Fintech Part 1: Blockchains – Disruptor, Panacea, and Reality

CFA Society Chicago hosted Blockchains – Disruptor, Panacea, and Reality, the first fintech event of a three-part series, focusing on blockchain technology and its applications. The event was held at The Chicago Club on January 17, 2018, attracting a sold-out crowd of over 200 people. The afternoon started with a keynote address and was followed by a panel discussion with industry members working in the crypto space. Those in attendance participated in Q&A session at the end of the event.

Keynote Address

Wulf Kaal, the event’s keynote speaker and moderator, is director of the University Of St. Thomas Private Investment Fund Institute, a tenured associate professor of law at UST School of Law, a leading expert on hedge fund regulation in US and EU, and an industry expert in the cryptocurrency space. He initiated the event by gauging the audience knowledge and involvement within the crypto space, introduced blockchain technology and outlined the following event agenda:

  • Blockchain Technology
  • Smart Contracts
  • ICO Market – Best fundraising for start-ups
  • Case Study – Blockchain in Loan Industry
  • Panel Discussion
  • Q&A session

Kaal then continued to highlight the magnitude of growth possibilities within the crypto space. He displayed past year price data for Ethereum and Bitcoin (two of the most famous cryptocurrencies) and emphasized the fact that what has been seen to date can be thought of as linear growth and that exponental growth is expected by the industry. He also shared four years of ICO related market data showing a total fund raising of $6.4bn to date.

Kaal discussed how some market participants regard the rise of blockchain as a bubble; some audience participants share the same view. He went on to educate the audience with the crypto space, blockchain technology and its application beyond the talk-of-the-town cryptocurrencies like Bitcoin and Ethereum.

He described the core characteristics of people believing in the crypto space. The following key characteristics describe a “Crypto Purist”, such as himself:

  • Believes in crypto space
  • Believes in decentralization
  • Believes in a New Economy – a new way of thinking

Moving on, Kaal educated the audience on blockchain technology stating that it is similar to “having an internet” like event. With “Code being the Law”, blockchain technology is self-executing. It is a decentralized public ledger where each block (or node) in the chain can be thought of as a sheet with the footprint of a previous page along with its information. Blockchain could be referred to as a peer-to-peer (P2P) network based upon “Trust” and “Disintermediation” with a copy of the ledger stored in different computers all over the world. The result would be a transparent decentralized economy. Constant additions to the blocks in the chain would require higher computing power to modify past blocks/nodes making it difficult or next to impossible to cheat/hack this system. Lacking scalability in applications at the moment, Kaal believes that whoever can figure out a way to apply blockchain technology to enterprise facing solutions will be the next “Google” of today.

By not being physical in nature and anonymous over VPNs (Virtual Private Networks), the use of blockchain ledger faces issues concerning lack of legal remedies and/or recourse in contrast to what we have today with internet related solutions. However, legal groundwork is being carried out to deal with such issues.

Continuing the discussion on law and blockchain, Kaal geared the discussion towards Smart Contracts which are self-regulating and self-executing contractual obligations. These contracts are inexpensive, automated by code, take only minutes to execute and have automatic remittance versus 1-3 days for traditional contract execution at a comparatively higher price with manual remittance. This reduces the need for lawyers due to the nature of the contract. When a smart contract is coded, it will end with an execution and cannot be stopped by either party. However, this could lead to some issues where unexpected circumstances occur in normal business transactions requiring flexibility from parties to the transaction. Kaal also briefly touched upon the different use cases of smart contracts with varying level of complexities. The industry expects banks to spend heavily in blockchain based solutions in the coming years. He predicted that settlements may very well happen one day using this technology platform.

Kaal then steered the focus towards the funding landscape within the crypto world. He discussed venture capital interest funding blockchain based start-ups in various industries ranging widely from Finance, Government, Consumer and Media. Next, he touched upon ICOs (Initial Coin Offerings) and how they stack up against traditional Venture Capital and crowdfunding sources in characteristics for start-up funding. Kaal shared market data on how since September 2016, Ethereum was the most popular blockchain for ICOs’ assets globally. The US leads the industry with the highest number of crypto start-ups globally followed by Europe and Asia. Russia on the other hand is leading in government support for the overall technology platform with state funded academy formation and by creating a more favorable regulatory environment than the US.

Proceeding to the next agenda item for the evening, the Kaal discussed a blockchain case study of a Loan Securitization. He compared the blockchain process to the existing loan securitization process and identified the following key benefits of the former:

  • Lower costs
  • Increased Safety
  • Faster Payment Streams
  • Rise in trading volume

Panel Discussion

The second half of the evening featured a panel discussion moderated by Wulf Kaal with speakers Colleen Sullivan, Zabrina Smith and Biju Kulathakal. Each of the panelists introduced themselves and discussed how they engage with the crypto space for their clients.

Colleen Sullivan is co-founder and managing member of Sullivan Wolf Kailus LLC, a boutique law firm based in Chicago that specializes in hedge fund, private equity, venture capital, digital assets and other alternative investment products. She discussed blockchain from a legal standpoint clarifying that ground reality for the regulatory environment is very different than what has been observed in the media. She recalled being present in South Korea when a reported surprise government “crackdown” on the crypto exchanges was merely an examination by Korean tax authorities on the tax implications of the crypto exchanges. She noted that governments are looking to exchanges to self-regulate in these unchartered territories.

Furthermore, Sullivan discussed various cases she has been working on for legal solutions around asset servicing, asset management and wealth management. Her firm has been leveraging blockchain technology for asset safety of their clients, efficient transactional authority and transparency, proof of value assessments, etc.

Next, Zabrina Smith, vice president within Northern Trust’s Market Advocacy & Innovation Research (MA&IP) team, introduced herself and described how she was working on researching ways to incorporate block chain technology to add value for global clients. Her team has been working with use cases around contracts, wealth management and other creative uses within the organization to add value and/or improve existing customer solutions. Northern Trust has been proactive in trying to apply the technology and has been working in the space as a pioneer to bring better solutions to its customers.

Finally the last panelist, Biju Kulathakal, founder of Halo Investing – first independent multi-issuer technology platform, introduced himself and described how his organization utilizes the blockchain technology for structured loans with options contracts. Halo Investing packages products from sellers like JP Morgan, Credit Suisse, and Goldman Sachs, and sells it to advisors like Schwab and others.

He presented an example of a typical transaction based on blockchain to illustrate the potential benefits like less documentation, quicker execution, lower costs and flexible issuance sizes when compared to traditional structured notes.

Q&A Session

The session continued with questions from audience noted below:

Implications/application of blockchain for lending securities?
Blockchain can leverage various functions including the following aspects of securities lending:
• Digital Identity; and/or
• Settlements (similar to implementation by Australian Stock Exchange)

Implications of blockchain for auditors?
Blockchain could be applied to automate life cycle processes reducing overall audit times and increasing efficiency for the whole process.

Benefits of leveraging blockchain technology to CDS contracts?
Blockchain based CDS contracts would be expected to be of a lower cost as no counterparty would be maintaining a ledger.

Implications of blockchain on access to asset classes?
By being able to sell part of assets, blockchain implementation would lead to increased access to assets which would otherwise be known as ‘Exotics’.

Implications for Visa systems?
Viewing Visa as a huge notary, blockchain could result in reduced visa costs.

Where blockchain would not be a viable technology?
Blockchain would not be viable where actual enforcement is required, for example policing etc.

Don Wilson, DRW Founder, on Why Cryptocurrencies Will Change

Over 200 professionals joined CFA Society Chicago for the February Distinguished Speaker Series luncheon at the W in Downtown Chicago to hear Don Wilson opine on one of the most popular topics in the financial industry today—the $450 billion cryptocurrency marketplace. The mood was focused and inquisitive, as Wilson, the founder of DRW Trading, doesn’t make public appearances often and rarely talks about the relatively new financial asset class of cryptocurrencies. Wilson’s vast knowledge in the relatively lesser known field can be attributable to researching the marketplace since early 2012 and eventually forming Cumberland in 2014, a subsidiary of DRW Trading, to provide market making services as well as hold principal positions in crypto coins and tokens. Today, Cumberland is one of the largest OTC liquidity providers in the cryptocurrency market.  I believe it is safe to say that Mr. Wilson was one of the earliest to have a vision of what a world of cryptocurrencies could look like, which makes his view on the future of this space very interesting.

Wilson echoed that in 2017, an inflection point was reached in the cryptocurrency market.  Bitcoin rose from $963 at the beginning of 2017 to close the year at $14,679—a roughly 1,500% increase that largely took off in the final quarter of 2017. In September of 2017, the CBOE and CME launched futures contracts for Bitcoin giving the asset a much larger and more sophisticated institutional audience. Even the most novice cryptocurrency investors – including those family members talking about it over the holidays —were talking about the price of bitcoin and the hottest new cryptocurrency they got wind of. Although we should pay close attention to the price of bitcoin because it was the first pioneering technology and currently is the largest coin by market cap, Wilson argued that by only doing so we would be missing the bigger picture of cryptocurrencies. The marketplace would also agree with his point.  For reference, in 2013, bitcoin made up 95% of the overall market cap of the cryptocurrency market. Today that number is closer to 40% of total crypto assets.

The technology behind Bitcoin known as the blockchain is predicated upon a framework that enables the transferring of value to anyone in the world without having to go through a centralized agent, today, most commonly known as a bank. Cryptocurrencies instead operate on a decentralized and/or a distributed platform. Benefits of switching form a centralized environment to a decentralized/distributed environment is it removes the need to trust a single organization to both hold your assets and control transfers in and out of your account. The decentralized system creates a much more resilient network that could operate even if one node of the structure went dormant. In a centralized system, if for example a bank is hacked or loses data, the entire system falls apart. In a decentralized/distributed system, there are thousands of independent “verifiers of the truth”, also called “bitcoin miners” who validate transactions for the price of small transaction fees.

 

Beyond bitcoin, there are other types of cryptocurrencies called utility tokens that are the result of ICO’s (Initial Coin Offerings) which raise money with a particular purpose or intent. Wilson believes it is the utility tokens that will have the most meaningful impact on the world going forward. Some examples he noted were Iota (MIOTA) and Civic (CVC). Iota is controversial because the underlying technology of the blockchain is different from Bitcoin. The Iota token was created in an attempt to solve the problem of how machines connected to the internet communicate to one another. For example, your household appliances will eventually all have the functionality internet connection and Iota embarks on how these appliances can communicate to one another in one language. The Civic (CVC) token is another example that in intended to facilitate identity validation. For example, Civic sets out to validate the presence of someone who lives in a remote country that may not have a birth certificate let alone a bank account, but they potentially have an internet connection that can confirm identity and allow for a financial transaction to occur.

There was ample time left for questions and as expected, most questions were in regard to what we should expect for the future. Wilson said we will continue to see great institutionalization of not only Bitcoin but all utility tokens. Investors are finally coming to the realization that the blockchain technology is here to stay and can be beneficial to societies in meaningful ways. When asked if we’ll be handing in our greenbacks for electro crypto tokens, the answer was that we probably shouldn’t expect that anytime soon as they are “unlikely” to replace standard government-issued currencies. Further, we can expect greater regulatory overview going forward which may have initial negative price implications in the very near term but should be positive longer term to strengthen the element of trust in the market place. Greater regulation, further institutionalization, and a nice near-term pull back might be all I need to buy my first (or likely only partial) bitcoin.

How to Improve your Quarterly Investor Newsletters

Do you ever feel stressed out when it’s time to work on your investor newsletter or other client communications? Do you wonder if investors understand the key points and theses you want to drive home?  If you answered “yes” to one or both of these questions, you are not alone.

Read on to learn about techniques and tips that will tighten up your investor communications while giving you confidence and peace of mind.

Why versus How

Many of us are technical writers and are used to expressing large amounts of details that investors can use to help inform a buy or sell decision. In his second writing event offered by CFA Society Chicago, Scott Wentworth, Founder and Head Financial Writer of Wentworth Financial Communications, offered a new framework to use when creating investor communications. He encouraged us to always think of the “why” versus the “how”. Thinking about why you are putting out your letter or communications and using this as an opportunity to demonstrate your understanding of your investors and the markets can create a big win. What are the three key things we should focus on?

Three Focus Areas

One useful tip Scott offered was on engaging the reader by providing your conclusion first. This is different than the typical legal opinion approach of citing the facts first then following up with a conclusion.

There are three key areas to focus on when developing investor communications.

  • Telling a compelling story
  • Providing content that is easy to consume visually
  • Streamlining the process for creating investor communications

Final Tips for Stress-free Execution

During the question and answer session, we learned how to refine our communications. Below are some final tips.

  • Use questions to engage readers but be consistent with section headers. Make all the headers questions or not.
  • If you use infographics, make sure they help tell the story and are understandable.
  • Analogies are good but be consistent and don’t take them too far. They should be used to get attention and create branding.
  • Make your main thoughts actionable.
  • Keep it fresh. Look around the industry and garner ideas from communications you like.
  • Have a section highlighting a different perspective or a section you can change in each quarterly communication.

Finally, reading non-fiction and fiction can help you become a better writer.

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