC managed. requirements, investors won’t have to provide As Burnie outlines: “When distributing funds each fund they invest in with personal informa- across multiple jurisdictions, some of our cli- tion. Their details would only be shared once ents are looking to see if they could automate with the third party.

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“The risk of a data breach becomes smaller token that digitally represents a real tradea- because it means data is not being shared ble asset. It is, in many ways, similar to the as much, and is being shared with entities traditional process of securitisation but with a which specialise in data protection. The FCA modern twist. are quite supportive of this type of innovation, Pugh outlines four key advantages that sometimes referred to as privacy enabling tokenisation provides for both investors and technologies, as it facilitates GDPR compli- sellers: ance,” adds Burnie. • Greater liquidity By tokenising assets – especially private Tokenisation of securities gathers steam securities or typically illiquid assets such In other market developments, one trend as alternatives – these tokens can be catching people’s attention is the tokenisa- then traded on a secondary market of the tion of securities, with major institutions such issuer’s choice. This access to a broader as Goldman Sachs exploring the options of base of traders increases the liquidity, developing their own digital token. This is now thereby capturing greater value from the a focus of R&D activity among many fintech underlying asset. start-ups. • Faster and cheaper transactions At Deloitte, Pugh foresees tokenisation Because the transaction of tokens is com- potentially having significant importance to pleted with smart contracts, certain parts of the asset management industry enabling the exchange process are automated. This accessibility and affordability for all, “thereby automation can reduce the administrative unlocking trillions of euros in currently illiquid burden involved in buying and selling, with assets and vastly increasing the volumes of fewer intermediaries needed, leading to not trades and investments”. only faster deal execution, but also lower To clarify, a token is an object whose value transaction fees. is based on another object, either physical or • More transparency virtual. The tokenisation of assets therefore A security token-holders rights and legal refers to the process of issuing a blockchain responsibilities are embedded directly onto

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the token, along with an immutable record regulated platform for digital security offering of ownership. These characteristics add and administration. Globacap is tokenising transparency to transactions, allowing you digital securities including bonds, shares, and to know with whom you are dealing with, funds and according to the company, this is what your and their rights are, and who has the first such exchange in the UK working previously owned this token. under the regulatory guidelines of the FCA. • Accessibility In August 2018, the company digitised its Tokens are highly divisible, meaning inves- own shares while earlier this year it did the tors can purchase tokens that represent same for two UK-based companies and also incredibly small percentages of the under- offered regulated arranger and custodian ser- lying assets. If each order is cheaper and vices in each capital raise. easier to process, it will open the way Myles Milston, CEO of Globacap, said: “The for a significant reduction of minimum (FCA) sandbox programme has been a great investment amounts. experience, enabling us to come to market with a new application of an emerging tech- A new digital asset secondary market? nology in a controlled but quicker manner. The tokenisation of securities could potentially From our groundbreaking proof of concept in lead to the creation of a digital asset second- August last year, to our product now coming ary market on which to trade tokens, which to market, the support from the Innovate Team previously wasn’t practicable. at the FCA was instrumental in the success of “If you take a private equity partner - this journey.” ship structure, for example, it has Limited Partnership interests which could be Precipice of change tokenised,” explains Watford. “One could then The tokenisation of hedge fund ownership will establish a white label list and fractionalise allow added fractionalisation, enhancing trad- units, meaning that we split them up so that a ability, and create a value-add for owners of single token represents a 10th or a 1,000th of the tokens. a unit and then we can trade these parts of a Issuers of tokens, supported by blockchain unit on a secondary market. This ability to split platforms, will gain operational efficiencies up fund units doesn’t exist with ordinary share and transparency in many categories, such classes but we aren’t there yet. However, it is as KYC/AML compliance and even regulatory worth bearing in mind that even if fractions and tax reporting. of a unit can be traded, to have true liquidity In addition, tokenisation will enable stream- there will still need to be active buyers and lining of portfolio management, faster clearing sellers of the tokens, which is dependent on and settlement of trades with blockchain-en- market economics.” abled real time reconciliation of information. This could help to democratise the funds Investors will ultimately have more trans- industry and bring new investors and into the parency on their holdings and hedge fund market. But it is worth stressing that even if managers will be able to drastically reduce the securities are tokenised, this does not by itself time required to compile detailed investment guarantee liquidity. It still requires an active and performance reports. pool of buyers and sellers. “The investment world sits on the precipice It is an exciting area of innovation. In July this of change once again,” opines Deloitte’s Pugh. year, Venturebeat reported that the SEC had “Blockchain is still waiting for that ‘break officially cleared blockchain startup Blockstack out’ moment as there are still significant to hold the first regulated security token offering unknowns related to the regulatory and legal under Reg A+ crowdfunding rules. environment. However, more and more players This is likely going to open the door to more are experimenting and collaborating to lever- start-ups seeking SEC approval to raise cap- age the benefits of blockchain technology, ital through the issuance of digital securities challenge traditional business models and and give investors access to a plethora of new re-invent industry value chains. investment opportunities. “The major risk for laggards is being left In the UK, the fintech company Globacap behind in the rise of digital platforms in the recently announced the launch of a fully financial services industry.” n

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 11 SILVER 8 CAPITAL Bitcoin, monetary innovation and the business cycle

By Manuel Anguita

t Silver 8 Capital, we believe that the the same time, they are isolated from disrup- future global monetary system will tions to the current financial system. Alook considerably different than that of Libra, a digital currency project that is today. In our view, the combination of tech- being promoted by Facebook, offers us a third nological progress and geopolitical and social proposition. developments are going to change the current Libra shares Bitcoin’s ambition of becoming forms and uses of money.1 ubiquitous and borderless. However, it is a cur- Ultimately, we strongly believe that block- rency that is governed by a central authority: chain technology will form the backbone of the Libra Association in Switzerland, with 28 this monetary evolution. founding members and open to more partici- In the modern world, currencies are pri- pants, primarily private companies. Therefore, marily sponsored by groups or individual it is a corporate-sponsored currency. nation states, together with institutions that To a large extent, the Libra Association is represent their interests. Currencies are, to very similar to a central bank, in the sense a large extent, a public and managed good, that it has the ability to mint new currency. tied to a specific geography and embedded However, the Libra Association intends to in a legal framework. Currency management outsource the monetary policy of this new cur- (i.e. monetary policy) has different aims, but rency to the world’s largest central banks (with is primarily used as a means to support eco- the exception of China), by simply backing it nomic stability and growth, together with a with low risk assets denominated in the major semi-disguised government funding goal. As currencies. any other centralised economic decision, man- As a result of this design, Libra’s monetary aging monetary policy is no easy feat, with behaviour will depend primarily on the com- many historical and current examples of both bined decisions of the US Federal Reserve, the good decision-making and mismanagement, European Central Bank, the Bank of England with pronounced social implications. and the Bank of Japan, each of which has In contrast, Bitcoin and other cryptocurren- its own goals and constraints. In this sense, cies are stateless and global in reach. Libra is a pass-through currency, as its mone- There is no central entity making monetary tary policy is purely accommodative of that of policy decisions: Bitcoin’s monetary policy is these large central banks. predetermined and written into its transparent In view of the significant regulatory hurdles protocol. We know that there is a hard limit that they will face, it remains to be seen how of 21 million bitcoin units to be minted, as successful Libra or other similar initiatives a function of time, irrespective of economic will be on a global scale, but it is clear to us developments or the need for any govern- that the international monetary landscape will ment funding. change very significantly. Notice that cryptocurrencies In the not too distant future, people operate within blockchain net- around the world will be able to choose works, completely outside of between competing forms of money. traditional payment systems. State-sponsored currencies may well Therefore, cryptocurrencies are continue to work as the primary subject to idiosyncratic, ear- medium of exchange in developed ly-stage technology risks, but at economies, with some penetration

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of cryptocurrencies and corporate-sponsored risk factors common to early-stage technol- currencies in e-commerce. In contrast, in ogy investments, which are typically related to developing economies with fragile financial assessments of technological feasibility and systems or weak institutions, new digital cur- adoption rates under conditions of extreme rencies have a higher short-term penetration uncertainty. As a result, business cycle con- potential, both as a general purpose medium siderations have had a muffled impact on the of exchange and as a savings instrument. historical return profile of this new asset. As To date, the reactions of governments and the technology matures, uncertainty over its central banks to cryptocurrencies have been feasibility diminishes, changing the weight of tame, focusing on the need to monitor illicit the risk factors behind expected returns and activities (money laundering is illegal, regard- correlations towards those related to its eco- less of whether it is being conducted in USD, nomic nature. in EUR or in bitcoin). From the perspective of As we approach a change in the business central banks, cryptocurrencies have been cycle, the important question for investors primarily looked upon as an experiment with is how to protect their portfolios, particularly interesting attributes, still too small to be a given the limited scope for central banks to source of concern in terms of their impact adopt countercyclical monetary policies. on monetary policy or financial stability. In an Bitcoin is still an early-stage technology, instant, Libra has brought to the spotlight the and as such, it will continue to be subject to potential impact of technological disruption on a high degree of uncertainty and idiosyncratic the status quo of state-driven monetary policy.2 technology risks. From this perspective, we The sheer size of Facebook’s over 2 billion believe that in the short term, adding exposure users and its international reach are clearly to Bitcoin within a well-diversified portfolio may worthy of attention, and even concern, for cen- well contribute to achieving a better risk-re- tral bankers. ward profile, as Bitcoin’s volatility results from In terms of portfolio management, we risk factors that are uncorrelated to the eco- believe that Bitcoin and other decentralised nomic cycle. cryptocurrencies offer an economic profile For investors with a longer investment that is in stark contrast to that of these new horizon, scarcity and independence from the corporate sponsored currencies. Bitcoin is traditional financial system are extremely rare transacted and stored outside of the traditional economic attributes that can potentially provide financial system. In addition, it has a hard, Bitcoin with a negative correlation to economic fixed supply that is not elastic to changes in shocks. In our view, these economic variables demand or sensitive to macroeconomic con- will become more prevalent in Bitcoin’s risk ditions. Bitcoin may or may not work as a profile as the technology matures. n medium of exchange, but due to its unique 1. See Mark Carney’s recent speech at the Jackson Hole design, it has the potential to become a store Symposium: The Growing Challenges for Monetary Policy in the current International and Monetary Financial of value and a hedge against inflation and sys- System (August 23, 2019). temic risks. 2. See Bloomberg, Don’t Rush to “Squelch” Facebook’s Libra, IMF’s Lipton Says (July 16, 2019). Based on recent news headlines and com- 3. See Jerome Powell’s testimony on Libra before the mentary from fund managers, it seems that Senate Banking Committee (July 11, 2019). institutional investors are starting to explore 4. We refer the reader to the correlation data from CoinMetrics.io (accessed August 26, 2019). Bitcoin as a means of diversifying investment portfolios. This coincides with US Federal Reserve Manuel Anguita Chairman Jerome Powell’s recent characteri- Co-Founder, Silver 8 Capital 3 sation of Bitcoin as “an alternative to gold”. Manuel Anguita, CFA is the co-founder of Silver 8, a US-based fund focused In fact, Bitcoin has historically been uncor- on financial technology. Silver 8 is one of the pioneer institutional investors related to traditional asset classes, such as in blockchain technology and digital assets. Manuel has a 20 year career in investment management. He initially worked for Goldman Sachs and Merrill equities, bonds, real estate and a number of Lynch, before moving into hedge fund management; Manuel worked for multi- 4 commodities. billion dollar funds (Vega, Proxima Alfa) primarily in global macro and structured In our view, Bitcoin’s phenomenal per- credit. Manuel received an MBA as a Fulbright Scholar from the Stanford formance since inception, and the volatility Graduate School of Business in 1998 and an MSc in Engineering (Hons) from the Madrid Polytechnic University in 1992. associated with it, has been dominated by

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 13 Ready when you are.

Pioneering digital asset infrastructure for institutions COPPER Building a Walled Garden

Interview with Boris Bohrer-Bilowitzki

opper is a London-based technology Based on a multi-signature mechanism, a platform that is set to revolutionise private key is split into thirds across the Fund C crypto investing. By building state- Manager, Copper, and a trusted third party (i.e. of-the-art trade infrastructure, the Copper trustee, lawyer, or fund administrator). This, Platform not only allows funds to easily, combined with whitelisting technology ensures and securely deploy capital across multiple that digital assets can be moved securely exchanges, it also provides institutional-quality across multiple exchanges and Copper’s independent custody. award winning offline custody, without ever Currently, crypto managers are required leaving the Walled Garden infrastructure. This to hold assets physically on each exchange mitigates counterparty risk. they trade on because the exchanges only “Having a set-up such as ours, where no provide liquidity within their own trading eco- single CP at any point in time can access the system. Unlike traditional assets, there is no fund’s assets, is key for the overall compliance centralised limit order book (CLOB). Whereas program and general peace of mind,” says a hedge fund manager doesn’t need to have Bohrer-Bilowitzki. an NYSE account, this is not yet the case in He explains that there are four points that the crypto space. have to be addressed in order for an exchange This means additional security layers are to be eligible. These included: needed to safeguard digital assets, as they • Two-factor authentication log-in; move from one exchange to another. With • Permission-based APIs; Copper’s pioneering trade infrastructure, the • Whitelist capabilities where one can pre-de- issues of counterparty risk and having to fine a certain set of wallet addresses at the deal with security risks related to hacking, exchange level; unsolicited withdrawals and private key mis- • IP whitelisting, where one can only initiate management have been removed. withdrawals or movements of assets from As Boris Bohrer-Bilowitzki, a Partner and a pre-defined set of IP addresses. This ele- Head of Business Development at Copper, ment is optional. explains, what Copper has built is a ‘Walled “Once whitelisting on the exchange is locked Garden’ solution for funds and their LPs, in down, it provides Fund Managers with a higher respect to secure trade execution and custody. degree of on-exchange custody – after which, “When we went live in 2018, we were to change an address it becomes a manual approached by several fund-of-fund inves- process involving Copper, the Fund Manager tors who shared the following problem: ‘Our and the Exchange. If a request is sent to move biggest concern is counterparty risk,’ they assets, it can only go to a pre-defined set of said. ‘If we allocate to a fund, there is nothing wallets,” comments Bohrer-Bilowitzki. For prohibiting the manager from misappropri- example, if the Manager is trading bitcoin – or ating that capital from the exchange’,” says any digital asset – on , and wants to Bohrer-Bilowitzki. move them to or , exe- “On the one hand, our Walled Garden cution can only happen if all three infrastructure provides full protection exchanges’ wallet addresses are of LPs assets; they cannot be mis- whitelisted. appropriated from exchanges. While “Our custody application is at the same time, streamlining the an essential part of the ‘Walled treasury management function for the Garden’,” continues Bohrer- Fund Manager into one central place, Bilowitzki. “The client having allowing them to be much more reac- their bitcoin custody address tive in the marketplace.” with Copper whitelisted on

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 15 COPPER

In a worst case scenario, where two of the three parts of the key are lost, one could use the seed mnemonic held by the administrator, for example, to re-establish the wallet. Part of the appeal of Copper’s infrastructure solution is not only the high level of flexibil- ity and security when executing one’s trading strategy, it is the fact that the Copper Unlimited custody solution solves a problem that tradi- tional custody solutions have historically faced. Say you have USD10 million of gold bars stored at home. It’s nice to look at, but you don’t want the custody burden so you give the gold bars to a bank. You’ve solved one prob- various exchanges means if they want to lem but created another one: somebody else move assets away from one of the exchanges, now has USD10 million of your gold. It might be and into custody, all they do is click a button.” protected in a vault with security cameras but This is helping to make digital asset man- theoretically someone within the bank can take agement safer and easier. The custody your gold, and everyone else’s gold in the vault. solution Bohrer-Bilowitzki refers to is the “With our custody solution we’ve solved the Copper Unlimited custody application: an first problem whilst also avoiding the second offline server-less, optically air-gapped appli- problem,” comments Bohrer-Bilowitzki. “What cation. The user installs the Copper Unlimited I mean here is, we as the custodian do not solution onto a machine that is not connected have sole access to a client’s digital assets. to the internet; nor ever will be. And indeed, neither does the client without The next step is to create a digital wallet, using the multi-signature authorisation. This known as a Copper Vault. As part of this means we are just as secure with one client process, a private key is sharded into three as we are with 50,000 clients. There is no cen- distributed keys, held by the client, a Copper tral point where all keys are being put together; representative, and a trusted third party. everything is multi-signature protected and each None of the fund’s assets can be withdrawn transaction is individually completed offline.” or moved without two of three keys coming This is taking digital asset investing into a together to sign the transaction in an offline new, institutional realm. The ability to mitigate environment. counterparty risk on exchanges, and even “The private key is split into three parts within the fund itself, while ensuring that no and encrypted, where each party creates their single person or entity can access the Fund’s own password, confirms it, and the application assets, is likely to give family offices, fund-of- saves this as a double-layer encryption file. We funds and other LPs, greater confidence in also eradicate any single point of failure by allocating to the asset class. using the BIP39 seed extension. This is simply “Before this infrastructure was in place, allo- a password that extends the seed mnemonic, cations were modest, USD100-500K, but now which is made up of 15 or 18 random words, we see allocations of USD5-10 million, which is and held by separate parties.” a major step up, and likely to continue rising,” Copper transaction files are encrypted concludes Bohrer-Bilowitzki. n and transmitted optically between the client’s Copper Unlimited storage application and the online trading environment. It is the only Boris Bohrer-Bilowitzki custody solution currently on the market that Partner, Copper provides this level of security. “All of this happens completely offline. If we Boris Bohrer-Bilowitzki has over ten years of sales and relationship management experience within asset management and fintech industries, across Europe. In suddenly disappeared and our offline machine his previous role as Senior Relationship Manager at Newscape Captial Group holding the private key is lost, it doesn’t matter he specialised in bespoke high net-worth strategic and structural planning and because you only need two of three key hold- execution, focusing on clients from Central and Eastern Europe. He holds an ers for authorisation,” says Bohrer-Bilowitzki. MBA and LLM.

16 | www.hedgeweek.com CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019

EVERSHEDS SUTHERLAND Turning information into cash: practical issues when setting up a crypto-fund

By Ben Watford & James Burnie

etting up a crypto-fund is not straight- e.g. bitcoin, and those whose value is driven forward. Participants can be unclear by outside assets (it is easiest to see these S as to the nature of this nascent asset as acting like vouchers for the relevant asset). class, whether it is an asset class, and just generally what it all means and whether it is Tokens: the risk profile worth anything. The Financial Conduct Authority (“FCA”) has This article seeks to help demystify what is also expanded, in its guidance, on the different going on, and to guide managers seeking to types of tokens, splitting them into three core: enter the crypto ecosystem. • Security tokens: this refers to those tokens that provide rights and obligations akin to What are we talking about? specified investments, such as shares, “Blockchain”, simply put, is a technology bonds, fund units. which allows for a single piece of data (called • E-money tokens: this category refers to a “token”) to be viewed by multiple persons any token that reaches the definition of simultaneously, at any time of the day, in a way e-money, which in broad terms means that which is more secure than previous systems. it is a token which is linked 1:1 with tradi- From an investment perspective, the key tional money. attribute is that, whereas before if a person • Unregulated tokens: this category refers to liked someone else’s data they could copy it any token that does not meet the definition and no-one would be able to split the original of e-money, or provide the same rights as from the copy (think sharing MP3 music files), other specified investments under the RAO. using blockchain the copy would be rejected This includes tokens referred to as utility by the original blockchain system. This means tokens, and exchange tokens. that, if a participant wanted to own a token The importance of this, for a fund manager, is held by another, the participant would have to as regards the level of protection when buying buy that token and cannot just copy it. different types of token. The token, therefore becomes unique and The risk profile of acquiring of security the value of that token is determined by the tokens / e-money tokens is a combination value attributed to it by the participants. So, of (i) the risk profile of the asset (ignoring in the case of bitcoin, a bitcoin is worth what- the blockchain element – i.e. the risk pro- ever another participant is prepared to pay for file of a share / bond / other security etc. in it. If, however, the participants determine that the ordinary course); and (ii) the risk that the the holder of a token is the owner of another blockchain demonstrating title fails. As such, asset, for example the owner of the token own fund managers should be focussed, in addi- a car, then the value of the token is driven by tion to their usual due diligence for the asset the value of the car (as the token is merely class, on, for example, what back-up and busi- proof of ownership of the car). For a fund man- ness continuity procedures are in place should ager, tokens therefore fall into two types: those the blockchain break down. whose value is driven by supply and demand, Unregulated tokens have a different risk

18 | www.hedgeweek.com CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 EVERSHEDS SUTHERLAND

profile. Here, depending on the detailed terms sheet and business (this is the platform behind, for tokens, there is a need to carefully plan, alongside a credible team, which example, Ether). consider the underlying asset – for clearly shows your vision. Option 3 is to invest into companies example, if the token gives rights to which are involved with crypto assets, gold, is that gold carefully secured? Having a clear vision: profit vs risk e.g. through buying shares. The advan- Another issue is that has been a appetite tage of this is that there is a specific historic perception, wrongly, that When dealing with service providers company you can, for example, secure somehow this law “does not apply” is it important to have a clear vision your investment against, however it is to these tokens. This is incorrect, as, for the fund, and, in relation to crypto questionable how this approach is for example, the common law against funds strategies, this involves being different from other funds which are fraud and misrepresentation does still able to answer questions such as: equity funds investing into FinTech. apply. Nevertheless, it is important when dealing in these tokens to have What are you investing into? What are the nature of your trades? proper due diligence in place. There are three basic options. Different investment strategies might Option 1 is to invest into well-known be used, e.g. passive, active or high Roadblocks to creating an institutional tokens, such as Bitcoin and Ethereum. frequency trading. If a high frequency quality crypto-fund The advantage of this is that these trading strategy is used, it is important One key factor to ensuring a cryp- tokens are relatively well known, how- to make sure that your custodian and to-fund is launched successfully is ever the disadvantage is that investors broker can support the speed of trad- ensuring the fund and its service pro- might questions why they would ing required. viders are of sufficiently high quality that not simply buy / sell these tokens investors are happy to invest into it. themselves, particularly if a passive What is your set up? Key to this is getting on-board with investment strategy is used. It is important also to consider the quality service providers who are Option 2 is to invest into more nature of the jurisdiction in which you willing, able and capable of assist- exoteric tokens, e.g. through “token wish to set-up. Some countries have ing. This includes: obtaining a bank generation events” or “initial coin specific regimes for crypto assets, account, ensuring that all the cor- offerings”. The advantage of these however it is questionable the extent to rect regulatory authorisations have is that there can be greater potential which these are really helpful. It is also been obtained, setting up with a volatility in terms of gain, however important to note that, if you are per- custodian, setting up with an admin- this is because these tokens are very forming regulated activities in the UK, istrator, obtaining your own FCA high risk, and there is a very high you will need permission from the FCA authorisations or utilising an FCA chance of them becoming worthless. for these, and to this end it is worth umbrella hosting solution, finding suit- Also, many service providers will considering, for example, whether a able brokers, on-boarding credible only support certain types of token hosting solution, in which a regulated directors and finding lawyers who can – for example, it is common for ser- entity takes responsibility for you activ- provide quality documentation which vice providers to only support bitcoin ities, can be used to avoid the cost of can be provided to investors. and tokens are “ERC-20” compatible obtaining direct authorisation. n To this end, it is worth noting that the crypto-community is still, relatively small, and as such it is important to make a good first impression. For example by using your lawyers to develop a

Ben Watford James Burnie Partner, Eversheds Sutherland Senior Associate, Eversheds Sutherland

Ben Watford is a Partner leads the Hedge Fund practise from the James Burnie is a Senior Associate in our Financial Institutions London office. Ben previously lead two international investment group specialising in financial services regulation, digital financial funds teams and has worked within a tier one investment fund. services and FinTech. James plays a leading role in the global Ben has been voted as a “recommended lawyer” and “Rising award winning crypto assets and blockchain practice and advised Star” in the Legal 500 and won 5 industry awards and led over on the first successful UK-based ICO. He works with companies 30 fund launches over the last 3 years. Ben focuses on the ranging from small start-ups to large financial institutions and establishment of hedge and other alternative investment funds, advises firms in the FCA sandbox, including those setting up advising investors and other service providers. blockchain solutions businesses.

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 19 OVERVIEW

Digital asset space developing an institutional image

By James Williams

he estimated size of the global cryp- fund assets in their wider portfolios. And as tocurrency market stands at USD293 the space matures, with more fund launches, Tbillion, according to Cointelegraph. and longer track records for investors to inter- Within this arena, PwC estimates that there are rogate, there is every reason to think that around 150 active crypto hedge funds, manag- the crypto and wider digital asset space will ing approximately USD1 billion in aggregate become more institutional over the coming AUM. years; just as we saw with the hedge fund Fund sizes remain modest, with the aver- industry a couple of decades ago. age crypto hedge fund running USD21.9 million “We have witnessed that numerous large (as of Q1 2019), according to the PwC report, companies are making important efforts in although given that this figure is skewed by blockchain initiatives, such as JP Morgan, a selection of funds managing USD50 mil- Facebook, Fidelity, ICE… In addition, the lion-plus, PwC estimates the median fund VanEck SolidX Bitcoin trust aims to offer bit- AUM to be more like USD4.3 million. coin ETF-like products to institutions, and the Still, given the volatility that tore through the People’s Bank of China will launch a state- cryptocurrency markets in 2018, the fact that backed cryptocurrency with Alibaba and fund launch activity remains buoyant suggests Tencent. While the US and China are show- that investors are still keen to hold crypto ing signs of letting digital assets becoming

20 | www.hedgeweek.com CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 OVERVIEW

While the US and China are showing signs of letting digital assets becoming more and more institutional, the EU is not that advanced yet.” Christophe de Courson, Olymp Capital

making the BVI the global hub for this exciting type of investment in the near future,” says Simon Gray, Head of Business Development & Marketing, BVI Finance. When asked what advice he would offer to someone who is thinking of launching a crypto fund, Gray adds: “We would always advise businesses or individuals looking to set up a fund in the BVI to get expert guidance from a lawyer or administrator before they begin. more and more institutional, the EU is not While we have flexible, accessible regulation that advanced yet,” opines Christophe de and reporting requirements, if one has never Courson, CEO and Co-founder, Olymp Capital, developed a fund before it can be a complex a Luxembourg-based, CSSF-registered alterna- process that, without the right guidance, can tive investment fund manager. be fraught with issues. “Arguably, crypto is in the same posi- “A BVI investment fund will have to adhere tion that traditional hedge funds were in 20 to a number of financial services regulations years ago,” comments Ben Watford, Partner, and, from the beginning this year, many enti- Financial Institutions at Eversheds Sutherland. ties will also have to navigate new ‘economic “It will take time for crypto funds to reach the substance’ rules which call on firms to prove institutional quality that hedge funds can now that elements of their business are physically attest to, but they are moving steadily closer based in the BVI.” to this goal.” Boris Bohrer-Bilowitzki is Partner and One of the biggest barriers is the lack of Head of Business Development at Copper, a depositary and banking options, according to London-based technology platform designed Watford. This creates barriers to entry for new to provide institutional custody and prime bro- market participants. kerage support to crypto investor. He is in no “The issue with that is running one of these doubt that the crypto space is becoming more crypto funds becomes a rather costly pros- institutional. “When we talk about trading vol- pect. The break-even point will vary dependant umes, I think it is currently still retail-driven. on a number of factors. If you can’t get AUM However, thanks to custody applications like up to the right level, you can’t run one of these ours, ticket sizes are increasing and more funds and expect to make reasonable returns,” players are entering the market. I do think we suggests Watford. are on the brink of making the digital asset Jurisdictions are responding quickly to sup- space properly institutional,” he says. port the growing universe of digital asset funds Copper’s approach to independent cus- and as the infrastructure continues to improve, tody is helping to make this asset class more to address the lack of depositaries among appealing to institutional investors but there is other things, a virtuous will likely ensue. still a lot to do. That being said, the scope of Places like the British Virgin Islands are focus- strategies is getting wider and more diverse, ing intently on the expectations that becoming and some managers are using regulatory one of the world’s leading offshore fund cen- approval and product innovation to appease tres for all things crypto/digital, will stand them investor concerns and really drive the asset in good stead. class forward. “Our on-island experts are already world Silver 8 Capital is a US-based investment leaders in the management and administration manager that uses fundamental research to of these types of funds and we look forward to select fintech investment themes and uses a

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 21 OVERVIEW

traditional open-ended hedge fund structure. the amount of uncertainty you have to deal It invests long and short in cryptocurrencies with is enormous. Risks materialise and you and its investment mandate also allows it to rapidly change your opinion of the asset. invest up to 30 per cent of the fund’s assets “In addition, these markets are still not yet in private companies. This VC aspect to very liquid. The lack of liquidity amplifies the purchasing equity interests in start-ups is a changing of opinions in the market. Volatility similar ‘hybrid strategy’ approach taken by is an expression of uncertainty and as a other technology funds. result we have to deal with large swings in “We focus all of our efforts on blockchain,” the day-to-day valuation of these technology explains Manuel Anguita, Co-Founder, Silver companies. It’s all part of the equation.” 8 Capital. “Most of what we invest in is in the The risk here is not volatility risk – you US. We can also do non-US investments in have to be able to withstand wild swings in other jurisdictions but doing so exposes us to performance – it is the risk of the technology additional risks, such as legal risks, other than working or not over the medium-term horizon. just start-up risks.” “It’s a different approach to trading fixed In Anguita’s view, digital assets are on the income bonds or equities,” says Anguita, path to becoming institutional but one hurdle “where these markets are more related to the still to be overcome is the fact that crypto- business cycle. A technology solution might currencies fall out of the domain expertise of become obsolete and we end up being wrong most portfolio managers and investors. with our fundamental assumptions. That is “Investors don’t necessarily have the time the risk.” to learn something completely new and, to Some fund managers are using the impri- date, still largely unproven. For now, at least, matur of trusted regulators to give credence it’s probably not a good use of their time but to their fund strategies and help assuage any as the asset class matures I think the situation fears investors might have as they dip their toe will change,” says Anguita. in to the digital asset space. Extreme volatility hasn’t necessarily helped, Olymp Capital recently became the first as witnessed by the wild swings in cryptocur- asset management fund dedicated to block- rency prices over the last couple of years. In chain and digital assets to be registered with January 2017, bitcoin was trading at less than the Commission de Surveillance du Secteur USD1,000. By December 2017, its price had Financier (CSSF). Olymp aims to bridge the enjoyed a meteoric rise, spiking just shy of gap between traditional investors and the USD20,000 according to the CoinDesk Bitcoin emerging blockchain market. Price Index (BPI). It is the first asset manager registered by After reaching those giddy heights, 2018 hit the CSSF able to manage Equity, Tokens and bitcoin bulls hard. The price had plummeted hybrid-type investments in the blockchain to close the year out at USD3,747, although ecosystem. on the flip-side, over USD2 trillion of bitcoin “We have designed the Fund as any other was traded, marking a 61 per cent year-on- PE or VC fund. We are not surprised to be year increase. CSSF registered but it confirmed that to On into 2019, and by 10th July the bitcoin duplicate the best practices and design of tra- price had rallied once more to over USD12,500. ditional Funds was the right decision,” says It has since pared back some of those gains, de Courson. trading at USD8,202 (at the time of writing). Another regulated fund manager in Dealing with these volatility swings is symp- Luxembourg is Block Asset Management, tomatic of an asset class that still attracts which became the first blockchain/crypto-fo- significant retail capital. It is also reflective of cussed Alternative Investment Fund Manager the fast-moving trials and tribulations of fintech (AIFM) registered with the CSSF. start-ups exploring blockchain technology. BAM operates the world’s first crypto fund of “We are dealing with a lot of uncertainty,” funds, which went live in January 2018. The fund says Anguita. “This asset is quite unique has been designed to offer investors full access because you have the risk profile of early to the world’s fastest-growing asset class with stage tech ventures in the public markets and the benefits of sound risk management and it is typically the case that with such ventures portfolio diversification to reduce volatility.

22 | www.hedgeweek.com CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 OVERVIEW

To address the speed at which investors European VC ecosystem specialised in block- can both invest and cash out their cryptocur- chain-related investments. And as De Courson rency investments, BAM recently devised a states, he is looking to take full advantage of creative solution: issuing the first ever public- the opportunities offered in this specific field ly-listed crypto tracker certificate on the Vienna “thanks to our network in the space”. Stock Exchange. The certificate is linked to the “We are dedicating resources to source performance of BAM’s fund of funds which it best-of class early-stage companies which are will, hopefully, mirror on the public market and well positioned to disrupt global business in is essentially a feeder mechanism. large industries and ecosystem, thanks to the “In short, it helps us with distribution,” says blockchain technology integration.” BAM co-founder and CCO, Kevin Ballard. “An As more digital asset strategies emerge, the exchange-listed tracker certificate is basically a institutional look and feel of the asset class box-ticking exercise for the compliance teams will continue to improve. One can now get at major financial institutions including private access to quant strategies, arbitrage strate- banks. Major asset managers and private gies, peer to peer lending strategies, mining banks wanted exposure to the digital asset strategies “and in our FoFs we have exposure space but in a way that allows them to retain to ICO/SCO strategies that are similar to PE or custody. Unlike investing in the fund directly, VC-type strategies”, confirms De Luque. “We the OTC certificate permits the bank or asset also have one strategy that invests in block- manager to retain custody.” chain-related listed companies – companies As Manuel De Luque Muntaner, co-founder like IBM, Microsoft who are investing huge and CEO further explains: “After one year of amounts in blockchain technology.” running the fund we realised that most of the The fund-of-funds being managed by BAM major banks didn’t want to take a crypto fund identifies six strategies within the digital assets on board. We looked into how to solve this space and currently invests in 10 funds in its problem and we decided that if we created a portfolio. tracker certificate, which is basically an OTC “In total we have over 800 funds in our instrument, it would make it easier for the database. The majority, however, do not pass banks to invest in. The tracker certificate is our strict due diligence process. A lot of com- basically a feeder to the main fund – and it has panies make it sound like they are running proven to be no problem at all for the banks. a Rolls Royce but when you look under the Some of the biggest asset managers in Latin hood you find it is nothing more than a ham- America have added our certificate into their ster spinning on a wheel. If they don’t have model portfolios.” an independent fund administrator, an annual Given the structural link between block- audit or a team with experienced in fund and chain and digital assets, Olymp Capital has money management, they are rejected,” con- positioned itself as a natural leader in the cludes Ballard. n

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Q&A with Simon Gray

How do you assess the importance of the Where other global jurisdictions have crypto/digital asset class as a future growth chosen to lump crypto assets under existing driver for the jurisdiction? regulation for other complex financial instru- We see crypto assets as a huge potential driver ments, we have decided to take a little more for the British Virgin Islands (BVI). Estimates time to assess exactly what is the right way suggest that while the asset class has fallen of regulating them, to the advantage of these globally from its peak early last year, the market businesses. is still valued at over USD200 billion. What’s more, with the likes of Goldman Sachs noting Some industry figures suggest the BVI is this summer that it plans to go “further than now the second largest cryptocurrency ever” into its research and development of market, after the US. What makes the BVI so crypto, it is clear that this asset class has gone attractive, from a regulatory perspective, and beyond a niche corner of the financial services in terms of the quality of the infrastructure market and is increasingly becoming a trusted and service providers it is home to? method of money management. There are a number of reasons for this. For example, the BVI’s international business and What initiatives are BVI Finance pursuing finance centre adheres to the highest global to attract fintech entrepreneurs and crypto standards which is reflected in the quality of managers to the BVI? service and products that it provides. We are working with the BVI Government The BVI was an early adopter of the and the Financial Services Commission (FSC) OECD’s Common Reporting Standard (CRS) to ensure that our ‘wait and see’ approach which requires the exchange of information on to regulation of this new asset class contin- an automatic basis with a number of jurisdic- ues to be the best approach. The BVI has a tions for tax purposes. We are also a member long history of not responding rashly when a of the Inclusive Framework on BEPS led by the new product or asset is introduced on-island. OECD’s Global Forum on Transparency and Instead, our great advantage is that we work the Exchange of Information for Tax Purposes alongside the private sector and financial ser- bringing together over 100 countries and juris- vices professionals to develop rules that work dictions to collaborate on the implementation for them, not against them. of the OECD/G20 Base Erosion and Profit A good example of this is the regulatory Shifting (BEPS) Package. In addition, the BVI sandbox that has been developed by the FSC is rated as largely compliant by the OECD for digital and tech-savvy businesses to come Global Forum and meets the standards set to us and test innovative products and services by the Financial Action Task Force (FATF) – in a safe environment. The FSC’s approach is the global standard setter in this area. to align regulation with innovation and lighten Another attractive aspect of the BVI is some regulatory obligations to help attract the fact that its legal framework is based on business as they test new products in the English common law, widely regarded sandbox. It does so by providing a as one of the most user friendly defined test environment using a and acceptable legal systems tailored and focused supervisory for doing international busi- framework whilst protecting ness across borders. market participants. With regards to the

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 25 BVI FINANCE

quality of our wider infrastructure and services, due diligence via crypto technology. the BVI is home to a cluster of associated spe- As an aside, it is interesting to note that the cialists across financial, legal and accounting BVI Government is pressing ahead with the firms with clients around the globe. As such, implementation of blockchain technologies to we were ranked the top offshore jurisdiction help better prepare for future weather emer- in the world for the eighth consecutive year, gencies. Earlier this year, the BVI Government with Vistra 2020 stating that the BVI’s pop- announced a partnership with blockchain ularity reflected a growing preference for company, LIFElabs.io, to provide a ‘Rapid “tried-and-tested service at a time of economic Cash Response’ enabling people on-island uncertainty”. to purchase goods and services with digital currencies. Do you get a sense that the BVI’s fund industry This is a great example of the spirit of the practitioners are well positioned to capitalise BVI demonstrating that we are always ready to on the crypto revolution? embrace new technology if it can be shown to We have seen many on-island firms spending offer us improved solutions. a lot of time talking about crypto assets. They clearly see the potential in the asset class and What will BVI Finance be focusing on over know that while other jurisdictions around the the next 12 months in light of the fast-paced world have set up onerous rules around them, nature of the crypto asset class? the BVI has been a lot more accommodating. For us, the focus is on developing and imple- Mark Harbison, an associate with BVI based menting a regulatory sandbox with the BVI offshore law firm Carey Olsen, told us that his regulator, the Financial Services Commission team are receiving a lot of inbound enquires (FSC), making it clear that the jurisdiction has about setting up funds containing crypto a long-term commitment to helping financial assets. After it was revealed that the BVI was services firms innovate through regulatory and the second-largest cryptocurrency market in the financial technology. world, they had a lot of interested people call- Only innovative products where the ing asking them to explain how it would work applicant has considered the appropriate to set crypto-based funds in the BVI. safeguards to manage risk will gain entry into Blockchain technology has huge poten- the sandbox. This should stimulate growth in tial to improve the way investment funds are areas where there previously was none as a managed operationally (regulatory reporting, result of heavy licensing and onerous regula- investor onboarding, AML/KYC). How impor- tory obligations not allowing products to test tant is it for the BVI to assess the opportunity boundaries and be more innovative. set for this technology, in order to continue In addition to the sandbox approach, the standing out as a leading offshore jurisdiction? BVI regulator recently expanded the BVI The BVI’s anti-money laundering and Financing and Money Services Act 2009 to anti-terrorist financing legislative regime meets allow for Peer-to-Peer (P2P), Peer-to-Business or exceeds international standards, as well as (P2B) and Business-to-Business (B2B) lending the jurisdiction operating a leading regulatory platforms to operate within the BVI. framework across the sector. That said, if new This may further stimulate the creation technologies such as blockchain can help of a new generation of decentralised crypto us further exceed expectations and lead the exchanges going forward. n charge in this area, that is an opportunity we will always look to explore. Simon Gray Recent amendments to the BVI’s anti- Head of Business Development & Marketing, BVI Finance money laundering rules now permit digital ID Simon Gray is a senior financial services’ professional with strong international verification and the receipt of electronic copies experience gained in the Caribbean, Middle East and Asia as well as major of documents, so businesses are able to use a experience in both public and in private sectors. Combining an investigative background with 25+ years of first-hand experience of international financial blockchain provider to double check identities. services and product innovation and design, Simon has spent much of his We have already seen a number of busi- working life in the private sector with senior roles including Baring Asset nesses and individuals using digital Know Your Management and Barclays Wealth. He has previously worked well established Customer service providers as a result of this organisations including as Director, Supervision (DFSA) within the Dubai International Financial Centre. change, illustrating the overall improvement of

26 | www.hedgeweek.com CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 RSK Rootstock’s RIF: The future of blockchain technology

Q&A with Diego Gutierrez Zaldivar

What is RSK? services firms like Tarjeta Naranja Who is funding and supporting RSK? Rootstock (RSK) is an innovative (Argentina’s main credit card issuer). In 2018, the RSK team raised USD150 blockchain network with a unique million by selling RIF tokens to a value proposition: combining Bitcoin’s How will it be used in the future? collective of respected blockchain large user base and robust security The RSK team is directing the bulk of investors, including Silver 8 Capital with smart contracting capabilities. its resources to expanding the net- and Coinsilium. Furthermore, RSK has RSK achieves this by enabling BTC work’s in-built services layer, as this formed a Federation of 30-plus service holders to import their cryptocurrency will allow it to attract further developer providers to support the network’s into the network via a secure, two-way talent and professional-grade appli- transactional activity. Among the conversion process. By offering full cations. Through the RIF token, any Federation’s ranks are prominent enti- support for Ethereum’s programming user will be able to make use of the ties such as Digital Currency Group, languages, RSK allows developers to computation, storage and payment Bitmain and Coinfirm. Finally, RSK has utilise their existing code and create channels that overlay the network. gathered the support of over 80 per powerful smart contract applications. This means that decentralised appli- cent of the ’s miners, In addition, RSK has an in-built infra- cations running on RSK will bypass who will also use their computing structure layer that provides services the scalability issues and UX frictions power to safeguard the RSK network. such as computing power, storage that pervade applications in smart and fast payment channels. This infra- contract networks like Ethereum. Who is the team behind Rootstock’s structure is fuelled by RSK’s very own RSK’s technology stack is particu- RIF? cryptocurrency – the RIF token – and larly well-suited to the development of The team comprises 70 employees is in active development. decentralised financial applications, spread across various geographies, as these are resource-intensive and spearheaded by Diego Gutierrez How is it being used now? require a high transaction throughput. Zaldivar, whose extensive entrepre- RSK’s mainnet launched in 2018 fol- neurial experience includes being lowing 4 years of hard work and part of the founding teams of some thoughtful planning. RSK’s user base of the most well-known digital projects is growing at a fast rate and a diverse in Latin America. Sergio Lerner leads range of applications has already the development on the technical side started to blossom. For instance, and has a stellar track record in fixing there are insurance solutions like cryptographic vulnerabilities. n InsurTech, financial applications like Money on Chain, gaming applications such as Crypto Spaceshift, and even legal service solutions like Signatura. To catalyse adoption, the RSK team recently set up a development studio in San Francisco and partnered with Diego Gutierrez Zaldivar Monday Capital to establish an RSK CEO, RSK start-up accelerator. In addition, the For more information on the RSK RSK team is executing on an ambi- network, the RIF infrastructure, and tious outreach programme, through further reasons to be excited, you may visit: https://www.rifos.org/ which it has partnered with financial

CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019 www.hedgeweek.com | 27 DIRECTORY

BVI Finance is the ‘voice’ of the British Virgin Islands’ financial services industry; marketing and promoting its products and services, as well as managing its excellent reputation as a premier international business and finance centre. BVI Finance was incorporated as a company limited by Guarantee in December 2016 and has operated as a public-private partnership since then. BVI Finance maintains a strong relationship with key stakeholders including Government and its many partners locally and internationally, media outlets and investors in emerging and traditional markets.

Contact: +1 (284) 852 1957 | [email protected] www.bvifinance.vg

Copper provides blockchain agnostic infrastructure solutions for institutional investors actively trading digital assets. Underpinned by multiple award winning, and optically air-gapped custody, Copper has built the tools and services required to safely acquire, trade, and store cryptocurrencies. Whether it’s secure long-term storage, instant T-0 OTC trade settlement, or bespoke trading environments across multiple exchanges, Copper delivers the infrastructure that enables institutions to meaningfully invest in digital assets.

Contact: Boris Bohrer-Bilowitzki | +44 (0)20 7101 9455 | [email protected] www.copper.co

As a global top 15 law practice, Eversheds Sutherland provides legal advice and solutions to a global client base ranging from small and mid-sized businesses to the largest multinationals. Our teams of lawyers around the world operate seamlessly to deliver the legal know-how and strategic alignment that clients need from their advisors to help further their business interests. We shape our advice to the unique circumstances and challenges of each project, and ensure the right people are in the right places to offer insight and certainty – from the day-to-day to the most complex, multijurisdictional matters. What unites us is our commitment to service excellence through a solution-oriented approach. We know our clients’ businesses, the industries and markets they operate in, and we know that great relationships yield the best outcomes. www.eversheds-sutherland.com Contact: April Hughes | [email protected]

Harneys is a global offshore law firm with entrepreneurial thinking built around professionalism, personal service and rapid response. Open, progressive and personable, we provide advice on British Virgin Islands, Cayman Islands, Cyprus, Bermuda and Anguilla law to an international client base which includes the world’s top law firms, financial institutions, investment funds and private individuals. Our network is the largest among offshore law firms with more than 12 locations in major financial centres across Europe, Asia, the Americas and the Caribbean, allowing us to provide reliable and timely service of the highest quality to clients in their own languages and time zones.

www.harneys.com Contact: [email protected]

Silver 8 is a US-based Technology Investment Manager that seeks to offer concentrated global exposure to innovation within Financial Technology (“FinTech”). The manager employs fundamental research to select FinTech investment themes with a multi- year horizon. Currently, the manager is primarily focused on blockchain technology developments and applications. The manager uses a hybrid strategy, investing primarily in liquid markets (digital assets such as crypto-currencies), and selected “opt-in” private investments.

www.silver8capital.com Contact: www.silver8capital.com

28 | www.hedgeweek.com CRYPTOCURRENCY & BLOCKCHAIN REPORT | Oct 2019