Dispatch №2

Something has to be done with digital assets (cryptocurrencies, ETFs, NFTS, metaverse-related products, and digital currencies) and the regulators are rolling their sleeves.

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Topic of the week: digital assets

How popular are those digital assets? Technology consulting company Capgemini released its 2022 “World Wealth Report” in spring 2022. High net worth individuals (HNWI) have embraced cryptocurrencies and other digital assets, with 71% of wealthy individuals investing in digital assets and 91% of high-net-worth individuals younger than 40 have invested in digital assets, according to the survey of 2,973 global HNWIs. 71% sounds huge, but lets’s have a look at another survey. This spring the Asian wealth management industry media platform Hubbis, in partnership with Singapore-based FinTech company Chintai, attempted to gauge the sentiment of the market in Asia through its own survey that we conducted amongst leading wealth management professionals in the region. And we see a very different and interesting picture.

Meanwhile regulators around the globe are concerned about the possible popularity of digital assets, risks and adoption. And regulators starting to take actions. Let’s have a look at what’s going on.

Kim Kardashian case

Who: Kim Kardashian and The U.S. Securities and Exchange Commission

What: Kim Kardashian, who is estimated to be worth $1.8bn, is handing over $1.26m to settle a lawsuit surrounding a crypto advert she posted for cryptocurrency token called EthereumMax on Instagram in 2021. As part of the settlement she agreed not to tout any digital assets for three years. The social media star asked fans “Are you guys into crypto????” before touting the EMAX asset to her 200m+ Instagram audience at that time, never stopping to disclose the fact that she was paid some $250k to do so.

Where: USA

When: Instagram post appeared back in June 2021. SEC announced about the settlement on the 3^rd of October 2022.

Why:

• The SEC has deemed Kim Kardashian’s post to be a promotion of a specific investment security, EMAX, rather than a broader endorsement of crypto as an asset class or idea.
• Famous promoters have a spotty record when it comes to investments, sometimes pushing fans into tokens that left them with losses. EMAX trading volumes spiked each time after celebrities promote it, with a staggering $837m worth changing hands in the first 6 weeks of the coin’s existence since mid-May. Since last summer, however, the coin has lost some 95% of its value, and recent trading is mostly negligible, suggesting some large losses for individual investors.
• The agency provided a high-profile reminder to celebrities that it is keeping an eye on how digital tokens and other assets are pitched. “Are other celebrities quaking in their boots right now? Absolutely,” said John Reed Stark, former chief of the SEC Office of Internet Enforcement. “This message is intended to really stop these sort of shenanigans dead in their tracks.”
• Penalty against Kardashian is by far the largest to date — signaling that the SEC is getting more serious about cracking down.

MAS on digital assets innovation

Who: The Monetary Authority of Singapore (MAS)

What: Published the opening address delivered by Ravi Menon, Managing Director, Under the title of ‘Yes to Digital Asset Innovation, No to Cryptocurrency Speculation’, Mr Menon explained the complexities of the digital asset ecosystem and its difference, what MAS is actively promoting, what MAS is discouraging, and what are the risks MAS is seeking to manage.

Where: Singapore. Green Shoots Seminar

When: On 29 August 2022

Why:

• MAS sees five areas of risk in digital assets and the regulator is focused on: (1) combating money laundering and terrorist financing risks; (2) managing technology and cyber related risks; (3) safeguarding against harm to retail investors; (4) upholding the promise of stability in stable coins; and (5) mitigating potential financial stability risks.
• It is MAS’ view that innovation and regulation are not incapable of co-existing. As Singapore aims to be a hub for innovative and responsible digital asset activities that enhance efficiency and create economic value, MAS’ development strategy makes the country one of the most conducive and facilitative jurisdictions for digital assets.
• At the same time, MAS’ evolving regulatory approach makes Singapore one of the most comprehensive in managing the risks of digital assets, and among the strictest in areas like discouraging retail investments in cryptocurrencies.

Framework for Responsible Development of Digital Assets

Who: The White House (USA)

What: Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets. Over the past six months, agencies across the government have worked together to develop frameworks and policy recommendations that advance the six key priorities identified in the EO: consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. The reports call on agencies to promote innovation by kickstarting private-sector research and development and helping cutting-edge U.S. firms find footholds in global markets. At the same time, they call for measures to mitigate the downside risks, like increased enforcement of existing laws and the creation of commonsense efficiency standards for cryptocurrency mining. Recognizing the potential benefits and risks of a U.S. Central Bank Digital Currency (CBDC), the reports encourage the Federal Reserve to continue its ongoing CBDC research, experimentation, and evaluation and call for the creation of a Treasury-led interagency working group to support the Federal Reserve’s efforts.

Where: USA

When: On 16 September 2022

Why:

• Millions of people globally, including 16% of adult Americans, have purchased digital assets—which reached a market capitalization of $3 trillion globally last November. Digital assets present potential opportunities to reinforce U.S. leadership in the global financial system and remain at the technological frontier. But they also pose real risks as evidenced by recent events in crypto markets. The May crash of a so-called stablecoin and the subsequent wave of insolvencies wiped out over $600 billion of investor and consumer funds.
• There is a need for adequate and appropriate regulatory oversight and frameworks to ensure that consumers, investors, and businesses are not exposed to undue risks and volatility, as well as the possibility of fraud. In addition, plans to extend existing anti-money laundering requirements to the digital asset industry will be considered to ensure that digital assets are not used as a means to facilitate illicit finance.
• There is a need for the digital economy to work for all, and to develop financial services that are “secure, reliable, affordable and accessible to all”. Plans include developing instantaneous interbank clearing systems to facilitate payments (similar to the FPS in Hong Kong), encouraging innovative financial technologies, and creating regulatory frameworks that align with global standards.
• There is a need to ensure that new financial technologies and digital assets will not create volatility and instability in the wider economy.
• The US intends to implement strategies to promote responsible innovation in digital asset industries, including encouraging research and development in fundamental areas, developing regulatory best practices, and so forth.
• The US will explore the implementation of a US central bank digital currency.
• As a global leader in finance and digital assets, it is likely that developments in the US will have ramifications across the world. In particular, regulatory requirements in the US as regards digital assets are likely to compete with regulatory standards from other economies, and may in the medium term create compliance issues for participants in the industry.

Summaries

And we are coming back to the issues of inheritance. Big or small.

Ray Dalio and the end of searching for CEO

Who: Ray Dalio, the billionaire founder of Bridgewater Associates. The 73-year-old founder launched his hedge fund in 1975 from a two-bedroom apartment in New York and has more than cemented his place as one of the most successful fund managers of all time. Forbes estimates that his career has amassed him a net worth of $19.1 billion.

What: Has given up control of the firm he built into the world’s largest hedge fund, entrusting its future and $150 billion in assets to a younger generation of leaders with their own ideas about investing. He transferred all of his voting rights to the board of directors and stepped down as one of Bridgewater’s three co-chief investment officers. Dalio will keep his seat on the board with a new title: founder and CIO mentor. He has no plans to sell his minority stake in Bridgewater and looks forward to mentoring the firm’s investors for years to come: “Hopefully until I die, I will continue to be a mentor, an investor, and board member because I and they love doing those things together. That’s a dream come true”.

Where: USA

When: On 30 September 2022

Why:

• While some of his peers converted the firms they founded into family offices or closed shop, Dalio was determined to create something that outlasted him.
• At a hedge fund, lousy performance is often the catalyst for change. While rivals such as Brevan Howard Asset Management and Rokos Capital Management had record gains in 2020, Bridgewater’s Pure Alpha lost almost 13%. That was on top of comparatively poor returns in the 2010s. But it’s good idea to make a move on a positive note. Bridgewater, after misreading the markets during the early months of the pandemic, has been putting up some better numbers. Its flagship Pure Alpha strategy has advanced 34.6% in this year through Sept. 30.
• Dalio (who is 73 now) initiated a transition plan as far back as 2010, figuring it might take as little as two years. But Dalio struggled in his search for successors. Over the following decade, seven different people at various times held the title of sole or co-CEO. Only in the past year did Bridgewater’s new ranks of leadership and governance finally come together.
• Now that those people are in place, handing over control is the final and irreversible step. “This was the natural progression of events; as soon as we were ready, we went ahead. I didn’t want to hold on until I died,” said Dalio.
• This step is in line with Dalio’s idea about meritocracy. As far as how that Bridgewater machine looks to me which makes me optimistic, I see it in the hands of an idea-meritocratic culture of meaningful work and meaningful relationships that is achieved through radical truthfulness and radical transparency. While it hasn’t been easy over the last 12 years, we made it! I know that because over the last two years I have watched and mentored them so they could run Bridgewater without my interference and they did a great job.
• Now that control rests with the board, Bridgewater is likely to invest more aggressively in technology and in people – even if Dalio objects.

2 cases against trustees

When you turn to the smaller inheritance issues counted in millions or hundreds of thousands of dollars, thing are getting less rosy.

Recently a Victorian court in Australia decided to remove a trustee from a family discretionary trust. Here is that case overview. The bottom line is that the trustee was conferred with ‘absolute and uncontrolled’ discretionary powers to distribute the net income of the trust in each financial year. In default of a distribution or decision that the trustee accumulate the income, that income would be held on behalf of the children in equal shares (‘default distribution clause’). But each financial year the income was distributed unevenly and the court decided that the trustee has failed to give appropriate consideration to the interests of all beneficiaries, that the trustee, although having ‘absolute and uncontrolled’ discretionary powers, should still consider the real situation and conditions of each of the beneficiaries, rather than acting out of personal preference.

Court made clear that the controlling mind of the trustee must set aside all personal emotions and make all reasonable enquiries to ensure that it is acting in good faith and with real and genuine consideration. A failure to do so risks the trustee breaching its fiduciary duty, having the distributions being declared void and being removed as trustee. These principles apply even in the context of a discretionary family trust.

The case also raises a number of somewhat compelling and difficult questions:

• Would you read this situation as an abuse of power on the part of the trustee?

• What are the laws in various jurisdiction regarding the freedom and powers of trustee even it has absolute powers?
• How do you deal with different demands from the number of one family beneficiaries?
• Where are the limits of trustee power? Should additional provisions be inserted into such trust deeds to better ‘protect’ the discretionary nature of a trustee’s discretionary power? (for example, provisions regarding the obligation to survey the class of beneficiaries)
• How will this affect the operation of trusts in general? Would such a case become a significant risk to trustees of discretionary trusts and self-managed superannuation funds without appropriate steps being taken by trustees prior to exercising discretion under the terms of the trust deed? Trust in this case generated around $1mln of yearly income. How significant was the size of the income distribution in each year and would the decision of the court have been different if the funds were question were more modest?
• What real steps do beneficiaries and trustees need to take to avoid this situation?

In the second case High Court in London has recently found that an executor was in contempt of court and sentenced him to a 4-month custodial sentence. The executor had failed to comply with a court order which had the effect of keeping the beneficiaries out of their share of the estate for almost three years.

Uncle of the Claimants was the sole executor and trustee of the estate. The Claimants at one stage wished to terminate the trust and receive their share of the estate. The Claimants wrote to the Executor on multiple occasions to request information (to which he did not respond) and then, afterwards, they wrote to him further asking that he administer and distribute the estate, again the Executor did not respond. Later the judge granted a freezing injunction in favour of the Claimants restraining the Executor from distributing or dissipating the estate pending resolution of the dispute. The Executor did not comply. Then the Judge found the Executor was in breach of the order and consequently was in contempt of court. The Judge found that 4 months was justified for the breach by the Executor on the basis that:

• The Claimants suffered significant prejudice as a result of the Executor’s conduct as they were kept out of their share of the estate for almost three years and two years after the principal asset was sold.
• The Executor had not acted under pressure from third parties to breach the order and was solely responsible for the breaches.
• The breach of the order was deliberate and the Executor did nothing to comply with the order, thus making his breach serious.
• The Executor’s failure to engage with the legal process demonstrated a high level of culpability.
• There was no mitigation by the Executor and no cooperation with the Claimants.

4-month custodial sentence over the sum of £425,000.

E-mail as a will?

And the last case for today. Although not a traditional, witnessed will, in certain cases, a handwritten will, better known as a holographic will, can be accepted as valid if it’s in the handwriting of the testator and signed and written in sound mind without any undue influence. California, for example, is one of the states that permits holographic wills. But what about e-mail?

Ashwani Prabhakar, a trusts & estates attorney at Davidoff Hutcher & Citron LLP in New York City, comments on the mentioned case. “Because the instructions aren’t in … own handwriting, the statute (California Probate Code Section 6111) permitting holographic wills’ primary purpose of preventing fraud is defeated if the email is admitted as a will using the holographic statute. The absence of a handwriting makes the holographic statute inapplicable to this case. In fact, the holographic wills statute does not even provide for material provisions to be typed and then signed by hand. To prevent fraud, it requires almost the entire document to be handwritten by the testator. For these reasons, I do not think a California Court will admit the email as a holographic will,” he opined.

“It should be noted that a Uniform Electronic Wills Act is being floated in the United States by the Uniform Law Commission as an idea to grant testators more freedom to draft wills without incurring legal fees, but even that new law, if adopted, requires formalities such as an electronic signature and witnesses to prevent fraud. None of these fraud prevention measures are present in the sending of an email,” Prabhakar added.

Here we go. No e-mail wills, please.

Links to consider

• Structuring For The Digital Asset Industry In Cayman, Bermuda, and BVI
• Private Capital AuM To Double By 2027, Reaching $18.3 Trillion
• Seizing the Opportunities for NextGen Wealth Management in Asia
• An interview with Jincheng Tongda & Neal discussing private equity in China
• Asia economic outlook and opportunities with Said Desaque
• Using Money To Accumulate Happiness Rather Than Wealth with Chris Budd
• The Evolution Of The Advice Business At Scale And The True Power Of Brand, With Joe Duran
• Tidal Wave of Capital for Alternatives from Retail
• Finding deep value in emerging markets
• Singapore Stays Ahead of the Pack as a Regional & Global Centre for UHNW Wealth

Infographics

Quotes

Books that caught our attention this week

How to Invest: Masters on the Craft

by David M. Rubenstein

A master class on investing featuring conversations with the biggest names in finance, from the legendary cofounder of The Carlyle Group, David M. Rubenstein.

What do the most successful investors have in common? David M. Rubenstein, cofounder of one of the world’s largest investment firms, has spent years interviewing the greatest investors in the world to discover the time-tested principles, hard-earned wisdom, and indispensable tools that guide their practice.

Rubenstein, who has spent more than three decades in the hypercompetitive world of private equity, now distills everything he’s learned about the art and craft of investing, from venture capital, real estate, private equity, hedge funds, to crypto, endowments, SPACs, ESG, and more.

• How did Stan Druckenmiller short the British pound in one trade for a profit of $1 billion dollars?
• What made Sam Zell the smartest, toughest investor the world of real estate has ever seen?
• How did Mike Novogratz make $250 million off crypto in one year?
• How did Larry Fink build BlackRock from scratch into a firm that manages more than $10 trillion?
• How did Mary Callahan Erdoes rise to the top of J.P. Morgan’s wealth management division to manage more than $4 trillion for individuals and families all over the world?
• How did Seth Klarman perfect value investing to consistently deliver net returns of nearly 20 percent?

With unprecedented access to global leaders in finance, Rubenstein has assembled the most authoritative book of its kind. How to Invest reveals the thinking of the most successful investors in the world, many of whom rarely speak publicly. Whether you’re brand-new to investing or a seasoned professional, this book will transform the way you approach investing forever.

Publisher: ‎Simon & Schuster (September 13, 2022)

Language: ‎English

Hardcover: ‎416 pages

Amazon

Buy This, Not That: How to Spend Your Way to Wealth and Freedom

by Sam Dogen

Sam Dogen, creator of the famous Financial Samurai blog, knows that you need to spend money to make money. Sam Dogen founded Financial Samurai in 2009. One of the pioneers of the modern-day FIRE movement, he was previously at Goldman Sachs and Credit Suisse, from which he retired at age 34. Dogen is a graduate of The College of William & Mary and received an MBA from University of California Berkeley. His passive investment income exceeds $300,000 annually.

He’s taught over 90 million readers how to invest wisely in all facets of life, from education to parenting to relationships to side hustles, even choosing where to work and play.

Now, in his first book, Buy This, Not That, the Financial Samurai takes the guesswork out of financial planning and shows you exactly what to buy, how much to spend, and how to optimize every dollar you earn so you can maximize wealth building and live life on your terms. The good news? You don’t need to be a millionaire or a genius to achieve financial freedom. It’s about making the most of your money, now and forever-and it’s never too late to get started. You’ll learn:

• The Financial Samurai’s 70/30 framework for optimal financial decision-making
• What is “good debt” and “bad debt,” and the right way to pay down debt or invest
• Strategies and tips for building passive income streams that work for your goals and risk tolerance
• How to invest in real estate, even if you can’t afford to buy property
• Rules for spending-from coffee and cars to mortgages and marriage

Publisher: ‎Portfolio; (19 July 2022)

Language: ‎English

Hardcover: ‎336 pages

Amazon

Photos

You know what? There is an idea how to spent $25 mln on T-Rex skeleton if it is your thing.

A fossilized Tyrannosaurus Rex skeleton, estimated to be around 66-68 million years-old, is expected to sell for as much as $25 million in an upcoming auction at Christie’s Hong Kong in November. The sale, which will occur on Nov. 30, will mark the first time a T-Rex skeleton is offered at (public) auction in Asia. The buyer will, along with the specimen, acquire all the intellectual property rights to the fossil as would be able to rename this remarkable T. rex.

The T-Rex named Shen, meaning god-like in Chinese, will be available to view at the Victoria Theater & Concert Hall in the lead-up to the auction, before being displayed and auctioned at the Hong Kong Convention and Exhibition Center.

It clocks in at 43ft long, 15ft high and 7ft wide, and weighs approximately 3,000 lbs.

Fewer than 20 T-rex skeletons exist in the world – most of which are incomplete. Shen was found in McCone County, Montana in the Hell Creek Formation, and is 54% complete.

“From its surging, bloodthirsty stance, to its remarkable preservation, this is one of the most scientifically studied T. rex skeletons to come to auction,” said James Hyslop, Head of Science & Natural History at Christie’s Hong Kong auction house. “After the unforgettable, record-breaking sale of STAN at Christie’s New York in 2020, it is a thrill and an immense privilege for us to be trusted with the sale of another wonderous T. rex skeleton.”

Another T-rex skeleton, which goes by the name of Stan, was sold in 2020 for $31,800,000 in an Abu Dhabi Christie’s auction.

How about it for your cabinet or a library?

More details here.