Q&A With Daniel Gallancy: Institutional Interest In Bitcoin Is Growing Steadily

Dec 12 2014 | 8:54am ET

Daniel Gallancy is founder and CEO of SolidX, a provider of total return swaps for large institutional investors interested in Bitcoin. Such derivative contracts are well known on Wall Street and offer the economic return on an underlying asset without actually owning it. SolidX recently raised $3.5M in from a group of investors led by Liberty City Ventures.

Steven Lord, founder of Modern Money Group and editor of its flagship institutional research publication, The Modern Money Report, recently sat down with Gallancy to discuss the burgeoning digital currency.

Lord: Wall Street’s interest in Bitcoin has grown significantly this year. What’s the current situation?

Gallancy: By 2013, Bitcoin had moved onto the radar of a lot of finance folks. This year, I’d say it has finally entered the lexicon. Granted, knowledge is definitely spotty, but there are analysts, macro guys, and out-of-the-box types on Wall Street now who understand Bitcoin, and know what’s going on. The trouble is that they can’t really pitch it yet. Fund managers don’t have a good mechanism of getting bitcoin into their portfolios, and it’s still pretty hard to explain to LPs. Plus, integration with back-office systems is lagging. The bitcoin ecosystem doesn’t yet have trading, settlement, clearing and custody compatible with the current institutional ecosystem, so it’s still a work in progress.

Tell us about SolidX and the team you’ve put together.

We provide financial entities, i.e. asset managers, hedge funds, family offices, etc., a way to easily engage with Bitcoin as an asset class. Until recently, these institutions were largely unable or unwilling to do so, especially in size. Our first product is a total return swap that provides full economic return of an equivalent position in bitcoin, whatever the duration. It’s essentially a legal contract that entitles the counterparty to the dollar movement in bitcoin, and relieves them of the hassles of actually owning, storing, securing and administering a position in bitcoin itself. These are not small concerns to large financial institutions, and our goal was to connect the financial services ecosystem to the blockchain ecosystem. That’s why we chose swaps - they’re very versatile. We’re working with bitcoin now, but down the road we can create swaps around any cash flows.

As for the team, we’re all heavily experienced in financial services and trading. We come from both the buy and the sell side, foreign exchange, legal & compliance, etc., and my team members hail from top-notch names on the Street. At the same time, many of us are also long-standing bitcoiners who saw the potential of bitcoin early on. So we have the financial knowledge, the Street credentials and connections, and the bitcoin background. We think it’s a good combination.

What do you think about the discussion surrounding Bitcoin 2.0? How will the blockchain impact Wall Street?

The Bitcoin community generally wants the blockchain concept to wholly disrupt finance. The issue is that the institutional financial services business is far more entrenched and established than in many other industries. There is tremendous inertia when it comes to systems on a trading desk, so the impact of blockchain technology on this sector may develop along a very different path than your typical disruption mechanism. A key point is that blockchain technology can be meshed into existing financial services, not necessarily replacing them. We don’t believe this is an all or nothing game - lots of value creation possible, both economic and otherwise.

What are you seeing in terms of overall institutional interest in Bitcoin?

It is growing steadily. We were in conversations with the asset management community for a long time before we launched, asking all kinds of questions and learning what it would take to bring Wall Street to the table. That said, it will take some time to really become an accepted and established asset class. The institutional community talks to each other, though, so we think there will be an accelerating network effect as it grows.

How does the regulatory environment affect SolidX? Are you concerned about the BitLicense?

Our swaps are under the ISDA framework. In the U.S., the CFTC regulates most types of swaps. We’ve also been constructing the product for a long time and have done our homework. Our counsel ranks among the top swaps counsel in the country, and we’re proceeding 100% by the book. This is one of the cardinal differences between Wall Street guys developing financial products for Bitcoin, and the bitcoin guys developing those products. We know the level of comfort Wall Street institutions need, and it’s high.

As for the BitLicense, we think it is fine. Ultimately, it will end up someplace that is appropriate for what we need, and we don’t think regulation will eliminate innovation. In fact, the more prudent regulation this ecosystem attracts, the more comfort level institutions will have, and the more they will engage it. Purists may not like it, but incorporating some level of basic regulation will be the best way to bring the most value to the maximum number of people.

You’ve recently raised $3M in seed financing. Will you need another round?

Prior to our raise, SolidX was completely self-funded from our founders. But we always knew outside capital would be needed in order for us to get us where we want to go. We are very fortunate to have an extraordinary syndicate of smart investors who are either in the financial services space, are bitcoin angels, or both. These are folks who get the crossover between Bitcoin and finance.

As for another round, this raise provides us with a significant runway. It’s obviously difficult to predict the future, but we’d love for this to be all we need. There are a lot of terrific opportunities ahead of us, and we’ll entertain growth capital if we need it, but right now we’re laser-focused on executing our plan.

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