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The implications of Blockchain technology in the Alternative Investments arena

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Part of the FinDating event by FinLantern, with support of the CAIA Association, I presented the relevant characteristics of Blockchain technology and models / use cases for investment platforms and instruments across Real Assets, Hedge Funds, Private Equity and Structured Products. Focus is on the Swiss ecosystem. I first give an introduction to FinTech, Blockchain, the respective Swiss actors, and then deep-dive into Alternative Investment asset class use-cases.

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The implications of Blockchain technology in the Alternative Investments arena

  1. 1. FinDating 2018 Geneva, June 21st 2018 – Four Seasons Hotel Des Bergues BLOCKCHAIN, CRYPTOCURRENCIES & FINTECH Making sense of Blockchain & Cryptocurrencies for a new Fintech Revolution 14.40 – 15.20 The implications of Blockchain technology in the alternative investments arena. Relevant characteristics of Blockchain technology and models / use cases for investment platforms and instruments across Real Assets, Hedge Funds, Private Equity and Structured Products. Jérôme Vasamillet, CAIA Wealth Management & Fintech @jerome_vasa
  2. 2. The implications of Blockchain technology in the alternative investments arena
  3. 3. Agenda Introduction Hedge Funds Private Equity Real Assets Structures Products Appendix
  4. 4. Introduction
  5. 5. 5 A few words about myself I am not a blockchain expert Jérôme Vasamillet Business Engineer, Jérôme has a blend of FinTech start-up and wealth management experience, most recently at Deutsche Bank and Entrepreneur in Residence at Fusion. A passionate builder of investment solutions, new business models and communities, he works with startups to bring his own start-up and wealth management experience and networks to founders. He also co-leads a 1’300+ Fintech community in the Geneva area to share, learn and help create opportunities for others.
  6. 6. FinTech An industry composed of companies that use new technology and innovation to disrupt the marketplace of traditional financial institutions and intermediaries in the delivery of financial services. Definition source: Infinite Financial Intermediation, Tom C. W. Lin, Temple University - James E. Beasley School of Law, January 5, 2016
  7. 7. 7 The universal bank model Source: https://www.dealsunny.com/blog/fintech-digitally-disrupting-the-financial-world-infographic
  8. 8. 8
  9. 9. 9 Unbundling through FinTechs Source: https://www.dealsunny.com/blog/fintech-digitally-disrupting-the-financial-world-infographic
  10. 10. Blockchain A shared + trusted + public ledger of transactions that everyone can inspect but which no single user controls. A distributed database that maintains a continuously growing list of transaction data records cryptographically secured from tampering and revision. Definition source: https://blockchainhub.net/blockchain-intro/
  11. 11. 11 What technology or business model innovation will have the greatest impact on financial services in the next 3 to 5 years? (Asked to top executives by CBINSIGHTS) ➢ A possible reason is the view that BC is still nascent to have a strong impact within 3-5 years Source: https://www.cbinsights.com/reports/CB-Insights_Smart-People-Fintech.pdf (June 2018)
  12. 12. 12 Source: https://cdn-images-1.medium.com/max/2000/1*szRfkqONPG7_7MeMqElnfg.jpeg
  13. 13. Swiss Focus
  14. 14. 14 Swiss FinTech Map Any Blockchain for Alternative Investments? Source: Swisscom (June 2018)
  15. 15. 15 Swiss Blockchain & Crypto Map 19 in Q1 2017 Source: http://fintechnews.ch/blockchain_bitcoin/swiss-cryptoblockchain-startup-map/10263/ (March 2017)
  16. 16. 16 (BlockchainHub) (OYOBA) Sources: http://fintechnews.ch/blockchain_bitcoin/swiss-blockchain-ecosystem/16514/ (January 2018) and https://www.oyoba.net/map/ (February 2018) Swiss Blockchain & Crypto Map 60+ in Q1 2018
  17. 17. Alternative Investments
  18. 18. 18 Relevant Blockchain characteristics “At its core, blockchain is just a database, one that is particularly good at dealing with transactions about assets, whether they’re financial assets, physical assets such as cars, or something more abstract like customer data.” (Ian Pattison while Cloud CTO & Blockchain Leader, IBM UK, 2017) Blockchain has four key characteristics which make it different: • Distributed and synchronized across networks • Smart contracts • Consensus • Data immutability and provenance of assets Of particular interest for Alternative Investments • Smart contracts: providing confidence all actors are “playing by the rules” • Data immutability: no changes brought to an agreed and recorded transaction • Provenance of any assets: where has it been? Where is it now? What happened throughout its life? Source: https://www.ibm.com/blogs/cloud-computing/2017/04/11/characteristics-blockchain/ (April 2017)
  19. 19. 19 Scope • Hedge Funds − Macro and Managed Funds − Event-Driven Hedge Funds − Relative Value Hedge Funds − Equity Hedge Funds − Funds of Hedge Funds • Private Equity − Equity Types of Private Equity − Debt Types of Private Equity − 3 primary types: • Venture capital • Buyout • Mezzanine • Real Assets − Real Estate/Land Equity & Debt − Infrastructure − Farmland − Timberland − Mining Land/Rights − Physical Commodities − Intellectual Property • Structured Products − Structured Deposits − Structured Capital ‘Protected’ products − Structured Capital-at-Risk products
  20. 20. Use Cases
  21. 21. 21 The companies / projects / applications shown in this presentation… 1. Do not constitute a recommendation to buy, sell or use their stock / tokens / ICO / TGE / products / services; 2. Are use cases to express blockchain applications, with focus on Swiss solutions, not an exhaustive list. Past performance is not an indicator of future performance. 365-Day Sharpe Ratio updated on 18 JAN 2018 GMT via silo.metaco.com
  22. 22. Blockchain & Hedge Funds
  23. 23. 23 Early Adopters of Bitcoin Investing & Hedge Fund Pantera Capital 2013 • “First U.S. Bitcoin investment firm… leading blockchain investment… one of the largest institutional owners of cryptocurrencies.” 2014 • Launched the Pantera Bitcoin Partners, a joint investment fund launched by Pantera, Fortress, Benchmark Capital and Ribbit Capital. June 2017 • Hedge Fund announced focusing on investments solely in tokens that power public blockchain protocols Source: https://www.panteracapital.com/ as of June 2018, https://www.coindesk.com/100-million-pantera-capital-ico-hedge-fund/ (June 2017) , https://cryptovest.com/news/panteras-digital-asset-fund-down-almost-50-in-march-due-to-bitcoin/ (April 2018), http://www.businessinsider.com/bitcoin-hedge-fund-pantera-capital-makes-a-strong-comeback-in-april-but-passive-indexes-did-a-lot-better-2018-5?IR=T (May 2018) 2 venture and 4 cryptocurrency funds: • Venture Fund III • Digital Asset Fund • ICO Fund • Bitcoin Fund • Long-Term ICO Fund
  24. 24. 24 Open collaboration on data sets Numerai – “the first Hedge Fund with network effects” Sources: https://numer.ai (June 2018) and https://numer.ai/whitepaper.pdf (February 2017) “Network effects power all of our greatest infrastructures” Andy Weissman Union Square Ventures, Numerai Investor ➢ At Numerai, the belief is that cryptocurrencies can bring network effects to finance
  25. 25. 25 Multi-strategy token hedge-fund SwissBorg Source: https://www.swissborg.com/en/ and https://trello.com/b/lacDIgRs/swissborg-roadmap (June 2018) “…discussing with service providers and legal experts on the bet way to move forward.”
  26. 26. Blockchain & Private Equity
  27. 27. 27 Managing Shares of Private Companies NASDAQ LINQ • Digital ledger technology launched in 2015 that leverages a blockchain to facilitate the issuance, cataloguing and recording of transfers of shares of privately-held companies • On the NASDAQ Private Market • Collaboration with Chain: blockchain infrastructure provider funded by leading venture firms Khosla Ventures, RRE Ventures and Thrive Capital as well as strategic investors Visa, Citi, Nasdaq, Capital One, Fiserv and Orange. • Challenges: − labour-intensive, paper-based, manual process − involving paper stock certificates, option grants and convertible notes − that quickly become outdated • Opportunity: digitally managed via blockchain to increase efficiency & security Source: https://www.forbes.com/sites/omribarzilay/2017/08/30/will-blockchain-change-the-way-we-invest/#76ad88fb5585 (August 2017)
  28. 28. 28 Cryptocurrency Investing Invictus Capital Supporting “talented entrepreneurs and visionaries… in the early stages of their project’s development” • CRYPTO20 index fund / tracks top 20 cryptocurrencies by market capitalization / direct access by holding a single C20 token • Invictus Hyperion tokenized VC closed fund / designed to function as a syndicate for investors looking to gain exposure to the earliest stage of blockchain investing / funding ranges between $250 000 and $1M • Kinetic Fund “The first open, passively managed tokenized fund to be launched by Invictus Capital” • TITAN AI tool AI tool backed by data science and machine learning to allow for analysis and plagiarism detection on ICO white papers Source: https://invictuscapital.com/ (June 2018)
  29. 29. 29 Private Equity for Blockchain Projects Blockchain Valley Ventures (BVV) • BVV is an accelerator and VC firm with a "hybrid" financing model for blockchain-enabled businesses − Hybrid? = combining two different forms of financing: • The traditional VC model • The newer ICO model • Lykke Corporation spinoff (pioneer in blockchain-powered trading) • Blockchain Investment Opportunities Note is an investment vehicle − Capital investments for blockchain projects − Cooperation with Vicenda • Global investment boutique with focus on private debt investing • “Bring borrowers and lenders together outside the realm of traditional financing sources” Source: https://www.lykke.com/company/news/2018-05-blockchain-valley-ventures ; http://bvventures.ch/ ; https://vicendagroup.com/en/ (June 2018)
  30. 30. Blockchain & Real Assets
  31. 31. 31 BLOCKCHAIN? • Smart(er) Contracts (execution, transparency, speed) • Fraud Protection (false listings, forged documents, and rental scams) • Affordable Investing (fractional ownership) • Cutting Out The Middlemen (brokers, lawyers, banks)
  32. 32. 32 Token Estate Investment Vehicle Tokenestate Source: https://tokenestate.io/Tokenestate_io_Whitepaper.pdf (October 2017) • Aim to be a more efficient and liquid via Real Estate Tokens vs. standard alternative investment vehicles • ‘Tokenholders’ entitled to a share of net profits generated by a portfolio of real estate properties • ‘Token Estate Investment Vehicle’ owns the properties − Property titles haven’t yet been ‘tokenized’ − Tokenholders rights not yet recognized in court − Tokenholders cannot yet be the legal owners of real estate. − Need to have a trusted intermediary which will be the legal owner of the properties, while issuing tokens to investors in exchange for funds.
  33. 33. 33 Bringing Real Estate Assets on Blockchain Crypto Real Estate (Swiss Real Coin) Source: https://www.swissrealcoin.io/RZ_SwissRealCoin_Whitepaper_A4_E_v2.pdf (March 2018) • Challenge: asymmetric information during real estate asset ownership transfer increases due diligence costs. • Opportunity: − Reduced due diligence costs − Increase transaction efficiency through data integrity − Blockchain provides permanent, non-corruptible and complete access to all property information − “offer full liquidity on the relevant market places and grant real time access to key information about the real estate (e.g. clear overview of occupancy rates, rent-free months, etc.”) via the coin • SwissRealCoin (SRC) − emitted by Crypto Real Estate Ltd (CRE) in Zug − SRC a Swiss Law governed bond structured to fund the activities of CRE and the acquisition of the real estate • Linking the SRC inner value (real estate portfolio) with the SRC market price to avoid volatility − “if the market price of the SRC exceeds the inner value of the SRC by two times, the SRC smart contract therefore will issue additional SRCs at market price to increase the inner value” − “reinvestment of the majority of the net rental income shall also continuously increase the inner value of the SRC”
  34. 34. 34 Blockchain register of rights to build WeCan.Fund Foundation of Industrial Land (fti) Geneva public company which assists manufacturers in the search for land and premises “Beyond providing transparency on the rights to be built, the interest is to decentralize exchanges, facilitate audit and speed up processes.” Sources: https://wecan.fund/blockchain/fti/ (June 2018) and https://wecan.fund/media/upload/various/blockchain_noffer/OC-Blockchain-2018-EN_YL3evXt.pdf
  35. 35. 35 Passion Investments WealthInitiative – non bankable assets on the blockchain Challenges: • Legal: linking on/off-chain – legal rights of token holders for the asset held in the physical world => IoT • Passion investments*: Lack of provenance history and condition reports, highly fragmented and inefficient market associated with high transaction costs. • Real Estate: lack of international standards and high bureaucracy make cross border transactions challenging. Slow transaction time and arduous process. • Art: highly inefficient art market associated with high transaction costs and opaque information data. • Direct equity investments: lack of fair valuation methods and asymmetry of information available. * include classic cars, fine wine, gems and jewellery, boats, aircraft, rare watches, rare stamps, coins, musical instruments, manuscripts etc. Source: whitepaper v 1.6 as of June 2018
  36. 36. 36 Blockchain Use-Case For Trade Finance Cerealia • Peer-to-peer grains trading and financing marketplace for SMEs and farmers • Using Blockchain, AI, IoT for the better of the industry • Founded by a 20 years-experienced grain trader • Use cases: − Get out of the USD regime − Provide a trusted platform for trades − Document transparency, traceability and accessibility Sources: https://www.youtube.com/watch?v=ve-N-geyag4 and https://www.youtube.com/watch?v=rI1KOcZ4M08 (June 2018)
  37. 37. 37 Direct Ownership of Gold & Silver Tarco International & AgAu • Fully decentralised ownership of cryptocurrencies • 100% backed by physical and allocated gold & silver • stored in secure world class vaulting facilities in CH • AgAu Gold Cryptocurrency − AgAu.GLD backed by gold 99.99% quality (1g of Au) • AgAu Silver Cryptocurrency − AgAu.SLV backed by silver 99.99% quality (1g of Ag) • Why Blockchain? − Distributed ledger technology to disintermediate the maximum number of points of failure, including central banks and traditional exchanges. Source: https://www.tarco.ch/ and https://www.agau.io/ (June 2018)
  38. 38. 38 Commodity Giants & Banks Consortium Geneva in the spotlight • Q1 2017 − ING, Mercuria and Société Générale ignited Easy Trading Connect, considered the first entry of such banking + commodity players into Blockchain − Objective: an experience to sell to China an oil shipment containing African crude oil through a bank, agent and inspector. Repeated three times, the traditional process was simplified and the average banking transaction was reduced from 3 hours to 25 minutes, beating hourly profitability rates. • Q4 2017: − BP, Shell and Statoil announced a partnership with Mercuria, Koch Supply & Trading and Gunvor along with banks ABN Amro, ING and Société Générale. − Objective: reduce administrative operational risks & costs of trading physical energy. − The partnership structured focuses on the raw materials industry, with objective to replace traditional paper contracts and exploitation documents by smart contracts and authenticated transfer of electronic documents. Source: https://www.letemps.ch/economie/negociants-geneve-sallient-imposer-blockchain (November 2017)
  39. 39. 39 “Smart” Intellectual Property Rights • “Since distributed ledger technology creates a secure, time-stamped and immutable chain of information, it is already finding applications in brand protection and enforcement, marketing and consumer engagement.” (WIPO) • “The law firm P&TS (Switzerland) has for example an agreement with the Bernstein Technologies GmbH which offers notarisation services for invention announcements based on blockchain technology, in order to establish irrefutably the possession of an invention or a work.” (ref. Medium article) • Possible applications (WIPO): − “In the context of IP-heavy industries, blockchain and related distributed ledger technology offer obvious possibilities for IP protection and registration and as evidence, either at the registry stage or in court” − evidence of creatorship and provenance authentication, registering and clearing IP rights; − controlling and tracking the distribution of (un)registered IP; − providing evidence of genuine and/or first use in trade and/or commerce; − digital rights management (e.g., online music sites); − establishing and enforcing IP agreements, licenses or exclusive distribution networks through smart contracts; − transmitting payments in real-time to IP owners; − authentication and provenance purposes in the detection and/or retrieval of counterfeit, stolen and parallel- imported goods. Source: http://www.wipo.int/wipo_magazine/en/2018/01/article_0005.html (February 2018) ; https://medium.com/@foustry/blockchain-based-solutions-for-intellectual- property-management-2ba14b51d5f6 (May 2017) ; https://euipo.europa.eu/knowledge/course/view.php?id=3038 (2018)
  40. 40. 40 1. Forest assets converted into tokens 2. ROI: token value appreciation & dividends 3. Marketplace: hold or sell Natural Resources and Land “Gold that Grows”: Blockchain transforming Forest Ownership & Impact Investing • An attractive asset class − real, stable returns over the long term − largely uncorrelated with traditional assets − Grow in size & economic value over time − ESG / SRI • Challenges − Access to ownership / minimum investment − Long term to maturity / illiquid − Regulatory Source: http://www.youareoxygen.com/2018/05/30/gold-that-grows-how-blockchains-can-transform-forest-ownership-and-impact-investing/ (May 2018) https://www.ekofolio.com/ as of June 2018 ➢ EkoFolio searches the world for sustainable forest investment opportunities, then fractionalise ownership by issuing tokens that represent the rights and value of ownership ➢ Part of the Fintech Sandbox with the Danish FSA
  41. 41. Blockchain & Structure Products
  42. 42. 42 Structure Products • Challenges within Structured Products − confusing terms, high fees and pushy sales practices by distributors • Opportunities via Blockchain − Make structured notes “cheaper, faster and safer” (Nilesh Jethwa, Marex CEO) • Remove intermediaries to potentially reduce fees • Reduced time to complete trades from 2 days “to minutes, if not seconds” • Decreasing the possibility of human error and settlement failure • London-based Marex Solutions creates first note using crypto technology (March 2018) − “it says is the first structured product to be registered, cleared and settled using the distributed ledger technology underpinning Bitcoin” Source: https://www.bloomberg.com/news/articles/2018-03-19/blockchain-enters-opaque-territory-with-first-structured-note (March 2018)
  43. 43. 44 Join the new EMEA open group on Linkedin https://www.linkedin.com/showcase/caia-emea/
  44. 44. Stay-tuned on Alternative Investments via CAIA Association
  45. 45. 46 Startup Weekend Fintech Geneva Batch #4, Geneva, 1-3 June 2018 @ Fusion Blockchain edition Total Attendees as of today: 327 attendees at 4batches Passionate Mentors & Speakers: 50 mentors (includes recurring) Dedicated Jury Members: 20 juries (includes recurring) Total Startups spawned: 10 Startups Fintecture (now at Station F Paris) DynaMetrics (now at F10 Zurich) and also projects: WeGo / NGOpen / BetterHalf / TradeForce / OWI / WealthPassport / AMRAC / Zerrro Fee Total Community: 1’350+ Meetup Members gather around Meetups https://www.meetup.com/Startup-Weekend-FinTech-Geneva/ @genevafintech #swfintechgva
  46. 46. Keep in touch (not yet via the Blockchain) LINKEDIN: Jérôme Vasamillet TWITTER: @jerome_vasa

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