Family Capital spoke to Leon Marshall from Genesis Global Capital about crypto assets and what family offices need to know about the fast-growing asset class. He also illustrates how Genesis Global Capital can help family offices make money from crypto-assets.
Can you outline the opportunities for family offices presented by digital currencies?
Great question. At their core, cryptocurrencies are digital assets which minimalize the trust between parties exchanging information or value. One corollary of this is that it enables both permissionless and censorship-resistant stores of value and transfer of that value. The most obvious and well-known example of this among cryptocurrencies is bitcoin.
Given this, what are the opportunities they present? Well, in this particular case, crypto-assets presents a good opportunity to family offices which have gold in their portfolio. Genesis Global Capital has an investment product which dominates gold across almost all attributes, because bitcoin is superior to gold in many ways. These days most transactions are digital, not physical. This matters when it comes to portability and fungibility of the asset class.
With cryptocurrencies, all you need to transact with bitcoin is access to the internet. And a bitcoin everywhere is worth the same. For cryptocurrencies, there is no “specification” issue as there might be in commodities trading. Bitcoin’s digital nature allows it to be highly divisible. This means that bitcoin could be used to make micropayments online, or be an ideal investment product for investors transacting in smaller amounts. Gold does not benefit from the same level of divisibility, portability or fungibility. And yet despite its digital nature, bitcoin is also bearer asset with 84% of the total possible volume already in circulation.
Give us some idea of how GGC works? And how might a family office work with GGC?
We deal with a number of family offices. For a family office, there are essentially two steps to working with GGC. The first step is onboarding. This takes 24 to 48 hours to turn around and involves a series of standard KYC/AML questions which we need before we consider taking on a client.
The next step would be executing the Master Loan Agreement. This is a document which acts like an ISDA master agreement in traditional finance. It lays out the parameters and terms of the relationship between a family office and Genesis in general terms. Once this is signed we have the pipelines in place to lend or to borrow either crypto or fiat currency from the family office.
Each trade is executed via a term sheet and we can do that using whatever method of communication the client prefers. We pride ourselves on being a high touch desk and are able to accommodate a number of bespoke requests across the duration of the loan, type of crypto asset, collateral requirements and interest rate. Our minimum loan size is $250,000, or equivalent.
So one example trade might be that the family office has spare US dollars on their balance sheet; let’s say they are looking for decent yield on $10 million. We would be able to borrow those dollars for some pre-agreed time period (three to 12 months perhaps) and would be able to pay mid-high single digits interest annualised on that.
Alternatively, a family office may already own crypto assets and seek to earn some interest rate on their holding (e.g. perhaps Bitcoin, Litecoin, Ripple etc). The interest rates the family office would receive would depend on the crypto asset that they are looking to lend and how long they are looking to lend for, among other factors.
Have you witnessed more family offices wanting to trade digital currencies? Give us some idea of the increased popularity of trading digital currencies among HNWs and family offices.
Family offices have been one of the earlier entrants into the digital asset space. We’ve had established family offices buy and sell crypto assets via GGT for more than six years. And while it may not be mainstream yet, we have seen that trend grow over the last two years. Family offices are typically entrepreneurial and have an expedited decision-making process. Many opportunities that exist in the crypto asset space require some openness to interact with the asset class and access to capital, As such, family offices have been uniquely placed to benefit from those opportunities. And we see no reason why that won’t be the case for the foreseeable future.
Give us some idea of the lending volumes GGC deals with on an annual basis? And how that has increased over the years.
GGC as a business began just over a year ago in March 2018. Since then we have achieved almost $2 billion in total originations with an active loan book today of $381 million.
In the last quarter of 2018, we began lending US$ as a pilot program and since then we have seen significant growth with our dollar lending business. Fiat currency lending now represents more than 10% of our loan book – a percentage we expect to grow. Having operated in the digital asset space for some time we accept crypto as collateral for cash financing.
Our borrowers of fiat currencies tend to be: institutions seeking liquidity without the need to sell (and realize capital gains), miners looking to cover fixed costs or hedge funds looking to gain leverage. Family offices have typically played an important role as a provider of dollar liquidity.
Given Genesis provide liquidity to trade digital currencies, volatility in the sector might actually be good for you as a business. Any views?
We’ve provided over-the-counter (OTC) liquidity out of our regulated broker-dealer Genesis Global Trading (GGT) platform for more than six years. From our perspective, while volatility may generate volumes, typically we see more clients come in to trade as prices rise. Higher prices tend to both attract attention and to normalize the asset class as the pool of traders we deal with grows. Bitcoin turns from being something foreign or geeky – to another asset class to trade.
We run our lending and borrowing operation out of Genesis Global Capital (GGC) which is federal MSB (Money Services Business) registered with FinCEN (The Financial Crimes Enforcement Network, a bureau of the US Treasury Department ). A lot of our clients here operate market neural strategies which involve market making, exchange arbitrage and basis (spot vs futures) trading.
These trading activities benefit from the volatility and require significant BTC borrow to property function; this helps to drive volumes within GGC. This demand also helps lenders of crypto assets, such as ultra-high net worth individuals, funds and family offices, which benefit through higher interest rates.
How important is it to be regulated in the digital currency space? And how does being regulated help you to develop your business?
Genesis (both GGT and GGC) caters to institutional market – we don’t interact or engage with the retail business. To this extent, regulation is an advantage as the institutions we face proactively seek out AML/KYC procedures and firms with robust legal, audit, accounting and compliance departments.
At GGT we are an SEC and Finra regulated broker-dealer operating out of New York with a bit license. And, as mentioned earlier, GGC is a federal MSB and registered with FinCEN. So we are highly regulated. One challenge is that there is no federal regulator for spot crypto – it falls in the cracks between the SEC and CFTC. So it is always the best guess to work out the federal regulated stance on some matters.
And we also find that state by state money transmission laws often differs – meaning that legal departments of companies operating in the space also face a cost just to keep up laws at the state level. In general, the regulators do a pretty good job and have a good understanding of the space. One area for improvement is at the level of legislation. There is certainly further work to be done to help policymakers understand the opportunities and challenges of the space a little better.
GGC was early into the digital currency sector. This means you’ve survived all the trials and tribulations of the sector, as well as its triumphs. Can you give us some views about the history of the sector and why you continue to flourish within it?
GGC really started as a service that clients from the trading part of the business (GGT) demanded. Back toward the end of 2017 many funds we spoke with were seeking a way to hedge their positions. While we ran some nascent spot borrow operations, Michael Moro, our CEO, saw the opportunity to formalise the process and think more systematically about how we manage this risk. While we had demand from funds to borrow, given we started the OTC desk six years previously, we also had a strong idea as to who might be prepared to lend crypto assets.
Since then we have grown the book to over 80-90 clients on the institutional borrow side. We focus relentlessly on ensuring we have the right operational processes, credit/underwriting policies, margin call levels, competitive spreads and collateralisation levels. I’m pleased to say that to this day we have not had a default or liquidation event despite the large volumes. Managing large volumes entails significant responsibility. We spend a lot of time thinking about how to manage that risk.
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