Fireside Chat: Regulated Institutional Capital with Ruben Amenyogbo and Shannon Corless

Transcript

[applause] >> Well, I'm really excited for this opportunity today. We have a couple of really good questions. I think I'm going to try and pose to Ruben, challenge him a little bit, but in some I think what we want to make sure that you all take away is understanding what it'll take for digital assets to move from an emergent technology to trusted financial infrastructure. Um and why the firms and countries that build the right compliance approach now will be the ones that actually shape how the infrastructure gets adopted. Um so before I go too much further into the questions, um I wanted to do a little introduction for Ruben, which is that he is the founder and CEO of Architect, which is a global investment firm

regulated in Switzerland. The Architect team has been active in digital assets since 2017, backing some of the most consequential companies in the industry, including Kasha, Privy, Worldcoin, and Zama. And prior to his career in digital assets, he worked with Rocket Internet and DeliveryHero on some of the largest tech IPOs in Europe, as well as with BCG Pipe in New York, advising some of the largest global balance sheets, including the million multi-trillion-dollar GSEs. >> What an introduction.

>> [laughter] >> So with that, we've got our questions sort of focused on three areas. Sort of what is the lay of the land right now, what are some challenges that we might see coming down the pipe, and then what is the the look ahead, if you will. So the first question that I have for Ruben is most firms in this space build first and stay unregulated, but you all chose the opposite quite deliberately. Uh what does it take being like what it says being licensed let you do that unlicensed competitors structurally can't?

And who is the customer who only shows up once you're licensed? >> Excellent. Yeah, thank you for the question. Um and absolute honor being here. Um you know, we've been coming to these events for a long, long time. Um today I see way more suits than we have seen in the past. So, amazing to see, you know, the industry coming of age. Um so, to answer your question, um look, for us getting the investment management license was both a strategic um and an economic decision. I think it's pretty obvious that it's a strategic decision. As a management team, you need to make a decision around what pools of capital do you want to go after? Um it is a mere fact that, you know, most of the world's capital sits

behind regulated walls, meaning um the large pension funds, endowments, um the big insurance companies, they can, in fact, only face regulated counterparties, right? So, when we, as a management team and our advisors, uh came together and asked us, "Hey, how do we position Architect?" Um going for the license was um was very obvious. Um the second piece of this puzzle is um what's the economically right decision, right? Um if you think about the cost base of an investment management company, um you know, a regulated company has a much, much higher cost base. You need to run an institutional grade setup from

custody to, you know, the way you do distribution, the way you do passporting in in every country. Um and this institutional grade setup is priced in as large asset managers, endowments, institutional allocators make decisions, right? So, um for us, it allows um commanding a larger price point, um and um you know, uh higher management fees um than what you would see, you know, for your usual um you know, prop shop um that is unregulated and just running an offshore operation.

>> Right. So, then, uh follow-up question for you. What does a billion-dollar due diligence process look like that and what questions do institutions ask that most crypto native founders never really see coming? >> Yeah, so well, [laughter] so we could go into some detail. It's actually pretty boring but you know, think about it like a lot of red tape around where can you market checking in with the regulators in you know, individual jurisdictions where you want to raise capital and once you have done that then you actually get to the fun part the initial phase where you face you know, large allocators is called you know, I mean some people call it foreplay, right? So you actually face

you know, the investment team they often go to events like these they want to get introduced to investment management company and the conversation is largely about the firm, right? How are you structured? What's your track record? How do you think about X space? How do you think about Y vertical and so on and so forth. Very little of the conversation is around a specific product, right? However, let's say you get through foreplay you you do well and then the conversation swaps, right? The conversation suddenly becomes much more structured, much more serious. You're no longer just facing the investment team, you face diligence, you face the risk teams, there's deep diligence being done on you know, your network people that know you well,

references, there's a big data room that just keeps growing and growing and growing and growing and yeah, it just becomes about the product quite a lot and how your counterparty can diligence to answer the second part of your question which is around what types of questions do people not expect. So I was on the other side invested a lot into funds and the types of questions that that GPs do not expect are you know, business continuity planning, right? Like what happens if you die, right? Um, who's your deputy?

How are you deputized? Reserves, right? How much capital does the company actually have if something goes wrong, right? Um, how you insured, right? All of these long-tail risks, very, very few people um, and very, very few young firms think about in advance. >> Fantastic. So now we're going to move into a couple questions that sort of address some of the challenges in this space right now. Um, the first question that I have gets at some institutional barriers and I should also preface that the next two questions really draw on some of my own experiences working with the Treasury Department of a few years ago. So the first question is this. The standard institutional objection to digital assets isn't necessarily volatility. It is really AML, it's

sanctions screening, it's source of funds. Yet what you all have done is very interesting, I think. You built a licensed, regulated firm on top of open blockchain infrastructure where the other side of the transaction might actually just be a piece of code. So how do you actually solve KYC and transaction monitoring challenges in that environment and where does it still continue to break down? >> Well, so um, I think the the first step is to actually take um, KYC, AML obligations um, seriously. If we take a big step back and we look at where the fields currently is, you know, let's say we look at um, the default space, the um, you know, on-chain asset management

space, the reality of what we're seeing is there's a lot of offshore operations um, you know, having discretionary powers over quite significant amounts of money on some of these like lending pools, credit platforms um, uh, and so on. Um, so the first step is really um, taking it seriously. The field is split between those that structure around compliance, right? And those that structure against or within compliance. And we would obviously consider ourselves a firm that structures within compliance. Now, what is it that you want, right? What is it that you want?

What is the allocator ultimately expecting of you? At the end of the day, you want to be a good steward of client funds, right? And in order to do that, KYC needs to happen on a couple of levels. Level number one is KYC at the capital formation level. As early as possible, you should know who the person is that invest is investing into your vault, fund, whatever the structure is, AML, right? Is there a politically exposed person in there and so on and so forth. If there is one bad sheep in there, all the other allocators into your fund can get stuck, right? You are facing an investigation, you know, your former colleagues can call come calling and and and suddenly you know, you're you're facing a

nightmare. Right? The second piece is KYC at the market level. So, once you have the funds in the capital in one of your funds or whatever vehicle it is that you're administering, you want to make sure that as you flow that capital into the market, it is not commingled with potentially illicit assets. We have to realize that we are experiencing some of the highest level of global conflict since what, 1946? So, you really want to ensure that there's KYC essentially at the market level. And that has been one of the the biggest frictions for many of the largest protocols, more for Euler and a couple of others as that was in many cases simply um not possible or just horrible UX.

>> So then, what does your risk function actually protect against and what can't it protect against when something goes off-chain? Or breaks on-chain, I should say. >> So, okay, risk, right? Um so, maybe sorry, I'm saying this again, but I have to again take a step back. So in risk is not your enemy, right? So, again, as a asset management company, the first thing that you want to be is a good steward of client money. The second thing you want to do is to create great risk-adjusted returns.

The magic's in the name, risk-adjusted returns, right? There's no reward without taking appropriate appropriate risk, right? So, for every single unit of risk that you're taking, you want to create appropriate returns for um for your investors. So, so what does the risk management uh department then do? Well, the risk management department basically maps out the entire surface of risk, the entire universe of risk that you and your firm are facing. This is cybersecurity, operational, uh investment concentration risk, you know, it goes on and on and on. There's a big matrix that you're creating, and then you think about mitigating those risks. Mitigating those risks mainly means formulating policies,

um you know, creating automations, and ensuring that you have the right screening in place. I'm talking about the chainalysis, hypernative, elliptics, and so on of the world, and and making sure that if a long-tail event happens, you have appropriate recourse or ideally, you know, preventative measures in place such that, you know, you deallocate um or you're not exposed to um you know, catastrophic risk um for your investors. >> Right. So, one last sort of challenge question, if you will, before we get to our final one, uh is really more about the strategic stakes involved here. So, there's a real debate, as I think everybody in this room knows, there's a real debate in Washington about whether crypto and dollar and that stable coins extend US dollar dominance, or do they erode it?

And so, I'm curious, Reuben, from where you sit, does this technology strengthen US financial primacy, um or does it actually hand leverage to whomever writes the clearest rules first? Um and then I think as a follow-on to that, how does Architect see this right now? >> Um I feel there are likely two pieces to this question. Um and usually there's one piece to this question, but because you're here there's two. So, the the first piece to this question is um if you look at what's happening on chain, if you look at, you know, where US stablecoin flows currently are, I think they're north of 95, probably even 98% of, you know, total global flows and

many talking about USDT and USDC. Um so, extremely dominant, right? Um is this great for the US dollar as a currency? Yes, it creates demand for dollar, it creates demand for the fiat implementation of it, um which in turn is then great for, you know, in the area of genius clarity, um you know, short-term government debt, right? Fantastic right? However, um the fact that stablecoin assets are pegged to fiat US dollars does not imply that the global financial rails that control the issuance and that control

the flow of these stablecoins serve US interests, right? And that is the piece that is currently extremely contested um in uh you know, in Washington chiefly. Um that is why, you know, Jamie Dimon just came out and called Brian Armstrong, you know, called him out as being full of right? Um and we there's a lot of strive over who is going to control this, right? Um and so, that that that secondary part is something that I got intimately familiar when I was um you know, serving the GS the GSEs multi-trillion dollar dollar balance sheets. Um As capital pools grow, the conversation just

becomes increasingly politicized, right? Um look, if you go and raise from an institutional investor, you have to take a step back and ask yourself, whose money are you now throwing into a crypto vault, right? Whose money is it? Like, if you raise from a from an insurance fund, if you raise from a large institutional investor, we are talking about retirement funds, right? We are we are talking about people like we are talking about insurances that have actual obligations, right? So, I feel this is something you know, we shouldn't as as investment managers shouldn't take too lightly and really, you know, assume responsibility and mature same as the industry is maturing and you are now working since.

>> So, actually one thing I would like to hear you talk briefly about is your decision to incorporate in Switzerland. You made that decision very deliberately and maybe you can provide the audience with a little bit more insight on that. >> Look, when we when we worked through here, we met many friends. I see many old friends here in the audience. And many of you know that for the longest time we operated out of Palo Alto, right? And and the the issue that we were facing, quite frankly, during the Gensler era was that the environment was hostile to our operations right?

We felt we did not have the regulatory clarity to um you know, make the best out of our talent, to make the best out of the opportunities that we had in front of us. And and hence we were looking for a jurisdiction that allowed us to you know, number one, be expressive, credibly neutral but expressive and on our US identity, but still fulfill the global mandate that we as Archax have. As we feel that, you know, opportunities are are global and we are going to, you know, um surface them and wherever they may be, right? Some of the team is in is in Rio, some of the team might be in Switzerland, a lot of them are in in the US.

Um But yeah, truly truly truly global mandate. >> Very interesting. So, then this brings us to our final question or two you, which really gets to the look ahead. I'm curious from your perspective, what does grown-up look like for digital assets? And you more specifically, what are the concrete milestones you think we should be keeping an eye out for? What needs to be true in 3 years for a pension fund or sovereign wealth fund to be able to allocate meaningful capital without it becoming a big news story? >> Okay, so so I think all of you know that in the past couple of months and years, we have seen you know, increasing institutional

adoption is I think the wrong word, but at least we have seen increasing institutional involvement. The big nine-digit you know, allocation has not yet fully landed, right? Um There's multiple reasons as to why. I do believe there's three waves that we you know, will live through. I think we are part of the first wave. That first wave is and you have heard it many times, but I sadly have to say it again, you know, continued education of the institutions. Yes, they're hiring people, but yes, they're still pretty naive on what's actually going on. Um but they start educating us as well, right? So, some of the pieces that I've been talking about around what does a

fully grown-up due diligence look like? Um you know, that is still few and far between. Like very few managers, you know, have had that that that institutional exposure um you know, in the crypto market. So, continued education um and continued proof of concepts. These proof of concepts will increasingly lead to things like the BlackRock Bitcoin ETF, um Janus Henderson, um some of the things that we have been seeing coming out of security ties. Um, and these successes, these pockets of success will create

competitive dynamics, especially with the large asset managers that compete on very, very, very low margins, right? Against one another. They they have been suffering from fee compression for many decades now. Um, that will lead to competitive dynamic where asset manager A, let's say a Blackstone, right? Can no longer afford to be you know, outside of a market where, let's say Apollo Global Management, their main competitor in private credit, um, is raising capital, stablecoin-based capital, um, at a cheaper cost of capital, right? So, these core competitive dynamics are, I think, what is bringing the asset managers in.

The asset managers, however, are not the allocators, right? So, what will make the allocators fall? What will make the largest balance sheets in the world fall? And I think this is going to be osmosis. They are going They are Look, they're in this like really comfortable position where they have the entire investment universe knocking on their door from, you know, Monday to Friday. Um, they're not in a rush. For them, our industry is still in the baby shoes, um, and they will just be able to wait it out. The key piece that will make them take it seriously is our staying power, right? Number one. And then more and more osmosis via the LPs

they're sitting on, via the investment reports with large investment managers that are getting, you know, their feet wet, um, in the space. >> So then, looking 5 years out, what will the winners have built that today's market leaders haven't? >> Um, track record, staying power. They will have not taken I I think this is important for like all the builders in here, right? Because There's like a pause point, right? Um they will have avoided taking shortcuts, right? So, one of the most important things that you want to do as you're building here because you are rare commodity, you understand what's going on.

You do not want to get on the radar of people like Shannon and her former colleagues, right? You want to make You want to make sure that as institutional diligence looks through you looks through you as an advisor, looks through you as a key person on a fund on you know, whatever it is that you're managing or trying to build comes back crystal clean, right? Your your reputation is is built over many many years and but it is destroyed, you know, in a few let's say not well meditated moves.

And with this, I think We're over time. All right, so thank you very much. Thank you Shannon. >> very much. This has been a wonderful conversation, I think. >> Thank you. >> Great. >> Back and forth. >> [applause]