An SEC Regulated Robo-Advisor for Digital Assets with Makara’s Jesse Proudman
As the crypto-asset markets continue to attract a new wave of retail and institutional participants alike, the breadth of possible investment opportunities can seem mind-boggling and, for the uninitiated, somewhat risky – especially when directly investing in, managing and storing the assets themselves. Although the…
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As the crypto-asset markets continue to attract a new wave of retail and institutional participants alike, the breadth of possible investment opportunities can seem mind-boggling and, for the uninitiated, somewhat risky – especially when directly investing in, managing and storing the assets themselves. Although the same can be said for traditional asset classes, tools to help de-risk and simplify investment decisions for retail investors have existed for some time but similar products and services such as Robo-Advisory for crypto have been lacking – until now. On this episode of Market Spotlight, Jesse Proudman joined Teana Baker-Taylor to discuss how he and his team have taken the technology and strategies they developed for their institutional clients at their crypto-hedge fund, Strix Leviathan, and have repurposed them for a retail audience in a regulatory compliant manner with Macara the first sec registered cryptocurrency robo-advisor.
From Strix to Macara
After Jesse’s prior company, Blue Box Group, which was acquired by IBM, he spent 2017 as a distinguished engineer and entrepreneur-in-residence at IBM effectively researching the crypto markets. There he launched a blockchain-oriented accelerator. After investing in the crypto markets, making and losing money, he concluded that the market had “opaque fundamental value” driven by fear and greed and needed a better way to invest.
(02:02) That is how Strix was founded, on the notion that if markets move in a behavioural fashion, they can be identified using patterns within the pricing data.
Jesse and his team spent the last three years building the software platform to enable institutional funds to identify those patterns and trade off them. While that business has gone phenomenally well, it is an exempt reporting adviser.
(02:24) Strix is registered as a 3C7 hedge fund, which means the company can only work with qualified purchasers and only up to $5 million in investible assets. The new startup, Macara, taps into a bigger ambition of a larger segment of the population that sits on the sidelines because the asset class, as it stands now is too intimidating.
(02:53) “Everything’s named the same thing. You’ve got to learn a whole new lexicon to participate…So instead of getting involved, people sit on the sidelines. We discovered this through a bunch of our conversations on the Strix side and we’ve been searching for a mechanism to get new people involved in the markets so coming up with this SEC-registered investment advisor, we realized this was a way to open up this asset class to a whole new market participant that otherwise isn’t here,” Jesse explained.
Crypto Vs Angel Investing
The market is akin to liquid angel investing in some ways, Jesse said.
(03:50) In angel investing you’re making early-stage investments in technology companies with the hope that some of them are wildly successful. The best deals in angel investing have always been withheld from certain people. Even then, you have to be an accredited investor to participate and it’s sort of an exclusionary market.
(04:19) “Crypto in my eyes is one of the first asset classes that are similar to angel investing. We have the ability for anybody to go invest in early-stage technology projects and I think it’s the first time this type of investment (crypto) has been open to the world to let anybody participate. But it’s been unapproachable,” Jesse added.
(06:15) Macara is the culmination of all of the work done over the last three and a half years by Strix, Jesse said. At Strix, Jesse built an investment platform called Octopus, a comprehensive end-to-end platform for institutional style funds from whom’s learnings, the new company is being built.
“… if we think traditional robo-advisory in traditional equities, they had to go build the technology to manage the accounts and to manage the relationship and to give the advice. They didn’t have to go build all the ETFs, right? The ETFs existed…that doesn’t exist here in crypto. There, there are no ETFs. And so we came to recognize that if we could create the equivalent of an ETF and in the MacArthur language, we call it a “themed basket”…that removes the complexity, removes the language barrier and makes it approachable to users, that could solve a lot of the problems,” Jesse explained.
How Many Assets Can You Trade on Macara?
(07:06) At launch, Macara would have about six different baskets. The first will be the universe basket, a Russell 2000 equivalent for people who want broad-based exposure to the market a. It also offers all of the investible assets on the platform, about 45, Jesse said.
(07:39) Macara will also have Gemini as its qualified custodian and trade execution partner. As such, assets that are supported by Gemini would be part of the universe of assets that Macara would deliver to its clients. In addition to that, Macara has a variety of different baskets, including a DeFi basket that makes the decentralized finance space less complex, and enable people to hold the actual protocol tokens.
(08:05) There’s an inflation hedge basket which is a combination of Paxos gold and Bitcoin for new market participants who may be concerned about inflation, but not quite sure about Bitcoin as a sole investment. There is also a blue-chip basket for large capital investments.
Mass Market Crypto Education
Macara’s thesis is to take all of the complexity of these different assets with different names and put them into human language that anybody can understand and make decisions around investing in.
(09:25) Macara wants to pair these investments with education, Jesse stated. In a recently published CNBC article, three investors in this asset class, don’t understand what they’re investing in.
(09:41) “I want people to know what they’re involved in when making investments here. We think that people are participating in this asset class for two reasons; one, the gains are compelling and two, they’re curious…And so we want to pair investments with a stream of information, both editorial and written content, as well as short videos so that people investing in something like a DeFi basket begin to understand and can be able to talk about what they’re investing in and why it’s exciting to them,” Jesse explained.
Who I Macara Built For?
(10:39) Macara was built originally built for the working professional, someone working 50 to 60 hours a week in their job and then comes home and spends time with their family. Such people do not have time to research these individuals assets. Macara wants people to gain exposure without having to spend three months understanding what’s happening in the space, Jesse said.
“What we’ve quickly discovered is there are so many people that are just curious about this asset class and they don’t know where to get started… the last thing we need is another crypto exchange. We don’t need another place to buy Bitcoin. What we need is a place for people to feel comfortable and safe, getting investment advice that matches their interests into the appropriate investible assets in this asset class,” Jesse added.
Key Features and Benefits
(11:48) Macara will be a mobile-first application that is scheduled to launch towards the end of this month. A user who downloads the app will go through a customer identification process to set up an account. Capital can be onboarded in three ways; money transfer over ACH from a bank account, through wire or crypto deposit. A user will then go through an initial process that tries to identify their interests and why are they are investing in the space. It will then steer the user into a basket that makes the most sense for a profile. A user will also be able to go through the breadth of the options and then make selections.
(12:36) “This is not like you’re going to buy Bitcoin and I’m going to buy Litecoin, and I’m going to do market orders or limit orders…all of that language and experience we think is too complex or too heavy for most folks. Instead, you’re saying, I like this basket and I’m going to subscribe to it. And then your capital is deployed into that vehicle and rebalanced over time…So simplicity is key here and normal, everyday language is key to remove a lot of the challenge around different asset names, conventions and exchange complexity. We just want to make it simple,” Jesse added.
Geography & Due Diligence
(13:50) Macara’s launch market is the United States, where it has its FCC registration which gives it the ability to operate. The company would look at expanding internationally over 2021 and 2022 but is focused on the initial launch in the US. Concerning customer due diligence, users are required to upload a copy of their ID or passport, an account is created and they can browse and fund the account.
Macara's FCC Authorization Process
(16:40) Macara began its FCC authorization process in November and was granted a license on March 30th, this year. Macara consulted Aspect Advisors, a regulatory compliance company to aid in the process, with Sadie, co-founder of Macara driving the entire compliance process. Effectively, the process was around defining the experience, customer expectations, how baskets work, pricing, how investments are done and documenting all that into a set of regulatory documents that get filed with the SEC.
While much of the crypto industry has spent energy their doing everything they can to avoid regulation because it’s hard and challenging Macara wanted to go the opposite route, Jesse said.
“We wanted to embrace regulation and approach this in a construct that people are familiar with. People generally understand the concept of an investment advisory so if the objective here is to make this asset class accessible to people that otherwise aren’t in the asset class, wrapping it in a wrapper that they understand, I think is key,” Jesse added.
Filling Taxes For Crypto
(18:45) Jesse is leaning on his experience from Strix Leviathan to solve one of the more complicated problems of the crypto ecosystem, taxes.
“We’ve had the benefit of working with some phenomenal firms over the last three years from the tax and audit perspective. So very early on, as we launched Macara, we engaged with them to think through ways to make this easier for clients…It’s a disaster for folks, particularly when you have to go back after the fact so the thesis in Macara is to try to simplify that experience. And if everything is contained within the walls of the MacArthur environment, we have all of the data we need to prepare tax documents for at the end of the year. We don’t want people to have to go figure it out and keeping it all within the bounds of one environment drives that simplicity,” Jesse said.
De-Risking Investment Experience For Consumers
Crytpo is a speculative asset class with a risk tolerance that is already off the charts in comparison to other traditional assets, Jesse said. As such an education component is very necessary. Investors need to understand what this asset class is, an early-stage speculative investing that while can appreciate tremendously, can also depreciate very quickly in value.
(21:10) “…it will be interesting to see how different companies and firms think about that. For exchanges, their entire value proposition and revenue stream is derived from getting you to trade. They make money off of trading fees…and I’m glad that those venues are available for people, but that doesn’t feel safer, sustainable, just pushing people into the latest fad because you profit off of it. We need to think through how we educate people about this asset class before they deploy capital and how we continue to educate them as they participate…” Jesse remarked.
(23:30) As an RA, Macara is prohibited from making income off of trading fees. This allows them to be objective in their trading activity, Jesse said. The goal is to get people invested in the assets that make the baskets that make the most sense to them.
“I think what will set us apart isn’t a matter of getting people to buy into the latest fad. It’s a function of getting people to understand what’s happening in this asset class because it’s a phenomenal and interesting asset class. And then to participate in a way that logically makes sense for them and where they are in their journey,” he explained.
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