Timothy Enneking, Managing Director at Digital Capital Management


[00:00:22] Ganesh: First of all greetings to you and thanks for your time for speaking to me. Please let us know about yourself, you know how you got involved with blockchain and your journey with DCM so far.

[00:00:40] Timothy: Well I was actually asked to manage an investment fund which as I found out was actually the first investment fund in the crypto space and that was about six years ago wasn’t my fund and it was an index fund the bitcoin-only fund so people subscribe. We purchased Bitcoin people and after doing that for a year and at the beginning of that year I thought Bitcoin is the stupidest idea I’ve ever heard. I didn’t like it in the index and due to completely unrelated events I was shutting down another fund and I did own and manage it rather than shut it down I decided to repurpose it and shifted over into the crypto space. So I did.

So it did very very well and actually put some of the fund into this index fund because the fund I was shutting down was a fund of funds and so we’d actually still owns the all-time performance record for a fund of funds which I suspect one of these crypto funds of funds will take out when we have the next bull market in the crypto space. And so I still oversees that outside the United States rather as you tell from my accent I’m a Yankee but I’ve actually done very little business in the US and moved back to the US proved to be difficult to run I basically overseas offshore structure from the United States so I shut that firm down created one less and things have been going great guns.

[00:02:25] Ganesh: Can you share us a few case studies of blockchain use-cases implemented by your team? How they are benefitting the clients?

[00:02:40] Timothy: They’re really three things in the crypto space. There are trading tokens. Then there is the blockchain space which is related to certain trading tokens and certainly the tokens I use a blockchain but that doesn’t really make them a blockchain investment per se. So blockchain investments with serious use cases mostly applied VC or PE investments. And then the third part of what we call Crypto and in fact, I published an article called the crypto trichotomy which if you look in CoinDesk you’ll see if there’s the same categorization.

There are three and the third piece is tokenization or the atomization of ownership. You really don’t have anything to do with crypto. There’s no relationship with crypto in tokenization although I think it’s that last piece that is going to be the biggest. The first two are very different. Right, so they’re very large tokenization projects going on where there’s not a token that has that anyone is trying to say is external market value. And because of that the only way to invest in such projects and many and more private. So like an IBM Maersk deal rights private you can’t invest in those.

So in terms of use cases, there are millions of them. But I talk about them a lot because in various four because I find them fascinating. But when you’re talking about my fund you’re talking about trading tokens. And at that point in time, you’re talking about technical indicators fundamental indicators market trends participants various other things. So if the question doesn’t really apply to the fund I’m going to go that way I’m happy to. But bear in mind that you’re sort of changing the subject.

[00:04:32] Ganesh: OK. For firms holding substantial reserves of Ether (ETH) and Bitcoin (BTC), you have recommended reinvesting these assets. What is the rationale behind such advice considering both BTC and ETH are always on the upward trend?

We found this recommendation on your website. So we wanted to ask you and understand.

[00:05:05] Timothy: It’s actually fast selling and it’s a good time to ask this question because for US investors anyway because it’s tax season. The thing about most people own a lot of BTC and ETH is that they were the very low basis and they paper a little for it as a general rule that’s worth much more now. So they invested. If they sell it and do something with it then they realize that gain they have a lot of taxes. So you never get out of the taxes but you want to push it down the road as far as you can. So for those people we actually have a share class one denominated in BTC another share class to nominate ETH and that they invest in that share class.

That investment isn’t a taxable event. And we buy and sell the BTC and ETH so they will incur taxes as we do that because when we sell it they incur the real they have a realized capital gain they pay taxes on it. We buy something else and presumably sell it higher then they have another game. So they will pay some taxes but we’re actually thinking So anyway that investment is just fine. They’re making more BTC retakes. They’re also incurring a tax burden will help pay that. But the other thing is we’ve actually thought about a structure where we never sell their BTC and ETH where we want to buy something we leverage long where we think the market’s going to go down and we short but we never sell the core assets at that point in time they would never have a basis increase their increase in value that they realized they would simply have some profit over and above that.

So their original BTC retail would keep that very low basis they would incur a tax penalty yet they would be earning more BTC and ETH. So we’re sitting on a fence there. It only applies to shareholders in certain jurisdictions where they have an approach to taxation similar to what the US has. But we’re asking our investors now which of those two they would prefer but in any event, it allows people to earn much more than they were able to. They are able by lending using last year’s as an example our class B the BTC was up 20 some percent in our class E was up about 70 percent even though BTC and ETH went down a lot in dollar terms, it sliced out a bunch more than when you started.

[00:07:37] Ganesh: OK. What measures an investor should take to identify the genuine projection of trending crypto volumes vs fake hypes? This is with reference to the recent report by Forbes stating 95% of reported bitcoin trading volume by CoinMarketCap is fake.

[00:08:05] Timothy: Whether the numbers are correct. I wouldn’t be surprised if they are but if you read the article and there was a great headline right you read I read an article because of the headline. Most people took the headline and didn’t read the article. The article actually says that the larger exchanges have legitimate value. That’s not where the problem is. And the inflated content will limit.

[00:08:39] Ganesh: No I said that about 10 to 15 exchanges actually put the correct figures.

[00:08:49] Timothy: And so we don’t trade on the smaller ones we don’t trade on those that fake their volume. I don’t think many people do. I mean that because they fake their volume they’re trying to get the impression a lot of people trade on them but they don’t. So it’s a great headline. I’m not sure if it’s really a substantive problem.

[00:09:09] Ganesh: OK. We notice an increased adoption of asset tokenization into the mainstream capital management, how can this benefit the masses & underprivileged?

[00:09:17] Timothy: So why do you think that there are more going into the mainstream or that there are more mainstream investors investing in crypto. Why do you think that? I’m asking you.

[00:09:41] Ganesh: OK. So this is because you see there are a lot of reports across the globe that is getting to know more and more popular. So we were on assumption that it’s getting into mainstream slowly.

[00:09:58] Timothy: There have been a couple of investments notably from Harvard and a couple of other investment funds. That has been made by traditional investors in the crypto space. Absolutely. I don’t know. I wouldn’t conclude that they are all that significant and they’re in a very specific space right. Because you’re talking about the blockchain investments I was talking about where you not trading tokens. So while it’s interesting that some of that are starting. It’s not nearly on the level again that the headlines would have you believe. I think blockchain has pretty much entered the mainstream because people realize what the value of trust is. Trust has always had value. However, trading tokens and trading in a market in an area where the market cap is one hundred and seventy billion dollars to say that there are a lot of institutions crowding into that space just isn’t true. The space is too small. There’s no way that it could accommodate a significant investment from even one large investor. People are testing it putting their toe in but not much more than that.

[00:11:29] Ganesh: Are the current rules like Howey Test, KYC, AML sufficient enough to identify/classify tokens as securities? Would the SEC’s recent guideline streamline this process?

[00:11:47] Timothy: I don’t know that the SEC issues are around KYC AML. KYC/AML aren’t that hard to do and there are lots of third party companies that will do it for you. So I don’t think the KYC AML really is something that’s a constraint with respect to security tokens ensuring that you have a class of investors such as accredited investors the United States has similar names elsewhere. That is something that one needs to do. And that’s why there are things like T Zero and finance is setting up an exchange do the same thing where you want to ring-fence certain investors that the SEC just is taking the existing law and saying hey this is investment so you have to follow certain rules. Those rules extends KYC AML is probably 2 percent of those rules. So I think the question is putting the emphasis where there really shouldn’t be that much emphasis there.

[00:12:58] Ganesh: Yeah right. How can the STO firms protect themselves from being vulnerable to regulatory breaches before launch OR do you see any gray area in regulation itself that leads to ambiguity in compliance?

[00:13:33] Timothy: Regulatory violations. Right. The regulatory landscape is incredibly varied. And it’s not complete in any country with the possible exception of Malta. I suppose theoretically it’s actually impossible to not, be completely compliant. And it’s almost certainly impossibly completely complying in every jurisdiction. So the companies try STO companies try and some of them have done a remarkable job recently. But even as you think like the IEO the initial offerings that are being done on this exchange offering started buying and it’s there are real questions and so one of that they fully comply with Maltese and EU regulation. They’re certainly trying. And that’s great but I doubt very much that are the things companies can do. Sure. But the first thing a company does is go forum shopping.

We’re working on a project now. Can be in the US where can we put this project. So that we can have a friendly and appropriate regulatory environment. So that’s the biggest thing companies have to forum shop. Find a good forum for what their project is.

[00:15:04] Ganesh: The SEC has rolled out another major update – the ‘no-action letter’. Can you take us through this and how it would impact the crypto landscape?

[00:15:17] Timothy: I mean if you look at what the SEC issued that no actually for it wasn’t an investment and it was, in short, there’s this test for foreign test called the Howey test it met none of those. There’s no way that was even security. It’s like me going to the SEC and saying look I want to sell you this kind of coke please tell me it’s not a security. Well, no kidding. There is nothing new in that. No actual. Again it was an example where the headline seemed to promise a lot. But the substance, in that case, was literally nothing.

[00:15:56] Ganesh: OK. In your recent authored article, The Crypto ‘Trichotomy’, you spoke about the three verticals of the crypto space. How are those three spaces (trading tokens, blockchain, and asset-based tokens) different and significant?

[00:16:31] Timothy: Now when I already talked about the three verticals and I think pretty much I think that pretty much that’s the one thing that I will add though is valuation. The first vertical trading tokens that we were single digit trillions in the second vertical which is blockchain projects. That will be almost certainly worth double-digit trillions and tokenization of real assets or the atomization of ownership as I’ve taken to calling it that will probably be worth triple-digit growth.

[00:17:06] Ganesh: OK. There were reports about the launch of USStocks, a token representing ownership of US stocks. Is the stock market on the verge of adopting blockchain and cryptocurrencies?

[00:17:19] Timothy: I think there are incremental advantages at least in the US to tokenizing stocks because the stock market is very efficient and the transaction costs are basically approaching zero. Settlement of stocks is something else because the process is slow. So if you’re in the US or most countries you sell your stock. Yes, it’s all going to buy more stock that you can immediately refund. But if you want to pull your cash off, you have to wait two or three days which is two or three and the T Zero project where they put stock trades on a blockchain that is a settlement or near a real-time settlement. That in terms of settlements there’s clearly an advantage in terms of tokenizing equity shares when that equity is already freely tradable, I don’t see the significant value.

[00:18:15] Ganesh: The Chinese government is reported to be planning to ban Bitcoin mining. Considering the gigantic Chinese economy, do you feel this would have a spiraling effect for the crypto ecosystem and adoption?

[00:18:20] Timothy: The Chinese government has been trying for years in one form or another to ban crypto and has failed miserably. So I don’t think this effort will have any greater effect. It’ll just force the Chinese to adopt again and life will continue basically as it was.

[00:18:49] Ganesh: One last question before I wind up. In September 2018, there was an allegation on CAM of SEC violation. Can you talk us through more on the sequence of events?

[00:19:03] Timothy: I’m limited what I can say but what happened was there was an inquiry. There was never an investigation. There was an inquiry. We cooperated with the inquiry. We made a settlement offer. And in that settlement offer, we neither affirmed nor denied what the assistants said.

We settle and start in the one thing I will say though is that the SEC paid a lot more attention because it was in the crypto space and things would probably have not been so formally resolved if we weren’t in the cryptos.

[00:19:39] Ganesh: All right. Thank you very much Mr. Timothy. Thanks for talking to us and we appreciate your good time and your thoughts. Thank you.

[00:19:46] Timothy: Thanks very much.