On The Brink with Castle Island - Tom Lombardi (3iQ) on the Crypto-Asset-Management Opportunity (EP.128)

Episode Date: September 21, 2020

Tom Lombardi, Managing Director at 3iQ Corp, joins the show. In this episode we discuss: Tom's path from traditional finance to the cryptoasset industry The enterprise blockchain era: lessons learned and the second order effects of the hype cycle The state of institutional exchange infrastructure The crypto-asset-management segment and how 3iQ is positioned to capture this opportunity   To learn more visit www.3iq.ca and follow Tom on Twitter @tomlombardi  

Today in the podcast, I sat down with Tom Lombardi. Tom is a managing director at 3 IQ, a crypto asset management company based in Canada. He's also an adjunct professor at the Pepperdine Business School where he teaches a course on digital asset finance. And he's had some of the top names in the crypto industry come in to guest lecture at his course. Tom someone I've been following through Twitter, actually, and through his personal writings for quite some time. So it's great to meet him and it's great to have him on the podcast. He actually has a similar experience to mine in the sense that we've progressed through, quote unquote traditional financial services firms before making our way into this industry. And it's also a big socks fan. So that's a big bonus points in my book, although we stink this year. This conversation was a fun one and it touched on a range of topics. We talked a lot about the asset management industry and the opportunities for crypto assets, specific managers. We also talked about the enterprise Ethereum alliance. Tom was actually the head of growth for the EEA. Talked about the market structure around how these assets are traded, as well as a range of other topics. So I think you'll enjoy this one. And without further ado, here's my conversation with Tom Lombardi.

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of close you get easy. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. So Tom, I'm really excited to have you join this podcast because I've been following you on Twitter

for a long time and love the intersection of financial services and your background, having spent time on a bunch of really interesting projects. But I have to say, this podcast is off to a great start with the 1967 Red Sox mug. I don't think I've ever had a conversation about Jim Wanborg to start on the Brank podcast. podcast. And so I tip my hat to you on this is like the best podcast start we've ever had. So thank you for joining the podcast. Yeah. I mean, if you poke a bear on talking about Red Sox Yankees, you're going to get a scratch. So yeah, got my Red Sox vintage 1967 mug out and cheers. Yeah, no, you're ready to go for sure. And so as a Connecticut guy, it's good to see that you're a

Red Sox fan. Why don't we just kick it off with an introduction? There's a lot I want to talk about today, but I think it would be helpful for the listeners to just hear your introduction, how you got into the space and what you've been working on. Yeah, sure. I'll give the log scale answer, and I'll burn through the beginning and kind of expand more towards the recent. So typical track, I started at Bank of America doing Quant Finance and then into investment banking. So Quant Finance, we were building credit default models for traders, CDS traders and portfolio managers, got into investment banking, Chicago, did the Real Estate Investment Bank, some fun deals, giving home builders more liquidity than they needed to pump up the

housing market in 2005 and 6th. And great experience, market turned, had some really wise guys at Bank of America kind of give really good advice. And the advice was just go to business school and take a few years off. So I did that and then came out working for a private equity firm in the end of 2008, 9, 111. So again, great timing to buy assets, creative financing. We had long-term capital. But typical track of kind of like banking business school, private equity. And at that point, I was like, you know, and I really want to open up to technology. and I want to get exposure to the operating side. So nights and weekends, I was consulting an e-commerce company in travel,

doing hotels, parking, shuttle, ways to get to the airport. It was great. I did that for a while, built a big office in Santa Monica, learned enough tech to hire smarter guys than myself to actually execute. But the combination of banking knowledge and high-level networking set me up well for something like Bitcoin. So it was early 2015, mid-2015, where, we had about $3 million in payment processing costs every single year.

And literally like banging questions into Google saying like, how can I get cheaper payment processing? And it was like page four of Google search. I found Bitcoin. And that's where I started to explore. Lightbulbs did not go off at the beginning. I think we all share sort of like we have that friend that gave us the idea and we walked away from it and said he's, you know, ignorant. And that's not how the world works. So I did that too.

but I also brought it to my board. The board said, this is interesting, but we're a traditional commerce. Why don't you leave that project alone and stop thinking about Bitcoin? So then I didn't stop thinking about Bitcoin. It took a few months of just like deep research, just long weekends at the library, back when that was a fun thing to do. And I was just like sold. I got through response right now thinking about it.

It was something that just took over like nothing in my career. And, you know, I got a young family with kids. And I just, I really had to just walk away from that job. So I planned my transition and I took two and a half years off of work, exploring what these assets and this technology could enable. I love how you get goosebumps. You can tell how passionate you are about this. And I guess when you go down that kind of journey, it's perceived as a big risk, but it's really

not when you're putting that much time and attention into it and see the big potential. So you took the time off and then where did that lead you? I know you did a stint at the Enterprise Ethereum Alliance. We'd love to kind of hear more about your path into that organization and then path beyond that. Yeah, sure. So another, I think this is another theme that I've heard from other practitioners in our space. I got into it and I made a small investment in Bitcoin, right? Fired up my coin-based account and that was the first intro.

So following that, Ethereum had just launched me in that, like that summer. And I had built this concept, this trade finance. application. Basically, your typical, like, if that, then this smart contract for receiving funds based on confirmation. And it was fun, and I learned a lot, and met some smart people. Two things happened. One, it was just really tough to go to my, like, Trad 5 friends and, like, to venture capitalists in Los Angeles. And it was a tough fight. And I'm more of a finance guy rather than, like, tech entrepreneurs. So I think the pattern I referenced is what happened is, like, the value of my investment of Bitcoin was outpacing the optimism I had in my little scrappy startup. And so that made me

a bit lethargic. I'm going to be real. So stayed in, I was sort of a straddling like Bitcoin also with a wealth management startup called weplan.org. It's still live today. It's a cool little like basically wealth management solution, automated solution for middle America. They're largely excluded from financial advice. You can't get a human on the phone to ask about investments if you don't have more than a million dollars. And that's just a reality. So this was a way to bridge that. I did spend a lot of time on that. So that was kind of my like tradfai hedge against Bitcoin. And I balanced between those two. But then, you know, we get into early 2017 and I was like, wow, like this is real. Like this is really real. So balance shifted back from away from the wealth management startup and

really focused in on Bitcoin. So at that point, I was making investments following the market so closely and blockchain and smart contracts. It really was. I sort of hit that like euphoria stage. And we were all there, right? You have to sort of be real that like we thought that this was going to change the world. I thought it was going to cure hunger, poverty and cancer and like the tricecta of blockchain solution. Don't forget lettuce on a blockchain. That was another big one. Oh yeah, lettuce. Sure. I mean, we got mango. And so that was an exciting time. And yes, I mean, I still strongly believe in the hard money properties. of Bitcoin, but definitely pursuing what a fairium had to offer. So actually got close with the guys

at Consensus, awesome team, still really close with them now. Joe and Andrew and, you know, all those guys have done a phenomenal job. Great to see them on a new kind of track now with JP Morgan investments. And, you know, I think they have a lot more focus and that's awesome. And so connected with them and they said, you know what, we need help on the EEA side. So they sent me there. And Enterprise's Therian Alliance was exciting, working with the top companies in the world. trying to solve these like just outrageously ambitious problems, starting with ideas, concepts. And some have come further than others.

My knowledge, my learning curve on what blockchains can really do, escalated quickly, and learning about actual applications in production projects, how things, how this round peg fit in the, in this square space of a bank or an insurance company, it was very obvious that it still is the square peg and the round hole and still to today. So great experience, but I really will come back to this thesis that I think you have to break these things down and rebuild them from scratch. I mean, countries like Estonia recreating like social services, right? And we could even look at some of these crypto exchanges and even defy as something that

we didn't bolt something on to make it better. We didn't supplement it with a little bit of this. I mean, these are ground up, and I still hold on to that. I have the promise of all of these supply chain and trade finance, but I think it's going to be more grassroots than the corporate establishment. Something that's probably pretty overlooked. I mean, people love to kind of dunk on the private blockchain hype cycle that we had back then, but I think there's an optimistic lens to it too, where you just had an awful lot of

interest on blockchain writ large, and a lot of people just paying attention to Bitcoin and public blockchains, in addition. to those private chains. So you had really influential people like Blythe Masters and David Rudder going around at some of the top levels of some of these banks and broker dealers and asset managers and talking about this. So that was really positive. And then from the ground up, you had all of these kind of innovation groups and developers who were working at these places that learned how to code solidity and learned how to use a UTXO data model. So I think we'll look back actually and be probably more charitable with kind of everything that was going on there. Yes, it was a blockchain

kind of hype cycle, but a lot of smart people got activated through that cycle, I think. Absolutely. That's a really good point. And so it's like for me, kind of transitioning back to financial services, which I did after the EEA, after that writing that knowledge curve of, okay, let's look at these as fair assets. And let's look at this as an asset class. That's real. And that's something that we can build, either build infrastructure around or incorporate

into the legacy stack. So my view is sort of lack some patience on the blockchain side and then realize like, wow, we have a thriving capital market around digital assets and like now's the time. So I definitely want to get into your work as a adjunct professor at Pepperdine and talk about 3 IQ, but maybe I want to spend some time just on your overall orientation on this industry and how you think about the space before we do. I think one of the hardest things for people who are explaining just what's going on in this industry is where to start. And so lately, Nick and I have been talking about just kind of breaking up into different tribes of things that are happening. So you kind of have this sound money thing happening around just money that is not controlled by the government.

So that's clearly one thing. And it's a big powerful idea, huge total addressable markets. You have another thing around kind of community ownership over things that are happening on the internet. And could it be possible to disrupt the likes of Facebook and Google at some point in the future with a network that is kind of community owned through cryptography? So that's a big, powerful idea. And certainly there's just tons of investments going into projects there. And you have things like, you know, U.S. dollars on blockchains and traditional securities moving on blockchains. And that's an enormous thing. And so there's probably five or six other kind of big categories that I left out of that. But I'm curious kind of how you think about what's

going on in this industry. And if you're just explaining it to one of your former colleagues, maybe how you would even break this down in terms of why this industry matters and why people should be excited about it. Yeah. I think you covered half of my question and half of my answer, at least, starting with Bitcoin as a hard money. I'm not going to regurgitate what a lot of your audience already knows around the self-sovereign nature of Bitcoin. It doesn't always apply to people in the U.S. who have Venmo, PayPal, so easy that we do. We also don't. have, hopefully we don't have a tyranny in our government that will take possession of our assets. So we don't have to worry about that right now. But what's happened with COVID and the way that

the world's changed, accelerated things like Zoom and things like Instacard and the movement towards hard money, I think is still a theme. We're waiting for it to occur where like Zoom, it already happened. They got X many 100,000 subscribers. We see Wallach gross, but like, do we see we're still in theory around like what money printing does to store value assets is bitcoin a store value asset so if i look at this bitcoin and i'm definitely so bullish and so invested committing my entire career if bitcoin doesn't work in the next 12 to 18 months when will it this is the time like this is what we've been sort of waiting for so i might have to put a clock on that to say like I have to test myself on this thesis and all the stars are aligned.

But what's great, kind of come back to your question around like, how would I explain, how do people get involved, the narrative for Bitcoin is speaking for itself. And it's going mainstream. And it's great to like, you know, when you have that initial conversation, you can skip three questions to be like, okay, like, how do I get Bitcoin? Where does custody look like? You're not talking about like who is Satoshi and how does mining work. We're able to skip a few levels of questions.

And I attribute that to this broader-based thesis around hard assets, hard money, and Bitcoin being included. The second part of your question around, like, community-driven endeavors point to defaq, because it's a great example. What's happening right now is amazing. I would point to maybe 15% of the projects are absolutely amazing. And then there's 85% of just sort of mimicking what's already being done. But like, wow, look what happens so quickly.

like no pre-mine, no venture capital, one or two people just like building tech and hundreds of millions of dollars pouring into it. Yes, that's scary. Yes, that's risky. But like, wow, that's just so astonishing. And I also like, how do I explain defy to someone who's already in crypto before? This would start there. And I would say, like, it's kind of like an ICO, but it already has product market fit. The ICOs were B-round valuation with bootstrapped progress. And now, D-Fi is like, I don't know, me, seed-to-a progress, but still, like, C-valuations. But at least we're climbing the development, the production, right? There are users.

There is tech. It is simple, and a lot of money is pouring into it. So it's better to ask this question to, like, a traditional venture investor. because they have a better vision on like stages of growth. And I look at Defi as just like exponentially further along than anything that came to market in 2017. I've been really wrestling with how to explain what's going on in Defi. And lately the way I've kind of been thinking about this, if you just think about how regular derivatives work,

they're sort of the underpinning of the capital markets to support every industry in the world. Like you have the airline industries making derivative bets on the price. oil, it's happening in agriculture, obviously financial services. Maybe what's happening in Defi here is kind of the first time that you've seen the open sourcing of derivative contracts and people that can just go off and build these things in a completely parallel manner. And so we're seeing this kind of rapid financial engineering innovation that I think eventually probably is the backbone of a lot of interesting things. But right now it does have this sort of casino element to it where you have, and by the way, not all derivatives are good.

you better than anyone know this based on your experience that some derivatives end up being pretty damaging and I'm sure the same holds for defy. But does that make any sense? I mean, curious what you think of that. Yeah. I would also say like, all right, let's explain defa. Let's explain yield farming to a traditional investor. I would call it asset rehypification for loyalty points. Right. I'm using a visa card to buy airlines. I'm earning. points for my visa card and I'm also earning airline points by buying the flight. Okay. So I'm earning two levels of points on one purchase. Extend defy into like, okay, use visa card to buy airline points, but then that same money is then sent to Marriott to earn night stay and that same money is sent to

Hertz rental car to get me more from. So is it exciting? Yes. Are there call it like coin on coin return in the present day? Yes. What's the longevity of something like that? I'm not sure. But to your point, like derivatives. In July, I wrote a call option on open. O-P-Y-N. And yes, I think they had some bug issues with their put contracts. But I wrote a contract on East in a decentralized manner. And the pricing was even better than I got on Derbitt. So like, that was exciting. It needs to scale. It needs the right infrastructure. But like, it was that simple. So D-Fi has simple tools that I think solve simple. of financial problems.

If you think about Bitcoin and there's this great macro narrative around a store of value assets, censorship resistant, seizure resistant. So there's a lot of reasons to be bullish on that story just based on things that are happening in the world. But I'd argue that there's also a lot of reason

to be bullish on it based on just specific market structure issues around how hard it is to access in how hard it is for institutions in particular to access. And a lot of that starts with custody, it's also largely around the exchange landscape. So, you know, when you look at just that centralized exchange landscape and kind of the different categories of regulated venues, kind of

offshore venues, what's your kind of just general take of where that market is now and curious how you think about it? If we take something, I guess, tangible like derivatives, derivatives are huge growing segments in digital assets, specifically Bitcoin, and there's a lot of involvement. CME futures are hitting, gosh, where did they hit? CME was at almost four, they're peaked at almost a billion in open interest, 948 million, currently 465 million open interest. That's phenomenal. But there are some constraints to trading on CME and trading on back is sort of the same. You've got these levels of like, okay, one, there's no, it's all Ciat, right? Sead on ramps. I have to work with an FCM that has to underwrite me as a risk client.

I have to pay monthly fees. I have to subscribe to, you know, archaic software from the 90s. And then I'm never even interfacing with anyone or anything at the exchange. And so I think in vain, it's like, okay, we want exposure to, investors want exposure to Bitcoin and they're getting it. But it's really designed in the, it's from the lens of the existing. financial stack, right? So back office at a hedge fund or, you know, a large investment shop, they're already connected to CME, it's just different numbers on the screen. What we struggle

that specifically when I was at Waste Financial is, you know, we have crypto-native investors. Like, they're all in-kind. E-D transitions are static and it's friction. So those venues are basically off-limited. So then with all the risk management controls in place, we look to some are the overseas exchanges. The overseas venues are not really exchanges because that's a official SEC term. They're trading venues. But something like, you know, put Deribat Max in this category, risk management is the top concern, especially when you're regulated, might take a whole other podcast. But the efficiency and the money in, money out, the depth of the order book, the tracking of assets, it's just so much better. So like I wish for the day for like

Arthur Hayes, the setup shop in Lower Manhattan, and just like try to recreate what he did under the proper jurisdictions that people need. I think that's a bit of a flyer. I'm not, I don't know if that's reality, but unfortunately some of the compliance requirements create this kind of friction, and it creates the incentive for intermediaries, and it's just hard. So kind of back to the first point I made, you know, we started, it's just like the most enterprise, the most enterprising, you know, like monumental platforms are going to be ones that start from scratch. So what's your take on just the equilibrium of where we're going in terms of these exchanges or trading venues? I mean, you'll hear people and they tend to be the kind of traditional Wall Street

types that would argue that these things are just not going to be able to endure from a regulatory perspective, some of these offshore venues. Then you hear others that are saying, look, this probably will just be kind of a parallel market structure and both will coexist. you're going risk off on some of these things as well. So curious what you think this will evolve into from just a market structure perspective. Institutional investors have their investment criteria. They already have their constraints. They already have the requirements for custody.

I mean, many of them have requirements for prospective-based securities. Like, that's what they can invest in. And so I think what you're going to see, and we saw this with Renaissance technologies, where they're starting to change their investment, not just, their investment mandate, but like their investor agreements to allow for exposure to digital assets, adding disclosures to the SEC saying, we might dive into this and here's 17 risk disclosures about it. So I look at that as like, oh, not like rentex coming in, like pump volumes. I look at that as like we're slowly reshaping the way the institutions are involved.

And then they'll follow. You saw this with the ETS applications, right? Winkle-Vye came early. early in their journey and they learned something. The next company that came through learned something from Winklevoss and then they applied it to theirs and the bitwise, you know, so like, so I think what we're going to do is back to like sort of the financial or certainly the trading venues is that and almost to the vein of like open source. Like we're using someone else's precedent and idea to

build on top of it. But but I don't I don't know. I mean whether like whether CME will be the venue of global choice, or will that be some derivatives exchange on a floating island in India? I have no idea. I have been thinking about one thing recently, and I think this does, this may shift into kind of like, there's a compliance hurdle, but then there's also other things like liquidity. How liquid is it? How liquid is an asset? And if it is liquid enough, then you'll start to make compliance work in your favor. If it's liquid enough, you'll start to find venues that give you access. If it's liquid enough, investors will, we see this across like the closed-end funds base.

They will endure tradeoffs that they normally wouldn't. So I wouldn't underestimate the power of liquidity that Bitcoin has and what people will start giving up more than a regular exchange. I couldn't agree more. I think you're already actually starting to see that happen where you have these large funds, these funds that people would have heard of if they were publicly in crypto that are establishing these offshore entities so that they can trade on some of these venues. So that's already happening. And the other part I agree with with what you said was just around how people are using some of these CME contracts as almost a gateway drug to start to do more interesting things. You start to do those contracts and then you start to realize that it's pretty expensive to keep on rolling them. So maybe you start to start. to get involved in spot a little bit more. You can see how this market structure is kind of building out like that. Maybe that's a good kind of transition point into just the asset management landscape. So now you're at 3 IQ.

So for those in the audience, rather, who are not familiar, could you kind of tee this up in terms of what is 3 IQ and why do you join? What's the company up to? Absolutely. Great. So, yes, I joined 3 IQ as managing director at the beginning of August. Say it at the top. Today, ideas, comments are from my own.

out of my companies. We are highly regulated company fund manager. And so, you know, I have to be cognizant of that. So we have our flagship fund is called the Bitcoin Fund. And it is the, essentially the world first fully regulated and major exchange traded Bitcoin Fund in a world. A bit of a mouthful. But it's something that like I've been seeking this for, I'd say, since about, you know, mid-2019, refocusing my energy and attention back to Bitcoin. And then, you know, I combine some of like the dynamics around like managed capital financial advisors, all those investment allocators who have a fiduciary duty. Like let's revisit that term when we go into the detail.

So 3 IQ flagship is the Bitcoin Fund, you know, IPOed in April of this year, not great timing with everything happening in the world. but, you know, we've had a lot of success. Pickers symbol is QBTC.U. It trades on the Toronto Stock Exchange, and it is also accessible from other locations. So we have that. We have our global crypto asset fund,

the small basket of visual assets, a index approach. That is a private fund, only available to accredited investors. And lastly, we are in preliminary perspective on the ether fund. And this will be a enclosed-in fund, much like the Bitcoin fund, that has ether, made a token of Ethereum, is the underlying asset. So since we're in the, we're in our waiting period with the regulators, please go to our website and find the preliminary prospectus for some more detail.

So that's kind of the headline on 3IQ. And I, you know, Fred Pye is a pioneer of asset management. He worked in bringing precious metals to ETS in fund formats. Canada. And I've thought about this. I wrote about this. I have a medium post called the Bitcoin Fund Primer. I'm sure Google search will get you there. But I talk about this in terms of like mirroring what happened in the gold market and the way that that once that asset was unlocked, the investment adoption once a EPS wrapper was around it was just like skyrocketed. And so I've heard guys a bit wise and some others referenced that example for something like Bitcoin.

So yeah, I mean, essentially we're a regulated asset manager at Canada, and we feel that it's an excellent testing ground for these passive tracking funds for people to gain exposure to. Sort of the short, cheeky answer is we sell custody as a service with a ticker symbol. And I really like, oh, my guys, don't beat me up for that one, but like, but simplicity of an investment offering is absolutely crucial. I mean, look at like, you don't have to go far as like Uber. We had ride sharing 15 years ago, but like until we had GPS, did we have the tracking simplicity to make Uber happen? And then on the other side, you look at like fintech companies and like opening bank accounts. And like the ones that are winning, like Revolute some others, it's like there are 24 clicks

to open an account. Like that's winning right now. So in my mind, yes, you can go to their Coinbase, do your KYC, connect your bank account, wait four days, that's on ramp. There's some more dynamic things like on a river financial and swan where there's more service, less sort of static, but you still have to do like 25 clicks. I look at these public offerings for passive exposure to Bitcoin in a ticker format. You go to your broker, you answer your ticker, you put in your order.

And I think that's going to have a huge advantage over the competition. Yeah, that makes a lot of sense. Certainly, if you look at just the infrastructure categories that have to be around in order to enable the crypto asset management industry to be a big industry, you look at custody, you look at regulated spot markets, and you look at probably index construction, the ability to actually have an institutional grade index provider. And so those things are starting to happen, which is really exciting. I guess on the other side of that, it comes back to the thesis and why people would want to hold some of these. So we've talked a little bit about that hard money thesis.

So you drill into that a little bit and then you just look at kind of where are the assets out there. If you made a chart of the big pools of capital, pretty high on that list, I think, would be registered investment advisors. And that's a channel that I would argue is like basically zero percent penetrated in terms of having financial products that have exposure to Bitcoin. I mean, there's very few options there. I guess why is that and what are the things that are starting to happen that will change that? Sure.

Great question. Let's break down like, I mean, specifically around the U.S., like, let's break down, where are assets, assets? So like, you look at the self-directed investor, roughly four billion, four trillion, sorry, in assets. These are your discount brokerage, your self-directed, right? And those are, in my mind, I look at that's the sort of token, like the token coin-based investor, I know pun intended. And that's great. Like, there's been a lot of penetration in that market. There are options out there. You're taking risk on behalf of yourself. So you, you, just need conviction on the asset and the right tools. Then we go to the next step, which actually skip to institutional capital, roughly 40 trillion dollars. Now we're talking about pension funds and insurance companies. They have an investment mandate for you have your stocks, bonds, alternatives, and then inside alternative, there's a little pocket for venture capital. Great for investors like you guys to have that allocation because I think a lot of money is flowing to actively managed exposure to digital assets and budget. because it fits in their mandate for venture capital.

You have to justify it as this new asset card. Then we get to managed capital, roughly $30 trillion. And these are financial advisors, wealth managers. Those investment allocators operating in a fiduciary manner to their client. They're directly managing client asset. So different where institutions just have like their pool and they're managing that. I look at this, like the wealth channel, as like fiduciary duty of an advisor to say, I'm going to pull your needs ahead of mine, and I have to vouch on a professional

regulatory level that every investment I put you in is suitable for you. And every investment that I put you in, I'm essentially liable for that decision. And there's different levels of that. There's different flavors. That in itself, it's not holding back on their decision to invest in Bitcoin or their investment basis to invest in Bitcoin, they have hurdles that they have to overcome. And you can say the traditional hurdle of like, okay, is it prospective space? And that's the first one, right? You have a prospectus. It's going to trade on a major exchange almost a slam dunk. Tesla, like even some of these PACs. Guys aren't going to get fired hiring IBM. You're not going to get probably not going to be

fired buying Tesla in anyone's place. follow these days, unfortunately. But then you go the next level down and you say, okay, this is a private placement. Okay, well, it's not registered with the SEC. They do their own disclosures, and there's medium requirements for disclosures. Now the advisor has to, quote, unquote, like, stick their neck out and say, this has to be so compelling, this has to be so interesting, that I'm going to put my client's capital into it. That's a big hurdle. And then there are things Like, there was another thing I was kind of researching, which I don't think a lot of people talk about. Financial advisors, we, I am one.

We study exams, securities license exams, and it covers stocks, bonds, real estate, alternatives. Well, it doesn't cover Bitcoin. So not only are they not educated about the asset, but when it comes to disclosures, when it comes to risk management, digital assets are not in the playbook. Wow. Like, you're really putting yourself out there. So that's like any measure of exposure, whether it's a closing fund, whether it's a private placement, whether it's qualified custody on with like fidelity of Coinbase, create service providers. There's still this idea that recommending Bitcoin to a client as a fiduciary is widely unknown.

So the ones that are doing it now are really taking that leap. So you had a question at the beginning around like, I think it was addressed around like education. How do we educate people around this asset? And there are a lot of people doing that. Bitwise doing a great job, gray scale and other reports. And we're coming out with a series of reports. But giving the financial advisor the thesis that hard money and they can subscribe to it. Luckily in Canada, we have a lot of gold investors, precious metals.

So it's easy to understand. But then it's like, how can we help them guide through that fiduciary compliance process? And until we get to that, that pool of $32 trillion will remain on top. So do you think that the economic incentives are aligned here, or are they getting aligned? Because historically, it's been like a challenge, right? Because if you're an RIA and you recommend someone to go buy X million dollars worth of physical Bitcoin and hold it in a treasurer, that's just less money that you can collect fees on at the end of the day if you look at it negatively.

Absolutely. I mean, I talk to so many advisors who say, yeah, Bitcoin love it. I have it, but I'm not going to recommend it to my client. Rick Edelman is a beacon of information and truth within financial advisors. What he said resonate with me is that he loves the concept. He talks about it a lot. But until there's a 40-act product in the market, which again, prospectus-based SEC oversight, he's not going to put his clients into it. But to your point, I mean, the incentives. So these hedge funds, have incentives on returns and they make a small enough bet to where they lose their keys, then maybe they can cover it or that's just part of business. Individual self-directed, same sort of deal.

Like I have conviction, it's my responsibility, I'm going to do it. But then you have like fee-based financial advisors who like they want their clients to do well. They want their clients to grow an AUM because they will take their smaller fees on top of a larger AUM. but is it compelling enough to grow that 1% E on a larger asset pool by reaching for the stars on something like Bitcoin in their mind? A lot of them know. So we're moving in the right direction. Like if we had this conversation two years ago, it would be a totally different conversation.

We've had the wave of ETF applications, and I wrote about a lot. Like, we have a lot to thank the Wink of All Twins for starting the flywheel. They answered the custody question that the SEC had. Then came guys that like Bitwise. They answered a lot. Maybe they didn't answer the question, but they filled in a lot of answers around trading and around reputable venues and price discoveries. You know, and unfortunately, we're still sort of stuck within that concern, but like so much

progress is being made. We have so many qualified custodian providers, NYDFS for oversight. Yeah, I mean, huge. And this is like kind of in summary, like part of the reason why my career shift to 3 IQ was like, okay, Bitcoin is so prime for just this Cambrian explosion and like which one of these rocket ships are going to be the one that get through. And I really fall on those with regulatory oversight, exchange trade and perspective based disclosures. In my mind, that's the horse that I'm betting on. Yeah, that's exciting. You're getting me jazzed up. One of the fascinating things here is that if you look at just the pool of traditional quote unquote asset managers, probably with the exception of my former employer, you don't see anyone in this market that is offering crypto asset products. So my view is that a lot of that Cambrian explosion is actually going to, with a couple exceptions, benefit a lot of these startup asset managers, these companies that are not that old. And I would put Grayscale in that category as well as you guys and BitWise and several others. What do you think this kind of looks like? a few years from now, assuming that we do have this great market growth here, does this end up being a situation where the incumbents are playing catch up and trying to push products through

their distribution channels? Can you catch up at that point? How do you think about that competitive landscape? I wrote about this in my Bitcoin Fund primer paper. We can look at the gold market, right? And there was this like fringe, I say fringe, U.S. standards, fringe asset manager out of Australia in 2003 that they gained approval for a gold fund. And they flagship moment, gold available in my brokerage account, the investment thesis was already there with gold, and this company, ETFS metal securities, which if you've ever heard of them, but they were the first one to come to market. And today, I think they have around a billion in AUM, but what happened was the spider, gold

Trust. GLD came along in 2004, only 18 months after the initial launch. And we all know that the global wealth financial markets is in the United States. And this company, the spider, definitely benefited from that. And today, they have some $60 billion in a UM. So we have a story where the sort of smaller, scrappier asset manager brought gold per market. But then it was supplanted by a dominant global ETS provider. So I guess we can learn from history. I don't want to sort of project on like what will happen with the Bitcoin ETS in the United States, but you can already see who's going after that.

You have brand name companies, asset managers, you have well-funded emerging companies. And I mean, I just, part of me has this notion that like there will be some pioneers and some of them may flourish, but eventually 20, 30 years from now, it'll just be the kind of the ETF rates that you see today. Yeah. Well, I guess that would be a good problem to have. It would. I mean, yeah, of course.

And we need the options. We need, but we need that. I come back to, okay, let's come back to this saying how, like, liquidity, my mind, this is sort of like a little off base, but, like, liquidity sometimes can trump compliance or, like, liquidity can trump inefficiency. And so, I mean, we're seeing it today clearly with gray scales, phenomenal growth. And it's a structure that is not ideal. Like, everyone knows this, right?

It's OTC traded. It's not prospective base. I mean, the company itself is a registered issuer, but the actual security doesn't trade a major exchange. If you want to get technical, it's our rule 144, it's trading of unrestricted shares. CalPERS is going to have a really hard time pushing their death. into something like that. But I'm proven wrong because look at, they're trading $100 million a day with some $7 billion in asset. So I guess this is a good example of like liquidity is

trumping compliance. So like our approach at 3 IQ learning from a lot of the dynamics in this market, we start with that compliance view first. And to set this precedent in a major first world country regulated financial market around the financial hub, right? It's powerful to set this example that it can happen. And that message should sort of go across borders as well. So on the other side, we talked about Bitmax and Deribut. Like, you really have to make big tradeoffs on compliance to source that liquidity. We're looking at that as more of a sort of a closer to like, Bitcoin fund, ticker symbols, adoption. One thing that I've been sort of underwhelmed around, and I thought things like Galaxy and some of these like private offerings, even the bitwise guys,

they're playing the long game. But gosh, I've been really underwhelmed with the lack of money going to private passive funds. And I think that's just that education, right? That's that what we spoke about. Like get the advisor, give them their toolkit for answering all the questions of auditors of compliance. And being able to say yes, yes, yes, yes, yes, yes. I know the product. I know my client.

that's a learning issue. That's not a product issue. Totally. Well, I only have you for a couple more minutes here, but I think the learning issue is a good way to sort of end this is you actually taught a course on blockchains at Pepperdine in the MBA program. So talk a little bit about how this came about and what was your approach there. As you can see all of these, my narrative is well woven together. Because like this class is part of my mission. And the mission of getting people, equipped with the thesis and the constraints so that they can gain exposure. I do it with financial advisors, do it with investment allocators, and now, you know, starting in January this year, I'm doing it with MBA students at Pepperdine University. So I teach finance. It's $6.98. What a big number. Must be some important stuff. But it's digital asset finance. And I, gosh, I wrestled with the name of that

class for more times than you would think. So how I got involved, kind of go back to like, Who are the adopters? The adopters of blockchain tech has been like the challengers, right, the challenger bank who needs an edge on the number one, number two, right? We've heard that scene before. But Pepperdine went to business school there and we're sort of the Challenger University in Los Angeles to USC and UCLA. And so I think talking with administration and my own sort of motivation was like, okay, this could maybe not give us an edge, but make it special and get us some attention and get a different perspective from, you know, the traditional business schools. But ironically, this opportunity came to me. I didn't even speak it out. There is a woman by the

name of Lena Martin. She won a university with giving away money to clubs and students. And she raised $100,000 for this blockchain at Pepperbank Club. She reached out to me, we started talking. I joined as a, you know, call it an advisor. Then I got an email from the administration at the business school after I was, I posted a job for way of financial business school. And they came to me and they say, listen, like, this is an exciting space. We do have some of our benefactors who are interested in this space and some allocating some funds to it. So this came at all different angles. But yeah, I met with the school and spent some time. I did a sort of a guest lecture for the students at one time. And then they just said, let's sign you up. So I started the class in January

and it was oversubscribed, as you would expect, people sitting on the floor. No, it was. People want token tips, you know? Yeah, yeah, oh my gosh, right? It was just like they wanted the alpha, and I'm like, no. If anything, I'm going to confuse you more than no. I'm going to talk you out of anything likely other than Bitcoin. But no, it was fantastic. So basically what I did is I reset my own knowledge.

Like I got to go back to like the white paper, and I've got to build on that speaking to pretend like you're, these are new adopters. I need them very basic. So the structure of class is basically half of the class I was teaching about traditional finance, right? We had to talk about derivatives market. We had to talk about security law. What is a security? What is the loan? What is how we test? We had to talk about infrastructure. We had to go back to these concepts, but then you loop in like, what is sound money. Why do we need this? Then it's like networking. How do messages propagate through the

blockchain? It was really hard to stuff into seven weeks, four hours a week. So what I did is I leaned on my Rolodex and I called him the really smart guys. So I had Jimmy Song to talk about what is Bitcoin's down money. One of the best presentations I've ever sat through, if you have a pleasure. Then I got into digital assets, digital securities. I brought in Sunana Tutasia from TD Ameritrade. So she's doing her PhD at Stanford for digital assets. So phenomenal. I brought in Luke Martin to talk about trading, venture coinist. I brought Tom Jessup to talk about fidelity digital assets to talk about infrastructure. Jusica and Paul Chow, Ledger X, to talk about legal frameworks.

I finally brought in my buddy, Teddy Fusarro, from Bitwise, to talk about everything, which was a great finisher. So I didn't even have to take notes because everything was just coming from my brain. I never had enough time to finish all of my thoughts. But then I would bring in, like, the pros to really show out the concept. That's awesome. Well, we need to have this be a course that people build on and start at other institutions. I really like what Cam Harvey is doing down at Duke with some of his stuff as well. So it would be great to see this in other places.

So, Tom, this has been great. I feel like we could wrap for a lot more time than we have, but really appreciate you joining. Where can we send people to learn more about what you're doing? So you know, we found me on Twitter at Tom Lombardi, email me, hit me up. And then 3 IQ. You can email me at Tom at 3 IQ.ca. We're doing some very exciting things. We have some things in the pipelines that we'll be hearing about. But yeah, I'm totally open.

I'd love to hear ideas. And building on the education, Matt, like I tried to circulate my syllabus so that people could get it. and could get building that sort of financial education around digital assets like that, please, fire questions, use it, grab the curriculum, and I'm available if anyone else to reach out. That's awesome. Well, this has been a ton of fun. Thanks for joining, Tom. Great. Thanks, Matt. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.Vicc. To listen to all of our podcast episodes,

please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.