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What cryptohedge funds are for…

Just pointing out what cryptohedge funds are for….

  1. First of all, there are a lot of rich people that just can’t be bothered.  Yes you and I can just go on poloniex and bittrex and buy and sell crypto.  But you and I also drive our own cars, mow our own lawns, cook our own food, and do our own laundry.  If you are a rich person, you have money so you will be spending your time on the yacht and eating at fancy restaurants.  You want someone else to cut the grass, and that’s where hedge funds come in.  Also with this sort of hedge fund, you don’t even ever often get to talk to the rich person.  You talk with the rich person’s head butler, and he makes your life miserable.  So for example, if you have a fund that just buys bitcoin, they’ll demand daily reports and charts.  The fact that these is sort of stupid since they can just read up the numbers online doesn’t matter.  If you are running a hotel, and the rich person what’s you to dress up in a chicken suit and do a polka. you do it.
  2. There are some trading stuff that you can do to make money.  Buy low/sell high.  Market making and short term trading.  This type of work is like being a hammer salesman.  You have a buyer and a seller, except that the buyer and the seller aren’t there at the same time, and so you buy and sell and collect a fee.
  3. Finally crypto is not just about crypto.  Eventually everything will be tokenized and the infrastructure you use to buy and sell crypto-currencies will be used to buy and sell Apple stock.

The reason that crypto-hedge funds are important is that they have no legacy.  For two years previous I’ve been trying unsuccessfully to get hedge funds to invest in back end technology.  Suppose you have a hedge fund that does everything by paper (i.e. most of them).  You literally have to hire someone to print out paper copies of brokerage statements and compare them with paper copies of your Excel spreadsheet, and if something goes wrong, you have to spend several hours on the phone with a broker, who is looking at their paper copy of your accounts.

This is insane.  The trouble is that you don’t have the money to get rid of this system and move to something that is all digital.  Everything works, and you aren’t making that much money, and so you can justify rebuilding everything from the ground up.

But with cryptocurrencies you can do all digital.  Since you are going to be building everything from scratch, you don’t use paper.  You don’t ask bittrex or poloniex for a paper statement because they wouldn’t be issuing one anyway.  You write exchange connectors that just download their data.  Now if you want to trade Apple stock, you still have to go to paper, but that will only be the case until next year.

 

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The problem with the bad apples analogy

I’ve heard regulators talk about ICO’s and saying that they don’t want a few bad apples to ruin it for everyone.  The trouble with this is that it doesn’t really describe how ICO’s work.

It turns out that there aren’t a “few bad apples”.  The majority or even the vast majority of ICO’s are scams.  So it’s not a matter of stopped a few bad apples.  Most of the apples are bad.  The hard part is that mixed in with the scams and terrible deals, there are a few good apples.  So if you have a regulatory regime that assumes that there are a few bad apples, it just won’t work.  Most of the apples are bad.

However, the difference now is that you can tell that there are some good apples.  One thing to remember with regulation is that each day, we all get bombarded by thousands of e-mails that are scams.  Just open up your spam folder.  It turns out that there is no regulatory system that protects you from scams, and what ends up happening is that people come up with common sense stuff to avoid spam scams, and we use AI (!!!!) to filter out the scams.

What’s different now is that instead of being 100% scams, we now have the technology to set things up that you can verify information and so it’s now only 90% scams.  Once you have a few good apples, that’s enough to build an industry.

How ICO’s were used for money laundering in China

At the Legal Tech panel, I made a statement that one reason the Chinese government cracked down hard on ICO’s was because ICO’s allowed for money laundering in ways that were impossible with BTC and ETH alone, and when someone asked me to explain why, I gave a bad explanation.

First of all, it’s important to point out that the money being laundered was “gray money” and not “black money.”  We aren’t talking about drug money or terrorist money, but merely some super-rich guy in China or Russia that perhaps wasn’t all that diligent about filing taxes, and also may have been an official with extra sources of income.

The fact that the money was “gray” rather than “black” is important because the ultimate destination of the money was Australia, Europe and the United States, and Western countries are extraordinarily welcoming of this type of money, provided you are willing to pay your taxes. You use this money to move your money to the West, where you will get citizenship and as long as you are taxed people will take your money with open arms.  Funny thing about US/UK/AU anti-money laundering law.  If you are a rich person that moves “gray money” into those countries and you declare it for tax purposes, then you have broken no laws.  It’s against US/UK/AU law for a Western company to bribe an official, but it turns out not to be illegal under US/UK/AU law to be a foreign official who has received a bribe.  It’s also not illegal to pay a bribe as an individual.  Funny that.

So it’s important to not get too moralistic about this, since Western countries are more than happy to take the money and the tax revenue associated with this.

Also there is an entire industry private banks, consultants, and lawyers that is involved with moving this money, and so what happened was that money that used to go through private banking and VC firms just got switched over to ICO’s.

So lets start with why it doesn’t work just with bitcoin and ethereum.  If you want to move USD 2 million out of China, then fine.  You find a bitcoin or ethereum broker, you buy and sell ethereum and your money is out, and the only problem is that there are a dozen ways of moving USD 2 million that are easier and cheaper than cryptocurrency.

The problem comes when you want to move USD 30 to 100 million out.  At that point Chinese bitcoin/ethereum exchangers won’t touch you.  The reason is that if you are USD 2 million, you are “ordinary rich.”  If you are trying to move USD 30 to 100 million out and you don’t want the Chinese government to know, then there is a very, very high chance that you are someone that the anti-corruption people at the Communist Party will find interesting.  So if you help someone move USD 100 million out of China, and the CCP can’t put that person in jail because they now are living in New York City with American citizenship, they will put you in jail.

It’s also the situation that it’s hard to disguise buying USD 30 million in ethereum.  What’s worse is that if you *try* to disguise it, then you’ve just put a big target on your back when the anti-corruption people come around and haul you to jail.

So ICO’s changes the equation….

First of all, it’s important that the people running the ICO’s are typically not Chinese and don’t live in China.  That means that if things go bad it’s going to be difficult to toss someone in jail.  They have to hire some local people to help run the ICO, but the person in China can claim (honestly) that they were just small fish and weren’t really involved in the decisions.

The way the ICO transaction works is that you have a smart contract that creates tokens in response to a deposit of ethereum.  So you have a rich guy make a deal with the ethereum promoter.  The rich guy will buy some ethereum send it over to the ICO, get tokens, and the ICO will end sell some of the ethereum back to the rich guy, who will then move it into the ICO.  Also, all of the transactions between the ICO and the rich person gets split up, and there is this huge stream of non-rich people trying to buy the ICO so that all of the money gets mixed in.  You can also deal with a promoter in Mainland China who promised a lot of small investors, and this lets them mix big fish money with little fish money, and unlike your normal OTC bitcoin trader, the promoter likely has plane tickets to the United States all ready.

So at the end of this the ICO has a bunch of money in a Chinese bank account.  The Chinese official has a bunch of tokens that they can sell once they arrive in the US.  At that point the ICO can spend the money to hire programmers and do other business in China, and the Chinese government has no way of tracing the original source of funds.  It’s worth noting that all this works better if the ICO is in fact going to spend their money on something useful.  You can try to do a simple “pump and dump” but then you run into the problem that if the ICO looks like they are just going to take the money and run, the Chinese rich person doesn’t know whether to trust the ICO.

One thing about this system is that it’s really difficult to figure out where to regulate it to stop the flow, so what ended up happening was that it was such a mess, that the Chinese government just put a stop to this.  It’s like the “I won the money in Macau” excuse.  That stopped working when the Chinese government made it clear that it wasn’t going to try to figure out who really won money in Macau, and if you were a Chinese official that set foot in Macau, you were finished.  They did the something for ICO’s.

Also this probably ended quite badly for the Chinese rich person.  Not only were the ICO’s shut down, but also the Chinese government forced them to turn over all records, and this isn’t the Italian mafia with a code of silence.  Once it’s clear that you didn’t get out in time, and that you are going to be in jail for a very long time if you don’t cooperate, then people start naming names.

 

Time Zone fun….

Quote from Doctor Who…..

The Doctor: Do you know like we were saying, about the earth revolving? It’s like when you’re a kid, the first time they tell you that the world is turning and you just can’t quite believe it ’cause everything looks like it’s standing still. I can feel it…

The Doctor: the turn of the earth. The ground beneath our feet is spinning at a thousand miles an hour. The entire planet is hurtling around the sun at sixty seven thousand miles an hour. And I can feel it. We’re falling through space, you and me, clinging to the skin of this tiny little world. And, if we let go…

One of the things that ended up happening when you work in banking is that you feel the earth move.  There are three major investment banking zones.  New York, London, and then you have various banking centers in Hong Kong/Singapore/Tokyo.  So each day you set at your desk and you feel the earth move as trading centers light up like Christmas tree lights.  Investment banking meetings invariably take place at around 9 p.m. HK time, because that’s when New York opens, and it’s afternoon in London.  And you can tell just from the fact that that meetings get scheduled around New York City time that the United States runs a global empire.

But the other thing that you find is that over time, the continents move.  You feel the spinning of the world, at the same time day by day, you feel the ground beneath slowly move.  Inch by inch.  You can actually sense Europe and America becoming tired, and new things growing here in Asia, and you have feel power leaving the old financial centers and moving toward the new ones.

So this causes a lot of time zone confusion.  I’ve noticed that I haven’t had any meetings with London and New York.  All of the meetings I’ve had are with San Francisco and Zurich, and just with the time of the meetings, you have feel the ground moving.

 

In the middle of a revolution

One thing that I very clearly got the impression of at fintech week is that we are living in the middle of a revolution.  It’s not just ICO’s and bitcoin.  ICO’s and bitcoin are part of just a broader revolution involving Trump and Brexit, and lots of angry people.

You know that you are in the middle of a revolution when the rats start jumping off the old ship.  As a former investment banker, I’m something of a rat, and I jumped off the sinking ship before everyone else.  But I’m sure that there was a moment in the French Revolution when the king’s ministers just stared at each other and said “why are we supporting the old system?”  The same thing happened in 1991 in Russia, when you had a lot of Tsarist officials or Soviet officials suddenly asking themselves why they are part of the old system, and deciding to tear off their hammer and sickles from their name cards.

The reason the rats are jumping ship is that I think you have a ton of lawyers, bankers, and consultants that suddenly realize that they can make much more money with the new system than the old one.

But there is something more than greed.  There’s quite a bit of anger.  So when I worked at JPMorgan, I saw how the super-rich lived.  There was just insane amounts of money flowing back and forth, and by giving me these bread crumbs, they kept me happen.  But one thing bothered me, and that was seeing how nice people were to rich people.  So you go to a bank now, you get shoddy service, and it’s obvious that they don’t care about you.  But then you see people jumping all over themselves at making rich people happy, and you figure out that they care about them and not you.

The thing about world politics and finance is that it’s just like high school.  There are the cool kids that run everything and they are the social center of the school.  There’s so much freaking money in the world, that most people can just survive on bread crumbs from the rich, but along the way, someone forgot to throw out the bread crumbs.

 

How to invest in ICO’s.

It’s pretty simple.

Look at a group of people.  Ask yourself what they are going to do when they get your money.  If you think good things will happen when they get your money, then give them your money.  If you think that bad things will happen when they get your money, then don’t give them your money.

I think the fact that you are about to hand money over to people that could take it and run away with it and leave you with nothing is a good thing.  You have to realize that when you do an ICO, the government won’t protect you.  If they scam you, then ultimately the money is there’s.  The only thing that will protect you is the honesty and integrity of the people involved.

And then you have to deal with the fact that people aren’t saints.  One thing that you quickly find out in investment banking it’s not black and white.  If you give someone a bunch of money, they will spend something for themselves.  The question is how much, and one nice thing about ICO’s is the money is large enough so someone has to be really, really crazy to want to take all of it.  If you raise USD 50 million, the 5 people involved can just take 20 percent of that, and they’ll have more money than they know what to do with, but then you have to ask with they are going to do with the rest of the USD 40 million.

Doing an ICO – Just DO IT with a healthy disrespect for the law

My advice for someone that wants to do an ICO is to just go ahead and do it.

As far as regulation goes, there are just two pieces of advice

  • Don’t steal people’s money
  • Pay your taxes

The thing about going through regulation is that the regulators have no idea what to do and they are just figuring out what the rules are.  So just be an honest business person and just do it.

Let me say something that I think will shock lawyers, but I happen to believe that when you do business ultimately the law doesn’t matter.  What matters is personal honesty and integrity, and if the law is so messed up that honest people can’t do honest business, then you should just go ahead and break the law.

I’ve been talking about the collapse of the old system and the creation of a new system.  One of the big problems with the old financial system was that people lost their sense of ethics and morality, and instead of trying to run an honest business, companies substituted law for morality.  You could get away with murder (or destroying the world financial system) as long as you filled out the right forms.  Rules that were designed to protect the consumer were perverted to just protect big companies and make sure that lawyers and consultants make a ton of money.

But I think everyone has realized that the old system just wasn’t working, and the old regulations make no sign.  No one was making money, and no one was benefiting.  So the old system is collapsing and a new system is arising.

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