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A look inside crypto firm Galaxy Digital, founded by “sidelined” Wall Street legend Mike Novogratz

Mike Novogratz, a former hedge fund manager who was once captain of Princeton’s college wrestling team, has been described as many things, including (in just one New Yorker article in which he was featured last year): an on-and-off-again billionaire; a sidelined Wall Street legend; “bombastic;” “full of shit;” and a former party animal whose “lifestyle…

A look inside crypto firm Galaxy Digital, founded by “sidelined” Wall Street legend Mike Novogratz

Mike Novogratz, a former hedge fund manager who was once captain of Princeton’s college wrestling team, has been described as many things, including (in just one New Yorker article in which he was featured last year): an on-and-off-again billionaire; a sidelined Wall Street legend; “bombastic;” “full of shit;” and a former party animal whose “lifestyle issues” led to his removal as a partner at Goldman Sachs back in 2000.

While Novogratz appears to be beloved by many friends, despite these qualities, or perhaps because of them, he may be more notable as a risk-taker who has racked up big wins — and big losses — first at Goldman, then at Fortress Investments. Now, he’s trying to rebuild his fortune with his own merchant bank, Galaxy Digital, which describes itself as a “bridge between the crypto and institutional worlds,” and which is squarely focused on cryptocurrencies and the promise of new blockchain technologies. It may be a smashing success, but failure looks like an option again, too. At least, as of November, Galaxy had suffered at least $136 million in trading losses.

To better understand the firm and whether it has what it takes to stick around, we talked last week with Sam Englebardt, a longtime media and tech investor who first began managing money for Novogratz’s family office and wound up co-founding Galaxy with him. Englebardt  — who was visiting San Francisco from New York for the week-long Game Developers Conference — oversees the outfit’s principal investments business alongside Greg Wasserman. The team invests from two pools of capital: its balance sheet and the EOS.io Ecosystem Fund, a $325 million joint venture with Block.one that’s focused on making investments in projects that utilize the EOS.io blockchain software. We asked about Galaxy’s taxing 2018, and how Englebardt, Novogratz and the rest of their 75-person team can produce the returns they expect to see. Our chat has been edited lightly for length.

TC: For our readers who aren’t familiar with Galaxy Digital, what’s the elevator pitch? 

SE: It’s a merchant bank with a balance sheet to invest. We invest in everything blockchain and crypto-related and in the future of tech broadly. We’re also publicly traded in Toronto [having executed a reverse merger with a shell company on the exchange]. We’ve invested several hundred million dollars already in blockchain and crypto investments and tokens.

TC: One of the things you oversee is a venture fund that counts Block.one as the only limited partner other than Galaxy. Block.one is developing a blockchain-based infrastructure software, is that right?

SE: It’s an evolution of bitcoin and ethereum; it’s another blockchain protocol that allows [developers] to build applications atop it that are decentralized. Block.one did a token sale and had enormous success, raising $4 billion dollars. And having raised all this money for the development of their protocol, they wanted to allocate some of it back to professional VCs who could then invest in a way that’s beneficial to [its own] ecosystem, so they committed $1 billion to partner VC funds. Well, they’re managing $400 million themselves, and $600 million is being managed by five partner funds, of which we’re managing $300 million. [The funds] are all geographically diverse. We’re the largest and cover North America.

TC: And you kicked in $25 million to have some skin in the game. Do you co-invest in anything with the other partner funds or share deal flow in any way? Also, does Block.one have to sign off on what you want to fund?

SE: Generally speaking, we’re trying to stay somewhat close to our geography, but if we see a great deal in Asia, we might share it with [former Jefferies Asia CEO Michael Alexander, the fund manager there] and take a share. And ours is ultimately a fund managed by Galaxy. We work closely and collaboratively with [Block.one] but they aren’t technically on our investment committee.

TC: What other products does Galaxy have?

SE: We’re also in the process of raising a credit and special opportunities fund to make structured credit investments in the space. We have an index fund. It’s a portfolio of investment products. Galaxy Digital more broadly has an investment business, a trading business — Mike is best-known for and been a macro trader and is now trading around crypto tokens and liquid products — and then an advisory business, too. We’re a registered broker-dealer doing M&A advisory, increasingly focusing on what we think will be opportunities as startups begin to [consolidate their efforts], and also doing traditional capital raising for startups and later-stage companies.

TC: Of those, which is your biggest business?

SE: Our investment business is our biggest business by far. Our trading business is growing quickly, even through a downturn in the market, though it’s really taking the longest to stand up as any trading business would. Our advisory business is [the most nascent].

TC: Galaxy found a way to go public back in August. Why was that important to the firm to do?

SE: If we’d just wanted to be a venture business, we didn’t need to go public. But we’re in this phase where institutional investors are going to want and need exposure to blockchain [investments] and crypto, while at the same time, it’s going to be a while before they feel comfortable buying these assets directly. Things are changing. Andreessen Horowitz has a [crypto] fund. [Former Sequoia Capital partner] Matt Huang has a fund now. They’re credible investors. But change takes time. And in terms of custody and insurance and CYA-type stuff, we felt having a public currency was the easiest way for investors to do it who don’t want to lock up their capital in a fund but who want to bet broadly across the space.

Not much of [Galaxy Digital] is floated. We think that as we prove out what we’re building [that will change].

TC: Is it safe to say that last year was pretty brutal, especially given that the firm officially opened its doors last January?

SE: Oh, yeah, definitely, though it was a somewhat predictable sell-off in hindsight. I don’t care what the asset class it is — when things go up with that kind of velocity, they tend to come down with equal momentum. People got very excited. What’s unique about crypto and blockchain relative to other retail [offerings is that it’s] possible for the average person to buy into the frenzy. The development of other tech has involved professional investors taking risk in a calculated manner, but suddenly, [crypto] was available to everyone. And it was the evolution of crowdfunding and social media and information spreads fast, and when the message is that you can get rich fast, people are going to go for it.

Presumably, many retail investors who got in got out, along with people who’d been in the space a while and took their profits. So things were never as good or as bad as they seemed. Despite the ‘crypto winter,’ companies have been [at work] and a lot of the hype is turning into actual working technology.

TC: So no more frenzies or bubbles?

SE: We’ll definitely see more as this technology continues to develop. We’re still a ways away from it being the seamless technology we enjoy with the web. But it’s probably not all that different from what we lived through the last time around, where a few companies become massively important and a lot of them don’t.

TC: How do you rate SEC chief Jay Clayton? Are you in favor of the SEC regulating more of this new world?

SE: Yes, for sure. Fair, researched, smart regulation is absolutely what an industry like this needs, along with making sure that people understand there will be standards in terms of behavior and business practices that every industry needs. I think the more reasonable regulation we have, the better everyone will be.

TC: Is there a country whose regulations or approach you’d like the U.S. to adopt?

SE: There isn’t one particular place where I think, the U.S. should do this. We’re our own unique country, with our own issues and problems and benefits. I do [hope that] in an increasingly global world, we don’t over-regulate ourselves to the point of people building technology elsewhere. There’s a lot at stake.

TC: What has you most excited right now about the deals you’re seeing?

SE: Video games and digital objects are one of the reasons I’m excited. Many will integrate blockchain technology in important ways that will matter this year, and, by the way, I don’t think we’re many years away from web 3.0 and the decentralized internet from being ubiquitous in the same way that we’d be shocked today if we encountered a business that had no exposure to the internet.

TC: What applications are close?

SE: The reason there’s been so much talk about blockchain and video games, for example, is because the [gaming] world is made up of digital objects. Meanwhile, people have recognized that the blockchain allows you to create truly scarce digital objects that someone can truly own and trade as they would a physical object. With respect to gaming, that means you can own the digital objects you acquire in the game, and if you’re a collector of certain physical objects, the experience of collecting will become gamified in digital ways.

TC: Meaning …

Consider that owning something is really about status. You show your friends, you achieve the status of owning that thing, then you either put it in your closet or trade it for money. In the digital world, you don’t have to go through the process of dealing with that physical object that has to be stored or else packed and shipped to someone else. There’s a startup called VIRL that buys custom shoes, then digitizes them using a volumetric camera system that turns them into a 3D object that you can see on your phone and authenticate as being one of say, only 10 copies. These digital sneakers — these non-fungible tokens — can then remain in the collector’s inventory or be made tradable through an exchange. And it just takes a second. You can have your item instantly.

The lines between commerce and gaming and trading grow more blurred by the day.

TC: What’s your driving thesis?

SE: That the digital world will blend with the the physical world as we invest more of our time in digital worlds and on our digital identity. Included in that is the inventory of stuff we own. We’re going to demand that no one can take that away from us.

Above: Mike Novogratz speaks during the 2018 Yahoo Finance All Markets Summit at The Times Center on September 20, 2018 in New York City. Featured mid-post: Sam Engelbardt

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Cryptocurrency

Register Lecture: Hidden heroes of Alan Turing’s Enigma

Live code-breaking and beer A curse follows Enigma, the cryptography device deployed by Adolf Hitler’s military during the WWII to protect their Morse communications from the Allies. That curse? Invisibility. Alan Turing has – now – become intrinsically linked with cracking Enigma, a machine of fiendish complexity capable of 159 million, million, million (1.59×1020) settings…

Register Lecture: Hidden heroes of Alan Turing’s Enigma

Live code-breaking and beer

A curse follows Enigma, the cryptography device deployed by Adolf Hitler’s military during the WWII to protect their Morse communications from the Allies. That curse? Invisibility.

Alan Turing has – now – become intrinsically linked with cracking Enigma, a machine of fiendish complexity capable of 159 million, million, million (1.59×1020) settings that demanded the perfect marriage of mathematics and engineering to break. Turing’s work would blow open secrets that helped alter the war – for example, alerting the RAF to Luftwaffe raids during the Battle of Britain. And yet, Turing received little by way of the recognition he deserved for decades – quite the opposite, in fact.

But Turing is not the only one to have suffered Enigma’s curse of invisibility. Join The National Museum of Computing on June 26 for a special Register lecture journey back 80 years to the eve of the Second World War, to hear the stories of those behind Turing.

Hear about who provided a critical leg-up to the struggling English in cracking Enigma and who helped build the Bombe – the device to mechanise the mathematics of code breaking. Eight decades after the start of the War, TNMOC will go inside the pioneering work of the Polish General Staff Cipher Bureau in Warsaw and shine a light on the roles of Gordon Welchman and Doc Keen, the long-overlooked Bombe engineering team lead, at Bletchley. Together, they helped put code-breaking at Bletchley Park on an industrial footing.

Your guide for this crypto history trip will be Paul Kellar MBE, a leading member of the Bombe Rebuild project – based at TNMOC as a working tribute to those who contributed to breaking the Enigma.

Starring with Paul will be a working Enigma to help demonstrate “knowing your enemy” and illustrate how the Bombe could attack and break the Enigma on a daily basis. You will get the opportunity, too, to participate in a live code-cracking exercise with Checking Machine – the last stage in recovering the Key of the Day after the Bombe had found the crucial settings.

Join fellow Reg readers with the TNMOC crypto historians and their machines at the Rugby Tavern, 19 Great James St, London, WC1N 3ES. Doors open at 18:30 BST with Paul taking the mic at 19:00. An audience question-and-answer session will follow a break to re-charge mind and grey matter. Get your ticket here. ®

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Breaking Up Facebook ‘Won’t Be Enough,’ Says Morgan Stanley Boss. Here’s His Proposal.

Breaking Up Facebook ‘Won’t Be Enough,’ Says Morgan Stanley Boss. Here’s His Proposal.

New York City’s just-concluded “blockchain week” was palpably more subdued than it has been in years past. (Or maybe I was just not invited back to the parties after my 2018 travelogue.)
In any case, I took a brief break from the madness of the Fortune 500 issue close to drop by the Consensus conference, the week’s marquee event, where I moderated a security-themed panel on Monday. My panelists were Tom Glocer, the lead board director of Morgan Stanley and former chief executive of Thomson Reuters, and Nadav Zafrir, the CEO of startup foundry Team8 and former head of the Israeli Defense Forces’ Cyber Command and Unit 8200, Israel’s equivalent of the U.S.’s National Security Agency. (For a recording, see video No. 15 here.)

Below are some soundbites from our conversation. I asked Glocer about a post he had published in the fall on his excellent personal blog in which he pondered who, or what, should own people’s data. His response imagined a world in which people might own their own information and where they would, using individual digital wallets, license the rights to corporations.

Rather than the current situation where we just weren’t paying attention and Google and Facebook, etc., built up huge caches of our private information, you would have the choice to sell Google your search history in return for a micropayment. Or you would sell Apple your photos in return for a micropayment, etc. I think it’s an interesting way of turning the current model on its head. But we’re not going to get there without some very significant government intervention along the lines of the debate that’s been raging about Facebook. Tech alone won’t achieve this jiu-jitsu move.

Since he brought it up, I asked Glocer for his thoughts on breaking up Facebook.

Just breaking up Instagram, Facebook, and WhatsApp won’t be enough. Facebook has over 2.5 billion folks. If you really wanted to go after them, I think you would have to go deeper and essentially declare a date by which they’d have to erase all of the data they’ve achieved to date and start fresh with what I’d call an informed consent and maybe, yes, micropayments. There’s no intrinsic reason why it’s awful that [Facebook] owns Instagram and WhatsApp…. If Mark [Zuckerberg] came out and just declared that on June 30th of next year we’re going to wipe out our histories—here’s your chance to download your own, in case you want to keep it, and here are the new rules of the road that you get to explicitly opt into—I would leave all those companies in his world.

The audience tended to agree. When I asked them whether Facebook should get the Sherman Anti-Trust treatment, only about a third of the crowd raised their hands.

Facebook, through the malicious hijacking of its targeted marketing machinery, has greatly contributed to an erosion of faith in traditional institutions. Nadav Zafrir summed up the predicament well. When I asked him what is the most pressing, most frightening threat the world faces, he replied without hesitation.

In one word: Trust. We are now in a world where it’s very hard for us to trust the simple things that, as my generation grew up, we were accustomed to trusting—our democracies. Our voting systems…. The irony is that the blockchain has a great potential to offer that [trust], yet it has become synonymous almost with the opposite…. At the end of the day attackers are human. They’re ROI [return on investment]-driven. They’re not super-ninjas or super-humans. They have their limitations. They have their vulnerabilities…. It’s an asymmetric battle when the attackers only need to find one single point of failure in the whole system and it’s game over. Hence, if we take that single point of failure and distribute it in a way where attackers need to hack everybody simultaneously and get everybody’s consensus, we’re flipping the asymmetry and taking control of the situation.

Of course, retaking control of the situation is no simple task, even with the advent of blockchain technology. Zuckerberg is, for his part, exploring how he might reestablish the foundations of his media empire on the footing of blockchains, cryptography, and private messaging. With all the consumer backlash and heat from regulators, it will no doubt take expert jiu-jitsu to pull off.
May the groundwork commence.
A version of this article first appeared in Cyber Saturday, the weekend edition of Fortune’s tech newsletter Data Sheet. Sign up here.

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