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Tokenization of Assets from Race Horses to Whiskey

Expert Interview


 
Benjamin Tsai, President and Managing Partner

Benjamin Tsai

Former CEO of Merrill Lynch Singapore Commodities and alternative investments at AllianceBernstein. Benjamin holds a BS from UC Berkeley, and an MBA from UCLA..

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Transcript


 

Adam Chapnick:

Hey, everybody. It’s me again, Adam Chapnick, with the Security Token Academy, and we’re here in Los Angeles. It’s CIS 2019. I am joined by none other than Ben Tsai, the president and managing director of Wave Financial.

Ben Tsai:

Yes.

Adam Chapnick:

I’m excited to have him with us. Thanks for joining us.

Ben Tsai:

Thank you, Adam.

Adam Chapnick:

All right, so you guys do a ton of interesting things, but for people who haven’t frequented Brentwood, the beautiful confines of Brentwood-

Ben Tsai:

Brentwood, yes.

Adam Chapnick:

Maybe tell us, what is Wave Financial? What do you guys do and how did you get started?

Ben Tsai:

Sure. We’re an asset management company, so, in terms of my background, I spent 15 years in finance across Asia, Tokyo, Hong Kong, Singapore, and Taipei, and so my focus has always been on the finance side, buy side, sell side and so forth. So, six months ago, I got up together with David Siemer, who’s our founder, and we put together an asset manager. So, he’s had a crypto blockchain focused venture cap company that ... a venture cap fund that he’s brought over as part of our firm, and we’re now also creating other asset management products there, asset management products and also investment strategies.

Adam Chapnick:

Very exciting. Okay, now, you and, of course, David are very familiar with this space going, stretching back into the ICO shall we say, but maybe we won’t focus on that for the purposes of today.

Ben Tsai:

Sure, of course.

Adam Chapnick:

But, what is it about ... I’m going to stick to the security token space. What is it about that that holds promise in your mind?

Ben Tsai:

From my perspective, I come from a very regulated space, so, in my 15 years as a banker and as a buy-side person, I was regulated in all of the countries that I named, plus the US.

Adam Chapnick:

So you feel comfortable?

Ben Tsai:

I’m very comfortable being regulated.

Adam Chapnick:

You’re comfortable with this.

Ben Tsai:

I have a license. Be registered. The first thing we did when we put together our organization was, we went and registered ourselves as an RIA, a registered investment advisor, so we’re regulated under California law. As we grow bigger, we’ll get to the SEC level also, and this is something that I think as asset managers we should be doing. And very recently, I think Andreessen Horowitz, the A16Z-

Adam Chapnick:

Yeah, that was the big news.

Ben Tsai:

They announced that they were going to do that, and we did that four or five months ago, so I’m just-

Adam Chapnick:

Just saying.

Ben Tsai:

Putting it out there.

Adam Chapnick:

Just saying.

Ben Tsai:

Just putting it out there, yeah, just that.

Adam Chapnick:

Wow.

Ben Tsai:

With that, we’re using qualified custodians. We’re using auditors and so forth, so we’re very careful in what we do with our funds, our assets under management and how we look at how we manage assets.

Adam Chapnick:

That being said, security tokens just fit hand in glove with that because the entire process, from issuance to secondary, all has to comply.

Ben Tsai:

That’s right. That’s right.

Adam Chapnick:

You guys, that’s no problem.

Ben Tsai:

That’s right.

Adam Chapnick:

That’s how you roll.

Ben Tsai:

That’s right. I think, right now, people feel like it’s a very burdensome and an onerous process with many, many layers to get security tokens working, and I don’t think people feel that in the traditional equity space or in opening bank accounts and so forth because it’s already set up. All the interface, all the infrastructure, all the UX, it’s all optimized, simplified and so forth, so people don’t feel the stress there. They’re feeling the stress because we’re doing it for the first time.

There’s also a bit of fragmentation in our field right now in security tokens, where there are a lot of different platforms. You have to on-board with every single one of them and, as you move to trading platforms, you got to on-board with all of them and so forth and so forth, in many cycles. Where, in the traditional finance world, a lot of that is simplified. You on-board to a brokerage account somewhere and they’re connecting you to all the exchanges, for example, and so forth. I expect that consolidation or that simplification or even just simply partnering up to happen a bit more as time goes.

Adam Chapnick:

Yeah, that makes total sense. You guys also have some interesting vehicles that you’re toying with, let’s say.

Ben Tsai:

Sure. Yes, so we’re exploring a number of things, so we’ve launched an investment index that looks after the large cap to try to give clients a feel for what a beta exposure would look like. We’ll be launching a series of different indices, which hopefully will give the client a better feel for looking at cryptocurrencies. I think a lot of people look at just Bitcoin, where is the market going, just Bitcoin. That may not be necessarily the right exposure. We’re going to try to find different angles to be able to show clients what the crypto market is going.

We’re also looking at derivatives. That’s a new market. That’s up and coming. We’re seeing people trade derivatives in Bitcoin right now. We’re starting to see nascent marks in ETH derivatives and, of course, you can call up an OTC counter. They’ll make you a derivative in whatever fashion you want or whatever token you want. But overall, I think we’re starting to see that.

In the third series, which I think we had discussed yesterday that was interesting-

Adam Chapnick:

Yes, this is my favorite.

Ben Tsai:

We’re looking at real assets that we can tokenize. That would make a lot of sense. You would take advantage of the tokenization process. I believe that there are a lot of cash flows and yield curves that could be liberated using the token format so more people can have access to it. We can talk about things which are not boring, things that I do all the time, which is real estate and so forth, and we can talk about things that are interesting, which we talked about yesterday.

We’re looking at whiskey, potentially doing something with whisky in terms of tokenization and so forth. I’ve spoken to people about brand new whisky, the aging process. The interesting way of talking about it is we would hold barrels, and the boring way to say it we’re basically providing balance sheet to distillers for them to make their business more efficient.

The other direction is more on the collectible side, where I’ve talked to friends who are going to Scotland to buy 20, 30-year-old barrels and aging it for another five, 10 years to try to pick up the gain in value from that perspective, and that smaller volume-

Adam Chapnick:

Right, like series D barrel.

Ben Tsai:

That’s right. Like, much, much later in that barrel. So obviously, the starting point is high, but the theory is that the ending point is even higher, as long as nobody goes and drinks it before then, and it doesn’t all evaporate away, yeah.

Adam Chapnick:

That’s fantastic. Now in those kinds of instruments, those would be security tokens or not?

Ben Tsai:

So, we’re envisioning all of these things, basically in fund format, and we would issue securities tokens and what we call digital funds around these things.

Adam Chapnick:

In the fund.

Ben Tsai:

So, they’re token representations of funds, and the funds would have these different types of investments. And we haven’t launched any of these yet, so we could talk about it to our liking.

Adam Chapnick:

Yeah, well I love that part.

Ben Tsai:

And the concept is, that these tokens would then be tradable on security token exchanges. We have a very close relationship with the top three in the US and many others, overseas also. So, we would like to list them, have them be available. Just back to the whiskey example, we can have the 2018 vintage, we have the 2019 vintage. You can trade fractional barrels with other people, thinking certain barrels are better than others, and you don’t have all that debate. And I’m not a big drinker, so I’ll leave it to the experts to tray those tokens.

Adam Chapnick:

Yeah, amazing. Well, I’m excited by that, because I think a lot of the fun in discussing the possibilities about tokenization is, trying to game out what are people going to fractionalize. And here you are on the cusp of the actual execution, of whiskey barrel fractionalization, which I love. So today whiskey barrels, tomorrow, Pokemon cards.

Ben Tsai:

We can do many things. People have talked to us about race horses-

Adam Chapnick:

Race horses? Yeah.

Ben Tsai:

Well the race horse business, as far as I know, a lot of is really for fun for a hobby. I know people pay to play, it’s very much a vanity sport.

Adam Chapnick:

But isn’t that already fractionalized in sort of the real world?

Ben Tsai:

In the real world it is, to a certain extent.

Adam Chapnick:

I don’t mean the real world, I didn’t say that. In the traditional world, let’s call it that, yeah.

Ben Tsai:

In the traditional finance world, yes it is to a certain extent fractionalized also. But I think it is more of a vanity project rather than actual practical investment.

Adam Chapnick:

Yeah, there’s no fundamentals-

Ben Tsai:

So from us, we’re an asset manager. We’re looking at things that we can invest in. And we’re doing whiskey really because we believe that there is profits to be generated in whiskey. You know, 10 years ago, people didn’t invest in barrels of Japanese whiskey, and now we have a shortage. And that could have been a great investment opportunity in retrospect. And we’re trying to catch that on the way forward.

Adam Chapnick:

Interesting. So looking at Wave for the rest of 2019, what significant things can we expect? What are you most excited about?

Ben Tsai:

Sure. We’re looking forward to continuing to launch products and hopefully we can gather AUF for these products. I don’t know if this is a humble brag or not, we’ll get to a size where we have to go apply for the SEC registration and go through the pains of that, and then we complain to everybody all about it.

Adam Chapnick:

Oh, yes, it’s so hard.

Ben Tsai:

And that’s how it works basically. It’s so hard, all the compliance.

Adam Chapnick:

It’s so legit. It’s very hard.

Ben Tsai:

The compliance, the regulators, yes exactly.

Adam Chapnick:

Wow, well I hope to hear you humbly brag about the pain of the SEC compliant process.

Ben Tsai:

Sure.

Adam Chapnick:

In the meantime, thank you so much for sharing with us about Wave, and you must come back.

Ben Tsai:

Thank you very much, thanks for your time.

Adam Chapnick:

Thanks Ben.