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Jeff Dorman: Arca’s CIO On Promoting Humility, Eclipsing $500M In AUM and Activism With SushiSwap

Nov 1, 2021 · 64 min media

By Tom Shaughnessy

The Delphi Podcast Host and GP of Delphi Ventures Tom Shaughnessy sits down with Jeff Dorman, Chief Investment Officer (CIO) of Arca, an asset management firm offering institutional-calibre products for sophisticated investors to gain exposure to digital assets. The two discuss Arca’s SushiSwap proposal, merging traditional finance and crypto, Jeff’s biggest lessons as a CIO, and much more.

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Interview Transcript:

Tom (00:00:01):

Hey, everyone, welcome back to the podcast. I’m your host, Tom Shaughnessy. Today, I’m thrilled to have on Jeff Dorman who is the CIO of Arca, which is a full-suite asset management firm offering institutional caliber products. They have hedge fund, they have venture fund. They have a lot going on. I’ll let Jeff go into that. For those who have been listening to the podcast for a while, Jeff is also one of our first guests ever on the podcast. Jeff, how’s it going.?

Jeff (00:00:24):

I’m doing great. How are you?

Tom (00:00:27):

Good man. A little tired, but it’d be weird if we had energy, right?

Jeff (00:00:31):

Well, it’s a 24/7 asset class so we should all be a little tired. But I think our enthusiasm for it keeps us awake more so than sleep.

Tom (00:00:39):

I’m totally with you. Well, Jeff, give us a brief overview of Arca. You guys have a lot of initiatives under the umbrella to talk about.

Jeff (00:00:46):

Sure. Before I get started, I do want to give a shoutout to you guys. I think what you guys are building at Delphi across podcasting and investing in research is second to none. I know you’re always interviewing guests, but I definitely love what you guys are doing so congrats on all your success.

Tom (00:01:02):

Appreciate that.

Jeff (00:01:02):

Sure. But yes, Arca is a full-service asset management firm. In some ways we like to consider ourselves the PIMCO of digital assets, where PIMCO is synonymous with fixed income, but they have a lot of different sub-strategies within fixed income. That’s really what Arca is.

Jeff (00:01:16):

We have offices in Los Angeles and New York, and we are trying to do everything related to digital assets. We have traditional fund strategies, hedge fund strategies, venture, illiquid strategies as well as some more fixed yield-type strategies where we’re actually investing within digital assets themselves.

Jeff (00:01:35):

And then we also have on the regulated side, we are using blockchain as a wrapper to introduce more traditional products. So, similar to how the ETF itself is not an asset class, but it’s a structure that embodies all asset classes. That’s what we’ve invented with what we call the BTS, the blockchain transferred fund, that we’re creating fixed income equity real estate products but doing it in a blockchain transferred fund rather than an exchange traded fund.

Jeff (00:02:00):

So, as you said, a lot going on in Arca, a lot of different pockets but we’re managing a lot of assets across different strategies and having a lot of fun doing it.

Tom (00:02:09):

Yeah. Grats on all the growth. I think people on this podcast can learn a lot about the space from you and a lot about the best paths forward. I mean, you guys have grown your AOM to over 500 million. You have a team that encompasses more than 35 people. I’m happy to be friends with a couple including a couple I won’t name specifically. But it’s exciting.

Tom (00:02:30):

One question I have for you is how do you wear so many different hats? How do you go from managing risk on a hedge fund side to potentially looking at a VC play to potentially looking at structured products to the lab side? How do you segregate your time so that you’re queued in on each to make the right decision?

Jeff (00:02:45):

Sure. I mean, to start with, as any business, it really comes down to the people that you have on the team and making sure that they have expertise in different areas, and then not trying to do everything too quickly.

Jeff (00:02:56):

For the first two years at Arca, we only had one fund. It was the Arca digital assets fund. It was our core flagship hedge fund strategy, which was long biased, research focused, investing in all the different digital assets that existed.

Jeff (00:03:08):

But over time, in order to build that out, we have legal expertise, we have compliance expertise, we have risk management expertise, we have training and operations expertise, research expertise. All of these different resources start to cultivate and grow on their own and then can ultimately be utilized as you grow these other areas. That’s what we did. We focused on the people, we focused on the processes and procedures that enabled us to then manage these other strategies.

Jeff (00:03:34):

From my standpoint as chief investment officer, my job is to basically run the investment committee and to run the risk committee. Those are two separate units within Arca. Risk committee is not making investment decisions; they’re looking at the overall risks of the business, the risks of the funds whether that’s pricing risk, or counterparty risk, et cetera. And then you have the investment committee which is ultimately overseeing what investments will make it into different funds and different strategies.

Jeff (00:04:00):

The way we really set it up is everybody at Arca and even beyond, our third-party research firms, our OTC dealers, et cetera, but everybody at Arca is in-charge of sourcing and coming up with ideas. Ultimately, that eventually filters down to those two committees, and I run those two committees to make sure that the right investments get into the right strategies and that we are sized appropriate to the risk reward of those investments.

Tom (00:04:21):

That’s awesome, and I love that there’s two separate committees. It obviously makes a lot of sense. We’ll dig into both. One question I have for you is you have so many people sourcing different ideas; you have so many people that have different expertise areas, skill sets. Maybe someone’s an expert in D5, maybe DAOs. D5 is too broad at this point, maybe AMMs at this point. But as a CIO, how do you understand them all the intricate level that your analysts do? How do you make decisions based on reviewing so many different concept areas at once on one IC each week, week-

Jeff (00:04:56):

Sure. I mean, the short answer is I don’t. It’s not my job to be in the weeds on every single investment. I don’t need to know all the ins and outs, I don’t need to be testing at 20 hours a day or 20 hours a week. Perspective really matters in investing. A big part of investing is not only just getting the investment right. It’s about the sizing, it’s about what’s history, how different instruments react to different macro environments or different news environments. In some ways, it actually benefits Arca for me not to be that close to each individual position.

Jeff (00:05:26):

I’m part of the investment committee. I understand what the analysts and the traders and the portfolio managers really believe, and is tress test their ideas. I mean, I’ll push back. Why do you think this? Why do you think this? What happens if this happens? But it’s not my job to get real in depth with everything. It’s their job. It’s their job to know it inside and out. It’s my job at a high level to put all those puzzle pieces together.

Jeff (00:05:49):

I put a lot of trust into the team. The core team at Arca has been here since pretty much inception. We’ve added a lot of really talented people from different areas along the way. We have expertise, as you said, in legal compliance and accounting in early-stage venture, in macro, in cryptonative D5. But really, each individual on the Arca team is in charge of honing in on their expertise and really doing their job. My job is to put it all together and make sure the puzzles fit.

Tom (00:06:20):

I love that. Makes a lot of sense. It’s kind of counterintuitive to think like, hey, I don’t want to be the one in the weeds. But the reality is it just doesn’t scale. How can you be an expert in a hundred different areas just as [crosstalk 00:06:31].

Jeff (00:06:31):

And I used to be. Look, I’ve been doing investments for 20 years across debt equity and now digital assets. I started as an investment banking analyst where I was in the 10ks and Qs and doing all the research on the actual companies. Then I graduated to a trading role where I’m managing the risk, and I had an analyst working with me. Then I became a portfolio manager where I was in charge of a very specific part of a specific fund. And now, obviously as chief investment officer, I’m in charge of all the different funds.

Jeff (00:07:00):

You don’t just walk into this role. It’s a progression across my career to get here, and same with the people who are at Arca today. The analysts will eventually become portfolio managers, the portfolio managers might eventually become CIOs, et cetera. I have the base, I have the knowledge, I have the experience to do all the things that my team does, it’s just not my job to do it anymore. It’s my job to help them do it and to trust them and to basically push back and give them some perspective to lean on as they’re doing their own analysis.

Tom (00:07:29):

No, I’m totally with you. I mean, we see it within Delphi. We’re imagining a bunch of different people, all of who are experts. So, you see less and less of the leads like myself and others in the weeds and more so relying on experts in each area, so it’s helpful.

Tom (00:07:45):

What do you think was the biggest learning you had transitioning from being a portfolio manager to a CIO?

Jeff (00:07:51):

A lot of the learning was exactly what we just talked about. How to be okay being a little more hands-off and trusting everyone else.

Jeff (00:07:58):

But I think the biggest transition is really, because of this asset class being so new and because so many different investors are coming in with either preconceived notions that may or may not be accurate, or no preconceived notions at all because it’s just so foreign to them, my job now is very educational. I have to come up with a lot of different analogies of what we’re doing, how it works, how it relates to things that our investors understand. It really is less about finding the best idea and it’s more being able to explain these ideas and why we’re doing what we’re doing, and how it fits with the processes and procedures that we set up, and how it fits with the themes that we think are important over the next 5, 10, 20 years of digital assets.

Jeff (00:08:43):

I spent a lot of time writing. For those who may have been on the Arca blog, I’ve been writing a weekly blog called That’s Our Two Satoshis for almost four years now. But I also write private investor letters, I do private investor calls. A lot of my job is basically extracting the information from my team and putting them into digestible formats that our investors understand and our perspective investors understand and, really, participants across the ecosystem understand. Because ultimately this asset class only really grows if you just get more and more people into the pot who understand and believe in the growth potential.

Tom (00:09:19):

Now, I’m totally with you there. So, give us a look under the hood of the investment committee process for you guys. What does that look like from diligence phase? I mean, this varies fund to fund a lot, and you’ve already shared some light on there, but what are the most, I guess, successful examples or worst examples you can give of the process running perfect start to finish, I guess?

Jeff (00:09:36):

Sure. Again, different strategies are slightly different. For instance, sourcing for the venture fund is a lot more about access and deal flow and making sure that you get a chance to participate; whereas sourcing for the Arca Digital Assets Fund, which is a more liquid strategy, that’s more about understanding news flow, working within tokens that already exist and how they’re going to react to certain news and certain information. But ultimately sourcing can be done by anyone at Arca.

Jeff (00:10:01):

We encourage every single person from the junior marketing associate to portfolio managers to come up with ideas. Everyone here is talking to people in the ecosystem. They’re reading, they’re immersed, they really are passionate about it. If you have an idea, bring it to the portfolio manager and say, “Hey, I want to discuss this idea. I want to assign a research analyst to it.”

Jeff (00:10:21):

Ultimately, a research analyst will be assigned to the project. They’ll do a write-up. Some write-ups might be half a page and a little bit of a quick hitter because it’s a small position around an event or a catalyst. Others might be 40-page deep dives on a new industry or a new sector or something that’s a little more complex. But ultimately, when the analyst is ready, they’ll schedule an investment committee.

Jeff (00:10:44):

The investment committee is always whoever presents. Our head of research, Katie Talati, shout out to her, she does an amazing job, and myself along with the portfolio manager of the individual strategy. And then we invite anyone else as optional. If people have opinions on it or have expertise or want to be a part of it, we welcome more people to join the investment committees and really help to push back and dissect.

Jeff (00:11:07):

For example, we have someone on our IR team who just loves Solana. He has been invested in Solana for a long time. Every time we do a Solana related investment committee, he joins because he has personal experience and interest in it. It doesn’t really matter what group they’re in, if they can provide value to the Investment Committee, then they’re welcome.

Jeff (00:11:23):

Investment Committee itself can be pretty grueling. The idea is not to make friends in investment committee. We’re attacking the presentor. We want to stress test all of the assumptions. What happens if you’re wrong? What happens if you’re right? Where are the competitors coming from?

Jeff (00:11:40):

The investment memo itself is usually split into three sections. You’ve got the team or management section where we’re really looking into who’s running this project and all of our conversations with them about the future prospects as well as whether it’s an [inaudible 00:11:56] or someone that everyone knows. We try to get as deep as we can with who’s running the project.

Jeff (00:12:02):

Then we look at the total addressable market, and the industry, and the sector, and the theme, making sure this is something that we believe in long-term.

Jeff (00:12:08):

And then third, we’re obviously getting deep into the tokenomics itself. How does this token accrue value? Are there any levers to pull to increase value over time? Ultimately, that sets the stage for how investment committee is run, and then ultimately comes to a vote.

Jeff (00:12:24):

Me as chief investment officer, I have the only veto power; but ultimately, it’s a vote amongst the people that are in the committee on whether or not this is something that we want to invest in. And if it is, most investment committees lead to a maybe, by the way. Very few are no, very few are yes. It’s usually a maybe with three to five things that the analyst needs to follow up on before we make a decision. And that’s a successful investment committee, right, when you push back enough that you raise questions that the presenter didn’t think about ahead of time? But usually, it comes back to a quick vote.

Jeff (00:12:53):

And when we have the vote, if the vote is yes, then it goes to the risk management and the risk committee about sizing and risks and things like that. Ultimately, it then leads to the trading desk and the operations desk to ultimately put the position on. There’s a lot of different people in the process from start to finish to get an investment into the book at Arca.

Tom (00:13:15):

That’s an awesome overview. I totally agree with you. Even internally, we see it as a grueling process. You’re definitely not trying to make friends, to your point. And agree on the maybes. We have a lot of maybes each week that go to further calls.

Tom (00:13:27):

Jeff, for somebody that’s in your position as CIO, and given your experience all over Wall Street, what do you think are some of the soft skills or personal skills or leadership or speaking skills that you think are lacking with the young people in crypto that you’d like to see more of? Because I feel like people have made a lot of money, they haven’t really gone to that Wall Street gambit. What are skills you try and teach your analysts, whether it be for the investment committees or whether it just be as people or analysts, that you think are lacking?

Jeff (00:13:55):

Yeah, it’s a great question. Obviously, I’m an old guy in this industry. I have Wall Street experience which some people would say is great experience. Other people would maybe look down on it saying that’s not relevant anymore. But I think the reality is, life experience is probably more important than necessarily where I received the work experience, having being 42 years old and having seen a lot of different cycles and different types of investments. I think I’ve just learned a lot regardless of where that seat was.

Jeff (00:14:21):

I’m incredibly impressed with the younger generation of investors regardless of what their background is. I don’t really care if you’re a software developer or you’re a financial analyst or you happen to be a mechanic. If you have a passion for this and you’re willing to put the time in to learn, this is probably the greatest era of investing ever. All the information is available to you publicly to figure it out, you just have to have a willingness to go figure it out.

Jeff (00:14:44):

I’d say where I see some holes, I guess, in the digital asset community with regard to the way investing is being done, first and foremost is not being afraid to be an apprentice. There’s a lot of 22-, 23-year-old portfolio managers that I joke. What do you call a portfolio manager in digital assets? You call them first year analysts because that’s what most of them are qualified to be. And that’s not meant to be a knock. There’s going to be a lot of really talented young people who are capable of being a fiduciary of capital and managing money, but there’s also just no rush to do it. It’s okay to work under somebody for a while, it’s okay to learn from somebody who’s done more than you before you go off and set off on your own.

Jeff (00:15:26):

I think not necessarily slowing down but certainly appreciating that there’s other people’s perspectives out there that are different than yours simply because of experiences is not a bad thing.

Jeff (00:15:38):

We have a lot of hungry young people at Arca who are incredibly smart, way more talented than me. Sometimes there’s even a little bit of a pushback at first because they have, “Who the hell are you to tell me what to do? Look how smart I am.” That’s fine. I like that attitude, I like the aggressiveness; but usually they come around eventually to, “You know what, I’ve learned a lot from you.” It’s the same thing in my career, I learned a lot from the people who were 20 years older than me.

Jeff (00:16:01):

So, I think that’s something that I’d like to see more of from people in this industry is a willingness to work with other people or under someone and not necessarily rush to do it yourself.

Jeff (00:16:11):

The next, I would say, is being a little bit more interested in long-form content. I know this industry thrives on tweets and sound bites, but you really learn the most as an investor when you write things down and you can reference them.

Jeff (00:16:26):

I mentioned I write every week even before we started our funds. I’ve been writing That’s Our Two Satoshis, but this dates back 20 years ago. When I was an investment banking analyst at Lehman Brothers, I used to go in every Sunday and I had to write a two-page debt capital markets update for all of our clients, and this is when the internet and Bloomberg barely are functional. I found out 10 years later that there was a whole slew of investors who got all of their fixed income information from me, some 22-year-old kid writing an update on Sunday mornings telling them what happened in the market.

Jeff (00:16:57):

Learning how to write is really important because what you think … When you say things out loud or when you put something in a tweet form, it’s always going to be a little more off the cuff and a little less substance. When you actually put something in long form content, you really check your facts. You check your sources, you check the data that’s helping you form an opinion, and you’ll remember it more when you write it. Therefore, it’s not uncommon that I’ll go reference something I wrote in May 2019. Just because I remember writing it, I know where to find it.

Jeff (00:17:26):

So, I would definitely encourage taking a little bit of time to hone your writing skills if you really want to become an investor for a long period of time.

Tom (00:17:36):

Now the writing skills is awesome. A lot of our plays come from our research division where long-form content has been a stable for a long time, so I definitely second you on that one.

Tom (00:17:47):

I guess, lessons learned this year, Jeff, because we’re continued on the lessons from you which I think is credible. What do you think is the biggest learning you’ve had this year in crypto? We had a crazy run up, we’ve had multichain roles in NFT blast off, there’s a lot going on. What do you think is your biggest learning, I guess, from an investment perspective this year?

Jeff (00:18:05):

Sure. I’m learning every minute of every day, right? I’ve never been in an industry or in asset class before where there is just so much information to process.

Jeff (00:18:16):

I think one thing that our entire team has learned, and it’s really kind of a prerequisite for working at Arca and really, I think, should be a prerequisite for investing anywhere, is just being open minded.

Jeff (00:18:32):

It’s very easy to hear about something new and if it’s slightly at odds with something that you had historically known that you just dismiss it or laugh at it or move on. We tried to be very open minded with everything, whether that’s being chain agnostic or whether that’s being sector agnostic, if something’s popping up, you should assume that somebody has a reason for doing it and somebody has done the work more than you have, and at least be willing to hear that side out before making an assumption.

Jeff (00:18:58):

I’ll give you a good example, the Loot Gaming project. I think it’s one of the dumbest things I ever heard about when I first saw it, but I would never have expressed that publicly because clearly there’s people out there that were way smarter than me who came up with this idea and were gravitating towards it. If my first reaction was this is dumb, I’m going to dismiss it, I would have missed out on learning a lot about what actually is being done there and why other people find it incredibly interesting.

Jeff (00:19:23):

Now, I still haven’t come around to thinking that this is the greatest idea ever. I don’t really have a strong opinion either way on whether or not this is going to be the way games are incubated in the future or whether this is going to be a flush in the pond and be gone in three months. But I certainly was open minded enough to at least read about it, and talk to people about it, and learn about it before completely dismissing it.

Jeff (00:19:45):

I think that is harder to do than we think just because everyone has these preconceived notions and biases whether you mean to or not. When you see something new, you generally have an opinion that’s not very well formed, we try very hard to push that aside and be humble and recognize that there’s people out there who know more than us. Let’s hear them out and research it and learn about it before we dismiss it.

Tom (00:20:11):

Yeah, Loot is an interesting one. For those who don’t know, basically they’re trying to reverse the gaming model where they release the specs first or capabilities and then people are supposed to build a game around that. I’m with you. I’ve always had an issue trying to figure out who’s actually going to build this. And I think it’s fallen off a little bit, but I’ll watch myself because I haven’t checked on it a little bit.

Tom (00:20:30):

I guess when seeing new things, Jeff, one lesson I think we could learn from you is obviously you don’t want to waste your time. Your time is very valuable, so you use muscle memory to dismiss things or not dismiss things. How do you filter when you see this many place come to your desk each day with so many people reporting to you? What’s the muscle memory? What’s the decision-making process like for you to spend your time?

Jeff (00:20:51):

Yeah. I mean, it’s probably the most important thing you do, right? Because you can get bogged down in the weeds on something that has no value to yourself or your fund or your investors, and go down a rabbit hole in the wrong direction and then have to pull yourself back out.

Jeff (00:21:05):

Generally, what we think about when it comes from filtering is you want to have the widest net possible, you want to have the biggest filter possible to capture as much information as you can. But you want to have people on the frontlines who are skilled at pushing the stuff aside that isn’t as important and focusing on the stuff that is.

Jeff (00:21:22):

Now, how do you build those people? How do you find those people? How do you build that expertise? Some of it is from having people that you trust. If you have a couple of third-party research firms like Delphi Digital that are providing information and have done a great job of it, you might rank that higher than something that comes from a random medium article that you’ve never heard.

Jeff (00:21:42):

Similarly, the OTC dealer desk that we deal with. Some of them are better than others at uncovering ideas and, quite frankly, getting to know Arca and knowing that we care about so that they’re showing us ideas that are relevant rather than just throwing darts and showing everything to us.

Jeff (00:21:57):

Part of it is internally having a real process. I know it probably sound like a broken record saying process and procedure so much, but it’s important for us internally to know exactly what it is we’re trying to do. In each of our strategies, we have a mandate. That mandate is, whether it’s sector- or theme-based or whether it’s token-type based, we have certain filters already naturally into each fund strategy where certain investments are going to fit and other investments aren’t. As a result, we can filter some of those out that immediately won’t fit.

Jeff (00:22:27):

So, what we try to do is be very broad with our knowledge base, very broad with our willingness to read and listen and hear ideas, but we have a few people on the frontline, our research analysts, our traders who are skilled at only really honing in on the ones that have a chance to make it the portfolio because they fit a pre-existing theme or sector or token type that we’re looking for.

Tom (00:22:51):

Yeah. No, I’m totally with you. It is really important important to make sure you’re spending your time in the right way, and filtering is really important.

Tom (00:22:58):

Jeff, just to switch gears a little bit, you guys are in a lot, you have several different funds. You guys are a full-service management firm but you’re also, personally, you get out there with the place that you feel strongly about, which I think is fascinating and admirable, right?

Tom (00:23:13):

One of the recent ones for you was the SushiSwap and what went down there. You guys and you guys ultimately had played a good hand there. Can you walk us through your push for SushiSwap and, I guess, what you learned and what the outcome was? If you can give a brief overview as well, that would be somewhat helpful too.

Jeff (00:23:27):

Sure, yeah. For those who don’t know, SushiSwap is the second largest decentralized exchange using an AMM process for trading just about any digital asset that you can imagine. The biggest competitor would be Uniswap. Uniswap and SushiSwap have very different beginnings, I guess. Uniswap, venture funded, sort of a big name everyone knew about. It was the first and has the most volume. SushiSwap was basically a vampire attack on Uniswap, copied the code and then make enhancements and has a little bit more of a decentralized leadership structure.

Jeff (00:24:03):

To start with, we were very bullish on D5. And within D5, we were bullish on very specific aspects of D5 like lending and borrowing and AMMs.

Jeff (00:24:11):

We were invested in Uniswap for a long time as well. Almost like the McDonald’s, Burger King or the Uber, Lyft, you don’t necessarily have to pick the best one, you want to pick the best industry and have a couple horses in there.

Jeff (00:24:23):

But when we got involved in SushiSwap, at first it was just based on valuation alone. The protocol itself was spitting out, at the time almost a billion dollars of run rate revenue. They had a different model than Uniswap where a portion of the revenue that is being created at SushiSwap was being [dividended 00:24:41] out directly to ex-SUSHI holders if you’re staking. So, fundamentally from just a valuation standpoint, SUSHI was and continues to be, in our opinion, one of the cheapest assets in the entire digital asset space.

Jeff (00:24:52):

But what we do with our investments is there’s always an element of active involvement in our investments. We aren’t always necessarily fully in the weeds, like we’re not necessarily going to be an LP as well as staking as well as like guiding the companies, but we always have a rapport with the management of the leadership team; we’re always involved in some way, shape or form to help increase the likelihood of success of the projects that we’re investing in.

Jeff (00:25:20):

With SUSHI specifically, they were doing a private round where initially SUSHI had never sold any tokens in a round; it was just farmed, and that’s how all the tokens became liquid. But they decided they were going to do a strategic round and sell some tokens to a private group of investors and ultimately try to diversify a little bit of their treasury in doing so.

Jeff (00:25:44):

We got a look on that deal early. We were already a pretty public investor in SUSHI. Everyone knew we were involved, so we got a look on it but we weren’t interested in the private deal. We were fine just being in the liquid tokens. But over the course of three months in the summer of 2021, a couple of things happened. First and foremost, the market crashed starting in middle of May, so the SUSHI tokens fell almost 70%.

Jeff (00:26:06):

Second, what started as a small opportunistic deal all of a sudden was a huge deal that lots of different venture investors and private investors were trying to get involved in. Ultimately, we thought that what SUSHI was trying to accomplish, which was raising a little bit of money opportunistically at a high SUSHI price and getting a few strategic investors involved ultimately turned into a fire sale at a depressed price at a much bigger number than they needed with a whole laundry list of investors, 80% of which we felt weren’t really going to add value to the project.

Jeff (00:26:37):

All we did was we publicly denounced the deal and said this is not a good deal for SUSHI, this is not a good deal for token holders. We, as large token holders and large customers of SUSHI, think that there’s a better deal that can be struck. We came up with our own proposal that would have saved a lot of delusion and a lot of money for SUSHI and token holders, which basically would have let them sell less tokens at a higher price. And also, laid out very publicly, what we would do to support the SUSHI ecosystem as a fundbetween being a liquidity provider on the AMMs, staking our tokens, helping with marketing and branding and customer awareness.

Jeff (00:27:15):

In a way, this is a form of decentralized governance in the best possible outcome, which was there is no CEO of SUSHI, there is no 10 person 80-year-old white person board in the backroom making decisions. This was out in the public the whole time. The private deal was in the public, our response and our counter deal was in the public. Lots of different comments were out there in forums and people discussing.

Jeff (00:27:41):

Ultimately, the irony here is that no deal ended up happening. The best outcome in this situation was no deal, and it was just scrapped altogether. But I really think it woke people up to how governance is going to work in the future, which is every stakeholder has a voice, everything is going to be done publicly rather than in back rooms. Ultimately, we’re going to try to achieve what is best for the projects and the stakeholders, not just what’s best for a small group of early stage investors that have enough capital.

Jeff (00:28:11):

We were pleased. We were pleased with the response we got from the community, we were pleased with how SUSHI handled it. More importantly, transparency and governance continues to be a hot button in this industry. I think that was at least one of many successful use cases of public debate and public transparency.

Tom (00:28:30):

I think it’s awesome. Your response was timely, it was well thought out. You guys save them from, I guess, offering tokens at pretty significant delusion of people who were pretty much already selling it, I think, if I remember it correctly. But there was so much media around that, that is important.

Tom (00:28:47):

What do you think was the main driver for making it such bad deal from the get go? It started off being wanting to get strategics involved, and I agree with that. That could be helpful. But like you said, It quickly became a massive deal with too many people involved that wouldn’t add much value. Is that the result of just having too many cooks in the kitchen in a decentralized way? Does the knife cut both ways here? What do you think would be the advice to future projects doing something [crosstalk 00:29:10]?

Jeff (00:29:10):

I think the biggest takeaway is sometimes we forget that even if you build something amazing like SUSHI that has billion dollars of revenue and all these different customers, the reality is the people who are building this, and often cases are 20- to 30-year-old engineers that don’t have capital markets experience, they’ve never worked in investment banking, they’ve never even thought about how to raise around. Just because you build something great doesn’t mean you necessarily have expertise in every aspect of building a company or a project.

Jeff (00:29:38):

In my opinion, again, this started out in a very wholesome way of hey, we’re going to make some phone calls and see if we can raise some money. Ultimately, the SUSHI team was probably being taken advantage of without even realizing that it was happening. That’s not because they’re not incredibly brilliant, smart people, but raising money and forming capital for a project is certainly different than writing amazing code and building a roadmap for a successful software.

Jeff (00:30:06):

I think ultimately, it just got out of hand with no one really being at fault. Look, this industry went from having almost no capital in it two years ago to now being flushed with cash and investment dollars and everybody wanted a piece of this. It’s a great project and people wanted to be involved. As a result, I’m not going to say it was sharks per se, but I think it was definitely an element of people who were used to financing rounds and used to just throwing their money and getting their way were in some ways taking advantage of a group of people who were ultimately in over their heads from a financing standpoint.

Jeff (00:30:39):

I think everybody learned from it. The investors learned from it. You’re already seeing a lot of big VCs in the space. They are now being a little bit more public and transparent with what they’re doing rather than just trying to get these closed private deals. You’re seeing teams being more transparent with what they’re doing because they want the expertise of the entire community, not just a handful of venture investors with money.

Jeff (00:31:00):

Again, I think everybody learned from this, ourselves included, and I think it’s ultimately moving us in a better direction of self-policing, transparency and public governance.

Tom (00:31:13):

Yeah. No, I’m totally with you. It’s interesting how much of the community you swayed with your proposal. I’m sure the VCs that were in the deal that we’re going to do it were probably not too pleased with your reply, but I’m sure that most of the token holders in the community pretty much agreed, of course.

Jeff (00:31:29):

Yeah, it’s rare when you get universal approval for something. This clearly wasn’t universal, but we did have a pretty high approval based on the feedback we got from a lot of different constituents. Like you said, from a short-term standpoint, we may have taken money out of certain venture investors’ pockets by not getting a really sweetheart deal. But in the long run, we probably made everybody richer because it shows what this community can do when you work together and achieve better outcomes. So, I think ultimately everybody becomes a winner in a situation like this.

Jeff (00:32:03):

But yeah, I think the most important takeaway from what you just said is there were an amazing amount of people with different levels of expertise and experience who were weighing in on these forums. I think that is so powerful, right? The whole idea of DOWs in general is why have full-time employees working on one specific thing when you can have all these different participants from across the world who can come in and go as they please with different levels of expertise? We had people with legal expertise jumping in, we had people with marketing expertise jumping in, people with software development expertise, finance expertise. It was amazing when you went through. I think there’s something like 300 comments on the forum related to this raise, and it was-

Tom (00:32:41):

I’m on it right now. It’s 360 [crosstalk 00:32:43].

Jeff (00:32:43):

Three sixty, yeah. It was amazing how much response we got and it really was awesome seeing all these different perspectives.

Jeff (00:32:51):

The most important thing is I think every single stakeholder, from the small 15-year-old kid in his mom’s basement who trades on SUSHI once in a while to the 75-year-old venture investor, everybody felt like they had an equal voice, and that was the first time we really saw that. Most of the time, the people with money or the people in power have the biggest voice, and what this industry is really changing or throwing on its head is the idea of, no we don’t need a small handful of people with all the power. If you have tokens, or if you’re a customer, or if you’re a developer you have the same voice as everyone else and we want to hear your opinion.

Jeff (00:33:27):

It’s a work in progress. I think a lot of people talk about centralization and decentralization as if it’s two ends of the spectrum with nothing in between. Realistically, it’s somewhere in between. You can’t be fully centralized and you can’t be fully decentralized. There’s some points along that spectrum.

Jeff (00:33:47):

I think in some ways you do need to have some centralized management who ultimately makes some decisions, but you really do you want to tap into the voice and the passion of other people in this community. I think SUSHI has done it. You’ve seen it in plenty of other spaces as well. I’m amazed at how transparent some of these companies and projects are being on their own, everything from the WiFi, quarterly reports they put out to the MakerDow and [AVE 00:34:14]. There’s all these different companies or projects that are just putting information out there, Axie Infinity, and it’s awesome to see because it now puts everybody on an even playing field of getting the same information and then ultimately giving back by having the same voice in terms of making positive change.

Tom (00:34:33):

I’m totally with you. It’s kind of funny, I’m on the blog and it’s just random conversation, then I see your blog post that Alex and your team posted in conjunction with you and then everyone just agreeing for as long as we’re going down.

Tom (00:34:47):

Thinking about this, would you consider yourself an active community member that’s helping to make sure projects make the right decisions, or would you think more activist investor, or is that dating myself on even bringing that up?

Jeff (00:35:01):

A couple of things there. To me, activist investing is just a form of value investing. What is an activist trying to do? They’re trying to unlock value that is supposed to be there that for some reason is not being there, whether that’s because of bad management or a bad board or bad decisions what have you.

Jeff (00:35:17):

We are value investors at its core. Activism sometimes is very public and can even be hostile. Sometimes activism is just picking up the phone and calling somebody and making a suggestion. I don’t consider of us activists in the sense of like a Carl Icahn or a Dan Loeb or Pershing Square or anything like that where you’re constantly picking these public battles. I do consider of us very active hands-on investors in that we are trying to help the team leaders and the project managers every day that we can. We’re trying to bootstrap the growth of these ecosystems and companies by using them ourselves. We are trying to be pretty hands on in the growth and in the success of these projects. Sometimes that can be a private 32nd conversation with an idea, and sometimes it can be a nine-month long drawn-out battle. But ultimately, it all comes from the same place which is helping something grow and helping to unlock value.

Tom (00:36:14):

It makes a lot of sense. Do you envision Arca taking a pretty, I won’t say activist again, but pretty forthright kind of approach with the projects if you see something similar pop up, or is this more of … I mean, your opportunity costs, you could always just sell SUSHI and walk away as a fund, right? I mean, you don’t have to go to this level of depth, but you guys did which is incredible. I mean, what’s the thought process there between future plays where you’re deciding whether, “Hey, let me sell,” or “Hey, let me take a pretty active approach here and write a counter proposal.”

Jeff (00:36:44):

Yeah. It’s probably a bigger, broader answer which is ultimately if you really believe in the future success of digital assets, governance is going to be more important than anything. You’re ultimately going to have a lot of doubts, you’re going to have a lot of very diverse stakeholder groups where almost everything is going to be decided by the court of public appeal as well as actual votes and governance.

Jeff (00:37:09):

Ultimately, we definitely have that attitude at Arca, that we want to be hands on, we want to be a part of these different communities. In terms of how we go about doing that, though, it has to be rooted in a belief that there’s something there, there’s something of value there that can be unlocked and be uncovered. If you don’t have that belief, then you walk away.

Jeff (00:37:31):

I’ll give you example, a year-and-a-half ago, we had a campaign with Gnosis. Gnosis, for all intents and purposes are doing some really, really great things from a building and development standpoint. But from a fiduciary standpoint, they were doing horrible things. They raised about $12.5 million in 2017 through ETH. ETH went up 10x, the Gnosis token went nowhere. They were sitting on a huge treasury, they were then using that treasury to basically run an illegal hedge fund by farming and staking and doing all these things without disclosing it. They were getting rich, while the Gnosis token holder were getting nothing.

Jeff (00:38:04):

That was an opportunity where we weren’t that bullish on the prospects of the success of the Gnosis company, but we knew the Gnosis token was undervalued. Once we unlocked that value in the Gnosis token, we were happy to sell and move on and let other community members get more hands on with growing the business and the company.

Jeff (00:38:21):

For something like SUSHI, we’re incredibly bullish, independent of any activism or any governance that we’re doing. We just love the prospects of what they’re doing. We think if Uniswap is coin based, meaning the market leader, very singular business, just focused on spot trading, we think SUSHI is FTX, right? Very innovative, lots of different product offerings, very sticky big user base that loves and is passionate about it.

Jeff (00:38:44):

Obviously, if anyone has invested in either FTX the equity or the FTT token, you know how that worked out. I mean, that’s what we think SUSHI is as well. But we also think that we have levels of expertise that can help them. One, we have capital to use in the ecosystem; two, we have legal marketing investment research expertise that we can offer to them; three is we are able to be customers and really help test a lot of their different products and see what we like and what we don’t like. Ultimately, whether we’re involved or not, we think SUSHI is going to be a huge success. But if we can help to bring forward that success through our own actions, we’ll do that.

Jeff (00:39:27):

As a broader mandate at Arca, we’re going to continue to hire research analysts that enjoy this stuff. I don’t care if you have 25 years of experience or two days of experience, if you like to get in on the Reddit threads and in the forums and into Discords and you like to be hands-on with understanding the growth [inaudible 00:39:43], we’ll hire you. We’re looking for more people to help us out in helping these different projects grow. Ultimately, like you said, it’s symbiotic, right? We’re helping all stakeholders but we’re also helping ourselves as investors.

Tom (00:39:57):

I love that, Jeff. It makes a lot of sense. One thing I wanted to ask you for was your link to the traditional world. Your experience and the investors you have are incredible.

Tom (00:40:06):

The funny part is I think when you and I were talking years ago, we couldn’t wait for the capital to flow in from Wall Street, we couldn’t wait for the pension funds to drive us forward. Now, it seems like it doesn’t really matter, right? We’re so flushed with cash, we’re able to self-fund things, we’re able to fund things within the ecosystem. We don’t really need or really care about external capital from traditional [inaudible 00:40:29]. We’re not contingent on it, I guess, to be successful anymore.

Tom (00:40:33):

What’s your take on, one, I guess the link of crypto to the traditional world maybe broadly from a technology perspective but more so from an investment perspective? Do you care about getting a pension fund? I mean, I’m sure you do as an LP. I’m not trying to make it an adversarial thing, but you’re trying to describe the difference between then and now and are linked to the traditional Wall Street world?

Jeff (00:40:54):

Sure. I think there’s a lot to unpack there. First and foremost is you’re right in that there’s been a complete 180. We went from a capital-starved to resource-starved industry to now being flushed with capital and flushed with resources. I get resumes every single day from people from BlackRock and Goldman Sachs and Bridgewater and JP Morgan.

Jeff (00:41:15):

Everybody wants in on this industry now, which is pretty awesome to see. Obviously, yourselves and also everyone listening here being early pioneers to the industry, it’s always nice to see that validation that other people want to get into.

Jeff (00:41:26):

In terms of the links on how we get there, though, for the most part this is still a pretty closed ecosystem, right? Once your money is in the digital asset ecosystem, it’s largely trapped there, and vice versa. If it’s outside of this ecosystem, it’s somewhat difficult to get it. You really don’t see a lot of money moving back and forth.

Jeff (00:41:42):

From that standpoint, I think it does still matter to get people into this ecosystem, every single onramp we can think of. Whether it’s the old school way of just coming in through bitcoin or the new way of coming in through an Axie Infinity or a game, or coming through open sea and an NFT, or coming in through a D5 fund or whatever you have it. There’s definitely more on ramps than we’ve ever seen. I think it’s much more important to get the people in here than it is necessarily to get their capital in here. But ultimately, they come together, right? If you start to put capital in here, you’re going to start to put the users in here as well and vice versa.

Jeff (00:42:14):

Specific to the LP use, the traditional institutional investors, the pensions, the endowments, the family offices, the funny thing is they’ve probably been the most consistent, which is they’ve been here since day one. They’ve been on our investor letters, they’ve been on our investor calls, they’ve been listening, they’ve been reading. It just takes a long time for a big institution to allocate capital.

Jeff (00:42:32):

I probably told the story before, but I remember when I was managing a pretty plain vanilla credit opportunity fund 10, 12 years ago, we had some investors who would take 18 months to two years to allocate, and that’s when they already knew the asset class, they knew the strategy, they knew my firm, they knew our competitors, they knew the service providers. Well, here, you’re asking investors to make a decision where the fund managers are new; the asset class is new; the type of investment, the tokens are new; the service providers are new. Everything is new. It just takes time.

Jeff (00:43:03):

So, I think we’re just now starting to see that money flow in because they’ve done what they’re supposed to do, which is do the due diligence, do the research, learn about the ecosystem, and now that money is starting to flow in.

Jeff (00:43:15):

Where you’re seeing a little more faster money is really coming from what I don’t consider institutional investors, but other traditional hedge funds, other banks and brokerages, other FinTech companies. They’re the ones who are moving faster, like “Oh, now I have to get involved because the space is high.” The traditional investors were here from day one, they just weren’t ready to put their money in.

Jeff (00:43:38):

So, in terms of going forward, I think it does matter to get that money. The more money you have in this ecosystem, the more research and development is going to go in. To your point, most of this industry can self-fund right now. We’ve all had a lot of profits over the last two years. A lot of companies and projects are sitting on cash. You can certainly sell fund, but there’s more to capital than just the money. Again, it’s the expertise, it’s the word of mouth, it’s the interest in taking chances on research and development beyond what is immediately profitable. I think the more eyeballs, the more money, the more engagement we have in the space, it’s going to take us to a whole another level.

Jeff (00:44:15):

In fact, my CEO and co-founder at Arca, Rayne Steinberg, wrote a really interesting article. I think it was from Forbes, actually, about a month ago where he said, “We’ve been talking about digital assets as an asset class. I’m not even sure this is an asset class, so much as it is a technology that’s going to underpin all asset classes. Meaning, every stock is eventually going to be a digital asset, every bond is going to be a digital asset, every real estate ownership and commodity and currency is eventually going to be represented as digital assets. For that to happen, you do want those real-world bridges. You want as many of those investment bankers and investors and customers to get into the space as fast as possible because it’s going to open up the floodgates to just how impactful this technology can be.

Tom (00:44:58):

That’s a hell of an answer, Jeff. Geeze. I really, really like that and I agree. When you’re thinking about the melding of crypto and traditional finance, we see stocks, we see traditional companies. How do you see that as playing out? Because most people that come into crypto, they sell their stock portfolios, they never look at Amazon stock again, and who cares?

Tom (00:45:17):

The reality is obviously very different worlds where you actually need these companies to have public listings, to raise capital, to produce products, et cetera, to compete. Do you see in either or scenario? Do you think that eventually all public-listed companies will have some crypto synthetic peg to it? How do you envision the two worlds coming together or not coming together?

Jeff (00:45:39):

I think every single company in the world is going to have a digital asset in their capital structure within the next three to five years. I really believe this. I think you’ll still have equity. It’s not going to replace equity. You’ll still have equity, you’ll still have debt, you’ll just also have a token, and that token will be somewhat of a hybrid between a loyalty rewards program and quasi equity. Very similar to a lot of the pass-through tokens we see today where the token has some value within the ecosystem but also is getting some form of top-line revenue or bottom-line profit dividended out to you in some way, shape or form.

Jeff (00:46:13):

I think what that does is it opens up an enormous opportunity for leveling the playing field. The analogy I like to give a lot, if you think about a Venn diagram, two circles of McDonald’s shareholders versus McDonald’s customers. It’s very little overlap, right? The people who own McDonald’s stock are generally not the customers who shopped there, and the people who are eating every day at McDonald’s are generally not the wealthiest shareholders. Obviously, there’s some overlap, but for the most part they’re two circles that don’t overlap a whole lot.

Jeff (00:46:46):

That’s ridiculous from a wealth disparity standpoint, The people who are getting rich do nothing to help the ecosystem, and the people who are helping to build the ecosystem are not getting rich.

Jeff (00:46:56):

You can expand beyond McDonald’s. You can look at DoorDash, you can look at Airbnb, you can look at even something like Amazon. You don’t have to be a participant or a customer or really any part of the stakeholder to profit financially.

Jeff (00:47:09):

I’ve been a Starbucks shareholder for 15 years. I literally have never had a cup of coffee in my life. The only time I ever go into a Starbucks is to use the bathroom or their WiFi. I’m doing nothing to add value to them, they’re doing nothing to add value to me yet somehow I’m benefiting financially from them.

Jeff (00:47:23):

I think that all goes away. I think you’re going to really see these ecosystems just get built by the early customers and the early adopters and the early users. Sure, some of these things are gimmicky at first, right? You have yield farming or you have these incentives that maybe wear off eventually and it doesn’t hold, but the idea of getting people in at an early level and getting them to be early customers and early evangelists, but also having them benefit financially is a really powerful thing. It allows anybody who is willing to put in the time and energy to benefit financially and from a utility standpoint for being a part of something.

Jeff (00:48:02):

I look at where we’re headed in that direction. I mean, think about all the people who have made money in the digital asset space just for experimenting. Whether it’s being the first to play Axie Infinity and getting rewarded with these retroactive airdrops or being the first to trade on dYdX and getting retroactive airdrops.

Jeff (00:48:22):

There’s nuances. Some of these work better than others, but the idea is you’re being encouraged to experiment, you’re being encouraged to use. You don’t need a huge capital markets process to do that. You don’t need a bunch of investment bankers running around trying to get you to invest in something early stage and then walk away for two years, like you said, and just hope that it did well. You now control the fate of these companies and projects.

Jeff (00:48:46):

I know there’s a lot of dissonance with regard to whether or not these airdrops are good or whether or not these liquidity farming projects are good or not because it leads to short-term usage and then eventually people might go away. But you can put a real-world analogy on how this works, right?

Jeff (00:49:00):

What if a restaurant opened up in New York and just said we’re going to give away the food for 60 days or 90 days? Well, eventually the food has to be good, and the ambience has to be good, and the people coming there have to be friendly, and the tablecloths have to look nice, and the forks and the silverware has to look good, and the wine list has to be good. You can fake it till you make it all you want, but eventually you have to build a good product. If that’s the marketing gimmick that you need to get people in the door who eventually are going to be willing to pay to use it in the future, that’s fine. That works really well. The important thing is you may never have tried that restaurant in the first place if they didn’t give it away, and you may never have tried the protocol if they didn’t give it away.

Jeff (00:49:41):

The difference is if you’re building a restaurant, you have a very fixed timeline for how long you can do this for before you run out of money. Whereas in digital assets you can conceivably, because the costs are so low, you can run this for as long as you need to until you hit that product market fit.

Jeff (00:49:55):

Now, again, you still have to build a good product, you still have to build a sticky customer, but it’s okay to give it away at first and get people in there and get them experimenting. I think that completely changes the investor user company dynamic. Probably we’ll have incredible case studies for decades to come about who the most successful companies and projects are in the future and how they really were built by their customers and stakeholders and not outside investors.

Tom (00:50:26):

I love your response, Jeff. It’s kind of crazy to think about how the users are not the owners in the traditional world when she come to crypto. I mean, it’s kind of a staple of crypto to have your community build up your project, whether it be liquidity, whether it be Dev Mindsahre, whether it be just on a Discord. I mean, just tangent but one of the projects that I first found when I got into crypto, because I was on a telco team prior, was Helium. Deploying nodes and learning the network, you didn’t really have to overthink it. It just made a lot of sense for a lot of examples, or for a lot of reasons.

Jeff (00:50:55):

Yeah, it’s amazing. There’s a lot of experimentation going on, and some are going to be better than others and certain communities are going to be building faster than others, et cetera. But it’s rare that you get in investing, it’s rare that you get to have a voice or an influence over the investment. I mean, we’re talking before if you’re a shareholder of some company, you’re basically just beholden to management’s decision and maybe once in a while there will be an activist investor who goes after a board if they’re doing something wrong. But still, it’s 10 or 15 people making all the decisions and you have some mildly passive vote through a proxy statement.

Jeff (00:51:28):

Here, you’re influencing it every day. You’re using it, you’re talking to people in forums, you’re experimenting with different token types, you’re evangelizing on behalf of other customers and users. It’s just a much more hands on beneficial way. I see this going well beyond companies too. I really think that every municipality is going to have a token very soon. I really think every university is going to have a token soon.

Jeff (00:51:52):

An example, let’s say you’re about to have your first child and you live in California and your whole family went to UCLA. Well, great. Why don’t you go by the UCLA token the day your kid is born? That token is absolutely going to be worth a tuition in 18 years. If you end up going to UCLA, great. All you did was pre-fund your college. No different than a 529 plan except instead of making random investments with a lot of restrictions, you’re investing specifically into what you care about, which is going to college.

Jeff (00:52:19):

Let’s say you ultimately decide you don’t want to go to UCLA. Well, great, that’s a publicly traded market. Somebody else will want that. You can just trade the token away to someone else and maybe sell your UCLA token and go buy an NYU token or whatever the case may be.

Jeff (00:52:33):

You think about all the money that comes into schools right now through boosters and through donors. A lot of these can be enhanced by having a publicly liquid vehicle. Same thing with municipalities. For anyone familiar with revenue bonds or GO bonds, go bonds are general obligation bonds. That’s how cities and counties fund themselves. They issue a bond either generically for the city, which is a GO bond; or they issue something very specific for a project, a revenue bond, meaning we’re going to build a park and we’re going to issue a bond just for that one park.

Jeff (00:53:01):

Well, same thing. This could be a token where, if you live in a city, you buy these tokens. But also, what if you live in LA but you just love what Miami is doing? Well, you have no way of profiting off Miami right now other than maybe buying a condo and hoping you can rent it out and flip it later. But what if I could buy the Miami coin but it actually is helping Miami build and I’m getting exposure to what Miami is doing?

Jeff (00:53:22):

I think you’re going to see a lot of these different experimentations happen that are outside of decentralized finance or outside of hard corporations.

Tom (00:53:33):

No, that’s awesome, Jeff. I like your take on people’s ability to get involved beyond D5 in the real world exampled and to allocate their time and their resources.

Tom (00:53:43):

One line of question for you before we close out. Obviously, the regulatory landscape for investors, projects, funds is a little bit up in the air. I feel like a lot of people are waiting on just basically [inaudible 00:53:55] decisions on tokens, on issuance. What’s the security? What isn’t? What’s going to happen with USDC? A lot of these things which are going on.

Tom (00:54:03):

You’ve been through a lot of revolutionary tech cycles even outside of crypto, and I’m sure that you’ve seen regulators not come after but try and either fight for turf to set laws to protect people while also helping to build out the space. How do you think it plays out in crypto? I know that’s a very dense question, but I guess at a high level, do you envision it being something of a learning process where we could march forward or do you think this is going to be something that’s a pretty hostile-like environment?

Jeff (00:54:34):

I think it could be hostile in the sense that right now there’s a lot of very anti-regulator stance in digital assets, right? Whether that’s because you have libertarian roots and that’s the reason you got into bitcoin in the first place, or because you’re just frustrated by very antiquated accredited investor laws and very antiquated security laws.

Jeff (00:54:53):

The reality is a lot of this is just misinformation, though, in the sense that there’s nothing illegal or wrong about being a security. The issue of whether or not you’re a security or not, it just means where can you legally be traded, right? If you’re a security, you have to be traded on a security exchange. If you’re not a security, you can be traded on these different unregulated exchanges. So, it doesn’t really matter from an investor’s standpoint or from a user standpoint whether or not something’s a security, All it matters is, from an issuer standpoint, do you have clarity on where you can issue this token, where it can be tradable, and who has access to be able to buy it.

Jeff (00:55:24):

I think a lot of people are caught up on the security versus security thing. To me, that doesn’t matter. What matters is that the regulators don’t make really bad long-lasting decisions, right?

Jeff (00:55:36):

So, one thing that we’ve been encouraged by is that a lot of the people outside of the ones you read about on the front page of the journal or the ones that are on CNBC every day, those are all sound bites and talking heads. Even Gary Gensler himself, right? I mean, he’s very consistent with his narrative that he puts out there publicly.

Jeff (00:55:53):

The thousands of people who work at the SEC, though, behind Gensler are incredibly knowledgeable about what the digital asset space is. They’re testing it, they’re using it, they’re talking to funds, they’re talking to projects, they’re talking to exchanges. They’re trying to learn. They’re doing what you would expect regulators to do, is they’re going to try to understand it. They’re going to try to figure out what fits within the frameworks and laws they already have versus what doesn’t fit in the current framework. Therefore, they need to craft new laws. None of it is going to happen quickly though, right? Here in the US especially it takes a long time for something to become a law.

Jeff (00:56:26):

From an investing standpoint, I don’t really care at all about what’s going on in the regulatory framework. I’m not going to miss out on years or even decades of generational growth because I’m worried about a headline or a sanction that comes down from a regulator. What I am going to do is continue to use our resources and our lobbying efforts and our public persona to help educate and help train about what does work within the existing frameworks and what frameworks need to be changed.

Jeff (00:56:50):

Ultimately, I think most people in the world, and maybe I’m wrong, but I do think most people don’t really care about whether or not something is regulated or not. Most people are not on the polar, either a love regulation or a hate regulation. Most people are like, I don’t care as long as it’s fair and it makes sense. I do think there’s trillions of dollars on the sidelines, though, that will immediately start coming in as soon as you do have some regulatory clarity. So, from that standpoint I do think it’s important.

Tom (00:57:16):

No, I’m totally with you. Not worth waiting. You have to get involved in technology, and it is kind of a double-edge sword where regulations could be annoying for innovative growth but it obviously would unlock a ton of capital which goes against my earlier wrong point about not caring as much about the outside world.

Jeff (00:57:32):

Yeah. I mean, look, we’re all frustrated. We’re all frustrated by the tape bombs, we’re all frustrated by what’s being held back by this lack of clarity, right? It’s like, well, again, why do you have to be an accredited investor to buy certain things, right? Why is the US on the same list as North Korea, Cuba and Iran in terms of the do not touch list? That’s not where we want to be. I get the frustration. But at the same point, for things to change positively, you do need this period of education and learning before you just come out there with some rules that immediately are going to be obsolete.

Jeff (00:58:04):

So, I guess, frustrating as it is in the moment, it probably is rooted in public interest. It’s just a matter of do we have the right people in Congress and in the government who are going to actually make the right decisions. That’s, again, going back to governance. Everybody has a vote on who you’re going to elect, and get the right elected officials in there who are going to take this asset class seriously or this technology seriously.

Tom (00:58:31):

No, I love that, Jeff. We’re almost at the hour and I want to respect your time. But just to close out, because we had a podcast discussion basically around lessons people can learn from you, whether they’re [inaudible 00:58:40] or whether they’re an investor, one of the things I wanted to ask you is I guess maybe the one or two best pieces of advice you’ve learned over your career, whether it be in crypto or whether it not be. Maybe from a mentor, maybe from a friend. I would love to hear that. Because everyone lives their life with their one or two pieces that they really just hold on to.

Jeff (00:58:56):

Sure. Yeah, maybe it was, I think it was Dr. Dre who said, “It ain’t about the biggest gat, it’s who’s the first to bust a cap.” Yeah, I think that’s interesting.

Tom (00:59:07):

I love that.

Jeff (00:59:08):

The reason I bring that up is we have been just … This idea that you have to be rich to get rich and you have to be a huge fund or you have to be a big corporation to get anywhere in the world, you have to have the biggest gat. You don’t, right? It’s who’s the first to bust the cap, it’s who’s the first to get in there and use a project. This industry really is turning it on its head in terms of who holds the power, who can get rich, who can make money, who can influence things, and it’s pretty awesome to see it. I mean, I’m jealous of it. Again, I’m 42 years old, I’ve worked at FinTech companies, I’ve been in and around finance and tech my whole career. I’m fairly tech savvy but I don’t know the half of what people are doing right now in terms of all the different walls they’re creating and using different applications and how they’re farming and how they’re experimenting with new projects.

Jeff (00:59:58):

My team is amazing at it. Shout out to the Arca team who are all younger and smarter than I am. What they’re doing is incredible and what people around the world are doing is incredible. I think it’s so important to be quick and open minded and willing to try something more so than it is to just be big and have a huge corporate umbrella or a huge government umbrella. I think that is really eye opening to me and really important.

Tom (01:00:25):

Dive the hell in. I love that.

Jeff (01:00:27):

Yeah. Just get your hands dirty. Get in there. It’s hard for some people. I’m the kind of person who I would rather be taught something by a person or watch a YouTube video than experiment myself. I’m a dinosaur, though. Most people now are like, “Yeah, I’m going to get in there. I’m going to learn it on my own, I’m going to research it, I’m going to figure it out.” I think that is … I’m trying to learn that every day. I have an 8-year-old son and a 4-year-old daughter. I’m trying to help them and learn from them about just get in there, just try it. Who cares if you fail? Try it, figure it out and teach someone else.

Jeff (01:00:56):

I think that’s probably the most important advice. Whether you get it from Dr. Dre or me or someone else, I think it’s where this world is headed.

Tom (01:01:06):

I love the Dr. Dre quote and I couldn’t agree more. Dive in. I see it all the time. People in DMs that left loved it, and I’ve never seen anyone go back.

Tom (01:01:15):

Jeff, thanks so much for coming on, man. If people have it and want a trip down memory lane, definitely check out Jeff’s episode from a couple years ago from the podcast. It was a different time and it was a lot of fun. I think we were at the WeWork at that point, right Jeff? In the city?

Jeff (01:01:27):

We were, yeah. That was scrambling for office space.

Tom (01:01:31):

Exactly. Well, Jeff, thank you so much for your time, man. We’ll talk soon.

Jeff (01:01:34):

Thanks for having me, Tom.

Show Notes: 

(00:00:00) – Introduction.

(00:00:40) – Overview of Arca. 

(00:02:30) – Jeff’s approach to time management.

(00:04:27) – Making decisions as a CIO.

(00:07:45) – Biggest learnings from transitioning into a CIO. 

(00:09:21) – The investment process at Arca. 

(00:13:27) – What young crypto professionals are lacking today. 

(00:17:46) – Biggest learning from crypto in 2021.

(00:20:30) – Filtering potential investments. 

(00:22:58) – The SushiSwap deal.

(00:34:45) – Jeff’s thoughts on activist investing.

(00:36:18) – Selling vs. active participation.  

(00:40:00) – Traditional finance and crypto. 

(00:45:02) – Envisioning the merge of TradiFi and crypto.

(00:53:43) – Jeff’s thoughts on regulations.

(00:58:35) – Jeff’s best advice.