Blockchain Opportunities for Washington State

Summary

A slide presentation titled Blockchain Opportunities for Washington State, dated December 1, 2020, by the CEO of Strix Leviathan, LLC, a digital asset manager. The slides introduce the presenter and the company, which reports managing about $10M in assets across two funds. They list issues facing Washington digital asset businesses, including the cost of compliance, with the company's legal fees given as $189,101 in 2018 and $206,708 in 2019, and call for a regulatory safe harbor and a clear asset taxonomy. Other slides discuss jurisdictional challenges of a global token economy, regulatory developments in other states and at federal agencies, and investor survey figures. The deck closes with a list of references and resources.

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                             BLOCKCHAIN
                          OPPORTUNITIES FOR
                          WASHINGTON STATE


Jesse Proudman, CEO, Strix Leviathan, LLC   December 1, 2020
INTRODUCTION:
JESSE PROUDMAN

        CO-FOUNDER and CEO, STRIX LEVIATHAN
        IBM Distinguished Engineer
        Founder of Seattle-based Blue Box
        23-year Technical Founder

        Raised $22M in venture capital, scaling Blue Box to 65 employees.
        Acquired by IBM in June of 2015 to establish IBM’s Seattle Cloud
        footprint. Post acquisition, grew our organization to ~180 employees.

        Life-long Washington resident and business owner. University of
        Washington Buerk Center for Entrepreneurship Board Member. Active
        angel investor focused on Pacific Northwest startups.

                                                                                2
STRIX LEVIATHAN:
TECHNOLOGY FIRST DIGITAL ASSET MANAGER
§ Founded January 2018. Operating for ~ 3 years.

§ Developed the most comprehensive investment software platform (named Octopus) in the
  industry. Utilized to power active and passive asset management for digital assets.

§ Preparing to launch a passive investment product called MAKARA DIGITAL in Q1 2021.

§ Managing ~ $10M in assets across two funds.

§ $3M in seed funding and operationally profitable. Backed 29 WA based Investors and:




 +80 digital assets traded        $500m in trading volume            31 months of trading 3
4
§ INVENTED NOTION OF DIGITAL SCARCITY

§ PERMISSIONLESS

§ DECENTRALIZED

§ UNCENSORABLE

§ GLOBAL
                                        5
THE ”BLOCKCHAIN” UNIVERSE IS VAST AND
EXTENDS WELL BEYOND BITCOIN
Bitcoin brought
blockchain to the world
but blockchain has                COMPUTING
                                  PLATFORMS            DEFI
grown beyond bitcoin to
an entire ecosystem of                                        SKY’S
digital assets.                                                THE
                                                              LIMIT
                                              STABLE
§ Platform Tokens         CURRENCIES          COINS
§ Security Tokens
§ Transactional Tokens
§ Utility Tokens
§ Governance Tokens


                                                                  6
 MAJOR INSTUTIONS ARE FLOCKING
 TO THIS ASSET CLASS




                                         Deutsche Bank Says Investors Increasingly
                                         Prefer Bitcoin Over Gold as Inflation Hedge




Guggenheim Fund Reserves Right to
Put Up to 10% in Bitcoin Trust ($500M)                                            7
KEY ISSUES FACING WASHINGTON
   DIGITAL ASSET BUSINESSES
CRITICAL ISSUES FACING WA BUSINESSES
PROHIBITIVE COST OF COMPLIANCE
        Regulatory uncertainty and conflicting information leads
         to an expensive legal burden for startups in the state.

         This has a direct impact on job growth in the industry.

     As a startup, we run very lean but our legal and regulatory costs are
                        a significant drain on resources.

 §   2018 - $189,101 in legal fees (15% of all expenses)
 §   2019 - $206,708 in legal fees (21% of all expenses)
 §   Payroll dropped from 68% in 2018 to 54% in 2019
 §   Unable to hire new roles due to rising legal/insurance costs            9
 CRITICAL ISSUES FACING WA BUSINESSES
 SAFE HARBOR PROVISION
• Startups choosing to do business in Washington are expending resources to interpret existing regulation
  and anticipate future regulation as it pertains to these new business lines in good faith. These
  technologies are often evolving faster than the state of regulation leaving many startups operating in
  nebulous grey zones.

• Retroactive penalties for regulatory violations that may not have been clear at the time of infraction will
  continue to deter blockchain startups from establishing a presence in Washington State.

• State approach needs to be adaptive as this market evolves. “The analysis of whether a token is offered
  or sold as a security is not static and does not strictly inhere to the digital asset.” - SEC Commissioner
  Hester M Peirce, Token Safe Harbor Proposal 2-6-20

• Safe Harbor should not provide immunity for bad actors engaging in fraud or illicit activities. Safe Harbor
  provides protection for those entrepreneurs taking proactive and thoughtful approaches to this rapidly
  expanding industry.

 Building a Regulatory Safe Harbor can attract companies to Washington.                                         10
 CRITICAL ISSUES FACING WA BUSINESSES
 LACK OF TAXONOMY AND GUIDANCE

Regulatory uncertainty is one of the
largest barriers to adoption and
investment.

To address this, legislative bodies can
take immediate action by engaging in
open communication with industry
participants focused on building a
clear asset taxonomy and
compliance process.
                                          11
REALITY OF THIS INDUSTRY IS FAR FROM
THE COMMON CRITICISMS
Blockchains are Transparent Ledgers - More transparency than most
appreciate. AML / KYC / OFAC Checks are industry standards. Money laundering
as a fraction of total transaction volume is orders of magnitude smaller than in
traditional fiat currencies.

Functioning Products and Platforms – 2017’s “ICO” fundraising craze resulted in
lofty ideas with limited execution. Fast forward three years and we’ve seen an
enormous shift in the sophistication and capabilities of this asset class. The
charlatans have largely been banished after a three-year drought.

Industry Security Has Improved Dramatically – Hacks and theft prevalent in the
2015-2017 era markets have been reduced given focused industry attention and
the rise of qualified custodians focused on safe storage.                      12
WHY DOES THIS MATTER?
BLOCKCHAIN AND DIGITAL
ASSETS ARE HERE TO STAY
“[Virtual currencies] may hold long-term promise,
particularly if the innovations promote a faster, more
secure and more efficient payment system.”
—Ben Bernanke, Chairman of the Federal Reserve


                    “Whereas most technologies tend to automate workers on the
                    periphery doing menial tasks, blockchains automate away the
                    center. Instead of putting the taxi driver out of a job,
                    blockchain puts Uber out of a job and lets the taxi drivers work
                    with the customer directly.”
                    —Vitalik Buterin, co-founder Ethereum
                                                                                  14
THE BIG PICTURE
     BLOCKCHAIN
        is to the
   Future of Finance
        as the
      INTERNET         STRATEGIC IMPERATIVES
      was to the
 Future of Commerce
                                               15
A GLOBAL TOKEN ECONOMY CREATES
UNIQUE REGULATORY CHALLENGES
Who has jurisdiction?
    § Example: Strix Leviathan (Domiciled in WA, Registered in DE) trades with X Company (Domiciled in Hong
      Kong, Registered in Singapore) with assets held by qualified custodian (Domiciled in CA, Registered in SD).

All tokens are not the same
    § MiCAR (European Commission) treats all DLT assets the same which leads to major issues.
    § US regulators vary: IRS – Property, CFTC – Commodity, SEC – only specific designations so far (i.e. BTC is
      not a security).

Banking regulations – again, one size does not fit all
    § Should not apply to all tokens (e.g., non-fungible tokens)
    § FAFT Travel Rule – the spirit of this measure is not the issue, the application is. Instead of grafting
      requirements built for legacy systems, develop new approaches that work with the technology.

Isolated actions by states may not provide relief
    § The result is “a patchwork of inconsistent legislation.” (Digital Chamber of Commerce)
    § New York – created the BitLicense in 2015, process too expensive and time intensive for most startups
    § Wyoming – enacted 13 Blockchain laws in 2019 to bring capital, jobs and revenue to WY, not aimed to align     16
      federal and state regulations on the industry
REGULATORY PROGRESS
MOVING IN THE RIGHT DIRECTION
§   WA DFI & Strix Leviathan - We have been actively engaged with the DFI for the past 2 years
    and are now in the process of applying to be the first RIA in WA focused solely on trading
    digital assets. Regular communication and engagement like this is key to growth of this
    industry in Washington State.

§   Conference of State Bank Supervisors - Regulators in 49 U.S. states have agreed to a single
    set of supervisory rules for money services businesses, including cryptocurrency service
    providers.

§   The Office of the Comptroller of Currency - July 2020 gave permission to Federally Chartered
    Banks and Thrifts to provide custody services for cryptocurrency. Safeguarding of assets is
    important for investor protection.

§   Wyoming - Taking a progressive approach. Defined “utility tokens”, granted banking charters
    to crypto companies.                                                                     17
WASHINGTON HAS A
“ONCE IN A LIFETIME”
   OPPORTUNITY
GLOBAL EMPLOYMENT TRENDS SHOW
ASIA LEADS THE WAY




                                                      19
             Source: PwC's Global Blockchain Survey
INVESTORS REQUIRE
REGULATORY CLARITY

                                                            58% of investors have a neutral or
                                                            positive perception of digital assets

                                          2020
                                                            +60% of investors believe digital
                                                            assets have a place in a portfolio
                                           2019



 39% of investors hold concerns around regulatory classification
                Source: Fidelity Digital Assets: The Institutional Investors Digital Assets Survey 2020 Review   20
IN A POST COVID WORLD
THE FUTURE OF WORK IS REMOTE
Washington is uniquely
positioned to benefit from
the shift to remote work.
- Fantastic place to live
- Rich with entrepreneurs and engineering talent
- World renowned research Universities
- Friendly tax jurisdiction

Digital Asset Finance, Mining and Blockchain Technology
Companies are searching for friendly jurisdictions.       21
IN CLOSING
REFERENCES AND RESOURCES
§   Strix Leviathan Research
    https://strixfund.com/digital-asset-research

§   Discovering Digital Assets - A Primer on Digital Assets:
    http://strixfund.com/discovering

§   Currently Virtual Currency License Holders in Washington State:
    https://dfi.wa.gov/sites/default/files/documents/virtual-currency-licensee-list.pdf

§   Fidelity Digital Assets: The Institutional Investors Digital Assets Survey 2020 Review
    https://www.coindesk.com/research/reports/fidelity-digital-assets-the-institutional-investors-digital-assets-
    survey-2020-review

§   University of Cambridge: 3rd Global Cryptoasset Benchmarking Study
    https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/3rd-global-
    cryptoasset-benchmarking-study/

§   PwC's Global Blockchain Survey
    https://www.pwc.com/gx/en/industries/technology/blockchain/blockchain-in-business.html
                                                                                                                    23


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