Plodding Mediocrity (Part II)

These series are from April 2018

Challenges of a remote fund manager

I would like to elaborate and discuss the challenges and perspectives of fund managers from around the world and their approach towards the crypto regulation. One of the benefits that this industry has brought is that it democratized fundraising to some extent. While I might be argued that it did not, because democratization did not come from the fundamentals of the technology but from the lack of any regulatory oversight, I will counter this that technology bears the promise of such democratization and high influx of funds from all over the world forced the regulators, if not to rethink, to at least challenge their opinions, requiring of course important steps in rule-making (these are addressed at the later stage here).

This leads to an interesting challenge for a fund manager the one who is not based out of a well developed economy with strong financial markets, but the one who sits in a developing economy where demand for crypto assets has skyrocketed as its prices have surged in 2017. Of course I’ve met many fund managers who can not care less about clarity in regulatory environment and are just focused on tripling/quadrupling etc their assets under management, I do not question their motives and I do not think they will relate to these challenges anyhow.

Challenge A: Regulatory outlook

Due to the high interest from investors around the world, there is a trend where fund managers are getting much more acquainted with SEC and US regulations in general. This is due to the lack of a good legal framework in the financial markets in developing economies. As United States has the most complex and developed financial market, fund managers are usually seen to be looking at the US regulations and its signals, trying to abide or replicate their rules into their management. But this is neither a great solution, nor an easy job to do, each jurisdiction is different, has different culture and societal structure, but the biggest gap might be the fact that these managers are looking to the regulatory bodies and signals of institutions that are themselves not yet aware of how crypto must be dealt with, and so this leads to the very distorted perspective that can harm the market overall, because it is in an early stage.

Because there is no regulatory clarity for me to classify any given token as a security or a commodity or a currency per existent legal guidance in jurisdiction where I operate, and because I do not want financial authorities to jump in too early, I quietly start to research the best practices. I personally look at the US capital markets and laws that regulate them. My reasons to do so are a) they are the deepest markets, b) they are the most interconnected and complex markets, c) they are the most developed markets and d) I prefer english reading to a french one (although I do speak french and EU publishes in english as well, plus EU’s regulations might be more relevant to what course my country will take towards capital markets, still I can’t avoid the fact that United States is projecting the best possible image in regards of its financial capabilities). I am following MiFID II as well but not closely and I am not at all following what happens on Moscow Stock Exchange, South African or Dubai and Singapore markets, although these markets can be praised by others and are more flexible regulatory-wise because they are not operating under the pressure of greater interconnectedness. I think it is great to review these new markets because they are adjustable towards friendlier regulations and that is what the headlines I see are saying. If I had more time and if I read Russian much faster I’d dig more into them, but after all I’m not a volunteered lawmaker at all and I think that at the end of the day U.S. will be the main rule-maker, e.g. when SEC published report on the DAO and deemed DAO tokens securities, Singapore’s MAS was quick to follow and update their loose regulations to look more like that of the SEC.

Why do I need to pick one regulator who will set the tone per my understanding for the whole industry? Because regulatory signals must be interpreted well, understood well, they are going to help you manage your long-term commitment and they will help you to envision the future for the crypto market in a clearer way and because it is your duty to manage funds responsibly a) towards your investors, b) towards the community from whom you’ve purchased any tokens and because while operating in a small market, rule-makers (who do not have enough understanding of crypto market) will seek out and approach you with recommendations and you need to be ready to provide them with some guidance. This guidance requires that you both understand how complex non-crypto markets work (long-term crypto planning) and how crypto challenges financial world through technology, I’m not saying you will come up with a solution, but you can come up with recommendations.

These recommendations if implemented by any government will be broadcasted globally through headlines on twitter and market will respond to it in shorter term.

N.B. this is not a discussion about governments creating friendlier environments for crypto startups through regulations such as Zug’s crypto valley, note well, that startup will not move to any place where regulations are loose, as a startup you want to move to a place where taxation is not killing your business, where economic activity and talent pool is available and where clear regulations will give you flexible guidance.

Challenge B: Contribution to the market law

Another challenge that I had to face was that fund managers have to contribute to the adequate crypto rule-making in their jurisdictions - how do they proceed with this? Do they consult with financial authorities and if yes how do they do it without bringing conflict of interest. This is an unfortunate goat rodeo that most fund managers run into, but few admit, because raising concerns in a booming market while profiting seems outrageously decent from a fund manager.

Of course I think that fund managers are not the only people who can contribute, but these are the people who usually have direct commitment to a) research adequately the regulatory risk and understand it and b) to resort to anything to make sure law is consistent with their stakes toward their holdings. Going to sleep peacefully when you’re managing a portfolio of $30 million for example, is a challenge when you understand that people in charge of regulations in your country have zilch of a grasp towards crypto related topics.

For the fund managers like me and others in my region, especially those who are young, this leads to a thinking of how we want capital markets to be regulated in general (at the Georgian Stock Exchange we only had 75 trades in 2018 so far), do we replicate the old rules from the most complex financial market that is U.S. or do we really create a new task-force and tackle these issues in a fresh manner. It is very hard to push for crypto agenda when there is no capital markets agenda in some economies, this might seem good for crypto because it is free to roll, but in fact this is bad because bad actors might be pushing their own large agendas to the policymakers and crypto topics might be completely omit from them.

To further complicate this issue, lets say in developing economies there is no need for special authorities such as SEC or CFTC, in most cases a simple financial authority such as Central Bank will take the realms of financial rule-makings and crypto (and even in worst cases - capital market) will not be priority in their mandate. It is understandable that big markets urge the creation of special authorities such as SEC or CFTC, but without them pushing a right regulatory agenda is harder. So how to proceed the best with a) adopting healthy regulations for crypto while b) avoiding conflict of interest?

Contribution should happen by educating developers, people who have hands on experience with technology, we should educate investors who have holdings in crypto and who can have a voice in rule-making, because investor protection is a common sense these days. We must educate capital market lawyers who are eager and interested in the technology and we must educate economists who call crypto bullshit, without understanding underlying technology.

Somebody has to do the job of keeping an eye on what happens in the developed economies and somebody has to track the regulatory sentiment and progresses there. We have to opine on these progresses in circles available to us and try to see how these said progresses can work in specific jurisdictions. Then we have to talk and educate everyone involved. We should not be taking seats of lawmakers, because I think this can become ugly with some fund managers promoting their particular agenda. This is why fund managers must become sort of catalysts, consuming this sort of information, processing it and adapting it to eventually share it. Developers should not spend time on reading comments on CFTC rulebooks, or Securities Exchange Acts and its amendments, capital market lawyers should not spend time consuming abundant number of white papers and reading MPC. Fund managers though have vested interest in technology and in regulatory environment, they have skin in the game compared to the chairman of X agency that will endorse Y bills.

technology, law, financeGiorgi Gurgenidze