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Tokenizing hedge funds

November 8, 2017

I’ve been talking to a lot of people about tokenizing hedge funds, and let me explain where the problems are.

One thing that’s not a problem is regulation.  If the regulators come to you and say “what are you doing?”  You tell them, “we are running a hedge fund.”  At that point you don’t have any regulatory issues.

Let me tell you what the real problem is.  Someone invests USD 10 million buying tokens for your hedge fund.  They lose their cell phone.  Have no idea what the keys are.  What happens?  “You’ve just lost USD 10 million dollars” is a wrong answer.  Or the hedge fund manager is vacationing in South Elbonia.  They get kidnapped, and the hedge fund manager gets a gun to his head saying “give us those USD 10 million dollars” or we shoot you.

This is not going to work, so you need some mechanism by which you can register the ownership of the tokens.  So if you have someone kidnap you, you give them the tokens, which turn out to be worthless after they release you.  You might want stock certificates, you might want casino chips.  You don’t want gold coins.

And so someone has to do the work to come up with the distributed apps and legal documentation that creates stock certificates and casino chips.  And trying to figure out how that works is going to be tricky.

The problem is that you then run into the problem of cost recovery.  You come up with the system to create stock certificates and casino chips.  The way that law firms normally do this is that they create the legal structures, and then they go to a copy machine and the use the same structure for each ICO.  That’s not going to work.  Once someone figures out the mechanism then the legal agreements and source code are pretty quickly going to go on the internet.

But then you run into the problem of who is going to do it.  One reason I’m not spending much time on this is that someone will do it, so someone else can do it.  The thing is that there is enough money flowing around so someone will end up doing this sort of thing.  We just have to wait a few months.

But here is what I hope will happen.  Right now it costs about USD 100,000 to set up a hedge fund.  The technology will be able to reduce the cost of setting one up to USD 1k.  At that point *everyone* can start of own a hedge fund.  There are a ton of structures and systems that are now only available to the wealthy, but if you push the cost of administration down, it will be like a Model T.  Everyone will have a hedge fund.  Everyone will have a family office.  Everyone will have a private banker.  If you want to set up an ICO, you go into an office and they’ll have all of the documents ready within 24 hours.


Sometimes I get a little depressed thinking about this.  You have this grand vision of the future, but you have to deal with the annoyance of living in the present.  This isn’t a new idea.  I’ve had it for about a decade.  But I’m seeing that the time has finally arrived.  All of the pieces are there.  Just need to dig the ditches.



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