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Benjamin Tsai, Wave Financial


Making waves – the regulated approach to digital assets


Wave Digital Assets (Wave) is an SEC registered digital asset investment manager that has managed over USD1 billion in assets, based in its native California, co-founded by Benjamin Tsai (pictured) and ably supported globally by Matteo Dante Perruccio, who is President International of the firm.

Perruccio has a 35-year history in the institutional asset management space, having been a board member, founder and CEO at some of the biggest names in the industry such as Jupiter, Hermes BPK and Pioneer.

His fascination with crypto came from different aspects. “What interested me and caught my fascination was the juxtaposition of crypto and traditional financial investment markets,” he says. “There was clearly innovation and growth for the future, and it had felt like the repetitive conversations around the same challenges in investment management had been on a cycle of seven years. We were hearing the same arguments over and over – is active worth it, is passive better and then there would be a correction and everyone would say that active was better and active managers were earning their fees.”

The second aspect that attracted Perruccio was the level of innovation and differing age groups involved in the new offerings.

“This whole new generation of investors, young people taking part in the narrative for the first time appealed to me,” he says. “There was the Robin Hood stuff but it was also about access and democratisation. You could get 20 somethings starting to be financially literate and involved in that conversation and I was hearing it from all angles.”

Perruccio was a net sceptic when he first started to look at cryptocurrencies four years ago. “But when I realised the technological underpinnings, it was a no brainer as it was an opportunity to change the whole financial industry, and now the conversations have evolved with even firms as large as BlackRock announcing it wants to tokenise its funds eventually so the technology is entering the main stream vernacular of the financial community.”

However, he also says that he expected to see some disruption as the industry grew. “I never expected to see FTX collapse, but I did expect to see some cleaning out of an industry that grew way too fast in a short period of time,” he says. “Whenever you see that you expect to see a Darwinian culling.”

He foresaw that some of the marginal or even significant players fall victim to laziness or fraud, and also notes that, within this sector, a lot of the components are unregulated which invites further problems.

“I use the example of technology itself,” he says. “We expected Facebook and Google and Amazon to self-regulate and companies rarely do the right thing without being constrained by regulation – why would we expect an industry like crypto to do the right thing? I am surprised there aren’t more cases of significant abuse or fraud in this marketplace.”

The big challenge for Perruccio was how to get involved in the crypto world. “I was intrigued by the technology and the opportunity it presented and then this huge challenge was how does someone like me who is not prepared to sign up with just any crypto cowboy get to work in this industry.”

Perruccio created a personal filter that he needed a regulated counterparty and people who shared his compliance and risk management ethos. “It was a small universe in 2017 and Wave jumped out as one of the few that started out as a regulated investment adviser, which is really unique.”

The process of getting a digital asset investment manager regulated required a commitment of time and resources, particularly when there was uncertainty regarding the regulators’ disposition to crypto firms.

Going forward, Perruccio is seeing the digital asset management industry develop from its obsession with capital appreciation to an understanding of the importance of yield.

“In the past it was all about capital appreciation – the market has broadened out but the first stage was this sort of fascination with crypto billionaires and buying low and we saw something develop in a time frame where we would normally need 10 years and we saw some people make money over 18 months so there was an acceleration of wealth being created.

“Then what we had, though, was Wave Digital Assets saying there is a different way of looking at these instruments – anybody can buy and hold but where is the value of that but isn’t there something else as this industry evolves and gets deeper. Can’t we start to wealth manage as opposed to transact?”

Wave Digital Asset’s co-founders CEO David Siemer, chief strategy officer Les Borsai and president Benjamin Tsai understood the importance of being regulated and making a commitment to compliance, Perruccio says. The three founders came from venture capital, traditional finance and entertainment technology backgrounds. Siemer had launched a venture capital fund based on blockchain and cryptocurrencies in 2017.

Benjamin Tsai, pictured, had a lengthy career in the capital markets and traditional finance, spending 12 years in Asia for Bank of America Merrill Lynch running structured products, followed by managing the Asia commodities business. Tsai also spent three years with AllianceBernstein as Head of Alternative Investment, creating products across different asset classes for investors.

“I would say that the way I see cryptocurrencies is as another asset class into finance which is not quite commodities,” Tsai says, commenting that commodities was the last asset class to be added after equities and fixed income and that cryptocurrencies are in a similar vein. “Cryptocurrencies have their own particularities and rules and regulations,” he says.

Tsai returned to the US in 2016 and now teaches a graduate level programme on Cryptocurrency Finance at the Anderson School of Management at UCLA.

“From my perspective crypto being added to finance is an inevitable thing,” he says, noting that year on year, there has been a significant change in the mood and content.

In the context of Wave Digital Assets, he explains that the firm started in a crypto winter and had two and a half years before the markets hit a path ‘where everything improved’, as he puts it.

“We are used to operating lean in that space and we are continuing to outperform in this market, mostly avoiding the disasters of last year and pulling the clients out in measures to protect them in this market.”

“People ask us why Wave Digital Assets didn’t have exposure to Celsius or Three Arrows?” Perruccio says. “And 90 per cent of the reason is that we have a sensible risk management ethos as most of us grew up in the traditional finance world – if you don’t get audited financials, it’s a red flag. The fear of missing out has the potential to take over everything else and we tried to fight that tendency. If it seems too good to be true it usually is and I am amazed that people think that the laws of physics are suspended for crypto.”

The US states that have been most supportive of the digital asset space have been New York and Florida, but California has had a history as the centre of technological innovation so may have had a better understanding of the markets Renaming its regulatory securities group the Department of Financial Protection and Innovation, it seems California sought to be a leader in blockchain and cryptocurrency, and, Perruccio says, did approve the firm as a digit asset investment adviser.

“The genesis of Wave Digital Assets was that Dave Siemer had been in venture capital in the technology sector for many years. He set up Wave Digital Assets realising that he had lots of holdings in cryptocurrencies and had been trying to get a private bank to manage it and there were no players doing that. Then he met Ben Tsai, who had been in traditional finance, and they agreed: ‘If that is what I am looking for then there must be others’.”

The first product was Wave Genesis, a venture capital blockchain fund, and then more funds came through. The Wave Bitcoin Income and Growth fund has met or exceeded its targets per annum over two and a half years, generating yield from covered calls on bitcoin.

Most of the funds have come from ideas created in the separately managed account space, Perruccio says, which is a big area for the firm representing some 70-80 per cent of the firm’s assets.

While admitting that the crypto winter has had its effect on the firm it is not in the way one might think, Perruccio says.

“Ironically or counter intuitively there is a depression in general demand for cryptocurrencies on the margins but we have seen a flight to quality so anecdotally we hear that family offices who have had a bunch of tokens that had been custodied with FTX want someone else. Fast forward and they are saying ‘gosh, we would like to have a regulated counterparty to manage this stuff and help us with diversification and liquidity’. It’s an odd reaction but people are proactively opening up conversations, saying ‘we would really like to talk’.”

Perruccio believes that when the crypto asset markets start to get a bit of positive beta coming back it could be a better time for the whole industry. “But to be brutally honest, our competitive market has reduced by 60 per cent so we are looking for distressed assets from funds who want to team up with a regulated player like us. Now Wave finds themselves being approached by people as they are embedded within the digital asset ecosystem.”

The firm is ready to expand and Tsai says: “We are looking forward to being on the offensive, having invested in a regulated Swiss digital asset management business in anticipation of a full acquisition, we are also looking forward to other potential acquisitions.

The firm bid against FTX to buy Voyager and lost which was a slightly bitter pill. “We were competing with someone who was not playing fair,” Tsai says. “But overall we are quite active in the space, looking for new opportunities and expansion. We are focused on building out our asset management foundation as an SEC regulated investment adviser with an international reach and an interesting client base.”

Perruccio says that the firm is actively looking for assets that are suffering in various trading funds and fund of funds that have had exposure to FTX and suffered from the overall decrease in asset levels, have a reasonably big infrastructure and were just getting to critical mass but are now back to square one with a big cost base.

“We are prepared for the re-emergence when the industry reboots itself both actually and figuratively,” he says. “We were fortunate to avoid a lot of the pitfalls and the competitive field has diminished. We anticipate a flight to quality when things open up.”

Tsai agrees, adding that the firm expects a new wave of regulation to hit the cryptocurrencies and digital asset arena.

“We are looking at how we can continue with the new regulations and develop decentralised platforms that conform and how to expand our firm with compliance as a priority,” he says.

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