When I first set up Brumby, I had an idea that once it was set up, I would like to tokenise it. I mentioned it in a few meetings in NY, and was surprised by the positive response. In essence, the feedback is that clients want it, and it was already happening with a few money market funds. The big driver is that it would allow investors in a hedge fund to easily sell their position to another investor, rather than both investors having to deal with the fund administrator. This makes total sense to me.
For me, I feel like the current system for fund regulation is overly cumbersome. I understand it is in place to protect investors and to stop money laundering. The crypto sphere offers no protection for investors, and totally enables money laundering - so I understand regulators hesitation with embracing the crypto world. But when the President of the USA has his own crypto currency, it does feel like the winds of deregulation are blowing through the system.
What I am going to do here is lay out what I think would be my ideal for tokenising Brumby.
What I envision:
To keep the current Brumby Capital with independent administrator who handles subscriptions and redemptions. This would be for investors in the traditional financial system. There would be a monthly NAV, which is the price where investors can deal at.
I launch a Russell Clark coin, or Brumby Capital coin, where I control the entire supply.
I make a market for Brumby Capital Coin around the NAV of Brumby Capital - but with a spread. That is if you trade Brumby Capital Coin, rather than Brumby Capital, you will need to pay a spread to get in and get out. So Brumby Capital coin will give you constant liquidity, but at a cost.
Profits from crossing the spread of Brumby Capital Coin, get paid to Brumby Capital. That is investors in traditional hedge fund gain from other investors chopping or changing. I like this aspect of the model. Liquidity at a cost - and long term holders gaining. This will not be possible if I have to keep the token and fund separate for legal reasons. In this case profits from market making would go to me.
A key aspect is that there would be no explicit guarantee that Brumby Capital Coin would trade around the NAV of Brumby Capital - just my intention. In other words, you would need to trust me. While this sounds problematic, I see it as moat. There are very few hedge fund managers that anyone would trust with type of product, but I think I am one of those people. The idea would be that when regulations change, I could then easily formalise the link between Brumby Capital Coin and Brumby Capital - but until that moment, you would need to trust me.
Pros
Brumby Capital Coin would be a token, so would allow investors in other crypto assets to invest without having to enter the traditional finance world.
For smaller investors, it would allow them to participate in Brumby Capital.
I think the future is for all funds to be tokenised, so this would be getting ahead of the crowd.
Cons
This structure requires the token to remain relatively small to Brumby Capital the fund. As there is no legal way invest cash from the token into securities, I would only offer Brumby Capital Coin as a convenience to small investors.
If there was a very large inflow to Brumby Capital Coin, I would not be able to maintain a price that is representative of Brumby Capital NAV anymore. If investors go wild, there would be no way to stop a Brumby Capital coin from becoming a pump and dump. I have mixed feelings about this - I feel like anyone dumb enough to buy a Brumby Capital coin after it has spiked 100% for no good reason deserves to lose money - but I know it is not a good look.
Even though my intentions are good, regulators may well decide that just setting up the structure is an intention to defraud (I have seen this logic from regulators before).
You may be asking, why am I publishing this note? Well I talked to some lawyers who are well versed in the crypto space, and they both recommended publishing. Their logic is that when regulators just see your actions, then they will assume the worst. When you state out loud what your actions are and why, then at least you can say you were not planning on deceiving anyone. That being said, I still feel a bit nervous about the whole thing - and for any regulators reading this, I have not actually done anything to bring this about - for the moment it is just words and ideas. Whether I go forward with this idea (or some variation) will largely rest on the response to this post. I will update you all in due course.
