Podcast: Play in new window | Download | Embed
Subscribe: RSS
“Just buying Bitcoin and Ethereum, for some clients and for some advisors, maybe it is good enough. But at the end of the day, you don’t want to be the one that’s picking the AOL or the Yahoo of this age. If you look at the the whole Dot Com era and all of the value that was created and apply that same framework to the digital asset space, it has a very similar trajectory.”
— Dan Eyre, Co-Founder & CEO, Blockchange.ai
One of the driving factors that lead Dan Eyre to found the first digital TAMP was the need to enable investors to own the underlying assets in third party crypto models. This wasn’t available four years ago, and for the most part it still isn’t available except through Dan’s company, Blockchange.ai. I spoke to Dan about the most efficient ways for RIAs and broker dealers to access the most popular digital asset managers, the importance of moving beyond pooled crypto investment vehicles such as GBTC, and a whole lot more on this episode of the WealthTech Today podcast.
The WealthTech Today podcast features interviews, news, and analysis on the trends and best practices in wealth and technology for wealth management, asset management, and related areas. This episode is part of our August focus on digital assets. We’re talking to the founders of innovative startups who are merging health and wealth to help financial advisors build stronger relationships, improve outcomes and enrich their clients’ lives. A quick shoutout to our sponsor, the Invest in Others Foundation, please go to InvestInOthers.org, and be sure to subscribe to our show wherever you listen to podcasts so you don’t miss future episodes.
Companies Mentioned
- Binance [02:35]
- Black Diamond [13:00]
- ByAllAccounts [12:48]
- Charles Schwab [03:10]
- Coinbase [02:30]
- Gemini Trust Company [06:15]
- Kraken [02:40]
- Orion Advisor Technology [13:05]
- Pershing [13:30]
Topics Mentioned
- How Advisors Can Invest in Crypto Baskets
- What Are The Benefits of a Digital Asset TAMP?
- Investing in Crypto Protocols
Episode Transcript
Craig: I’m so excited to announce our guest for this episode of the WealthTech Today podcast it’s Dan Eyre, co founder and CEO of Blockchange.ai. Dan, welcome.
Dan: Thanks for having me, Craig. Glad to be here.
Craig: Oh yeah, man, I’m glad we could we could work this out. Where are you calling in from?
Dan: I’m out here in the lovely San Francisco Bay hills.
Craig: It’s a beautiful area. Nice to be there, can’t wait to get back out that way, conferences, travel, September, we’ll be heading out. It’ll be fantastic. Dan, can you give us 30-second elevator pitch for your company Blockchange.ai?
Dan: Sure so Blockchange, the best way to think about it is an ecosystem of models or asset managers within the digital asset ecosystem. So going beyond the scope of just Bitcoin or maybe a Bitcoin-Ethereum of allocation for advisors, family offices, and other financial professionals that would like to get their clients access to the digital asset space in a comprehensive, actively managed way where you have diversified exposure. That’s what we’re all about, is creating that ecosystem.
How Advisors Can Invest in Crypto Baskets
Craig: Yeah, and just full disclosure, I’m on the advisory board of Blockchange.ai and one of the reasons why I was excited to work with you guys, was because no one’s really doing this. I’ve been in the industry for a long time, and seeing the progression of the managed account space, and the technology platforms and ecosystems as you mentioned have managed accounts, and I see you guys where managed accounts were 15, 20 years ago where it was really difficult to trade managed accounts. It was difficult to move models from the managers to the sponsors and do the trading and do the allocation, and get the executions right, and now it’s all easy with managed accounts. But now crypto seems that’s where managers accounts were 15, 20 years ago is where crypto is. It’s hard to trade, it’s hard to execute, it’s hard to do all that work and optimize. So can you explain a little bit more detail that I’m doing, as if I’m a broker dealer or an advisor at large RIA who wants to invest in a basket of cryptocurrencies not just your normal Bitcoin, Ethereum, but a basket, why you can’t just do that manually, why is it better using your tools?
Dan: There’s probably a few things to unpack there. The first and most obvious problem is that most of the options that are available out there, think of like a Coinbase or Binance US or Kraken or something like that. They offer retail clients the ability to purchase crypto assets, but at the end of the day if an advisor wants crypto to be under their umbrella, where they can bill on it and advise on it and everything, you can’t be leveraging individual client accounts. You need some way that you can onboard clients through a normal process that you would with if you’re bringing a client onto Schwab, for example, there’s an established process. You onboard them, that account gets created, you have discretion over the account, just like you have discretion over all of your other accounts, and you’re not one authorized individual using API keys for each individual final client account. And so that was the first problem to overcome was, how do I do this for all my clients, how do I take an allocation between 1-5%, that’s how you do it. You don’t link up to each individual client account.
Dan: The second piece of that is, how do you scale the way that you approach managing those accounts? Once they’re all onboarded, you get cash in the accounts, you have models or strategies that you would like to put different client accounts into. Maybe some are suitable for some clients and some are suitable for other clients, that that’s an important differentiation but once you decide how you want those clients to be engaging with the market, you have those conversations with them, how do you do that in a scalable way? If you can imagine trying to trade every individual, each individual account, you’re going to run into a scale issue. You get 10 clients you get 20 clients, maybe you could do that but you’re going to be spending an inordinate amount of your time doing that, when you could be focused on just scaling it from a model strategy perspective, where you’re really just making an adjustment in one place and rebalancing all the accounts. So it’s much more efficient.
Dan: And then the last piece is really just, sort of from a compliance perspective, ensuring that you don’t have custody. That’s a very big challenge in the digital asset space because unlike stocks or bonds, digital assets can be moved even easier than wiring money. So if you’re an advisor and you want to avoid having custody, but you still want to give your clients exposure, you need to go through the proper protocol and that’s something that we worked pretty diligently in for quite some time to resolve where you can still maintain discretion, you can still trade many accounts at scale, but you’re not the custodian of the end client assets.
Craig: So I can summarize some of the benefits of Blockchange over manually accessing or even working with some other outsourcer is, you’ve got the same seamless onboarding. You’ve got custody, you’ve got the rebalancer, you’ve got the models, and it’s secure. So all that stuff is happening, just like they would trade mutual funds and ETFs, on the rebalancer with a model, and having all traded away from them and they’re just getting executions back and seeing their accounts filled out, you’re doing the exact same thing so it’s easy for an advisor to be able to scale the crypto side of his business the same way does the legacy asset would that be a proper definition.
Dan: That’s correct and actually on the custody front, we partner today primarily with the Gemini Trust Company. They provide the pure custody and cold storage infrastructure. We’re not technically the custodians. So even if our platform was ever compromised, there’s no way that the assets in the cold storage over at Gemini could be compromised. So it’s an additional layer of security, where you’re still maintaining the discretion over the accounts, still able to do everything that you would normally want to do, but the integrity of the end assets where they’re stored is is completely safe and secure.
What Are The Benefits of a Digital Asset TAMP?
Craig: I want to go with a couple of differentiators that I see that Blockchange has compared to other firms, there are other firms popping up in the managed account space in the RIA market offering crypto trading, crypto rebalancing, but what’s the difference? I know there’s some rebalancers out there where you can buy Bitcoin, you can buy Ethereum as an asset. Why isn’t that good enough for an advisor and what’s the benefit of what you’re doing?
Dan: Just buying Bitcoin or buying Bitcoin and Ethereum, for some clients and for some advisors, maybe it is good enough. I’m not going to be the one who says that it’s not but at the end of the day, you don’t want to be the one that’s picking the AOL or the Yahoo of this age. If you look at the the whole .com era and all of the value that was created as a part of that, and sort of apply that same skeleton or framework over here in the digital asset space, it has a very similar trajectory. On the internet side, you had one protocol is the internet protocol that we all know today and everything’s built on top of it. You’ve got Facebook, you got Amazon, all the heavyweights have created, the only way you could get peace at value by buying the stocks. The applications that were built on top of the internet was where the value was approved.
Dan: In the digital asset ecosystem, the value is actually baked into the protocols themselves. So as these protocols, tokens, if you will or coins, get more and more usage, they are instruments that you can invest directly in rather than waiting for the securities or the equities of the companies that are building on top of it. And so it’s a paradigm shift. And so, not buying pieces of the protocols themselves, you’re doing yourselves and your clients a disservice, because you want a broad base of exposure across all of these different use cases that have real world usage, and actually the reason they’re getting so much usage is because they’re disintermediating many of the inefficiencies that you saw in the traditional system. So why would you not just go with Bitcoin Ethereum in my mind, it’s because you want a way to sample the ecosystem and grab a piece of all the value that’s being created, and there’s a lot of it out there and it’s very diverse from the use case perspective.
Dan: One of the logistical challenges of participating in a more diverse strategy or portfolio or model of assets once you get beyond Bitcoin or Ethereum, well, that’s when you get into the world of complexity as it relates to execution. So if I’ve got 100 clients or 200 clients, and they’re all in a basket of 5, 6, 7 different assets, and I want to add an asset or two to a strategy, and I want to rebalance those clients maybe I want to change the allocations too, within the strategy. Once I do that, the logistics of trading between my existing basket, my target basket are such that I now need to find the most efficient route to get from that basket to the end basket. And unlike traditional securities of stocks and bonds and whatever, you don’t always stopover in US dollars in the crypto world, right, there are direct pairings so many of these tokens have pairs with Bitcoin or with Ethereum. There are many ways to get from where you are to where you want to be, and there are time implications and cost implications for taking one route versus another.
Dan: So when we’re talking about execution efficiencies, one of the things that we do that’s a major differentiator is we create what’s called an execution graph, and we look at all the different ways you could get from point A to point B, we say this one’s going to be the best route, because we’ve measured every route, and we’ve run a multi level mathematical optimization, and we can conclusively say at this point in time, this is going to be the best thing, the best path forward. So from an exit perspective, that’s a big aspect of thing. And, you know you could be looking at 10, 20, 30 different traits depending on how sophisticated the portfolio is, there’s no way that you’d be able to scale that without a way to rebalance many accounts using many of those optimization graphs in one go. So that’s that’s one piece.
Dan: The second piece is the performance management, so being able to track on an individual client basis, on an advisor basis, on a firm basis, on a manager basis, if you’re a manager using the platform. And then also on a model basis, what was the actual performance, not just the backtest that says based on the current state of the portfolio, how would that have performed over the last year, I mean we can do that too. But tracking the honest rebalance basis when you add an asset when you adjust an allocation, if you want to be GIPS compliant, at any point in the future, you need to be able to track the model performance and client performance, and there’s a whole deep, sort of modular approach that we’ve taken to that that enables you to not just generate reports but track the entire history, and understand your performance in a clear and concise way.
Dan: So that’s another big piece of it, and there are other elements to we’re working with, ByAllAccounts now, to provide integration into the traditional kind of wealth stack of many different systems, not just one individual, not just the BlackDiamond, not just in Orion, but all of them across the entire spectrum which getting that data into those systems is a big deal. The last piece and I’ll leave it here, Craig, is that we are the only provider that enables advisors and managers to get paid through the digital asset ecosystem. There are ways today that advisors can get paid by billing a little extra out of the cash account over their custodian, called it a Schwab or Pershing, or whatever. But for managers in the space that are looking to sell to new advisors, there is no way other than asking those advisors for a check at the end of the month or the end of the quarter after the fact there is no good way to do it other than our platform and so that’s another really big differentiator.
Craig: I’m taking notes furiously here, you mentioned a lot of good stuff that I wanted to cover. So that is something that people need to be aware of, when you’re investing in crypto, why should you pick the winners and losers, you don’t know, there’s hundreds of cryptos that are probably gonna be valuable, there’s tens of thousands but most of them are going to be crap. Most of them are the s-word coins, right, so we don’t invest in those. But similar to why we recommend with advisors don’t pick stocks yourselves outsource to a manager, you can always fire the money manager if they’re not doing well, don’t let the client fire you. So the same thing with crypto if you want to get your clients into digital assets, pick a manager, find a manager who’s got the experience, who can offer a basket, and they’ll make the allocations, they’ll do the trading, although they’ll give you the allocations, and then Blockchange will execute the trades, and that way you’re divorced from that. So that’s one benefit.
Craig: The second one is the digital pairings that when you’re making a trade now, with a stock or mutual fund, there’s one place to go. You go to the market, you trade it, in most cases. If it’s a very specific thinly traded security, maybe you need to go to certain broker dealers or certain execution points but for the vast majority, 80/20 rule, 80% of all assets being traded are ETFs and mutual funds and stocks and that is traded normally in USD. Right, so either you’re buying it for and you’re paying USD or you’re selling it you’re receiving USD.
Craig: As you mentioned, with a digital asset that doesn’t always happen. In fact, it happens even less, if you’re selling Bitcoin you may be turning it into Ethereum, or turning it into Litecoin or turning into USDC, a stable coin. So, once it goes into the crypto world, it’s less likely to come out again into fiat, it’s more likely to stay in some form of digital asset, and that’s where your expertise comes in that a firm that’s just a rebalancer that offers Bitcoin, can’t do that. There’s no other pairs, they can’t do that. Even if they somehow could manhandle you into another pair, they don’t have, as you mentioned the execution points. They don’t have the optimization, and as someone with a computer science degree who has spent some time analyzing how crypto works, that’s not easy to do. To build that multi level mathematical optimization as you mentioned, to go through all the different pairs, all different execution points, all different exchanges to figure out how to execute a particular basket rebalance that an advisor is doing that could save them thousands, tens of thousands of dollars across enough accounts, that’s a tremendous amount of value. Okay, so I’ve just restated with everything you just said, which may not have been necessary.
Dan: But better.
Craig: I hope so, just in my mind how I understand it.
Dan: Well, yeah. But I did want to touch on, you stated what I thought was pretty accurate. And we talked about this a lot with our prospects and our customers is basically, crypto doesn’t behave the same, it’s not just that it doesn’t behave the same way, it’s that you can’t evaluate it the same way either. You can’t pull a quarterly report or an annual report for Bitcoin or for Ethereum right, so if you’re an advisor that’s looking at this space, and trying to navigate it unless you already know a lot about it, education is great and you should continue to do it, but it is very unlikely that you’re going to be able to provide a better outcome for your clients by trying to educate yourself and then investing on their behalf. A manager, who, this is all they do, they’re gonna be spending all of their time, rather than you spending 30% of your time, outsource to them, they’re spending all their time, they know how to do the fundamental analysis on crypto. They know how to look at on chain metrics and what they mean they know how to look at the GitHub and say okay, how quality, are these commits, is this garbage, or is, or is this good stuff that’s really contributing the protocol? They know how to look at it, you don’t know how to look at it, and so you can save yourself a lot of time and still get in relatively early, we’re still in the early innings of all of this. Find a good manager, and really focus on building that relationship there to get a good outcome for your clients. So I just wanted to reiterate that because it’s a really important point that if you don’t go to a manager, you’re probably going to spend way more time for an asset class that’s really only like up to 5% allocation your clients’ portfolios.
Investing in Crypto Protocols
Craig: Another the thing I wanted to mention that you brought up, which I thought was really interesting digresses a little bit from the what does Blockchange do, but the value of the protocols themselves and your ability to invest in them. It’s like 20 years ago or 30 years ago, right before HTTP took off, that’s how the web works right that the Tim Berners Lee development of HTTP. Before that there was a couple of other protocols that were competing to run the internet, and it’s like if I was going to buy an HTTP token and the value of HTTP. Right, that’s what buying Bitcoin is or buying Ethereum is, it’s buying an HTTP token but 30 years later and the next generation of things. So that’s a cool thing to think about.
Dan: I’m sure Tim Berners Lee wished that he could’ve been able to do that, have the founders token fund.
Craig: He’d be on his own yacht by now. So, I want to talk about some of the different things you do differently, and we talked about how you differentiated from just a pure rebalancer that’s just rebalancing Bitcoin or Ethereum, you’ve got a lot more than that. You have a rebalancer, you have performance reporting, you have these trade execution optimization tools. But also, if I was looking to do this if I was say, an RIA and I’m also looking to get into digital asset management, can you give me an example of how an RIA would get into the space? So that they think hey we’re growing, we want to start our own digital asset manager, and we want to work for our own clients. What’s that process like and and how would they come to you, and how would things be so much better by working with Blockchange and doing it themselves?
Dan: I do have actually a great example for this. So, there was a company by the name of Arbor Capital that we engaged with middle, two thirds of the way through last year. And by the way, disclosure was commercially available for a year in live unfortunately, Arbor was one of those early customers and really they wanted to do was they wanted to get out of the game as it related to Grayscale products, not picking on Grayscale but closed end funds, they have this risk. It’s somewhat unknown risk, there’s the discount or premium depending on what’s going on in the market, because they don’t have any arbitrage mechanism to NAV, you could wind up paying more for less digital assets inside the fund, or you could wind up paying less, so it can work to your advantage, or your disadvantage, and you really can’t control what that’s going to be.
Craig: Can I jump in Dan? So Grayscale is Grayscale Bitcoin Trust.
Dan: That’s correct.
Craig: Which trades on pink sheets. It was one of the only ways that retail investors could buy bitcoin in their IRA, or other qualified accounts because it trades like a mutual fund in effect but it’s a trust and has a very high fee, it’s a 2%, 200 basis points fee, because it’s the trust and the way it works so yeah just wanted to jump in with that
Dan: Right so the fee was was already 200 basis points, and then you had the risk of, well, maybe you’re paying 30% over NAV, or maybe you’re paying 20% under NAV or maybe paid 30% over, and then all of a sudden, now it’s a discount 20 under, right? So you just can’t control it and so a lot of fiduciaries were looking at, well how do I do this in this asset class that makes the most sense. And so, most advisors when they go through the research phase they realize that if there is an asset class that you should own the underlying, that your client should own the underlying, it’s digital assets, it’s crypto because there’s all these other things and we’ll get into that in just a minute, of opportunities down the line that owning the underlying will afford you.
But Arbor had recognized that pretty early on and Matt Cholesky, good friend of mine, he engaged, he said this is what we’re looking for. We’d like to migrate our clients over from funds to owning the underlying in separate accounts. And so that was the first step we helped them to do and they realized that this space was starved for managers that had experience on the traditional side, and they weren’t just sprung up to be a crypto manager in an opportunistic manner. They had a long history with their clients, decades of experience with their clients, and had a good, long history, track record, managing crypto personally. And then also, professionally through the Grayscale product, and they wanted to take that offering into the marketplace and solve this problem for other advisors, and so Arbor was actually one of the first you know SMA managers, one of one of the first managers on our platform that delivered models to other advisors in the marketplace. It’s generally been a great success story to see them along that journey, be able to kind of think that this early in the ecosystem, and then now have something that they can bring out into the marketplace and scale.
Craig: Yeah and getting away from GBTC is so important for firms who they want to control it because you’re basically outsourcing it again to someone else or outsourcing it to GBTC, and you don’t you don’t hold custody. So it’s a way to get exposure to Bitcoin but you don’t have the assets you don’t own it.
Dan: You get the price exposure, that’s their right and discount premium can mess with that a little bit but there’s other elements of it too that I was kind of alluding to a minute ago. If you want to do, like lending or staking, it’s not a one size fits all, you can’t just tell your clients, oh, you know, this fund is at various times we might decide to lend or state the assets, that’s gonna get really hairy, because the risks are different, you need to disclose those to clients. So really the best way to do it is in separate accounts so you might have somebody’s retirement account that you want to do some staking in there through through the defi ecosystem. Well you can do that if you own the underlying for that particular client. Whereas another client, you might find that lending is better. Where one client that you don’t want to do any of those things, you just want to hold the assets in the account, and you’re going to treat tax advantaged accounts differently than you’re going to treat tax eligible accounts.
There’s all of these things to consider with digital assets because it’s not a one size fits all. At the end of the day, probably the most important one, especially for managers out there is tax loss harvesting. I mean you’ve got this volatility, these great waves of volatility, where you can in crypto because it’s digital property, and they’re not securities, you don’t have the same rules around washing, so you can buy and sell cryptos at any point that you’d like for whatever reason, so you can recognize the loss, offset other asset classes, or offset future gains in crypto. It’s one of the best asset classes at this point in time to do exactly that.
Craig: And that’s something that most advisors don’t understand, that that’s one of the differentiators of owning the asset rather than buying a few GBTC. You’ve got it you can do these types of things, and advisors need to differentiate. There’s so much out there advisors are being squeezed in so many different ways, in so many different aspects and other firms and fintechs out there squeezing them as well, that advisors need these types of differentiators, hey you can offer a basket of crypto assets to your clients, especially the higher net worth clients, you can automatically do trade and rebalance, you’re going to hook them up with the best managers, you’re gonna own the underlying, you can stake it and lend it out, and generate more income, generate passive income, which is something that’s done a lot on the crypto side. Those are all great benefits, so talk about if a firm wants to do this, if there’s an RIA out there that also wants to do the same thing, how difficult is it to do that?
Dan: The first step is really just assuming that they’re not forming for this purpose, registering a new RIA is is a whole different conversation. But assuming that they already have their registration, they’re an existing firm they want to put clients into it, there’s two different ways that they can engage with Blockchange in the Vitria platform. So the first one is if they want to manage it themselves, they have a thesis in the crypto space, they want to develop their own models, they want to onboard their own clients and manage those clients within that model ecosystem that they’re building, they can do that. It’s a very easy process, they need an institutional relationship with Gemini which we can help to get them set up with. And then after that, we link up the systems, and they’re off to the races. They can onboard clients, they can trade those clients, they’re good to go.
Dan: The second route is that they want to outsource the allocation, in which case they don’t need an institutional arrangement with Gemini, they instead would work with the managers that are on the platform that are offering various models that they’ve curated and actively manage, and in that case they would engage with any of those managers. We actually have a ESMA network up on our website. The website is Blockchange.ai, and on there you’ll see the SMA Network tab, and then you can see any of the managers that are on our platform in there, soon to be a few more as well. It’s a great opportunity for advisors to reach out and get an understanding of what the difference is what the differentiation between the different managers are because there is quite a bit at this point. There’s some that specialize in defi and really getting diverse access to the space across many different protocols, there’s some of them that focus on ESG options, there’s a lot of different ways to approach it. And so we would, we would encourage advisors to get in touch with some of the managers on the website, the SMA Network page.
Craig: I was looking at that myself, there’s a number of really good looking managers there and this is the power the benefit of connecting to Blockchange, right, that you have access to these managers, your ecosystem for managing digital assets, for reaching out to managers, for connecting managers to sponsors, managers to RIAs, to be able to build out this ecosystem to support a full featured digital asset investment strategy.
Dan: That’s right.
Craig: Awesome. So can you give the name of the website again for people who are interested.
Dan: It’s www.blockchange.ai.
Craig: That’s Blockchange, not blockchain. Change your point of view, change your digital asset provider. We’ll put a link in the show notes, you can also go to our website and look it up, because I’m an advisor so I have it on my website as well. Dan, thanks so much for being here. I think this is really helpful and I think people learned a lot.
