Digital asset opportunities for all seasons

For this episode, we were joined by Kelly Chia, Deputy Head of Research Asia, Bank Julius Baer, covering digital assets, macro strategy, ESG and thematic investing.

Prior to joining Bank Julius Baer in 2011, Kelly worked for Temasek Holdings, Singapore’s sovereign wealth fund.

Graduating as an engineer from Nanyang Technological University, he first worked at a General Electric joint venture designing complex repairs for aircraft engines. Mr. Chia then transited into business development with the Singapore government and finally made the leap to be a sell-side analyst for OCBC Bank and Standard Chartered more than a decade ago.

1. Crypto winter and industry seasonality
2. Utility vs. yield
3. Institutional approach: demand and supply of services

 

*Disclaimer: The accuracy of this transcript is not guaranteed. This is not investment advice, and any opinions expressed here are the sole opinions of the individuals, not of the institutions they represent.

[00:00:13] Seamus: Hi, welcome to the 34th episode of METACO Talks. Today we’re speaking with Kelly Chia, The Deputy Head of Research in Asia, Julius Baer.

[00:00:36] Kelly: Thank you for having me.

[00:00:37] Seamus: Yeah, no problem, Kelly. It’s been great to have you here. I’ll just give a little intro. You’ve been obviously with Asia for 11 years, initially trained as an aerospace engineer. You took a leap into equity world as a sell side analyst at OCBC, subsequently Standard Charter Bank, and then moved to the buy side with Temasek. Exciting background. Very glad to have you here today.

[00:01:01] Kelly: Happy to be here.

[00:01:03] Seamus: It would be great to hear a little bit about your journey, as particularly you’ve come from the aerospace engineering and now you’re researching crypto markets. What’s the common denomination here? To the moon is the expression we all hear, but I’d love to hear more about it.

[00:01:17] Kelly: The other common denominator would be high stress. Aerospace, super high stress.

[00:01:24] Seamus: Hopefully nobody died if you get it wrong, basically.

[00:01:27] Kelly: Most definitely. Nobody died on my watch as an aerospace engineer too, thankfully. But the one thing, I entered this crypto thingy on my own in December 2020. That would put me like a crypto teenager maybe, not really an adult yet. I came in primarily because I wanted to know whether this thing that everybody was talking about was a whole boatload of rubbish, I need to do it myself, or it’s seriously going to change our lives forever moving forward. In December 2020, believe it or not, there was still Binance.sg. They closed that down because of regulatory issues. I onboarded. I bought BNB. I didn’t buy enough ETH, unfortunately. I bought BNB because I was really stingy because of gas prices. On the same day that I bought BNB I went straight into DeFi. I went straight into pancake, it’s so crazy. I didn’t know what happened, but I read it and I tried it. That’s how I entered this space.

[00:02:36] Seamus: Straight down the rabbit hole. You obviously put quite a bit of research, and you recently wrote that when it comes to crypto, there are long or short term institutional opportunities for every season, be it crypto winner or summer or in between. All of those categories we’ve seen recently. Do you are to expound on that?

[00:02:55] Kelly: Yeah, Business Times asked for an article on crypto. I was just thinking about it and in honesty, I got the inspiration when I was thinking about my holiday. I haven’t gone out of country for some time, at a point of time. I was just, it’s really great that I can go into a winter country. I’m going off next week, actually. Then it hit me. Wow, at the point in time when I was writing it, we were already in a crypto winter. Terra has collapsed, Three Arrows, Celsius, and a whole bunch of them all basically blew up. But I think that this whole winter that we are currently in is more of a pricing thing. Everybody there is definitely a winter in price because the pricing interestingly is basically the same price that I entered the whole crypto world in December 2020. It’s quite interesting.

That’s the pricing part of it. But if you go the underlying, if I ask you Seamus, it going on at METACO. So busy, you’ve got so much stuff to do. I think that the rails and the infrastructure that’s all being built up isn’t in the winter at all. If you came to Token 2049, sure that’s before FTX, but that’s already after the collapse of tree ECM and Terra, it was super crazy. Everybody was just doing so much and developing. Maybe I’m biased cause I’m an engineer by training, but I think engineers are not as flaky in general, as other professions. I think you get a lot of smart people, Seamus in METACO, or your engineers are pretty brilliant. If they see nothing there, you don’t see 100,000 of them all entering this particular industry. I think the winter part definitely is pricing, but the rest of it doesn’t seem like.

Do you want me talk about the other three seasons? If you think I’m spewing rubbish, but at the point of time I thought that something that was in autumn that was going to tip into winter was this whole play to earn rubbish, where you basically needed new users to come in to bump up prices within the same ecosystem for the ecosystem to survive. If not, it doesn’t work. It’s true today. Everything at in point of time, I thought that not only are the prices of these tokens going to go down, development and interest in it is just going to basically weigh into nothing. I think we see that today.

The other thing which I had second thoughts about, doubts about it being decentralized and autonomous. This is still up for grabs. But I think that most things to come to a place of intense influence, especially an organization or movement, you really need a leader. You know, as in life, a person that makes hard calls. If you go to war, if your company’s struggling to survive, I’m pretty sure you need someone to make hard calls. You don’t want to leave it to everybody to supposedly think what’s going on. Like, are we going to cut 500 people, are we going to cut 5 people, are we going to hire another 500 even though we are sinking? You need someone to do that.

[00:06:29] Seamus: You see that a consensus driven early start-up is definitely hard to manage. Typically, you need somebody to drive it forward.

[00:06:36] Kelly: Yeah. I had doubts. That’s up for grab still, maybe something can work out. Somehow, I think there’s something good to look forward to. Interestingly, all the funds that have been raised for digital assets were raised generally around the time of May and June. That’s when Terra collapsed. A16 raised 4 billion after Terra collapsed, one month I remember. IT WAS quite amazing. I’m like glad that all that money was raised then, and all the collapses is happening now, because it washes are all the bad stuff. Hopefully a majority of whatever funds have been raised BY whoever gets deployed into things that hopefully are better governed.

The last part, spring. The whole DLT part, where it is the utility of the technology, I think that’s something which gives me a lot of hope. Even though a lot of what we doing now is like a solution, finding a problem, but I think the more we get into this DLT technology, there is definitely intense opportunities to solve for the creator community. Like remittances, the people who really need efficiencies and for the middle men to basically go away, I think these applications are really helpful.

[00:08:11] Seamus: Well, you’ve touched on a lot of topics we should expand on. I think I’ll step back a second. You’re given your personal opinion, but it would be great to go into how you look at this from a Julius Baer perspective. What’s your role at Julius Baer, and what are you doing related to the crypto space?

[00:08:27] Kelly: Well, I have my regular job as the Deputy Head of Research. I do macro research: stocks, bonds, look at macro. In my not much spare time, but it still takes up a massive amount of time because it’s obviously crypto, we do have opinion on Bitcoin and Ethereum. I think that as a regulator entity that publishers regulated research on Bitcoin and Ethereum, that’s quite a feat. We jump through hoops of fire to be able to achieve that. That’s something that we do as an organization also.

[00:09:08] Seamus: Interesting. We’ll get into the details, but trust has been a theme that’s come out this past week when we’ve seen some firms fall from grace. A firm like Julius Baer is a trusted institution. It’s regulated, it’s trusted, it’s been around for a long time. How is Julius Baer overall looking at this opportunity, and what’s the journey been so far?

[00:09:32] Kelly: We looked at it for a long period of time, and we took a break. In the last nine months, the project team worked super duper hard. Not nine months, it’s slightly more than a year already. We started maybe third quarter of last year. There was a lot of evaluation. We think definitely we are early in the game. Julius Baer has a midterm strategy that’s typically iterated to the market every three years, and our group CEO has said that digital assets will be a key part of that. At this point in time, we have a minority investment in SEBA Bank. That’s a parallel way to play this whole thing. But we’re hoping to come as near to the chain as possible. What that means is that we hope to eventually, our vision will be to create for our clients’ ability safely custodise their assets, and possibly have some form of yield for their assets.

[00:10:48] Seamus: That’s definitely an exciting strategy, and I think we’re seeing more and more banks go that way. Your partnership with SEBA is quite early compared to many banks, but I think that ambition is increasingly becoming more mainstream across firms.

Going back to some of what you said, you touched a bit on the utility speculation aspect of things. Longer term, clearly right now we hear criticism all the time that there’s no use for blockchain, or crypto rather. It’s just a highly speculative asset, and that’s what it’s all about. We’ve had these big spikes and big drafts lower, and maybe there’s some confidence to that view. But there’s a utility you talked about, this conundrum of balancing the speculative element, which are the incentive mechanisms as well, with delivering utility. How does that get balanced longer term? Is that something that’s going to be resolved? Something like housing, everybody wants affordable housing, but everybody also wants housing to go up in value because they’re all long. How do we resolve this? Or is there a way to resolve this?

[00:11:50] Kelly: I’ll answer the housing part first. If you to long housing yet be affordable, you just need to buy a house that’s slightly further out, and hopefully you’re in a pretty good spot where the city is expanding. That’s my thought on housing.

I think that for crypto, there is the use of crypto and then there is the want of crypto. Let’s talk about the want of crypto. I think a lot it is happening today. Essentially, people want their token to go up 100X. They want to say that I bought Solana at $1 and sold it at $243. That’s the want that I think is happening now. There’s also a want maybe in social flex. If if you buy an Ape, or you buy a punk, and you put it in your Twitter profile, you might have to pay $8 Not sure yet. It’s just like you suddenly become, I don’t know, more credible because you own one. I’m not sure. But that’s just the want of it. The use of it, we’ve talked a little bit about it just now. There’s possibly atomic settlement. Today’s stocks is T+2, or T+3, or T whatever. I’m hoping that DLT will make it T+0 instant.

We talked about remittances, where it helps cut off this huge middle layer. If you’ve got people that’s remitting their funds back home, the middle guys take so much from them. These are the people who specifically need to have efficient ways to deliver money to their families.

This whole thing about wants versus users, we need to differentiate it. Currently, I think it’s a lot of wants for blockchain. It seems like a bit early in terms of the use of it. It’s like after the dot com burst in 2000, and then you’re trying to anticipate, okay, this company, this company, this company’s going to survive. Nobody really knows. I really hope it doesn’t mimic dot com though, because from the dot com burst to where it really recovered, I think it took 15 years. I hope it doesn’t take 15 years for digital assets. I think technology cycles definitely have compressed quite a lot.

[00:14:23] Seamus: I think to your point, though that there was a bubble in the technology space. There may have been some ways to expend it, but we built the rails for what we have the internet economy now. I think we’re moving at a much more exponential pace where we will recover these cycles shorter, and maybe there’ll be other bubbles.

But fundamentally, the new way to exchange value, that’s trustless, that’s instant, has had profound impact on financial markets. We’re seeing that already, talking about banks, about how they can exchange value. We have a market that works on a daily settlement basis, or multiple days settlement basis. If you move to instantaneous, it completely changes business models.

I’ve been in the market since 1991, and seems from the last week we’ve seen events that have wrapped up the Enron, Madoff, Lenon and MF Global all in one. We’ve had FTX, and go a bit further back we’ve had Three AC, Celsius hurting sentiment in the market.

How can these bad corporate and finance practices still happen? Are we going to get through this soon, or is this a long-term damage to the market?

[00:15:32] Kelly: It’s anybody’s guess. But one thing’s for sure, all your Bitcoin libertarians, where everything in their whole world should be decentralized, we should be able do anything we want for money, nobody should be prying. I know I work in a bank, so I may be biased in saying this, but it really appears that we as humans can’t really self-regulate. So our view is always that regulation is inevitable, and it is not optional. It is not. It has been unfortunately shown time and again, after Terra, Three AC, and then you go to the point where we have FTX last week, yeah, I think regulation is inevitable.

You asked about how is this going to happen? How did this happen? Come on, there are frauds even in SEC listed companies, right? Audit every single year, maybe even by a big four auditing firm, if there’s collusion, in FTX there was all sorts of things like backdoor algorithms and stuff like that was programmed in, I think that when collusion is involved, it’s basically impossible to fix. But hopefully chances are that the number of times it happens from now onwards will be slightly less.

[00:17:03] Seamus: Well, one of the things we’re seeing, or as a company, our view has been that as more assets move on chain, and you touched on this earlier, basically individuals are going to manage everything themselves or they’re going to rely on a trusted counterpart. Maybe this really focuses the market again on trust, as assets grow into this space. Firms like Julius Baer are extremely well placed to benefit from that trust.

[00:17:33] Kelly: Yeah. I have to say one thing though, this whole FTX thing, I was in FTX, unfortunately. But I have to say, it’s such an awesome platform. It’s so great when it was working well, and in two weeks time it basically went to zero. I think that this whole aspect of opportunity and trust is important.

The truth is – it’s a funny thing that I’m using the word truth, because I think at the end the truth is still greater than trust. Because not many people still trust banks. I think we all know that. But the point is, there’s some form of way in which you’ll be able to go through the legal system to arrive at some form of middle ground for regulated entities. That’s just some of my thoughts with regards to that. Opportunities, definitely a lot of opportunities.

[00:18:32] Seamus: Well, speaking of truth, the whole point of putting things on ledger is the transparency it delivers. You don’t need to trust if you can verify. You can have things like proof reserves. The benefit FTX had was it was such a great platform, nobody bothered to look. Once they started looking, questions came up, and that’s when things came up.

[00:18:51] Kelly: The funny thing is according to CrunchBase, there were 44 investors in FTX. You look at them, it’s like, wow, such pretty blue chip guys. I’m like, what happened to institutional due diligence? I don’t know. Like I said, I’m pretty sure they all did the due diligence, but the problem is that if there’s collusion, it’s the human condition, a part of our fallen human nature.

[00:19:22] Seamus: Julius Baer covers a lot of high net worth individuals, the institution investors. How’s their attitude towards the market? When Julius Baer talks about crypto, what services are they looking for? Or digital assets say more broadly, not just crypto, but what services are they looking from you?

[00:19:41] Kelly: We’ve been on a journey where we speak with clients specifically on crypto, trying to draw from them what they really want, what they’re adverse to, something which would appeal to them. In general, I think in quite a number of crypto specific discussions, there’s one thing that stands out. I’ll paraphrase what they say. They say that if I’ve got 300K in my MetaMask, I think it’s okay. These are rich guys, 300 K in MetaMask is fine. But if they’ve got 3 million or 30 million, I think I would like to move it to a safer platform like you. I think at the end of the day, there is still an aspect where they want a rail of safety, especially for the funds that are quite substantial. That’s one.

The other thing that they really want is some form of yield, because high net with individuals really generally are yield investors. That’s them.

In terms of interest, we’ve got lots of interest. Specifically in Singapore, we recently had an in-person event. We had about 70 clients sign up. These events, typically they’re dropouts, because they’ve gone for so many, they are well banked, so many private banks. In this one, every single one of them turned up except two. They didn’t turn up because they had COVID; they had just tested positive the night before so they were practicing social responsibility. I think it really goes to show at the end of the day that whether they want to do it or not, I think it’s something which they’re definitely exploring. Maybe it’s because they’re driven by the kids.

I’ll give you a story. I was speaking to our partner in Thailand, we have a partner in Thailand, and in Thailand they’re pretty big in this whole crypto thing. We hold so like this round tables for presentations, in order to engage not just the matriarch and patriarchs of the family businesses, but the children. It’s between teenagers all the way to, I don’t know, early 30s. I was just talking to one of our partners there, and he was just saying that he’s a super DJ person. He’s middle aged or something, he’s about the same age as me. But he’s seriously into this. He was speaking to the kids; the kids were as usual on the phone, not very interested about macro, federal, what the fed’s doing. He was talking to them and he knew that they were interested in digital assets. He talked to them, and one of them just looked up from his phone – this is what he told me – and asked him, “What coins do you have?” Right in his face. He was like, wow, that’s, direct. Fortunately he was quite a DJ, so he just stopped everything he was doing. Suddenly the whole table, they put down their phones, this uncle, this is quite interesting.

After that, one of them said, “You know, we don’t talk to no-coiners nowadays.” There was just some crazy stuff going on. Obviously this was before FTX. I think it was even before Terra. I’m not sure how the conversation would change then. But I think that next generation, like my son asked me about Bitcoin, and he’s nine years old. Yeah, something’s going on in that generation.

[00:23:27] Seamus: There’s always been a lot of excitement around the crypto native currencies. But what about from Julius Baer or your client’s perspective, things like structured products, tokenization of private assets, luxury assets, NFTs , how are they and you looking at that space?

[00:23:43] Kelly: Private tokenization and NFTs, a little bit further out for us. It’s a little further down the roadmap. That’s something which interesting, but we’ll consider it the next step because it’s definitely significantly more speculative than what we’re dealing with in terms of pure points and tokens.

But other than that, in terms of like portfolio diversification, if I can talk about that, we did a little bit of a study. Essentially, if you took a portfolio of 50% bonds and stocks, but you take half a percent away from stocks and bonds, I think the from the back tested way in which we have done our study, the one with 1% Bitcoin would had an annualized performance of about 10-ish percent, while the regular one 50 stocks and 50 bonds was about 8-ish percent. Two percentage points outperformance every single year.

Obviously with where we are today, if we redid the study. Possibly that could be done. But the interesting part is that if we went beyond 1.5% of inclusion, the risk we want compared to the volatility isn’t exactly very attractive anymore. That means the portfolio becomes super volatile, and it’s not really something which we advocate.

[00:25:16] Seamus: Our portfolio allocation’s been a lot tougher. The traditional, let’s say you described it 50/50, the fixed income lakes become fixed loss this last year at least, basically. But now you’ve got Ethereum yielding potentially 10% or higher, depending on how you structure it, the returns are increasingly on the crypto side, which is a very big sign.

[00:25:35] Kelly: You can look at it the other way, though. Like Makodoll has said that I don’t want to put my stuff in Ave, because it’s yielding me 0.5. I’m going to put it in US treasuries, which is amazing. I think this is exactly where we talked about the want of crypto versus the utility of crypto. The want of crypto is I just want to returns, I really don’t really care about anything else.

[00:26:03] Seamus: One other quick question, was looking through some of your past podcasts, you had one at DeFi, Decentralized Finance 100 Times and Beyond Podcast. This was closer to the end of last year, and you were talking about the growth of DeFi having gone from the start of 2020 at 653 million to a quarter trillion by the end of 2021, which was a 375 fold increase in two years. How is your view on how banks in DeFi will interact? Is this going to replace banks? Is there still a role for banks in DeFi?

[00:26:37] Kelly: I hope so. I seriously hope so. No, I think there’s definitely a place for banks. I’ve said it just now, I think that at the end of the day the guardrails are there for regulated entities. Like many of the clients, I paraphrase, 300,000 in MetaMask, but if you hit 3 million, 30 million, 5 million, they’re like, I’m just going off rem. For us at Julius Baer, we recognize that yield is very important to private banking clients. Like Ethereum at 10% today, I’m pretty sure us just safe custodising the assets is not going to work. We don’t have a very good value proposition. We need to be able to get yield on that. It’s just that they off rem from MetaMask to possibly Julius Baer, and we do it for them.

Also to paraphrase, essentially if they got 9% on their MetaMask, they are fine with getting 6.5 or 6 if they’re with us, as long as they can pick up the phone and call someone, and say, “Hey, what’s going on?” That kind of thing.

[00:27:50] Seamus: It seems very much the case that as more and more of your aggregate assets move on chain, you’re going to want somebody to call when things go wrong. Who are you going to call? There we go. Well, Kelly, I think we’re just on time. It’s been great having you, and we’ll definitely be following your work very closely. Thanks very much for your time today.

[00:28:11] Kelly: All right, thanks for having.

[00:28:13] Seamus: Everybody else, thanks for joining, and we hope you enjoyed this episode. Until next time, don’t forget, we’ll upload the recording and script to today’s METACO Talks at www.METACO.com/talks, and it’s available on all your favourite podcast channels. Thanks very much for joining. Thanks, Kelly.