Three years ago, the founders of the $10 billion Stone Ridge Asset Management had a problem. Several of the advisory firm’s founders and senior employees were buying bitcoin at such a rate it became obvious the purchases needed to be looked at more closely by the firm’s auditors. As word got out that Stone Ridge’s staff was personally investing in bitcoin at such a scale the firm’s clients increasingly wanted to express the same thesis. As Stone Ridge co-founder, Robert Gutmann, put it, that thesis is a belief in “the long term growth of an open-source monetary system—in assets like bitcoin.”
The problem was, Stone Ridge needed a way to turn the dollars they wanted to invest into bitcoin, and to safely store that cryptocurrency once they had it. And since they were personally invested in bitcoin, they needed to do all that in a way that not only satisfied their clients, auditors and regulators, but themselves. So, instead of just establishing a few custom funds for their clients as they’re wont to do, Stone Ridge took the extraordinary step of building execution and custody tools from scratch and kicking off an entirely new line of revenue, executing cryptocurrency purchases, and then holding onto the assets for their customers.
By 2017, that vision had evolved into the New York Digital Investment Group (NYDIG), the first Stone Ridge subsidiary that isn’t wholly owned by the parent company. That year, the firm quietly raised $50 million in a previously unannounced investment and set about building a spinoff that served the new breed of institutional investors increasingly seeking their services. Last Friday, that work went to the next level, when NYDIG raised another $50 million growth equity fundraise led by Fintech Collective, with Bessemer Ventures, and Ribbit Capital participating, bringing the total raised to $100 million. As part of the announcement, Stone Ridge Holdings Group revealed NYDIG is custodying 10,000 of the parent company’s bitcoin, valued at $115 million at today’s price.
Behind the sudden burst of activity is none other than the Covid-19 pandemic. As businesses around the world closed up shop as part of quarantine or sought help from their governments, central banks tried to offset the drop in activity by injecting billions of dollars into their economies. While unemployment increased, markets stayed surprisingly stable, resulting in a sense of impending collapse, says Gutmann, speaking in his first interview since taking over as co-founder and CEO of NYDIG. “We’ve seen a pretty dramatic acceleration in the count of institutional investors who want to participate in the market since March of this year,” he says. “The macro backdrop against the public health backdrop has caused a lot of people to rethink their portfolio composition.”
Based in New York, NYDIG spent the $50 million it raised in 2017 to build out the execution and custody services they would need to manage a rafter of custom bitcoin funds, and to acquire two cryptocurrency-specific licenses. The first license, a BitLicense from the state of New York is used by the NYDIG Execution subsidiary to convert dollars into cryptocurrency and back again. Another subsidiary, NYDIG Trust has a New York State limited purpose trust charter allowing them to buy and hold bitcoin and other cryptocurrencies for investors. Few NYDIG customers are public yet, though a representative of the company says Stone Ridge’s $115 million position isn’t the largest it manages. Last month Ripple chairman Chris Larsen revealed he’d moved one of his XRP wallets to NYDIG custody.
Currently, the majority of NYDIG’s revenue comes from banks, registered investment advisors to ultra high net worth individuals and institutional allocators. These products are built on a single platform that integrates execution, custody, anti-money laundering and know your customer protection. Specifically, NYDIG builds custom funds, separately managed accounts (SMAs) for middle-income investors, and other services for ultra high net worth individuals. “Different institutional allocators are used to buying fund management services, so that’s what we sell them,” says Gutmann. “Macro hedge funds are used to buying prime brokerage services. So that’s what we sell them. RIA’s are used to buying a set of ultra high net worth advisory solutions. And that’s what we sell them.”
The two largest funds currently managed by NYDIG are the $190 million Institutional Bitcoin Fund LP, disclosed in regulatory documents in June and the $140 million Bitcoin Yield Enhancement Fund LP disclosed in May. Among what Gutmann calls “several” smaller funds is the NYDIG Basket Fund totaling $2.4 million, including bitcoin, ethereum, XRP, litecoin, and bitcoin cash. While NYDIG isn’t sharing its total assets under management the firm now custodies more than $1 billion, it says, and the number of its clients has quadrupled over the past ten months.
The second revenue stream comes from integrating NYDIG’s underlying execution and custody platform into banks, foundations, and university endowments. In September, the Office of the Comptroller of the Currency (OCC), a branch of the U.S. Department of the Treasury, published a letter saying banks and other financial institutions could hold reserves for clients that issue digital tokens on a blockchain, called stablecoins, which are backed by U.S. dollars. “We’re having lots of conversations with banks, about various kinds of partnerships all the way from basic sub-custody solutions,” says Gutmann, “up to end consumer products that the banks are providing, where we’re the back end”
As part of the preparation for today’s public launch Gutmann and other NYDIG and Stone Ridge executives published a lengthy analysis, in February 2019, called “Buying Bitcoin” about the difficulties money managers face when looking for significant bitcoin liquidity. The 22-page report concludes, for now, that today’s bitcoin market is dominated by retail investors and speculators. From the report: “Given that agents (fund managers, trustees, and other fiduciaries) control the vast majority of the trillions of dollars of investable assets in the world, we expect material institutional purchases of Bitcoin as these agents work their way through the challenges of this burgeoning asset class.”
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So far, the paper’s conclusion appears to be playing out. Last week payments giant Square invested about $50 million into bitcoin, or about 2.5% of its last reported cash-on-hand. Struggling business intelligence firm MicroStrategy converted a whopping $425 million of its assets into bitcoin, and at least 20 institutional investors have filed paperwork with the SEC showing they invested in the Grayscale Bitcoin Trust (GBTC). Newly launched Canadian digital asset manager 3iQ has $91.2 million in its Bitcoin Fund trading on the Toronto Stock Exchange and institutional investor, Cathie Wood, of New York-based Ark Invest told Forbes she sees bitcoin as an “insurance policy” against inflation.
To help bring NYDIG’s in-house execution tools to its clients, the company last Friday also bought New York-based Etale, which specializes in order management software and is integrated with Coinbase Pro, Gemini and itBit. Over the next few months NYDIG plans to further integrate its own in-house execution tools with Etale, making them available to clients for the first time. As part of the deal, NYDIG also obtains a data set including high frequency price, quote and depth data to further refine its own offerings. The firms are not sharing terms of purchase, but all four employees will be joining NYDIG.
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Further demonstrating institutional interest in the asset class, NYDIG last month hired former Goldman Sachs partners Ronnie Wexler and Tejas Shah to help run the company. Some other notable NYDIG staffers include former New York State Superintendent of Financial Services, Ben Lawsky, former Goldman Sachs managing directors Eric Kramer and Rodney Miller and CEO and co-founder of Stone Ridge, Ross Stevens. Brooks Gibbins, managing partner of lead investor, FinTech Collective, is joining the board as part of the investment. The startup now employs a total of 35 people.
The irony of the surge of interest in bitcoin brought about by Covid-19 is the pandemic is also testing one of bitcoin’s earliest value propositions: that it’s uncorrelated with traditional markets. As traditional markets dropped, so have bitcoin, in large part. Same goes for many upwards movements. However, depending on the time one looks, Gibbins argues, correlation, or non-correlation can be found anywhere. As a result, especially in the face of such global uncertainty, the lead NYDIG investor advocates that institutions should allocate between 100 and 500 basis-points of their portfolio to digital assets. “With the unprecedented fiscal and monetary stimulus happening across the globe post Covid-19, portfolio hedging in digital assets will continue to be more and more relevant,” he says. Already, NYDIG’s typical bitcoin investor has between 1% of 5% of its portfolio invested in cryptocurrency, with a few investors more comfortable with the technology exceeding 5%. “If you’re legging into a $5 million to $500 million position in an asset, you are going to want to apply a number of different offensive and defensive capital strategies,” he says.
The numbers from the Department of Finance suggest they have struck taxation gold. But they’ve been wrong before
Published Apr 19, 2024 • Last updated 8 hours ago • 5 minute read
“99.87 per cent of Canadians will not pay a cent more,” the prime minister said this week, in reference to the budget announcement that his government will raise the inclusion rate on capital gains tax in June.
The move will be limited to 40,000 wealthy taxpayers. “We’re going to make them pay a little bit more,” Justin Trudeau said.
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But it’s hard to see how that number can be true when the budget document also says 307,000 corporations will also be caught in the dragnet that raises the inclusion rate on capital gains to 66 per cent from 50 per cent.
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Many of those corporations are holding companies set up by professionals and small-business owners who are relying on their portfolios for their retirement.
The budget offers the example of the nurse earning $70,000 who faces a combined federal-provincial marginal rate of 29.7 per cent on his or her income. “In comparison, a wealthy individual in Ontario with $1 million in income would face a marginal rate of 26.86 per cent on their capital gain,” it says.
Policy wonks argue that the change improves the efficiency and equity of the tax system, meaning capital gains are now taxed at a similar level to dividends, interest and paid income. The Department of Finance is an enthusiastic supporter of this view, which should have set alarm bells ringing on the political side.
That’s not to say it’s not a valid argument. But against it you could put forward the counterpoint that capital gains tax is a form of double taxation, the income having already been taxed at the individual and corporate level, which explains why the inclusion rate is not 100 per cent.
The prospect of capital gains is an incentive to invest particularly for people who, unlike wage earners, usually do not have pensions or other employment benefits.
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That was recognized by Bill Morneau, Trudeau’s former finance minister, who said increasing the capital gains rate was proposed when he was in politics but he resisted the proposal.
Morneau criticized the new tax hike as “a disincentive for investment … I don’t think there’s any way to sugar-coat it.”
Regardless of the high-minded policy explanations that are advanced about neutrality in the tax system, it is clear that the impetus for the tax increase was the need to raise revenues by a government with a spending addiction, and to engage in wedge politics for one with a popularity problem.
The most pressing question right now is: how many people are affected — or, just as importantly, think they might be affected?
One recent Leger poll said 78 per cent of Canadians would support a new tax on people with wealth over $10 million.
But what about those regular folks who stand to make a once-in-a-lifetime windfall by selling the family cottage? We will need to wait a few weeks before it becomes clear how many people feel they might be affected.
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The numbers supplied to Trudeau by the Department of Finance suggest they have struck taxation gold: plucking the largest amount of feathers ($21.9 billion in new revenues over five years) with the least amount of hissing (impacting just 0.13 per cent of taxpayers).
The worry for Trudeau and Finance Minister Chrystia Freeland is that Finance has been wrong before.
Political veterans recall former Conservative finance minister Jim Flaherty’s volte face in 2007, when he was forced to drop a proposal to cancel the ability of Canadian companies to deduct the interest costs on money they borrowed to expand abroad.
“Tax officials vastly underestimated the number of taxpayers affected when it came to corporations,” said one person who was there, pointing out that such miscalculations tend to happen when Finance has been pushing a particular policy for years.
Trudeau’s government has some experience of this phenomenon, having been obliged to reverse itself after introducing a range of measures in 2017, aimed at dissuading professionals from incorporating in order to pay less tax. It was a defensible public policy objective but the blowback from small-business owners and professionals who felt they were unfairly being labelled tax cheats precipitated an ignoble retreat.
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Speaking after the budget was delivered, Freeland was unperturbed about the prospect of blowback. “No one likes to pay more tax, even — or perhaps more particularly — those who can afford it the most,” she said.
She’d best hope such sanguinity is justified: failure to raise the promised sums will blow a hole in her budget and cut loose her fiscal anchors of declining deficits and a tumbling debt-to-GDP ratio.
That probably won’t be apparent for a year or so: the government projected that $6.9 billion in capital gains revenue will be recorded this fiscal year, largely because the implementation date has been delayed until the end of June. We are likely to see a flood of transactions before then, so that investors can sell before the inclusion rate goes up.
After that, you can imagine asset sales will be minimized, particularly if the Conservatives promise to lower the rate again (though on that front, it was noticeable that during question period this week, not one Conservative raised the new $21 billion tax hike).
The calculated nature of the timing is in line with the surreptitious nature of the narrative: presenting a blatant revenue grab as a principled fight for “fairness.” The move has the added attraction of inflicting pain on the highest earners, a desirable end in itself for an ultra-progressive government that views wealth creation as a wrong that should be punished.
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Trudeau’s biggest problem is that not many voters still associate him with principles, particularly after he sold out his own climate policy with the home heating oil exemption.
The tax hike smacks of a shift inspired by polling that indicates that Canadians prefer that any new taxes only affect the people richer than them.
Success or failure may depend on the number of unaffected Canadians being close to the 99.87-per-cent number supplied by the Finance Department.
History suggests that may be a shaky foundation on which to build a budget.
National Post
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Like a bad houseguest, hotter-than-expected inflation continues to linger in the US.
Traders had hoped by now the Federal Reserve would be free to start cutting interest rates — boosting rate-sensitive stocks and unlocking a largely frozen real estate market. Instead, stubborn price growth has some on Wall Street rethinking whether the central bank will lower rates at all this year.
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