Fund Accounting for Digital Assets with Patrick Clancy from MG Stover

[00:00:00] Patrick: So when you think about a fund vehicle in particular, the reporting standards are effectively the same. The nuance now comes around the reporting, custody and control environment of the digital assets.

[00:00:13] Patrick: Are those sitting in these centralized providers like the exchanges, custodians, OTC desks, or is the manager holding all, all the keys, all the tokens, and how are they going about that?

[00:00:25] Patrick: That's where we see a lot of opportunity and the goal is for us is to not only make the portfolio reconciliation easier for the fund managers and for the admins and CPAs to be able to query that data, but also, to make all the operational nuances of their team so that they're used to dealing with someone on a timely basis who understands both funds and crypto.

[00:00:49] Umar: Welcome to The Accountant Quits, where we help accounting and finance professionals learn how to manage a business using crypto. The investment funds industry is massive, a trillion dollar behemoth, that touches everything from mutual funds and hedge funds to private equity, ETFs and pensions. But something's changing.

[00:01:10] Umar: The world of finance is moving, evolving from the slow, opaque world of off-chain transactions to the fast, transparent reality of onchain finance. This isn't just theory, it's happening.

[00:01:22] Umar: Tokenized funds are here with institutional assets under management, already crossing $470million, according to rwa.xyz.

[00:01:33] Umar: Fund managers and administrators can't afford to stay still.

[00:01:36] Umar: To survive, they must adapt, embrace digital assets, and rethink their services.

[00:01:42] Umar: Since 2014 MG Stover has been at the forefront of this evolution, supporting over $40billion in digital assets, and now a supporting partner of Securitize, a leader in tokenizing real world assets with $3.7billion onchain.

[00:01:59] Umar: Their latest venture? Otto, an application service designed to power the institutional digital asset fund industry.

[00:02:08] Umar: But what does it take to actually make this shift? How do fund administrators truly embrace digital assets?

[00:02:15] Umar: Today I'm thrilled to be speaking with Patrick Clancy, the Head of Growth at MG Stover.

[00:02:21] Umar: In this episode, Patrick and I will dive deep into the realities of fund administration for digital assets, how to launch a digital assets fund, and the essential tech you need to leverage.

[00:02:33] Umar: Lastly, if you're new to this channel, I'd really appreciate your support to help us grow by liking this video and subscribing. Now, enjoy my conversation with Patrick. 

[00:02:44] Umar: Patrick, welcome and thanks for making the time to be here. 

[00:02:48] Patrick: Absolutely, honored to be here and looking forward to the conversation. 

[00:02:52] Umar: To start, Patrick, I'd like to dive, on the challenges of fund admin for digital assets.

[00:02:58] Umar: So for the listeners, a fund in very simple terms, is a pool of money from multiple investors managed by a fund manager. And in the case of a digital asset fund, this money would be invested into a range of digital assets. So when it comes to digital assets, these can be stored on various platforms, right?

[00:03:18] Umar: Like wallets, exchanges, custodians. But also that leads to like a fragmented, type of custody.

[00:03:26] Umar: Plus, I mean, you want to also be working with a custodian that enables you to put your funds to work, right? So through staking, trading or having DeFi access.

[00:03:36] Umar: The other challenge comes with the crypto data.

[00:03:39] Umar: So from multiple sources like your onchain transactions, your DeFi protocols, centralized, decentralized exchange, and all of those come in different formats.

[00:03:50] Umar: So, Patrick, to kickstart our conversation, could you walk the listeners through the challenges of fund admin for digital assets? 

[00:04:00] Patrick: Yeah, of course.

[00:04:01] Patrick: And I think really the big thing to note here is that every manager is different, whether that's an open-end fund strategy. So think of it as like a hedge fund or a VC fund, which is a closed-end fund strategy. And so those, investment strategies differ depending on the structure, but then also the type of investments they throw dollars or allocations towards.

[00:04:24] Patrick: Now, the big thing that we're starting to see is that, and we've seen it for a while, is that there's a hybrid between the two. And what this opens up operationally is how are these funds structured? What are the type of assets they're holding and what, what are their LPs demanding in terms of distributions and return profile?

[00:04:46] Patrick: The big thing for us in particular, when we see it from a back office perspective. You know, your fund, your average fund administrator is looking at these managers and saying, okay, what does their day-to-day operations look like? What are the assets they are investing in? And then what are the available supporting platforms, but also technology to be able to reconcile that activity?

[00:05:10] Patrick: And that's a place that we feel very strongly positioned and where we've spent the majority of our time. 

[00:05:16] Umar: Now because we're starting with basics, Patrick, could you also clarify the difference between a fund manager and a fund administrator and also like in terms of custody once like the investor sends their funds, who takes care of, of custody, and how does that work?

[00:05:35] Patrick: Yeah, definitely. So, your first one difference between a fund manager and a fund admin. So a fund manager is an actual registered entity, many of them are registered with the SEC or fill out form ADVs which are publicly available. These is what you would see for traditional managers.

[00:05:52] Patrick: They, they manage the portfolio, they may have operational components. They have certain AML/KYC coverage components.

[00:06:00] Patrick: Where fund admin comes into the mix is if those groups really wanna scale operationally.

[00:06:04] Patrick: Think a fund admin as doing all the back office accounting work, investor servicing, treasury management services, and there could be outsourced AML/KYC, officers, specifically for like Cayman domiciled entities.

[00:06:18] Patrick: Just because you need to have a, a lot of different coverage.

[00:06:22] Patrick: It's not an easy thing to just start up a fund. And so there's a lot of compliance and regulatory things that happen. We help provide those guardrails to make sure that these fund managers can focus on the investment activity and we can help them scale operationally.

[00:06:37] Patrick: As it relates to like the assets and how they take assets, either in kind, so let's say they have a large LP and rather than giving dollars, they want to contribute their Bitcoin or ETH or whatever it may be.

[00:06:50] Patrick: There's a few different ways that fund admins get familiar or comfortable around that. They've gotta check the wallet addresses. They have to make sure that they're not, been red flagged by maybe a Chainalysis or some other group.

[00:07:03] Patrick: There's a little bit of due diligence that goes into it operationally, but then once those dollars are in the door, and they wanna start making allocations or, trading or, you know, buying into certain private assets, really the custody of those assets is dependent on the availability of other platforms to provide support for those.

[00:07:26] Patrick: So a lot of the major ones, yes, they're, they're covered by most platforms, centralized exchanges, custodians, et cetera.

[00:07:34] Patrick: When you get into the nascent tokens, which a lot of the VCs, will get on SAFT token, SAFT agreements, it's a simple agreement for future tokens.

[00:07:43] Patrick: What you would see from a token generating event, a lot of these networks, aren't, aren't fully supported by centralized groups. And then there's gotta be some alternative procedures that these fund managers have to do where they're actually gonna be custodying them on their own side until they could find a proper place to set those assets. Like a, like a qualified custodian or someone like that.

[00:08:05] Umar: You mentioned qualified custodian. Would you be more, more working with like regulated custodians, like the BitGo, Anchorage of the world? 

[00:08:13] Patrick: Yeah, and several of our managers do, and once again, that comes down to, the amount of, assets that they're able to support.

[00:08:20] Patrick: Obviously there are certain costs related to certain things, but also I think what our managers are looking at is also product adjacent services. So, you know, they don't wanna just put their assets into a custodian and pay 20 bps on an asset that's just sitting there. They wanna be able to monetize those assets.

[00:08:39] Patrick: And so, so a lot of these groups have been figuring out ways to either tie in with other reward platforms, providers, think of staking activities, think of you know, trading desks, et cetera. They've got ways that they've got to help monetize those assets on the behalf of their managers. And then there's a collaboration point because for us, we have to be able to track all that activity and make sure that it's accurate, reflected properly.

[00:09:05] Patrick: And so for us, it's having a great relationship with the manager, but also having a great relationship with these, with these other service providers or platforms. 

[00:09:14] Umar: Now in TradFi I mean, the fund industries is like a trillion dollar industry. Now, if, let's just say there's a fund admin listening to this, how should they approach, like building this operational setup when it comes to digital assets or, yeah, what, what kind of systems, processes needs to be in place to support everything from the like, accurate NAV calculation, investor reporting, audit readiness, like all these elements? 

[00:09:45] Patrick: Yeah, I think there's a number of things there. So when you think about a fund vehicle in particular, the reporting standards are effectively the same.

[00:09:53] Patrick: The nuance now comes around the reporting, custody and control environment of the digital assets. Are those sitting in these centralized providers like the exchanges, custodians, OTC desks, or is the manager holding all, all the keys, all the tokens, and how are they going about that? For like folks who are trying to take a step into this environment, I think the big thing that, that they should be considering is their comfortability with, all these different tokens, platforms, protocols.

[00:10:31] Patrick: And that data needs to be standardized somehow. And so whether you're finding other, you know, crypto subledgers obviously for ourselves, we've developed our own kind of dog food with that, with Otto, with our own product.

[00:10:44] Patrick: But it really comes down to, and what we've seen for ourselves, you know, as a prior life as a fund administrator is it majority of the time gets spent on the portfolio reconciliation and understanding the ins and outs of what's happening on the activity.

[00:11:01] Patrick: And, you know, for TradFi folks, they're used to getting like trade blotters and other things that help help them reconcile and understand those things.

[00:11:08] Patrick: For us it's really about being able to standardize all that data and then be able to be agnostically, feed those things into other reporting systems.

[00:11:18] Patrick: What we've seen to date, for a lot of the crypto subledgers out there and we, and we've tested 'em all. We've tested every single one of 'em. What's great about it, a lot of them are, are, very strong on the developer side. What they lack, what we feel like it could be around the nuances of institutional reporting.

[00:11:37] Patrick: And so that's where we really felt for ourselves for Otto, where the opportunity lies is that investment fund reporting is, is very, very nuanced.

[00:11:47] Patrick: Now the assets are very sticky, so there's a good business model there. But the thing that it requires is that you have to understand the accounting and the fund reporting nuances and couple that with the understanding of what's happening in crypto and all the nascent chains that things are getting built on.

[00:12:04] Patrick: For us that that is like the green pasture. That's where we see a lot of opportunity. And the goal is for us is to not only make the portfolio reconciliation easier for the fund managers, and for the admins and CPAs to be able to query that data, within Otto. But also to make, to make all the operational nuances of, of, their team, not having to become just a power user on Otto. That we also have a, a service component so that they're used to dealing with someone, on a timely basis who understands both funds and crypto.

[00:12:40] Patrick: And that's where we really think for a lot of these groups that are looking at the TradFi environment, and coming into crypto, hey, find some trusted resources, test and talk to everyone about their knowledge frames on these things.

[00:12:54] Patrick: And we're pretty confident, you know, as more and more TradFi groups come in, we're gonna be positioned appropriately for that. 

[00:13:02] Umar: Now on this podcast, we've touched on the challenge with completeness and accuracy of onchain data, multiple times. We are gonna speak about Otto in a bit, but I wanna ask you, what were the gaps in the tooling stack that maybe led you guys at MG Stover to, to develop like your own, your own tool?

[00:13:23] Patrick: Yeah, and I think the big thing for, for folks who don't have like a financial institution background, like an institutional finance background, when we looked at a lot of these different tools in particular, there was heavy, heavy testing on the balances. So they query the balance components.

[00:13:39] Patrick: What we see for ourselves is like, you can't just query the balances and assume all those to tie because managers are trading, you know, it could be algorithmic, it could be a number of different things. What we had seen is that the transaction data, was very cumbersome or hard for groups to be able to get comfortable with, and there would be gaps or holes in that data, that we would find that, these things would either get manly plugged or there would be certain things that just didn't reconcile with some of these groups.

[00:14:13] Patrick: For us and the way that we approach it, and the way that we have seen it is really this comes down to the reconciling this data on a recurring interval.

[00:14:24] Patrick: And those intervals can change depending on the type of activity.

[00:14:27] Patrick: For us, specifically being able to see, the activity not only from a balance component but also from a transaction component, making sure that those actually tie to each other, is a very important process because before you load all those things into a institutional reporting platform, you need to make sure with certainty that those things are very accurate and correct.

[00:14:51] Patrick: And it can't just be, oh, I'm gonna plug this one in here. Oh, we're gonna fill this over here. It has to be, if there is manual intervention, if there are things that happen, you actually need to be able to discern and show where those things happen.

[00:15:05] Patrick: And then the goal is, is that you can go back and keep querying and querying the data until that actual spot is filled.

[00:15:13] Patrick: For us, that's become a big value add for our managers because when they're in the conversations with their auditors, when they're talking to you know, anyone from a regulatory component, the regulators could feel comfortable that, okay, this is accurate, complete data that's been scraped, tested, tried and true.

[00:15:33] Patrick: And it's coming from a SOC 2 Type 2 product. Now we don't have to worry so much about the process around that.

[00:15:40] Patrick: Now it's about getting comfortability maybe with the assets or, the types of transactions that they're participating in.

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[00:17:26] Umar: Now I also want to touch on like the different vehicles for these digital asset funds. Yeah. We've seen a range of digital asset fund structures, emerge over the past few years, like from your hedge fund style vehicles, VC funds, tokenized funds, which is new, and ETFs like from last year.

[00:17:45] Umar: Like I mentioned in the intro, as per the data, on rwa.xyz, the total AUM for institutional funds stands at approx $470 million.

[00:17:56] Umar: Could you walk us through these main fund structures that you're seeing in the crypto space today? And how should a business think about choosing the right structure based on their strategy, investor base, and also some regulatory considerations? 

[00:18:11] Patrick: Yeah, I think this comes down to a couple things. It, it's knowing your LP base and knowing, and coupling that with the fund manager strategy.

[00:18:21] Patrick: So if you are a quant shop, if you're a heavy trading shop, long, short, et cetera, they're more guided to go towards an open-end fund vehicle similar to a, to a hedge fund. Now, when I say open-end, what does that mean? That means that basically there's contributions or subscriptions and redemptions within the year.

[00:18:43] Patrick: And there's certain, you know, caveats and gates when you initially contribute capital into a hedge fund, that they will lock up that capital for a certain period of time. Sometimes that's 6 months, sometimes that's 12 months, sometimes that's 24 months. Then after they get past that gate, like they'll have like either monthly, quarterly redemption components, that they allow their investors to effectively do.

[00:19:05] Patrick: What we had seen though, and this has become a very interesting component to this, is that a lot of these open-end fund vehicles started seeing like, okay, maybe some of these markets are a bit tapped in terms of liquidity, or we don't see a lot of alpha in a certain area, or asset class or specific niche within crypto.

[00:19:24] Patrick: These are really, they'll look at certain SAFTs, SAFEs, private investments, buying on secondaries, a lot of different things. And the thing that happens on that side in particular is that you, the managers, would then have to side pocket these assets. And so what that means is, is that they're holding those assets, and the LPs contributed dollars in a side little pocket effectively.

[00:19:49] Patrick: And until there's a realization event that occurs in that side, pocketed hard of value asset. That's not gonna release. They can't release. So if they wanted to redeem their money out, they would be able to re redeem everything out except that little side pocket until there's a realization event. And so what we're starting to see is that managers don't want to just specifically Hedge Managers and I'll get into VC in a bit.

[00:20:13] Patrick: They don't want to just have a strategy where it's liquid only or, because the way that this environment is going, if they get in on a SAFT agreement and there's gonna be a token generating event in 12 or 18,24 months, well there's gonna be a liquidity event that they can side pocket initially and then they can distribute out later.

[00:20:35] Patrick: Now, there's also like tax advantages as it relates to SAFT agreements around okay is it more advantageous as for a manager to realize those tokens immediately? Or is it better for them to distribute those assets in kind? And obviously there's a tax effective purpose for that is by distributing that in kind, there's no realization event.

[00:20:56] Patrick: You're not paying taxes on that. But also you allow your LPs if they're sophisticated enough, to actually, you know, stake those assets or, you know, go yield farm on those assets or figure out another way of generating rewards on those nascent chains where there tend to be higher rewards initially.

[00:21:15] Patrick: And the reason being is that they're trying to grow up and, and build out those chains. So they want to incentivize people to participate in those new nascent chains.

[00:21:24] Patrick: And so, conversely, when you think about it from the VC side, they're typically in all the SAFEs and the SAFTs and the privates and those assets are locked up significantly. But with these token, you know, with these SAFTs agreements, there's these liquidity events, these, these token generating events where now they're opening up liquid arms of their strategy and, okay, I'm gonna start like a staking strategy over here. I'm gonna do some yield farming over there.

[00:21:51] Patrick: I'm gonna throw some of these things in some liquidity pools or DEXs. And so what you're starting to see is these two worlds are starting to converge.

[00:21:58] Patrick: Now, what are, where do we think that's going ?

[00:22:01] Patrick: Candidly, I think it's gonna be going more towards the closed end fund vehicle. And the reason being is that it locks up certainty for the fund manager that those assets are gonna be there.

[00:22:12] Patrick: The reason being is that these managers want to be able to have time for these theses, these ideas to be able to grow and build out. And a lot of times, you know, the volatility of the crypto markets, you're not able to capture all those things within a single year, let's just say there's multiple cycles that happen many times within a year.

[00:22:34] Patrick: If you remember the initial, like DeFi summer and the things that happened, those are full market cycles that are happening before a year even ended.

[00:22:41] Patrick: And so, what we're seeing is that managers are looking more at locking the capital up and they're going more towards that closed end fund vehicle status.

[00:22:51] Patrick: But they have liquid strategies and components that allow them to get their investors' money back and they can distribute their cash, but it allows a little bit more access and flexibility for the managers to not have to be performing month to month, quarter to quarter. It allows a little bit of a longer view for that.

[00:23:10] Umar: I wanna stay on this topic of like narratives from a capital market perspective. So we are seeing three key narratives converge in the world of tokenized assets, regulation, macroeconomic shifts, and the maturing value proposition of tokenization itself.

[00:23:26] Umar: On regulation. I mean, there's more and more regulatory clarity around stable coins, for example, you have players like Visa, Paypal, Stripe, like, joining the stablecoins bandwagon let's say.

[00:23:37] Umar: You have, the Franklin Templeton, the BlackRock, of the world, also issuing like tokenized funds. So from your perspective, how are these three forces, regulation, macroeconomic shifts and innovation in general shaping the next wave of digital assets products, and funds? 

[00:23:55] Patrick: Yeah, this is where, I have to say like non-investment advice or things like that.

[00:24:00] Patrick: But I would say I get very bullish in this environment. And the reason being, we now have an administration in particular that is focused on specifically building out this industry. The reason being is that we're seeing some of the largest asset managers participate more and more within the tokenization of assets.

[00:24:20] Patrick: And I think in particular, when you look at the regulatory environment, yes, there's a stable coin bill that is sitting out there. If you look at the news over the last couple days, it looks like it's stalling a little bit because there's a little bit of a gerrymandering or arm wrestling, I guess you could say between the Dems and the Republicans.

[00:24:37] Patrick: And I think what will come out of that is, and from what I've understand, from my own sources, it seems like people are very incentivized to get the stablecoin bill done, which will be great for us.

[00:24:52] Patrick: Now, what does that mean for capital markets? Well, if you are, think about if you are a custodian, think about if you're a qualified custodian and now you have a stablecoin offering where you effectively allow managers who have custody assets on the behalf of others, the assets are custodied, but now they wanna operate on margin and they want to get into certain positions and, or trade in and out of, these QCs in, in certain environments.

[00:25:20] Patrick: Assuming that there's gonna be better market structures sorted out with David Sacks and the crew.

[00:25:26] Patrick: Now, if you have them trading and settling in your stable coin, and, they're able to operate on margin, your stablecoin now has become a lot more valuable.

[00:25:37] Patrick: And so the thing that I think is coming is, in particular is that a lot of people focus on payments. you know.

[00:25:44] Patrick: But we're institutions, right? So payments isn't really the big thing. The, the thing that's coming up for everyone is collateral management. How do I use my assets in a efficient manner, so that I can be able to trade and settle instantaneously. And there's value for institutions, which is why you're starting to see tokenized products take off.

[00:26:06] Patrick: You're starting to see treasury products take off. And really what this allows everyone is better rails, better, use cases for managers around liquidity management, but also risk management components. When you're able to actually make sure that you're getting something back much quicker than you were having to wait a couple days, well, you're not gonna be, found with your shorts down.

[00:26:32] Patrick: If there's a bad day in the market, you're gonna be able to move more nimbly. And I think in particular, if, if we are sitting here and looking at this like the macro narrative on where these things are going, if we have a regulatory environment and incentive to build a regulatory environment, which the US currently does and has an administration that is looking for this, we are now gonna start discerning what market structures look like.

[00:26:57] Patrick: The codification of what assets that are securities, represented through tokens. Are the tokens actual securities or are they representation of the securities? And the other thing that comes into it is the, like the NFTs and the casino side of the house. Like, you know, you had Donald Trump in particular come up with his own meme coin. Does that mean that his meme coin has any value?

[00:27:20] Patrick: No. I think of it really as JFK back in the sixties had a bunch of, plates with his face on it. It's a collectible. I think the way that Trump will probably use that collectible is, hey, you could go to dinners. You're a part of his network. There's other things that come out of that, that allow them to kind of expand a community component.

[00:27:40] Patrick: And I think that's effectively what is happening with these digital assets is that it, there's a bigger, larger narrative here that is, effectively using technology to build communities, whether those are within institutions or the lay person in retail. 

[00:27:58] Umar: Why do you think some of these fund managers are launching, like tokenized funds, like traditional players like the BlackRock, the Franklin Templeton, why some of the others are not, and actually what are they you think waiting for before they start to scale their exposure?

[00:28:15] Patrick: Well, BlackRock will have its own reasons, and I don't want to, assume too much. But the things that I would say in particular, as it relates to BlackRock and some of these others is that they control trillions, tens of trillions. And I think the thing that comes into it is that these legacy systems are very expensive to operate.

[00:28:35] Patrick: And when you have centralized groups, centralized power, et cetera, a lot of people are concerned around, hey, some of these big groups are gonna be coming in and, running the roost. I'm not that concerned about it.

[00:28:48] Patrick: My, my actual concern is, for these managers that are, looking to tokenize their products, what are their operations gonna look like?

[00:28:57] Patrick: It's great that you can tokenize a product, but now you have to actually think about is it expediting the back office and reporting components to it? And I think while step one is kind of like, same as the internet, being able to log into the internet and see it initially, that's where we are with tokenization.

[00:29:16] Patrick: Okay, this asset is now tokenized. Great, fantastic. What can we do now after that? I think there's gonna be things where now you'll, I don't want to, prognosticate too much, but think about from an institution, they're gonna have different requirements and compliance reporting needs than the lay person or the retail person.

[00:29:37] Patrick: So specifically institutions will wanna know that their counterparties on certain trades or whatever, are, you know, a terrorist organization or someone who's been red flagged or something like that. Because sometimes given, the anonymous nature, the pseudo anonymous nature of blockchain, and, you don't always know who the counterparty is, who's buying those things.

[00:29:56] Patrick: So I think you will start seeing a little bit of walled garden to some of these things. And I think what that'll allow though is really institutions will be able to operate freely, quicker, faster, settle more efficiently, with cheaper systems on these decentralized platforms. And, I think also the other thing that comes into it is that the reporting and operational needs are gonna change as well.

[00:30:22] Patrick: Those will become a lot more automatic. i.e. you know, this is where I plug Otto again. But the, the nuance comes into it is that, well now that these , these assets can be represented onchain, what else can we be doing onchain to support the operational nuances of the fund management and the institutions?

[00:30:42] Umar: I want to move on to speak about MG Stover. So your fund admin business was recently acquired by Securitize, like I mentioned in the intro. It's gonna now, now operate as Securitize Fund Services. And for the listeners, so Securitize is a, it's a regulated FinTech platform and it specializes in the tokenization of real world assets.

[00:31:04] Umar: And as of today has $3.7billion onchain. So as MG Stover now transitions from the fund admin business, your focus shifts to Otto, the application service that you've mentioned. And we'll cover in the next part. So before we speak about the acquisition, could you provide us with a history of MG Stover and really being a pioneer in digital fund admin since 2014?

[00:31:30] Patrick: Yeah. I think, so here's the best part. MG Stover started in, you know, right, right as the great recession began. And if you look at it, recessions are great times to start businesses, right? There's a, usually a big upheaval in terms of, you know, services where things are going.

[00:31:49] Patrick: And from there, they had really focused Matt and the crew, Matt Stover and the crew had really focused on alternative investment funds. There was holes around some of the reporting nuances, service providers, et cetera, which Matt saw an opportunity to start his own thing. As that grew, and MG Stover grew assets, grew assets under administration, they were approached by a family office group, a client, around the fact that they had invested in this Bitcoin vehicle.

[00:32:21] Patrick: This is about in 2014, so about like 7, 6, 7 years after the inception of the firm. Matt seeing it as a, as an interesting space, took a look at it. And really from there, it, it truly expanded, from when they were manually entering all these trades into traditional systems, which is a for anyone who knows, is a very cumbersome process.

[00:32:48] Patrick: And then really starting to go through and, and setting the standards around a certain number of things like the, UTC standard on pricing and closing NAV and, those things. Those were developed in-house, by the team, by our actual, by godfather of Otto, Seth Altman. And then there's all these, we found the, you know, first bankers to take it on.

[00:33:09] Patrick: We found the first auditors, we worked with the first legal teams on a lot of these different things. And really from there, what we had been able to see is that we had, MG Stover had developed technology, which they had sold to other centralized exchanges for their portfolio reconciliation tools.

[00:33:27] Patrick: And then DeFi came. It was like, oh, this is all changed again. And so, really what this has led to is that there's been several iterations of Otto, and each time we've gotten better and better and better, and specifically honed into the certain nuances as it relates to it.

[00:33:45] Patrick: We think fund administration is a necessary part of financial services as well as making sure that the Bernie Madoff and the other things, having a reliable third party group being able to ensure that the books and records are good and having them accountable to the books and records is a very important process.

[00:34:07] Patrick: But Matt and the team, you know, we're looking at it in terms of, well, do we, do we see the opportunity in terms of building, more and more people and building out a firm or can technology solve components of this? And what we had seen is if we focused on the portfolio reconciliation and the nuance that happens with the trading for these institutions and understanding that compliance environment, Matt really wanted to double down on the technology.

[00:34:34] Patrick: And now this is where we see today is that MG Stover is now its own entity and the headline product is Otto and that's where we are spending the majority of our time. And so hiring a, a number of devs to the team, hiring number of operational folks and, this is where we see the future of finance going.

[00:34:54] Umar: Was that then the main rationale behind the acquisition of, the fund admin business by Securitize. So rather building like tech platform instead of scaling like a resource intensive, fund admin business. 

[00:35:08] Patrick: So for Securitize, they have this for different needs, and I don't wanna assume on their own behalf, but because they're tokenizing so many assets and because they're so close to different, so many different, institutions, I think the need for them to be able to expand their team with a knowledgeable group was a value add for them.

[00:35:28] Patrick: So now they have, you know, over a hundred accountants who came over. And effectively the piece that comes with it is that that entire group understands digital assets front to back. And not only that, they're also specialized on the investment fund reporting. And so when, when they acquired MG Stover's fund admin business, it was with the understanding that they were also gonna be licensing the technology from MG Stover.

[00:35:58] Patrick: And that our accountants are very familiar with the process of how Otto is utilized, and we want to be a good partner to them to be able to support their growth, and we see that doing it through the technology. 

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[00:37:52] Umar: Now, okay, so let's speak about Otto.

[00:37:54] Umar: I understand this was first like a proprietary tool for MG Stover only.

[00:37:59] Umar: Now it's being commercialized. Could you walk us through what is Otto, what are the features and who are the typical clients of Otto? Is it just for fund admin? 

[00:38:09] Patrick: Right, yeah. Great, great thing. So really at the end of the day, bread and butter, like is, it's really about the portfolio reconciliation. We we have a number of integrations across a lot of centralized players, whether those be exchanges, custodians, OTC desks, which are actually pretty hard to get data from.

[00:38:29] Patrick: And for any of the OTC desks out there, we're happy to connect with you as well. But I think the big thing that happens is that, specifically when we think about this product, once we can hook in into the data and be able to pull that data, the fact that we're reconciling that, that data on a, on an intraday basis, and that cadence typically is around an hour, on an hourly basis, we see for ourselves, it gives our managers an insight into their portfolio and knowing it's true and accurately reflected.

[00:39:01] Patrick: Now, the reason that's very important is think about from a manager perspective. You know, there's risk analysis, there's portfolio management. There's a number of things that go into it. Operational things, compliance. Now, all those team members can effectively log in, see the same portfolio, but they're looking at it all for different reasons.

[00:39:20] Patrick: One is looking at it from a risk management perspective. One is looking at it from an operational perspective. Another is looking at it for their audit or regulatory compliance perspective. And so for us, what we're trying to do is aggregate as much as we can in, in terms of the data that comes in, standardize that data and help streamline their operations.

[00:39:41] Patrick: We wanna be agnostic to the reporting systems or reporting engines that clients have already paid for. We wanna make sure that those integrate properly. But the big thing that it also comes up to is there's a lot that also happens on the private side. How do you capture certain things that are happening on the private side?

[00:39:57] Patrick: And so, given that we see the fund managers on the open end side, like the hedge funds and the close end fund side and everything in between, it's a portfolio monitoring tool that really allows everyone within the organization as well as for external folks, you can give the access to the auditors.

[00:40:17] Patrick: The auditors can know that it's SOC 2 Type 2, reliant data. They can also share it with the regulators. There's a number of different things where we can give permissions just depending on how the client wants to utilize that. And then really for us, the big thing that, and the big things that we're focused on date is that it's not just about servicing other fund administrators.

[00:40:37] Patrick: We're looking at other platforms, other groups, other infrastructure groups, tokenization platforms, a number of different channel partnerships that we think are gonna be very important in terms of where finance is going. And our goal is really to help those groups be the best versions of themselves, knowing that this tooling for the fact that we just spun out of, after this deal and now we have our own primary focus.

[00:41:07] Patrick: Knowing that groups that have lasted and have, you know, been doing this, crypto sub love work for much longer than us, that we can already say that we manage, and support billions of dollars on our platform is a very strong indicator for the market. But now we're just focused on the institutions.

[00:41:26] Patrick: And so that's really the game that we wanna play and that's the area that we're gonna be focusing on in particular. 

[00:41:33] Umar: Now. In the beginning when I went on Otto's website, I was a little bit confused whether it's a sub-ledger. Now, but then I thought, okay, you guys are in the fund admin business and if people listening are familiar with a tool called Allvue, so basically those tools are, it's, it's like an accounting or investment software that automates the entire front, middle, back office for, for funds, like from fundraising, investor reporting, NAV calculation. So then I thought, ah, okay, so maybe you guys are building the Allvue for crypto. So instead of me speculating, it's maybe best to hear the truth from you Patrick.

[00:42:13] Umar: So how does Otto compare with the subledger and yeah, why would the subledgers on, on the market not be appropriate in your opinion for fund managers or administrators? 

[00:42:24] Patrick: So first as a shout out to my other sub-ledger friends, like we think your technology is great in certain use cases. For our specific use cases around, financial institutions and other things that were needed.

[00:42:36] Patrick: There's just some additional requirements that we think Otto covers as it relates to that. When you bring up the Allvue component, Allvue is a very well known platform within the fund, fund world. I would say, there's some specific nuances as it relates to its ability to be adaptable with crypto.

[00:42:57] Patrick: There are ways in which we help navigate that with our fund administration clients specifically with Allvue. And I think the thing that we're thinking about in particular is that right now for us, it's ensuring that for our partners that we're working with, specifically like a Securitize, others, the big thing that comes up for us is what are they building towards and what is their latest need? And the reason I say that is that every manager's need, every institution's need is different than the other. And you have to understand not only their reporting requirements and their tech stack, but now you also have to understand the nuances of crypto and the reporting nuances of crypto.

[00:43:42] Patrick: Those can involve like five to six different things. And for us, we see some really interesting plays around being able to add dashboarding and analytics and other things. So more for the front office type of group. We also think that there's really interesting things that could happen as it relates to, being able to share, aggregate data of what is happening on Otto and unique reports for our users and things like that.

[00:44:11] Patrick: For us in particular, I think the big thing that we are focusing on today is it's not everything that we want it to be. We've only been doing the, I mean, we've been doing this for a while, but doing this, trying to work with other groups, trying to work with other crypto subledgers, trying to understand can we, is it better for us to buy or build it effectively?

[00:44:33] Patrick: It came down to this doesn't make sense for us to buy these things, just given the costs. We're just gonna build this and we're gonna do it the right way, and we're gonna do it for the, the ways that the institutions know that they can trust that. 

[00:44:46] Umar: Very cool. Now, Patrick, as the Head of Growth at Otto, I wanna ask you what are like some of the growth initiatives or partnership opportunities that you're looking forward to in 2025?

[00:45:01] Patrick: Yeah, I would say the big things in particular is actually just creating brand awareness. The biggest thing for us in particular is, okay, MG Stover, great name. Everyone has appreciated what MG Stover has done over the last 10 plus years, right? We've been doing crypto now longer really than any other accounting group.

[00:45:22] Patrick: And so the question now becomes is, hey, listen, MG Stover, we are the experts. We have seen the things, and we have been doing this for a long time. The question is now is rather than it being a pure service play, there's technology to back this up and it's been vetted by the group. We eat our own dog food on this.

[00:45:40] Patrick: I think I may have said this earlier, but I think the big thing for us in particular is creating brand awareness for that. We're starting to make a concerted marketing effort. We're starting to look at certain channel partnerships. There are certain infrastructure providers, specifically on the staking side.

[00:45:56] Patrick: We have a public partnership with Global Stake. They are a staking provider, which has their own differentiated, value prop, which really comes down to the fact that a lot of these staking providers don't own their own physical bare metal. And why that is gonna become a problem is because a lot of them are heavily dependent on AWS and if we have all these crypto groups dependent on AWS, is this truly decentralized like we're talking about?

[00:46:27] Patrick: And so the, the new, the value prop from what we see with Global Stake in this partnership with Global Stake is that they own this down to the bare metal. They own the physical hardware, and then they're former telecom guys. They, they, also do distressed debt and other things, from back in the day.

[00:46:47] Patrick: And their team, shout out to the Global Stake guys, but their team in particular identified that not only is it a good idea to get all the compliance and the SOC reporting and the other things completed, which some of these other staking providers do not have by the way.

[00:47:03] Patrick: But then also to focus on the fact that they own the, their own physical bare metal.

[00:47:08] Patrick: And there's not centralization risk around if AWS one day, one day decides to own the world, and squeeze the margin on some of these groups, well, we're gonna be aligned properly with a group that controls their entire stack. And, they want to be able to make sure that they're reporting on the behalf of their public partnerships.

[00:47:32] Patrick: They have a public partnership with Ledger, they have some others that are coming out with some large custodians and other ones. And I think this will be a matter of time for groups to actually understand some of the nuances around that. And we think that we're gonna be, properly positioned for, for that.

[00:47:49] Patrick: And we're looking forward to growing, growing in tandem with them. Now that's one perspective, right? That's one channel.

[00:47:56] Patrick: The other channels we're looking at in particular, you know, there's certain tokenization platforms, there's certain things that we see over on those sides. there's a lot of just, TradFi groups that have adjacent services for, you know, wealth management or other things.

[00:48:12] Patrick: And so we have ties in with groups that we like. Those are things that you'll be hearing more about Otto, over time, but really for us it's about making sure that it accomplishes the goals that they want to accomplish and we want to make sure that we ride together with them on that. And then they could say that these are powered by auto and MG Stover.

[00:48:35] Umar: Now a, a big part of what we do at The Accountant Quits, I mean, the whole idea is to try and educate accountants on what is crypto accounting. But the issue I have is a lot of times when I speak to very traditional accountants, a lot of them are intimidated by, I mean crypto in general. And, like last year I went to a conference, they were like just CEOs, Partners and I was speaking about crypto.

[00:49:00] Umar: Most of them have never like installed a self custodial wallet or even just traded on an exchange, right? So how much is like, yeah, the education, like a gap in, in the work that you do, like maybe when you are reaching out to more the traditional players. 

[00:49:19] Patrick: So this would've been a much different conversation like a few years ago, candidly.

[00:49:23] Patrick: To date, I actually think a lot of these groups are doing a much better job. There are groups that have subject matter experts on their team. There are groups that have identified their strength and weaknesses, what they're good at, what they're not good at.

[00:49:37] Patrick: We always try to find that natural intersection.

[00:49:39] Patrick: We try to find that way. We, we do not try to be a bull in a China shop. We try to figure out how to plug with everyone. We're very selective in terms of how we collaborate, who we collaborate with. a lot of that time. And we could tell you this and Matt will tell you this, when they started in 2014 and then really the upcycle from there, you know, 15, 16, 17, you had every fund manager under the sun, but they didn't know how to do some of these things.

[00:50:07] Patrick: For us, we actually are very selective on who we decide to partner with. There has to be not only a knowledge, a shared knowledge, respect factor, but there's also gotta be a collaboration factor. And there's gotta be things that make sense also from, from a partnering standpoint. And so really for us, what I would say is for, accountants who are trying to get into it, I think accountants honestly are the Spartans of finance.

[00:50:34] Patrick: And what I mean by that is that accountants, because they have learned the balance sheet, the income statement, all the different things that kind of come through those things. You could look at any business, at any, at any opportunity and really understand immediately how to make an impact on that. And that could even go out to marketing and other things.

[00:50:53] Patrick: When it comes to digital assets, I think the hesitation that comes for some accountants around that is the cumbersome and the quality of the data. Do they know what they're looking at is actually true and valid and accurate? And I think the thing that happens for them is some of them don't feel like they're as technology savvy, but I actually would disagree.

[00:51:13] Patrick: I think more accountants, as I'm seeing young professionals come into the industry, are actually more technically savvy than ever before. And so, as you know, yes, they're not gonna be operating in indexes and, you know, swapping yields and other things initially, but I think they have the mind frame and the mindset to understand these things.

[00:51:36] Patrick: And I think the thing that will eventually happen was that especially what we feel like with Otto, and the convergence of TradFi with crypto is that they won't have, there won't be an option but to, to have, to start paying more attention to these things. And I think our young accountant friends are gonna be the ones who lead the next adoption, the true adoption curve.

[00:51:59] Umar: Perfect. Thanks for sharing. Patrick. I'm seeing the time pass. Has there been anything today that we didn't touch on or maybe, that you would like to reiterate, to the listeners? 

[00:52:11] Patrick: Yeah, I, I mean, the big thing that this all comes down to, in particular is just really that with a, with regulatory guidance, with the desire, um, to report on these assets in real time because the data is available. To be able to give more actionable data and intel to managers, we're gonna see that tokenization that these platforms that are, that are, addressing niche uses today are going to rapidly expand and we wanna be able to support them on the, on the reporting.

[00:52:49] Patrick: And that's why we're, we're heavily focused on those institutions. 

[00:52:53] Umar: Perfect. Now I always like to end the podcast with, asking my guest, it's like a tradition on the pod. Do you have a favorite quote or let's say like a maxim that you live by? 

[00:53:05] Patrick: Yeah, I think, I think the big one, and I actually just recently posted this on, LinkedIn.

[00:53:11] Patrick: And so for any of you who are on LinkedIn, feel free to reach out to me on there. But the big one that I like in particular is a Steve Jobs quote. And it's really, it's not about faith in technology, it's about faith in people. And the reason being is that people build technology. And what we have to understand is that for us to be able to grow as an industry, but also from a product perspective, et cetera, is that the only way you're able to do those things is by properly collaborating.

[00:53:42] Patrick: And we want to be able to see our entire industry thrive and grow, as, as well as, our competitors in their re respective, realms and agendas. And I think the big thing for us is that assuming that people always have the, have the best interest of doing the best for the industry, that is gonna help propel us a lot further.

[00:54:04] Patrick: And so that's my favorite quote. 

[00:54:06] Umar: It's a beautiful way to end the episode. If people want to reach out to you or if they want to, yeah get onboarded to Otto, learn more about Otto, where should they go? 

[00:54:17] Patrick: Yeah, so www.ottodigital.io. We have a form there. You can, you can put something there.

[00:54:24] Patrick: We're also gonna be revamping that and doing some other things. And then also, you know, I'm available via email, telegram, and LinkedIn. And so you could find me on all those ones or even, DM me on, on Twitter, 

[00:54:36] Umar: Very cool. Well, thanks a lot for your time today, Patrick, I won't be at Consensus next week, but hopefully we'll, yeah we'll be seeing each other very soon and we'll be in touch. 

[00:54:48] Patrick: Yeah, appreciate you. Thank you, again for the conversation and this was great.