The Intersection of Traditional Finance and Crypto With Insula Investment Management
Jules Becci de la Riviere, founder and CEO of Insula Investment Management, joined Coinscrum in the latest edition of the Meet the Founders series. He explained the origins of the company, saying that he is from France and studied in the UK at King’s College London, where he learned about finance and crypto. That is also where he started Insula.
Jules explained how the goal from the onset was to create an intersection between traditional financial and cryptocurrency. From there, he came up with the idea for a 100% crypto fund, which is a fund that only accepts investments in crypto and only invests in other cryptocurrencies, all of which unfolds on the blockchain.
(1:44) “We found out that many methods that work well in equities work actually very well or even better sometimes in crypto. This is the gist on how it started,” said Jules.
He went on to explain that the project offers an alternative to people who want to have a diversified basket of cryptocurrency at any point in time. They are targeting people who believe in crypto and the technology in the long run and would like to be invested with a solution that is close to an index. So they would like to own a diverse basket of cryptocurrency over time.
Typically in the investment management space, customers are dependent on the manager, something that Insula helps to solve through blockchain automation. Even if in the unfortunate event that the manager were to fail and become insolvent, theycan ensure that customers can always withdraw their funds – something that technically doesn’t exist in the traditional financial markets, pointing to the failure of Lehman Brothers as an example.
(5:04) “We solve this problem by using the blockchain. People don’t have to trust what we say — they just have to look at what the blockchain says in terms of data. So, for example, if the blockchain says the Insula fund made 10% this week, you know that it’s true because it’s not us calculating the figures and then declaring it. So this is something brand new that we bring to asset management,” said Jules.
(6:15) “You can just recreate finance on the blockchain, you can recreate the S&P 500, anything,” said Jules.
Insula also has its own token, ISLA, which was created to incentivise the group of people who helped Jules to launch the project in the early days. They decided to do a small-sized ICO, which was not designed for pre-seed investment. It was more about splitting the share of ownership of the project with people who would help to make it a reality, he explained. The idea was that they would have something to look at, which would be the rising value of the token.
From there, they added use cases to the token, including using it to pay for a subscription to Insala Premium. They expect nearly all fund investors to subscribe to this to streamline the technical barriers that accompany fund investing, such as customer service, accounting, etc. Customers could also use the basic version of Insula and invest on their own if they know how to use the MetaMask wallet.
(9:37) “Customers can invest on their own, they can be autonomous. But if they want a layer service over this, to be guided, then need to subscribe.”
In yet another use case for the token, Insula pays one-third of the fund’s profits to token-holders but only to the liquidity providers of the token, a distribution that they make monthly.
(11:03) “So Insula has a place in DeFi. This is where it belongs. This is why we’re not especially interested in listing on centralised exchanges. We’re only looking at decentralised apps,” said Jules.
He went on to explain how after two years, the Insula team has discovered who they are supposed to target and who is interested in their project. They narrowed it down to sophisticated investors in general. However, the team realised that as an asset manager, in order to grow, they needed to incrementally grow. They want to target sophisticated investors but to start with they ideally target high-net-worth individuals, who are by definition individuals, because the barrier is not as high in terms of the compliance and regulatory requirements of a large asset manager.
It is much faster and simpler to service individuals, who make smaller investments. Right now they are targeting very small family offices, and the vision is to climb the institutional scale until they are targeting larger institutional investors in time.
Insula is currently live and they have a few investors who have placed relatively small investments. But Jules notes that the platform “is growing fast” because people see the performance of the fund.
(15:57) “Now we’re trying to begin onboarding bigger high-net-worth individuals and start partnering up with investment funds if they want to have a crypto desk or crypto investment management desk, where they can offer clients [the opportunity] to invest in crypto via us, this would be as well part of the business model,” saidJules.
The name Insula has different meanings, one of which is a zone of the human brain responsible for emotions in trading. Very experienced traders typically manage to keep their insula under control to prevent panic or letting their emotions influence the way they trade. So typically, experienced traders manage to inhibit the effect that this zone of the brain may have on their trading, which is the psychology of the financial markets.
It’s well known that trading algorithms now dominate in traditional markets. Human traders are being replaced by robots more and more every year.
(17:55) “So we thought okay, so then the crypto market is just a market like any other one. It is an electronic market whether from very close or from taking a bit more distance, these two markets, equity markets and crypto markets, can be assimilated as very similar.”
He added that they use algorithms to generate risk management in a more conservative and less speculative approach to investment. The team does not make the decision to invest in specific assets. The selection of which cryptocurrencies are going to be in the portfolio is automated as well. There are no emotions in the system, said Jules, adding that it is a “mathematical framework,” as they do not believe putting all eggs in one basket is a good idea.
Jules went on to say that he is building software that is replacing traders. Also, he commented on the aspect of clients investing in the fund and being able to remove their money from the funds. In traditional finance, the clients are dependent on the investment manager. But this is something that neither the customer nor the asset manager wants, as it puts more pressure on the manager as well.
Insula came up with a way in which they run the fund on the blockchain so that customers can invest and withdraw whenever they want. When they click invest, it’s invested. When they click withdraw, it’s back in their wallet.
(22:15) “We’re not in the middle interfering with this, [and there is] no ability for us to freeze the funds. Typically, this means that our customers are in control,” said Jules.
When people invest in Insula, they have their own wallet, their own private key and are the owner of their funds. They can invest in their fund and you can remove the funds at any time because everything is automated. The customers can also see the performance of the fund on the blockchain. Jules explained that it’s not Insula declaring the performance — it’s fully automated and fully decentralised and the calculation agent is the blockchain itself.
As for Insula’s role in DeFi, Jules explained how with decentralised platforms such as theirs, and more broadly DeFi on smart contracts, in theory, there is potentially less counterparty risk because the contracts are autonomous, segregated from the asset manager although acknowledging that smart contracts themselves offer an attacked vector that needs to be mitigated over time
(28:06) “To me the No. 1 risk is that there is a natural selection going on because this is a Wild West. There is no regulation going on. It is very hard to regulate a decentralised ecosystem. Regulators are willing but I’m not so sure if they’re in a hurry to regulate DeFi because it’s going so fast as well. I would say that if you’re developing on DeFi now, you’re really at risk of seeing your project hacked, let’s say as it is, especially if you store a lot of money on it,” said Jules.
This could have been a huge problem for Insula, because they are an asset manager and they intend to store quite big amounts of cryptocurrency on smart contracts. It is a big problem that needs to be solved. And it is solved through the auditing of smart contracts.
Insula chose to build on the Melon protocol, which is a well respected project based in Zug. It has been audited and it is strong. So they did not build their own smart contracts or code it themselves. Instead they tried to use templates or existing protocols. Because what has been proven over time is usually the best way to develop smart contracts. If you build something new, you take the risk of injecting mistakes into the code, Jules said, adding that auditing a smart contract is crazily expensive so all the mistakes may not be found.
(30:12) “We tried to build in a very conservative way,” said Jules.
He used airplanes as an example, whose computer operating systems are usually very old versions of Windows for the simple reason that they were proven to work well. They are simple but reliable because it’s a plane, it cannot crash, he noted. Insula takes the same approach with its fund.
(30:35) “We’d rather not use the latest version of a smart contract or innovation for our fund. If it’s not audited, there is absolutely no way to do it,” Jules said.
In addition to the auditing of smart contracts, there is a regulatory aspect surrounding decentralisation because it is the first time in history that there are things that are technically hard to regulate or eventually ban.
For more information visit their website: insulainvestments.com