Having launched the world’s first Bitcoin fund in 2014, Danny Masters at Global Advisors believes it could transform Jersey’s funds industry, if not the island’s entire finance sector – but a seismic shift in thinking may be needed. He explains all to Nick Kirby
Considering he studied as a physicist at Exeter University and subsequently at Imperial College Business School in London, it might seem natural that Danny Masters’ first step in employment was as an oil trader for Royal Dutch Shell. As he readily admits, the mid 1980s were a very interesting time, being the beginning of the free market for oil.
After Royal Dutch Shell, Masters moved to Salomon Brothers, where he added to the physical oil deals he had been doing by layering derivatives and position/risk taking on top. The next step was to New York where he worked for JP Morgan, running their global energy trading business.
Come 1999, with considerable experience in oil and commodities, he launched Global Advisors with his business partner Rus Newton – who’s still his partner today. The intention was to give investors direct access to the commodity markets with a dedicated, experienced manager. Starting out with a relatively narrow focus on energy and metals in the discretionary space, Global Advisors subsequently added a systematic multi-commodity trading product. The major focus for the last year has been a project in cryptocurrency, which culminated in August with the launch of the world’s first-ever fully regulated Bitcoin fund out of Jersey.
Masters spoke to businesslife.co about the journey from oil to fintech, and his take on Jersey’s finance industry.
You sit outside of the funds mainstream and could easily be called an innovator. Looking at changes in the funds industry since you launched Global Advisors, how vital is innovation?
If you take commodity markets in particular, when I look back to 1999 they had come a long way in terms of their development, sophistication, breadth, regulation and so on. But there really wasn’t much in the space that was accessible by third-party investors, which was surprising because commodity activity comprises 30 or 40 per cent of global GDP, so it’s an immensely important landscape. The way that investment managers had typically played that was to buy shares in Exxon or Mobil if they wanted oil exposure, or Billiton if they wanted a metal exposure. But there’s a big difference between investing in companies that are active in the space and investing in the commodity itself. And that’s what we pioneered when we started Global Advisors.
Since that time there’s been an explosion in the number and breadth of products that are now available, and direct commodity investing has become a very legitimate activity. I think the most powerful example of that is the concept of the exchange-traded fund, which, in many cases, is a way of expressing a pure commodity exposure in an equity form. From there, it multiplied out to a range of products covering a broad area of commodities through indices.
So in answer to your question, I would say this is a great example of how important innovation and change are.
Is your Bitcoin fund another perfect example of this?
I see real parallels between Bitcoin and the way the oil market developed in the early days. What I saw back then was lots of volatility, lots of credit risk, illiquidity in the market, scant regulation and a generally rather chaotic scene. By the time the late 1990s came along, the market was more sophisticated, but there was a limited amount of products. So stage one is ‘chaotic market turns into organised market’ and stage two is ‘organised market spins off all these interesting products’. The early-stage products are often discretionary fund managers.
To me, Bitcoin looks exactly like that – it’s a very chaotic, illiquid, volatile, misunderstood, under-regulated, embryonic market – but, like commodities, it has a very compelling and forward-looking argument. And that argument says this type of cryptocurrency or blockchain technology is a much more advanced and sophisticated way of transferring value and assets among and between people.
You don’t know how you’re going to get from today’s embryonic market to one where everyone adopts this new technology. But for someone in my position you need to have a belief system that screams ‘I am armed with the truth!’, and it will get there somehow, and you then manoeuvre your way through time as that story unfolds.
In the oil market for example, I knew in 1999 that by 2010 we would need 50 per cent more oil production to satisfy the depletion we were seeing in global reserves and the demand from China. The only way that could happen was for the oil price to be higher. And the way it happens is: here’s the story, here’s the market, guys like me recognise that story and package it in a way that investors can participate in – and when they do it drives the price higher, and that higher price creates the economic activity that’s required under the original thesis.
So I see a great parallel between the oil markets and other commodity markets and what’s going on in Bitcoin now. Right now we are in the 1987 oil world if I look at how Bitcoin behaves. I believe there’s a very long track ahead of where it is now. But I believe the destination is one where this kind of technology is widely adopted.
It seems to me that there is an embarrassment of riches for investors now – but can there be too much choice, or is this simply just a case of supply and demand?
Investing in its basic form is a very simple construct. You have to buy an asset at a price of A and sell it for a price of C, as long as you don’t visit price B in the meantime – which is so low that it makes you sell it. There’s nothing investors like more than a good story, a little bit of price momentum with the feeling there will be more in the future and a robust vehicle by which they can express their view in that asset appreciation.
For someone like me, who wants to create new products for investors, you have to think about that amplitude of where is price point A and price point C and how do I create that product so it’s both an attractive return but the volatility and the negative excursion is acceptable. So it really is a question of scouring the world for opportunities and finding where you think you have that raw return that can be exploited, and you go from there.
With this in mind, it’s perhaps not surprising that the funds universe has grown so much, with managers and providers carefully looking for those opportunities.
Coming back to Bitcoin – why Jersey?
Well obviously I have history, having based Global Advisers here, but it’s more than that. On the spectrum of global regulators where you have Beirut at one end and New York at the other, Jersey fits a unique spot. It’s high up that scale but, unlike New York and London, a product like our Bitcoin fund, which is complex and new and quite difficult to understand, requires a tremendous amount of face time with regulators – and you’re not going to get that in London. So once the opportunity presents itself, Jersey’s a very good fit because a lot of the early work is around regulation.
I look at Bitcoin and say this is a great fintech with problems. I’m supposed to get paid for solving those problems, and Jersey is supposed to get paid by helping me solve those problems – and the way that we’ve worked in really close cooperation with the regulators here on this product has put Jersey on the global stage as a place that has managed to get its head around this complex new thing in the very early stages.
Some people have said Bitcoin was not only risky from a reputational perspective, but also that this is very new tech. What would you say to that?
I think these things are hard to understand. But whenever disruptive tech like this comes along, I think common sense should prevail – people should take a look at these things and weigh them purely on their merits.
What’s more, I think the island’s reputation shouldn’t just be solely a squeaky clean, well-run, transparent place. It should be an innovative, squeaky clean, well-run, transparent place. And Jersey hasn’t really had to innovate – it innovated in the 1980s in trusts statutes and open-ended investment funds by going to London, finding out what clients wanted and couldn’t get done over there, and provided it here. That has been a great technique for the islands over the years. So why can’t it happen again?
What are the roadblocks to this innovation?
When we started this project, I imagined that the commercial service providers in the island would be behind it – the accountants, auditors, lawyers and administrators – and the regulator would be holding it back. It didn’t turn out that way. I think the regulator approached the project with the most maturity and brain power and sense, and ultimately many of the other professionals had little experience in this space.
But consider this – we employ KPMG to audit the Bitcoin fund, and I think they’ve subsequently got two more pieces of work from referrals from us from companies in the Bitcoin business. All of a sudden KPMG has a Bitcoin accounting business! At a moment when some of the other Big Four hesitated and said they didn’t like the sound of Bitcoin, KPMG are going to develop an expertise these other firms aren’t going to have.
If you take a bit of risk, you should be able to manage your business to avoid those risks turning into problems. And if you’re good at it, you end up with new business. And that’s as true at island level as it is at company level.
And what of the banks?
My experience is that the commercial banks have almost universally refused to engage in this project. It was ‘no’ from the very beginning – I had some of the quickest answers I’ve ever had from banks in my life. The response would be the bank has no appetite for the Bitcoin business, and the back channel would say we are concerned about the money laundering and the reputational risk. But I believe that Bitcoin and distributed trust as a broad subject is such an enormous competitive threat to the conventional banking system, that banks are rightly treading cautiously at the moment.
The rejection either comes from unfamiliarity, laziness or fear – but somewhere in there are turkeys not wanting to vote for Christmas.
So the problem is that no bank will handle it?
We have banking relationships for the fund now – in Germany and in Austria and we are about to have one in Asia. I think that is a shame, given government and regulator support for what we have done. So we are working with Digital Jersey, with treasury and government ourselves to try and find a banking organisation on the island. Maybe by creating a licensing environment where the bank is going to have to make an investment in understanding, but should then be rewarded by the fruits of that going forward. Or there is the nuclear option, which is to crowdfund a new bank and get an exception to the Top 500 banks in the world rule and have a Bitcoin Bank of Jersey.
Looking at fintech as a broader issue – do people really ‘get’ the opportunities that exist, or is there a danger they’ll miss the boat?
I believe the blockchain on which Bitcoin sits will be the backbone for a whole new way of doing finance and trusts and managing assets. I remember Dublin in the 1980s creating the tax-free banking zone on the edge of the Liffey – it transformed Ireland. Fifteen years ago, my stepfather took Victor Chandler Limited to Gibraltar and created a gaming industry that’s now the backbone of Gibraltar’s economy.
So once in a decade or so, along comes an opportunity that’s really multiple commercial opportunities in one. I know that if Jersey puts forward a holistic solution to Bitcoin, including regulation, government, consumer protection, insurance, population, economic development, Digital Jersey and banking, this place would become the global hub for blockchain technology this side of the Atlantic. And so much so that I can pinpoint half a dozen businesses that would come here that meet a lot of Jersey’s requirements of high-value, low-footprint, strong growth businesses. This is exactly why the Isle of Man is so aggressively pursuing the same opportunity.
Over the next six to 12 months, that window will close because someone is going to put this all together. And Jersey is remarkably high on the list of contenders and is a banking solution away from having that holistic formula. So much so that exchange businesses, payment processors, mining companies, other blockchain-based businesses, could look at Jersey and say: I can walk around the streets and talk to people from all spheres who understand it. I’m hoping sense prevails. To protect traditional commercial banking is a rearguard action.
Will all of this change the way the funds landscape looks in the years to come?
Clearly a lot of international financial engineering is tax driven – but the opportunities to do any kind of tax-driven structures are massively lower and have been shrinking rapidly as the advantage that one jurisdiction has over another has narrowed.
The cross-border transparency and cooperation now demanded has shrunk the universe of opportunities for all offshore jurisdictions. You can see it quite clearly in the size of Jersey’s deposits, which are going down quite dramatically in my view. There has got to be a Plan B – the current status quo is not going to be a happy outcome for the island in five or 10 years time I don’t think.
But that Plan B has to involve all the players – people don’t exist in silos any more.
Exactly. If they want things to be successful, they can’t say ‘I’m all right Jack, I’ve got enough business coming in’. You poke a hole in one side and it will start leaking out everywhere. There’s been some great really uplifting moments in our Bitcoin journey where smart people have got their heads around it as much as they can and have said ‘we’ll give it a go’. I’m not naïve – I think if my Bitcoin fund is a success it will be a wonderful success between the government, treasury and Global Advisors. If it goes horribly wrong, I will be lynched in the town square as some irresponsible heretic. But that’s the risk one takes – this is the bleeding edge of fintech, and it’s succeed or go home.