Jim Dowd, Founder & Managing Director of North Capital – Interview Series

Benjamin Tsai is the President & Managing Partner of Wave Financial. Wave Financial offers early-stage investment, asset management, and treasury management to further the growth of the crypto and digital asset ecosystem

What was it that initially attracted to becoming the President and Managing partner of Wave Financial, an early stage venture fund focused on crypto currency?

My experience is mainly in the finance space, both sell side with BofA Merrill Lynch for 12 years and buy side with AllianceBernstein for 3 years.  When I returned to Los Angeles, I started to get involved in blockchain technology and its various uses.  The most natural one was to apply it to finance, and that application was most interesting to me.  So when I met David Siemer, our CEO, we decided to put together Wave Financial, an asset management firm focused on blockchain/cryptocurrencies.

This platform allows me to explore the limits of the space, such as crypto derivatives.  We have recently launched the Wave BTC Income & Growth Fund, which is a fund that pays a target rate of 1.5% yield monthly by selling Bitcoin options in the market.  We believe this is an innovative product, first in the market, and should be attractive to both long time bitcoin holders and also new investors in crypto.

 

One of the index funds offered by Wave Financial is the ‘Select 20 Index’ which is a fund that rebalances itself monthly and provides exposure to the top 20 digital assets. How has this fund performed compared to a more activate trading fund approach?

Comparison between active and passive management is always difficult.  This is especially hard in the crypto world, where there is not any established benchmark.  We developed the Select 20 Index to serve as the crypto market benchmark that better reflects the market compared to just Bitcoin.  With the index as a baseline, we also have our fund which tracks the index.  Due to the low fees, we believe we are doing well to provide market beta to investors.

There are actively managed funds that may be doing better and worse, but they would have been taking higher risk compared to the market beta, and also have higher fees.  The outperforming ones would have been able to justify the higher risk and fees, but the underperforming ones obviously do not.  For an investor to determine which funds could outperform would be very difficult, as track records are very short, and the crypto market is still in its infancy.  It would be difficult to show how that alpha capture can be replicated going forward.

In summary, there will be funds that outperform and ones that underperform our index and/or fund.  But for clients to take a pure market beta, similar to an equity ETF, our product provides the exposure at a low cost, and is an effective tool for achieving that for the investors.

 

Wave Financial is clearly bullish with the future of digital securities having invested in both Securitize and Vertalo. What is it about this industry that has you most excited?

I believe the existing infrastructure for equity, fixed income, and various asset classes have all been building and improving on older systems which were silo-ed.  As investments themselves become more flexible, the traditional infrastructure is no longer efficiently supporting the new way of asset management.  For example, there use to be just bond investors and equity investors, then we had 60/40 target allocations, then the endowment model which included alternative investments of hedge funds, real estate, commodities, and more exotics assets, and so forth.  For the next generation of investors, access to these asset classes and being able to get int and out of these assets should become more simple and more available to a wider audience.  I believe digital assets can do that.

For example, we are currently working on a kentucky whiskey fund.  This fund will give accredited investors access to investing in whiskey, with the opportunity to trade the ownership on the blockchain in a private exchange.  This type of flexibility at a reasonable cost was simply not available before the advent of digital securities.

 

What are some of the issues that security tokens need to overcome to reach mainstream adoption?

I believe that the education and infrastructure are two things that are missing in the industry before we can have mainstream adoption.  On the education side, we need to get investors comfortable about tokenization as a technology applied to existing financial instruments that improves the efficiency of it.  The legacy ICO marketing issues and poorly thought out projects (along with frauds) certainly has given the concept a negative bias.  But education will overcome that with time.

The second part is infrastructure; we need to have well accepted stable infrastructure for doing security tokens.  This means issuance platforms (like Securitize and Vertalo) that have transfer agent license which allow them to track/change the ownership of the securities, qualified custodians (like Coinbase and Kingdom Trust) that can help clients hold the security tokens with peace of mind, and security token exchanges (like OpenFinance Network and tZero) that can provide a place for the tokens to be traded.

As an addendum to the infrastructure, we also need better user interface so clients can focus on the investment aspects of security tokens instead of worrying about what chain it’s on and other technical challenges that are not really relevant to their core investment thesis.  When I log into Schwab to trade, I don’t think about what OS I am running and what language the interface is programmed in to complete my trade.  Once done correctly, it would be very transparent and irrelevant for the users.

 

Out of all the different types of assets which can be tokenized such as real estate or art, what industry do you personally believe is best suited to tokenization?

Is this a trick question or a softball?  I think whiskey barrels are the best thing to focus on!

Seriously though, I think any asset that gives off a cashflow would be interesting.  We have looked at real estate, race horses, solar panels, and other ideas that can be done.  Whiskey was good not because the portfolio gives off cashflow, but because we can sell a few barrels to generate cash and also provide a mark-to-market for the investors.  This is hard to do with a single Picasso; it would be impossible for me to sell a fraction of it.

The real estate space is an interesting one.  I am personally a real estate investor in Southern California, so I keep a close eye on this.  In the US, deals have not generally been very successful due to the fact that the buyers of real estate are not really interested in the tokenization, and there are plenty of buyers to support the business without it.  I believe that the development in Asia will be different, as more people are looking at both real estate and blockchain technology.  The two combined should be attractive enough for Asian investors, and it should catch on better than here in the US.  I have spoken to a number of top tier financial institutions in Japan, and real estate is an area of focus for them as they look at tokenization.

 

Circling back to the Wave Kentucky Whiskey (WKW20) that you mentioned earlier. For investors who are not familiar with this, could you explain what this is and the benefits of investing in this asset class?

Although we started the discussion with tokenization of hard assets, Wave Financial are a California Registered Investment Advisor (most of us are FINRA registered) so we have fiduciary duty to our investors to provide good products.  We reviewed a number of different assets and decided to focus on whiskey because the return profile is very attractive.

We are able to source a barrel of Kentucky whiskey and store/insure it over 5 years for roughly $1000.  In 5 years, that barrel of whiskey is estimated to be worth $3000 to $5000 on a conservative estimate.  This is a 3x-5x return over 5 years, and the variability is very low.  Also, as this is a commodity, we are able to get insurance for our inventory, which covers the value of the losses if we dropped a barrel or if the warehouse burns to the ground.  (This has happened before, as the whiskey is over 50% alcohol!)  The downside risk is limited.  One last point I would bring up is that we have found whiskey to be very resilient in down markets.  From industry research, through the financial crisis, American whiskey had only 1 down year in 2009, and the drop was 1.4% by dollar and 0.7% by volume sales.  (This is not an anomaly, Scottish whiskey went up in value in 2009.)  All of this means that the whiskey is a very attractive investment asset class in general and especially in this market.

 

In early 2018, you Co-Founded and became the CFO of the LA Blockchain Lab. Could you share with us some details on what the LA Blockchain Lab is?

LA Blockchain Lab is a non-profit that was founded to connect academia and government in Southern California to promote the use of blockchains.  We count UCLA, USC, UC Irvine, and Caltech as founding schools and we work with the City and County of Los Angeles governments to education and disseminate information about the developments in this space.

 

What are some interesting projects that you have seen come out of the LA Blockchain Lab?

One of the roles we have taken is to provide consulting to large corporates as they explore the use of blockchain.  For example, we worked on a project for Lamborghini a while back that explored how they can use the technology.  It was fascinating as we presented to the board and had a lively discussion at Pebble Beach.  We also consulted with Panasonic and helped them host a seminar on Smart Cities, with the CTO of City of LA and USC professors presenting on technological advances to cities and what more can be done.  We plan on further seminars in entertainment, finance, healthcare, and other topics, although we are assessing the situation with the shelter-in-home order in place.

 

Is there anything else that you would like to share about Wave Financial?

We are very proud of the work we have done for the past few years in rolling out products and providing treasury management services for corporate and high net worth individuals.  We think this is the professional and the right way to do business, and we look forward to growing our business to serve more customers over time.

Thank you for this fantastic interview. For readers who wish to learn more visit Wave Financial.

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