As a Crypto Fund Manager, it is my duty to keep abreast of all blockchain developments within the Asset Management space. I’d like to share my recent experience testing the Melon Protocol for the establishment of a Blockchain Native Crypto Fund.

As 2018 came to a close, so did my decade long career in the pharmaceutical industry. I was previously the Director of Discovery Research at British Biotech company, GW Pharmaceuticals, whose goal it was to develop medicines from cannabinoids; compounds unique to the cannabis plant. My role there had exposed me to Bitcoin back in 2012 while I was scouring the internet to identify medicinal uses for cannabis. Geographically separated individuals with similar pathologies had found solace in social media platforms and were sharing their experiences with one another in the treatment of their complex and chronic conditions. Here they exchanged notes on which particular strains were most beneficial for treating things such as inflammatory bowel disease, depression, rheumatoid arthritis and the like. Due to the illicit nature of the substances they were using, another conversation was occurring in parallel, procurement, and this led me to my discovery of the Silk Road, and its native currency, Bitcoin.

It wasn’t until April 2013 when the price of this digital asset rocketed through $100 that my interest was truly piqued. I needed to know what this magical internet money was all about! As a researcher by training, and having always had a fascination with technology, I conducted a deep dive, not only into the technology stack itself but across more esoteric themes such as the potential societal impact and philosophical implications of the technology. I was hooked. Bitcoin, and more specifically, blockchain became a new pursuit in life, and I would sing from the rooftops to anyone who would listen. Very few people did, except for my long-term friend (and future business partner) Graham Stanton. Together we started investing in the space and by 2015 had built out a well-diversified portfolio containing about ten different crypto assets.

By early 2017 Bitcoin and blockchain had re-entered the public conscience, and we both started getting approached by friends and family who remembered us as the “crazy bitcoin guys”. This began a journey of education and onboarding for those interested in speculating on this emerging and exciting asset class. We would assist them in setting up exchange accounts, direct them to buy hardware wallets and help them to set up their self-custody solutions, advise them against the scams proliferating through the ecosystem and protect them from the hacks they would be vulnerable to.

It was during this time that we first invested in the Melon Protocol, when it became listed at the cryptocurrency exchange, Kraken, having recognised its potential for setting up Digital Asset Investment entities in a decentralised manner. We understood the power of decentralisation, and this use case had very obvious growth potential. We have kept a keen eye on the project and its progress ever since.

At the end of the year, Graham and I decided that we wanted to do this full time, and like me, he quit as Commercial Director at World First, an FX and payments company, allowing us to embark on this new chapter in our lives. Unfortunately for us, it was quite evident that the Melon Protocol was still in an early stage of development and would not be ready for us to use at this stage.

Therefore, the intention was to set up a fully regulated and tax efficient vehicle within which our immediate network would feel comfortable investing their hard-earned money. It was this entity through which we would deploy capital into the markets. With neither of us having much experience in the establishment of Investment Companies and Funds, we didn’t quite fathom what we had gotten ourselves into. We have experienced significant pain points along the way:

Domestic regulatory requirements: We started this before there was specific guidance from the FCA relating to cryptocurrencies. Therefore, trying to understand the specific requirements within the UK as to what we can and cannot do and for which activities we would require regulatory cover i.e. who we could market the fund to, and whether we could even trade these unregulated assets. There were two approaches, direct authorisation or sitting under a regulatory hosting service, yet no clear guidance as to which was the most appropriate solution for us. With pros and cons of both but no certainty of becoming directly authorised (and the possibility of wasting 12 months in the process) we chose the indirect route and pursued a regulatory umbrella company.

We started this before there was specific guidance from the FCA relating to cryptocurrencies. Therefore, trying to understand the specific requirements within the UK as to what we can and cannot do and for which activities we would require regulatory cover i.e. who we could market the fund to, and whether we could even trade these unregulated assets. There were two approaches, direct authorisation or sitting under a regulatory hosting service, yet no clear guidance as to which was the most appropriate solution for us. With pros and cons of both but no certainty of becoming directly authorised (and the possibility of wasting 12 months in the process) we chose the indirect route and pursued a regulatory umbrella company. Fund location and structure: With so many parameters and considerations it took a significant amount of time to simply gather the information. There are numerous offshore jurisdictions each having their own set of fund structures and variations. Frustratingly we were unable to obtain an overall assessment of the landscape and so opened up a dialogue with law firms in each jurisdiction to gather information on the specific vehicles and then compared and contrasted ourselves. Some have restrictions on the number of investors, others with specific requirements around custody of assets, and others having burdensome capital requirements, we finally settled on a BVI Private Fund.

With so many parameters and considerations it took a significant amount of time to simply gather the information. There are numerous offshore jurisdictions each having their own set of fund structures and variations. Frustratingly we were unable to obtain an overall assessment of the landscape and so opened up a dialogue with law firms in each jurisdiction to gather information on the specific vehicles and then compared and contrasted ourselves. Some have restrictions on the number of investors, others with specific requirements around custody of assets, and others having burdensome capital requirements, we finally settled on a BVI Private Fund. Identifying the required 3rd party service providers: Identifying all the elements that are required for a legally compliant and efficient fund was not straightforward. We required Fund Administration, Audit, Onshore Legal, Offshore Legal, Order Execution and Portfolio Management platforms, Insurance, Offshore Directors, Domestic and Offshore Banking. Finding 3rd party service providers that understood crypto was the most challenging aspect of all of the above. Whenever the word crypto is mentioned most providers are turned off, particularly banks. Finding an administrator that can effectively value crypto assets stored in multiple locations was challenging.

Identifying all the elements that are required for a legally compliant and efficient fund was not straightforward. We required Fund Administration, Audit, Onshore Legal, Offshore Legal, Order Execution and Portfolio Management platforms, Insurance, Offshore Directors, Domestic and Offshore Banking. Finding 3rd party service providers that understood crypto was the most challenging aspect of all of the above. Whenever the word crypto is mentioned most providers are turned off, particularly banks. Finding an administrator that can effectively value crypto assets stored in multiple locations was challenging. Custody: Third party custodians are expensive and lacking in most regards (arguably they increase the risk to our investors as we are forced to disseminate the private keys for our assets). It is very difficult to find a complete solution for a manager that wants to be very active around more than just the top 20–30 crypto assets.

Third party custodians are expensive and lacking in most regards (arguably they increase the risk to our investors as we are forced to disseminate the private keys for our assets). It is very difficult to find a complete solution for a manager that wants to be very active around more than just the top 20–30 crypto assets. Promotion/ marketing requirements and restrictions: Working with our regulatory umbrella company on multiple iterations of the marketing collateral and vetting different approaches was burdensome, a definite time sink and bottleneck to our capital raising activities.

Working with our regulatory umbrella company on multiple iterations of the marketing collateral and vetting different approaches was burdensome, a definite time sink and bottleneck to our capital raising activities. Investor onboarding journey: An extremely time-consuming process requiring multiple notarised documents, an appropriateness test, subscription agreement and KID document, and finally international transfer to our offshore bank. Navigating this maze with investors is a painful process.

Earlier this month I had the privilege of attending the DeFi Summit London. This exceptional event showcased the best of decentralised finance, but one standout session for me was the live demo of the Melon Protocol. I was lucky enough to be selected from the audience to set up a fund. With a few transactions, a new crypto fund was born and moments later it had its first investor — all conducted on chain through Ethereum. A wallet had already been pre-funded so all I had to do to set up my fund was choose a name, decide which DEXs to use, decide on the asset universe, the level of performance and management fees, the price tolerance, the maximum number of positions, the max concentration (% of fund on a specific asset), a user whitelist (for AML/KYC) and whether to use an asset blacklist (available for socially responsible funds). The whole process took less than 30 minutes.

Although it is very early days for the protocol, and the user interface still leaves a little to be desired, the experience was enormously impressive to me as a fund manager; it specifically addressed most of the pain points mentioned above in one way or another:

Fund location and structure: The fund does not have a jurisdiction in the traditional sense and exists on-chain.

The fund does not have a jurisdiction in the traditional sense and exists on-chain. Identifying the required 3rd party service providers: All fund administration and audit is conducted at the protocol level and displayed on-chain providing complete transparency and accountability of investment management decisions.

All fund administration and audit is conducted at the protocol level and displayed on-chain providing complete transparency and accountability of investment management decisions. Custody: All assets are held by the fund’s smart contract. Although this alleviates the necessity for a third-party custodian, it does raise the issue of smart contract risk.

All assets are held by the fund’s smart contract. Although this alleviates the necessity for a third-party custodian, it does raise the issue of smart contract risk. Promotion/ marketing requirements and restrictions: Being on chain, the fund is viewable to anyone, anywhere in the world and therefore it essentially markets itself — the manager just needs to perform!

Being on chain, the fund is viewable to anyone, anywhere in the world and therefore it essentially markets itself — the manager just needs to perform! Investor onboarding journey: Any investor would need crypto asset experience, as subscriptions and redemptions are conducted with crypto. However, presuming that an investor has this experience, it is trivial for them to invest into the fund.

And the best thing? It cost about $10 to set up and launch the fund. That is four orders of magnitude cheaper than a real-world fund!

However, there are certain limitations using this Melon Protocol in its current incarnation. The first is that any Melon fund manager must check the domestic regulatory requirements in order for them to perform investment management decisions to ensure that they are operating within the eyes of the law. I firmly believe that regulators will soon recognise the power of this technology and embrace it, thanks to the wonderful work that Mona and the team are doing at the Multichain Asset Managers Association (MAMA). Second, all trading activities must be performed through decentralised exchanges which currently suffer from low liquidity, although I have no doubt this will improve with time. Third, investable assets must belong to the Ethereum ecosystem. We are seeing advances in cross chain transfer (such as WBTC and tBTC, although these are centralised and experimental, respectively) and the emergence of interoperability protocols (Cosmos and Polkadot) which should enable more diversity in the future.

If the pace of progress within Melon and the surrounding ecosystem continues at the rate it has over the last year, I imagine many of these limitations will be solved in the near future. I can say with conviction that Melon, unlike a lot of existing protocols, has a cast iron product market fit and we will be watching their progress very closely.