NFTs are growing, but so are their controls and regulations

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U.S. Department of Justice last week took an innovative step in applying established criminal theories of liability to non-fungible tokens (NFTs), said an article by Nasdaq.

On June 1, the U.S. attorney’s office for the Southern District of New York announced an indictment charging Nathaniel Chastain with engaging in an insider trading scheme involving NFTs sold on OpenSea, an NFT marketplace, where Chastain previously worked.

The DOJ trumpets the indictment as the “first ever digital asset insider trading scheme” and follows President Joe Biden’s executive order in March calling for various federal agencies to ensure “responsible development of digital assets.”, adds the article posted on the Nasdaq website. 

Coupled with the executive order, the indictment sends a strong signal for operators of NFT and cryptocurrency marketplaces that regulators are watching.

An NFT is a type of digital asset stored on a blockchain that provides proof of ownership and a license to use it for specific purposes. Although the digital objects can vary, a large section of the market involves digital artwork and images. OpenSea permits users to create, sell and buy NFTs on its platform. Creation and transfers are evidenced on the Ethereum blockchain, and purchases are commonly made with ether, a cryptocurrency native to the Ethereum blockchain.

According to the indictment, Chastain took advantage of the way OpenSea promotes NFTs on its site. Multiple times per week, OpenSea lists “featured NFTs” on its homepage. Featured NFTs usually appreciated in price after appearing on the homepage because of the “increase in publicity and resulting demand.” The Indictment alleges that Chastain knew which NFTs OpenSea would feature on its homepage, because he sometimes, in his role as an OpenSea employee, selected them.

The Indictment further alleges that Chastain agreed to keep these selections confidential and to not use his knowledge of the selections for personal gain.

New York prosecutors’ case

The Southern District of New York alleges that Chastain acted on that confidential business information before it became publicly known. According to the prosecutors, Chastain purchased NFTs shortly before they were featured on the OpenSea homepage and resold them at double, triple, quadruple or even quintuple the price he originally paid, compiles the report.

Chastain allegedly concealed the scheme by purchasing and selling the NFTs from various anonymous accounts and then transferring funds through even more anonymous accounts to cover his tracks.

While the indictment alleges facts and methods commonly seen in typical stock-related insider trading cases, it differs from common insider trading prosecutions in important ways. The indictment charges Chastain’s scheme as a violation of the general wire fraud statute, rather than as a violation of the U.S. Securities and Exchange Commission’s insider trading statute and rules.

Nonetheless, the indictment uses the same insider trading theory commonly found in violations of another statute.

For instance, the wire fraud count is premised on a “violation of the duties [Chastain] owed to OpenSea.” In other words, the DOJ’s theory is that the breach of Chastain’s agreement with OpenSea not to use confidential business information for personal gain constituted wire fraud. While insider trading prosecutions require a breach of duty, wire fraud prosecutions do not.

Although the indictment is grounded in the language commonly seen in insider trading cases – e.g. “confidential business information” and “obligation to refrain from using such information”– it stops short of labeling the NFTs at issue as securities. Thus, it appears that the government was concerned that it could not prevail if it brought this case as a typical insider trading case.

If this wire fraud theory proves successful, the DOJ could theoretically use it as a model to police market manipulation for other assets, regardless of whether they are considered securities.

It is curious that there is no companion SEC case to the action by the Southern District of New York. The SEC has been focusing on regulation of digital assets, especially NFTs, states the article.

In March, Bloomberg reported that the SEC was probing NFTs and had issued subpoenas related to NFT offerings. In May, the SEC announced that it had doubled the size of its crypto assets and cyber unit. Tucked into the announcement was a statement that the SEC will “focus on investigating securities law violations related to” NFTs as well as other crypto assets and stablecoins. And SEC Commissioner Hester Peirce reiterated that the SEC was focusing on fractional NFT s and NFT baskets.

Are NFTs securities?

With all the attention and resources devoted by the SEC to examining cryptocurrency markets, it would not be surprising if the SEC took the position that some – or even many – NFTs are securities, according Nasdaq’s text. That position would fit with its aggressive stance on cryptocurrency regulation, adds.

In fact, it appears that the SEC has already asserted that some NFTs are securities. That same assumption forms the basis for its recently issued subpoenas related to NFT offerings. What remains uncertain is not whether the SEC will be aggressive in regulating the NFT markets, but how aggressive it will be and, of course, whether its interpretation of the definition of securities as it relates to NFTs will be upheld by a court.

Most likely, the SEC believed that the facts of this case and the particular digital assets involved did not present a strong case for insider trading. It appears that not only the SEC, but also the Department of Justice, plan to aggressively regulate manipulative behavior in the digital asset markets.

To read the full Nasdaq article click here.

 

Sanctuary Wealth Launches Customized Alternative Investment Platform for Hybrid RIAs

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Sanctuary Wealth announces the launch of a customized alternative investment platform for its member firms, streamlining the complexities of managing alternative investments through their entire lifecycle, according to the company’s release. 

The company explains that Sanctuary’s customized alternative investment platform, powered by +SUBSCRIBE, offers an innovative digital experience for product menu centralization, product training and education, investor onboarding, electronic subscription documents, compliance controls and fully integrated ordering workflows.

Advisors are thus empowered to quickly and “automagically” make an investment in any alternative investment fund, and easily manage client positions through the investment life cycle on a single software solution, the firm said.

“With our new platform, Sanctuary Wealth becomes the first hybrid RIA to offer this kind of digital access to alternative investments, where everything has been sourced and vetted by our own team rather than outsourced to a third-party vendor,” said Jim Dickson, CEO and Founder of Sanctuary Wealth.

Patrick McGowan, Managing Director and Head of Alternative Investments for Sanctuary Wealth added: “We spend a lot of time on the sourcing and diligence side to form a compelling pipeline of offerings across private equity, private credit, and real assets focusing on both emerging and leading fund managers, and across open-ended and drawdown strategies.”

“By using our technology, Sanctuary has delivered a custom alternative investment platform that integrates with any fund manager, third-party custodian, reporting provider, or other vendor to ensure an easy and seamless workflow,” added Rafay Farooqui, Founder and CEO of +SUBSCRIBE. “We are thrilled to partner with them on this important private markets initiative.”

Coupland Cardiff Asset Management announces succession plan with James Tollemache joining as CEO

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Coupland Cardiff Asset Management LLP (Coupland Cardiff) has announced that James Tollemache will be joining on 1 August 2022 as CEO, pending FCA approval. This follows over 15 years at Redwheel, formerly RWC Partners, and a total of 18 years in the asset management industry. 

Established in 2005 by Richard Cardiff and Angus Coupland, Coupland Cardiff is a specialist asset manager with assets of USD 2.75bn. The firm manages capacity constrained equity strategies across Asia, India and Japan on behalf of professional investors including banks, wealth managers,  institutions and sovereign wealth funds. 

Tollemache joined Redwheel when it was a small organization, from JPMorgan Asset Management. He held a number of senior roles at the firm and played an integral role in building the business in the UK and Europe before becoming Head of Sales in 2013, subsequently sitting on the Management  Committee.

Latterly he worked to grow the US business, most recently as Head of US Wholesale and  Latin America as well as Middle East and Africa.  

James Tollemache commented: “I am hugely grateful for the experience Redwheel has given me  over the years and proud of what we have achieved. I have no doubt that its success will continue. To have worked with such a talented group of people, many of whom are friends, has been a privilege.  

“The opportunity we have at Coupland Cardiff is an exciting one as we look to continue to grow the business, building on its 17 years of expertise across Asian markets and a solid track record. Once FCA  approval has been completed I look forward to getting on with the work at hand. As an independent  asset management business concentrating in areas rich in alpha with a structure that promotes long  term success, autonomy and alignment, there are some real opportunities in the market today,” he added.  

To ensure a smooth handover, founder and current CEO, Richard Cardiff will remain CEO until such time as FCA approval is obtained and will continue to work closely with James thereafter. 

Richard Cardiff commented: “The partners and I are very pleased we have James joining us.  Structured and thoughtful succession planning is key to the successful future of any company. To find  someone like James, with his experience of working with investment teams and clients across several  channels and jurisdictions provides everyone associated with CCAM, staff and investors alike, a  tremendous opportunity.” 

 

Schroders Expands US Offshore Business with Strategic Solutions Director

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Schroders today announces further growth in its US Offshore team, with the appointment of a Strategic Solutions Director in a newly created role, bolstering its services on the family offices, OCIOs, Private Banks and fund of funds space.

Ever Zambrano, who has over a decade of investment, product development and sales experience, will be based in New York and report to Nicolas Giedzinski, Head of US Offshore.

Ever joins a senior team with an average of 10 years’ experience in managing sales and business development across multiple companies. Prior to joining Schroders’ US Offshore team, he was the Global Lead of CIM Third Party business at Citi Private Bank, where he led global sales and distribution for third party mutual fund and SMA platform the Private Bank and US Wealth Business. 

Prior to this role, Ever was a Product Specialist for the Citi Private Bank business in Latam where he held different sales responsibilities across the Traditional and Alternative Investment product offering.

Prior to joining Citi, Ever was a Portfolio Management Associate at Guggenheim Partners Latin America and he began his career in the industry at Merrill Lynch & Co, as a Senior Financial Analyst.

Nicolas Giedzinski, Head of US Offshore commented: “We are excited to add Ever’s vast experience to our team and to further expand Schroders’ footprint in the US Offshore region. His deep understanding of how to build ad-hoc solutions and private market vehicles will be very helpful as we actively maintain our high-quality service and ideas in an extremely rapidly evolving environment”. 

Schroders’ US Offshore team, which is based in Miami and NY, focuses on funds across long only fixed income, private assets, liquid alternatives and equities, amongst other asset classes. Utilizing the comprehensive range of Schroders’ unique and innovative products and services, the US Offshore division aims to help clients meet their specific investment goals. The team is pleased to announce Ever’s addition, further ensuring the division’s exciting structural development.

Insigneo to Receive $100 Million Investment Led by Bain Capital Credit and J.C. Flowers

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Insigneo Financial Group announced today that Bain Capital Credit and J.C. Flowers & Co. LLC, with participation from private investors, have agreed to make a significant minority investment of $100 million in the Company.

The capital will be used to accelerate Insigneo’s growth and expansion strategy.

In conjunction with the transaction, Bain Capital Credit is providing debt financing for Insigneo’s previously announced acquisition of Citi International Financial Services, LLC (CIFS) and Citi Asesores de Inversion Uruguay S.A., from Citi.

“There’s great opportunity for Insigneo to continue on its growth trajectory as an independent wealth management firm focused particularly on the international front,” said Raul Henriquez, Insigneo’s Chairman and CEO. “The fact that two of the world’s leading private investment firms have chosen to support our growth plans is testament to our strong leadership and unique culture —focused on service, innovation and technology. We welcome Bain Capital Credit and J.C. Flowers as strategic partners and are confident their support will enhance our overall capabilities.”

“Raul and the Insigneo team have built a best-in-class wealth management platform to serve the evolving needs of international advisors and their clients,” said June Huang, Vice President at Bain Capital Credit. “We’re excited to partner with them on the next stage of their growth.”

“There is a growing demand for wealth management services in general, but especially in underserved Latin America, where Insigneo is very well positioned for further expansion,” said Richard Carrión, Operating Partner at J.C. Flowers. “We look forward to leveraging our deep financial services experience to help the Company identify and secure new opportunities.”

Headquartered in Miami, Insigneo operates as an SEC-registered broker dealer and registered investment advisor. The Company also offers services through locally-regulated advisory firms in Montevideo, Uruguay; Buenos Aires, Argentina; and Santiago, Chile.

Today, the Company’s independent wealth management platform supports 170 investment professionals (IPs), in addition to 37 partner firms that account for another 182 IPs, altogether servicing close to $13 billion in client assets.

Black Salmon Closes $500 Million Industrial Fund

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Black Salmon closed its industrial fund for the acquisition and development of industrial properties across the U.S. with investment capacity of approximately $500 Million.

The industrial fund intends to identify and make investments over the next 24 months. This announcement comes on the heels of Black Salmon closing a $250 million multifamily fund, and interest resulted in exceeding the firm’s goals for the industrial fund raise. 

The firm’s investment strategy focuses on merchant build, opportunistic development, and value-add opportunities across the entire US supply chain – distribution warehouses, industrial infrastructure assets, and cold storage – in strategic markets throughout the US, including those concentrated near distribution hubs, such as coastal and inland ports and railways. 

“Black Salmon’s acquisition strategy as a company is centered on the diversification of investments based on our extensive market insight. Together with partner LarrainVial, we plan to continue developing strategies to provide our Latin American and European investors access to the U.S. real estate market,” said Jorge Escobar, managing partner and Co-CEO of Black Salmon. 

In partnership with InLight Real Estate Partners, the fund has seeded with investments located in key industrial markets in the Sunbelt region.

Demand for industrial assets pre-dates the pandemic due to the expansion in logistics and distribution which has continued to increase and is now outpacing supply.

A recent CBRE Research study found that for each incremental $1 billion growth in e-commerce sales, an additional 1.25 million square feet of distribution space is needed for support.

“The disruption in the supply chain caused by continued growth of e-commerce has created unique and compelling opportunities for investment” says Stephen Evans, managing director of Black Salmon and portfolio manager for the fund.

“Consumer behavior is changing, and the demand for products at a rapid rate has created a need for more and efficient warehouse space. Now, through our firm’s expansion into the industrial asset class, we are providing our investors with an opportunity to participate in a sector showing exponential growth,” added Camilo Lopez, managing partner and Co-CEO of Black Salmon. 

Black Salmon has amassed a two-billion-dollar acquisition and development portfolio, including office, industrial, hotel, multifamily, and senior housing properties in major metros, such as San Francisco, Miami, Austin, Orlando, Atlanta and Phoenix, along with a large development pipeline in South Florida.

Could Immigration Solve the US Worker Shortage?

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The biggest gap between job openings and available workers in postwar history is one of the key reasons that inflation is soaring in the U.S. A drop in immigration has helped push the gap wider, suggesting an increase in foreign-born workers could help contain the rise in wages and prices, according to Goldman Sachs Research.

As pandemic restrictions were lifted, labor demand recovered much more quickly than the labor force itself. As a result, wages jumped 5.5% during the past year, according to Goldman Sachs’ Wage Tracker.

If this pace continues, the Federal Reserve would have a difficult time achieving its longer-run inflation goal of 2%. Labor participation is expected to pick up in the U.S., adding as many as 1.5 million workers over the coming year, but economists at Goldman Sachs predict that will leave a sizable jobs-workers gap of around 1 million.

Fed Chair Jerome Powell recently noted that the drop in foreign-born workers coming to the U.S. has rippled through the employment market. Immigration slowed in the U.S. between 2019 and 2021 amid the spread of COVID-19 and policy changes, leaving the labor force about 1.6 million workers smaller than it would have been if it had stayed on its pre-pandemic trend. And while green card issuance and temporary work visas have rebounded recently to roughly their previous levels, immigration rates would need to increase even more to make up for the shortfall, Goldman Sachs Research shows.

The COVID-19 health crisis was part of the reason for the decline in immigration, but Trump administration policies, from visa bans to lower caps on refugees, also played a part. Under the new administration, the pace of immigration into the U.S. appears to have returned to what it was before the pandemic, according to Goldman Sachs Research, as temporary visas and green card issuance have rebounded, and the cap on refugees has been lifted. But even so, the population of foreign-born workers is smaller than it would have been without policy changes and the pandemic, and Congressional Budget Office estimates indicate the shortfall could increase.

It’s difficult to catch up because U.S. immigration law has numerical limits on many categories of visas. Broad bipartisan immigration reform appears out of reach, but smaller changes may have a chance, such as a bill for farm workers or other temporary jobs.

The Biden administration has some options that could increase immigration without approval from Congress, such as clearing the administrative backlog of interviews for visas (by waiving those interviews, for example), redeploying unused visas from previous years and allowing family members of certain types of visa holders to work.

Immigration is a top political concern in the U.S., but so is inflation. To get price increases back to the Fed’s 2% target, the jobs-workers gap in the U.S. needs to narrow by around 2.5 million, according to Goldman Sachs Research, and the expected increase in labor-force participation is well short of what appears to be required. It may be realistic to boost annual immigration by a few hundred thousand people — making a modest dent in the shortfall — but not by enough to close it.

When it comes to cooling the labor market, this suggests the Federal Reserve will have to do the heavy lifting by raising interest rates enough to slow the economy, the report concludes.

Unpredictable Scenarios Make It Necessary to Explore New Options for Asset Allocation and Portfolio Construction

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With inflation high, central bank liquidity flagging and interest rates rising, family offices are reviewing their strategic asset allocation, according the new Global Family Office Report by UBS.

The report is based on a survey from 221 single family offices that collectively oversee wealth of USD 493 billion and have average assets under management of USD 2.2 billion.

“We are observing a period of substantial transformation in many areas. The COVID-19 pandemic, digital disruption and geopolitical developments are all driving profound change for global businesses and financial markets. In response to these risks and uncertainties, family offices are reviewing their options with greater urgency”, said Josef Stadler Executive Vice Chairman UBS Global Wealth Management.

He added: “A strategic shift first observed last year is gaining pace. Amid continued inflationary pressure and low expected returns, family offices are seeking both additional sources of return and alternative diversifiers.”

Family Offices are reducing fixed income allocations and sacrificing liquidity for returns, as they increase investments in private equity, real estate and private debt.

Topping their list of concerns are high and possibly persistent inflation, alongside unstable global geopolitics – all at a time when the valuations of many financial assets remain elevated.

Against this backdrop, most believe uncorrelated returns will be harder to find. As they explore new possibilities, they’re looking for alternative diversifiers including active strategies, alongside illiquid assets and derivatives.

Reviewing strategic asset allocation In one of the most uncertain periods for financial markets in several decades, family offices are reviewing their strategic asset allocation (SAA), the report said.

“A new era is beginning: the tail winds that supported asset prices through the pandemic are fading as central banks raise interest rates and withdraw liquidity against a backdrop of resurgent inflation”, it’s added.

In 2021, SAA remained stable, largely unchanged since 2019, although changes are likely in future. Approximately a third (32%) of portfolios was allocated to equities, around a seventh (15%) to fixed income and 12% to real estate. Cash was 10% and hedge funds 4%, with 2% in private debt, and gold and commodities both at 1%. Private equity was an exception – continuing its steady rise from a 16% allocation in 2019 (funds and direct investments) to 21% in 2021. Yet family offices evidently anticipate that attaining their goals will become more challenging, with over three quarters (77%) having an objective of growing overall wealth, concluded UBS.

To read the full report you have to access the following link. 

Seven Leading Cincinnati Wealth Executives Create DayMark Wealth Partners, An Independent Wealth Management Boutique

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Dynasty Financial Partners announced its partnership with DayMark Wealth Partners, the most recent independent advisory firm to leverage Dynasty Financial Partners’ industry-leading platform of technology-enabled wealth management solutions and business services for financial advisory firms.

The founding seven partners previously worked together at Wells Fargo’s Cincinnati office.

The founders include two executives, Mike Quin and Steven L. Satter who is General Counsel for DayMark Wealth Partners and five financial advisors: Robert E. Prangley, II, CIMA®, P.J. Boland, CPWA®, Jason M. Beischel, CFP®, Mike Larison, AAMS® and Daryl J. Demo. The total number of staff is 14 professionals.

The firm previously managed $1.4 billion in client assets.

“We launched DayMark Wealth Partners because we wanted full ownership of the business, the client experience and our ADV. We want to act in the best interests of our clients, pure independent environment, and support elite, top advisors, and we can only do that if we have the freedom and flexibility to only focus on our clients’ goals,” said Mike Quin, Founder of DayMark.

He added: “We fully expect to acquire like-minded teams who understand that their primary concern is their clients and we want to help them execute that client experience at a higher level.”

Shirl Penney, CEO of Dynasty Financial Partners, said, “We are honored to welcome the entire DayMark team to the Dynasty community. We expect DayMark to be a preferred destination for multi-generational families, entrepreneurs, corporate executives, and business owners. They will also be a premium choice for advisors seeking partnership, professionalism, and integrity in their new firm. We anticipate that DayMark will grow fast both organically and inorganically and we believe they are the type of firm that represents the wealth management boutique of the future.”

According to John Sullivan, Dynasty’s Director of Business Development, “The launch of DayMark signals another significant stage in the evolution of the wealth management industry. Increasingly, we are seeing executives in management positions and larger, more sophisticated teams choosing independence as the path that best benefits advisors and their clients. We anticipate that DayMark Wealth Partners will build one of the industry’s truly significant, professional wealth management firms and we look forward to partnering with them.”

About the name DayMark: Lighthouses are often painted in a unique pattern so they can be easily recognized during daylight, a design known as a daymark. As advisors, DayMark Wealth Partners looks to guide high-net-worth clients and their families with the clear direction of a well-thought-out plan, giving visibility for generations to come.

Based in Cincinnati, DayMark’s clients include business owners, corporate executives, and many high-net-worth families with multiple generations – in some cases four and five generations.

Big Tech, Merchants, and a Range of Data and Fintech Firms Now Account for 35% of the Value of the Financial Services Industry

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A tectonic shift is occurring in the financial services industry, as technology companies jostle with incumbent firms for position in a market that is expanding rapidly into new services, according to global management consultancy Oliver Wyman. Established firms traditionally organized around managing risk are still growing, but most of the industry’s value creation is being driven by financial infrastructure, data, and technology (FIT) companies.

In its 24th annual State of the Financial Services Industry Report, titled The Tectonic Shift Between Risk, Data, and Technology, Oliver Wyman states that the primary driver of this value shift is the slowing growth of more capital-intensive risk intermediation services, which have been growing at about 3% a year over the last decade, compared with capital-light services linked to connected data services and value technology services, which have been growing at about 8% a year.

As a result of this ongoing shift, nearly one-third of the world’s largest 50 financial institutions are now FITs firms, up from only two a decade ago. 

“The financial services industry has had a good decade — no major crisis, a huge amount of innovation, and playing an important societal role in COVID and on climate,” said Pablo Campos, Managing Partner in Oliver Wyman Iberia.

He added: “The decade has also seen a dramatic change in the financial services landscape, to a wider industry with more firms acting in co-opetition with each other, and overall a shift in relative value from incumbents to new players. With rising interest rates and volatile markets, we anticipate quite different conditions in the next few years, with the benefits going to those firms that can anticipate and pivot to the new sources of value growth.”

The Oliver Wyman State of Financial Services 2022 report shows that without more action, this shift in relative value is poised to continue. Most incumbents are struggling to find a decisive way to reorganize around, and invest effectively in, the changing sources of value and growth in the industry. 

As big tech business models converge, mobile wallets and moves into embedded finance will become more prominent, according to the report, as the emergence of digital assets and digital identification amplify and accelerate the value shift.  

That said, current market and economic conditions may provide an opportunity for incumbent firms to regain share. Rising interest rates should deliver an earnings boost to some banks and insurers, and investors are challenging some big tech and FITs firms’ business models. If incumbents can pivot more decisively toward new sources of value and invest earnings carefully, there are significant opportunities.

In addition, the 2022 State of Financial Services report finds that while the top incumbent firms in the industry have increased their market value by 70% over the past decade, delivering $1.3 trillion in new value, a combination of large financial infrastructure, data, and fintech firms have delivered 400% value growth and nearly $2.3 trillion of value.

Essentially, more total value is being created outside the incumbent industry, from firms that purport to be in similar ecosystems with the incumbents. And $9 trillion in new value has been created by the big tech industry – even with the significant adjustments in 2022 – which is increasingly moving into financial services through payments initially but is expanding to provide many other financial services.  

 

gráfico oliver wyman

Key trends

Among the other dynamics reflected in the report, it highlights that, since the global financial crisis, the financial system is much better positioned to play the economic shock absorption and policy transmission role for which it is at least partially backed by governments, as seen in the responses to COVID-19, the Ukraine war and climate. 

Moreover, the big tech companies are still keen to grow in financial services without expanding too much in the core value groups of financial services risk intermediation. Oliver Wyman expects another wave of partnerships as they focus on further integrating the enterprise into the center of the customer’s life, and bringing trading, advertising and other services to the customer through further accumulation of connected data and delivery of valuable technology.

In addition, the consultancy expects significant consolidation in the FIT landscape, especially as rising interest rates and volatile markets lead to a shift away from companies that do not have sufficient revenue stability.

Finally, another trend reflected in the report has to do with disintermediation and the emergence of new assets, such as stablecoins. On the former, he notes that it is a risk, but not the only one: “An increasing misalignment of the oversight and cost of risk management with the growth in the value of connected data and value technology in the industry inevitably poses risks. Other industries, such as automotive, healthcare, energy and telecommunications, reflect the same challenges as managing a mature set of traditional asset-heavy products and services while trying to refocus on value growth.”