In this episode of the R&G Tech Studio, asset management counsel Ed Baer sits down with technology, media & telecommunications co-lead Ed Black to discuss his journey from private practice to in-house counsel (and back again), and shares his thoughts on the future of exchange-traded Bitcoins.
Ed Baer: Sure. I’m in the San Francisco office of Ropes & Gray. I wound up in San Francisco after working at BlackRock for a long time. When BlackRock bought BGI, I was transferred from New York to San Francisco. And for a bunch of years, I ran the legal team for iShares, which is the big ETF firm. I then did something interesting—I went from private practice to in-house and then back from in-house to private practice. And the main downside of all that is I had to take the California Bar 20 years after graduating law school.
Ed Black: I take it you did it the hard way: 90 days off work, nothing but studying, all that.
Ed Baer: I took two weeks off between starting work at Ropes. I studied the stuff that I didn’t know—I practiced for a long time, so it was really not that big a deal.
Ed Black: As someone who graduated from UC Berkeley and took the California Bar and experienced it as a form of exquisite torture, you’re obviously a better lawyer than me. It was super hard for me, although I did make it through. And you live in San Francisco? It’s not just your home base for practice, it’s home base for life?
Ed Baer: Yes, in the Bay Area. I'm east of the city, and it’s kind of a world away in terms of environment. It’s significantly warmer in the summer and actually a bit cooler in the winter, where I live, even though it’s 17 miles from the office.
Ed Black: Just on the other side of those hills. Let’s get to it—the first question I have for you is a general question. Inside Ropes, right now, who are the clients you focus on, and what is it that you do that makes them happy clients?
Ed Baer: I do work mostly with ETF clients—that is the bulk of my practice. But I also do a number of crypto things, and, in fact, ETFs are how I got involved in the crypto space. Shortly after I joined Ropes, I was hired by the Winklevoss twins to help out with a Bitcoin ETF. Ultimately, that was unsuccessful, and it’s remained unsuccessful for lots of other clients, including clients that I’ve worked with. So, I work with big established asset managers, and also with startup asset managers. And I'm fortunate with my BlackRock experience—I have lots of friends who are at other asset managers, some of whom start up ETF companies.
Ed Black: Wow. And completely out of order—I just got to ask the question: Are we ever going to get an exchange-traded Bitcoin instrument out there (an ETF, an ETP)? Is it going to happen?
Ed Baer: I think it’ll happen at some point. I don't think it’s likely to happen while the current SEC Chair is the chair. Right now, there’s some litigation that is going on for one of the firms that was denied it’s opportunity to list, and they’re suing under the Administrative Procedures Act, and so that might be the catalyst, but those lawsuits tend to take years. And so, I’m not optimistic that there’ll be anything in the next couple of years, at the very least.
Ed Black: If you had to think about these clients in the ETF space that you’re working with, and you look, in particular, at how tech is driving activity around ETFs, are there key issues that are on your plate right now where you see tech playing a critical role in how the clients see the issues, the issues they’re facing, and how we help them solve those problems? Anything along those lines?
Ed Baer: Yes, sure. The ETF industry has traditionally viewed itself as a financial tech solution, so it takes a traditional pooled investment vehicle and then permits daily intraday trading. And the creation and redemption process for ETFs is very reliant on baskets of portfolios that are constructed electronically—there’s calculations that are done throughout the day. The history of ETFs is that there’s a technology-based solution—it’s largely been an equity solution for the most part. So, ETFs in the fixed income space are much smaller, much less popular, have been around for less time, but there’s really a lot of opportunity in the ETF space for fixed income. And so, one of the things that we’re helping clients with is to figure out how to develop systems to trade fixed income ETFs in such a way that they’re able to transact similar to how equity ETFs have worked.
Ed Black: And is that something you say you’re working on right now? Can you be specific?
Ed Baer: Sure. So, I have one particular client, BondBloxx, and I work very closely with them. And as I mentioned, those are friends of mine that started this shop, and they’re one of the only shops that’s out there that was formed specifically to work on fixed income ETFs. These are all people who are experts in the field—they were very early pioneers in the ETF space for ETF capital markets and trading technology. And before they set up their operations, I spent hours and hours with them on the phone with their consultants—the software designer for the trading system—and we talked about how to efficiently create ETF baskets and monitor the activity. And so, that’s one of the things that I feel is not typical for an outside lawyer to work on at that sort of level.
Ed Black: It’s not typical to roll up your sleeves the way you do when you’re helping your clients. Because of all that in-house experience you had though, you’re really able to help them get things done.
Ed Baer: Yes, that’s exactly right. Like I said, I sat on the phone with their consultant, who was a person who’s designed these trading systems, and he asked me a bunch of questions and said, “What do you think about this? Will this work legally?” And they came up with a system, and that’s the system they’ve implemented to construct their baskets and monitor their fixed income portfolio position.
Ed Black: Let me come back a little bit to crypto, which you mentioned. I get it—I jumped in with that big question early about are we ever going to get an exchange-traded instrument? But I know that there’s lots of other practical questions around crypto that are, again, like this area where you’ve helped BondBloxx—that is, people are trying to structure or essentially market infrastructure capabilities that allow the liquidity and the trading that will make all of these things go. And when you think about crypto and everything on the blockchain, I know there’s a lot of, at least what I read in the paper, interest in, “Is there infrastructure? Are there trading platforms? Are there custodians? Is it all secure?” Have you engaged with that area?
Ed Baer: Yes, absolutely. So, you’re correct. The irony is that crypto was originally formed to disintermediate official entities and things like that, and as it sought to gain legitimacy, they’ve been embraced by the traditional finance world—so custodians, central counterparties and things like that. And so, we’ve worked very closely with a lot of our clients. We have large university endowments and things, and they have these wide portfolios and many of them have been exploring crypto. And so, we work with some of the custodians and try and set up custody agreements, trading agreements and things like that, for these large institutional investors. It’s interesting because these are very sophisticated investors, but when it comes to crypto, it’s just not the same thing that they’re used to doing. Their custody arrangements, for instance, are completely different because instead of just going to a big bank like State Street, BNY Mellon or something like that, they have to work with a firm called Kraken or Coinbase—something that’s completely new. And while they’re pretty well established for crypto, they’ve all been formed in the last 10 years.
Ed Black: It sounds to me like this is another one of those situations where your ability to roll up your sleeves and really be practical because of your hands-on experience in these markets really pays dividends—but do I have that right?
Ed Baer: I’d certainly like to think so. The traditional custody model talks about securing assets and things like that, and so when you have an equity security or a bond, you can represent that on your books by having a book entry through an official depository so there’s evidence. With digital assets, the evidence is a little harder to prove because it’s essentially a private key paired with a public key on this public blockchain where other people can see that it’s there. How do you evidence control over that, and how do you keep that secure? It involves rapidly evolving technologies. They talk about cold storage, which is things that are completely offline—not connected to the internet anywhere. Then they talk about warm storage, where in order to facilitate transactions, you have to be somewhat connected. And so, you have to sort of move between the warm storage and cold storage. You have to have these various controls in place (multi-signature controls) and things like sharding of private keys, where you break the private key up into pieces so that you keep it secure, and it requires two or more people to get together to act on the digital asset. So, it’s a really interesting space.
Ed Black: Fascinating stuff. All right, let me ask one more question. At least based on what I read in the papers, when you look at the advantage of ETFs, one of the reasons ETFs have swept the market in a way is because they’re administered on an automated basis—that is, they’re a set investment strategy, a set investment equation, and that dramatically decreases administrative costs. You’re not paying for anybody’s judgment, and especially in the liquid markets for ETFs, they can be something that performs for the investor with very, very low-cost infrastructure. You look at that the rest of the world outside of ETFs, candidly, people are moving to robo-advisors, to model platforms, to all these other things that aren’t ETFs but have that same highly automated profile, frankly, high-efficiency in terms of cost. Are you engaged at all with that aspect of the way technology is affecting markets—the automation of what used to be called “discretionary” investment management?
Ed Baer: Yes, absolutely. So, what you described is really the index ETF market. This is an ETF that is tracking the classic S&P 500, Russell 1000 or the Barclays Aggregate Index—those big broad indexes that have been traditionally used as benchmarks by institutional investors for years and years. So, the ETF is able to deliver those strategies in a very cost-effective way. And then, when coupled with the technology that you just were describing, these model portfolios and robo-advice platforms, ETFs are really the perfect vehicle for that. So, that is one of the things that our clients are all very interested in.
Ed Black: Hold on, so the robo-advisor in the model platform sits on top of the underlying ETFs and creates a customized offering?
Ed Baer: That’s right. So, it can be customized, but often it’s just like you would go to a financial advisor—you’d sit down, you'd talk about your risk tolerances, what your time horizons are, what you have to invest and what your goals are, and then there’s models that are typically designed to fit cohorts of people, not necessarily a custom-design for you. And so, you’ll work with the robo-advisor—basically online, you answer these questions and it says, “Based on what you’ve said, we think this portfolio consisting of these seven ETFs…”
Ed Black: “…Will provide just the right mix—it’s just the right cocktail for you.” And you work similarly, not only with the ETF people, but also with people putting together the robo-advisor platforms and the model portfolio platforms as well, is that right?
Ed Baer: Yes, absolutely. So, the goal of our ETF clients is to get on these platforms, and the goal of these platform clients is to be able to offer a broad number of solutions that includes ETFs from various providers. And this technology interface, which is essentially a robot—you answer questions, and the robot gives you advice, essentially. That advice often consists of a portfolio of ETFs, and some of them are single managers, so you might find all of the ETFs in the portfolio are from the same manager, and some mix it up depending on the right solution.
Ed Black: Right, but in any event, you help them pull that together. Alright, running a little bit out of time—I’m going to switch gears. In the last few minutes that we have, I’m going to ask a few questions. Now, I call this the personality test segment of the podcast, Ed. So, silly questions, I get it, but just give me your best answer. We’ll see what we come up with. Do you go to concerts? And, if so, what has been your favorite?
Ed Baer: I go to concerts—not as many as I used to, but growing up, most of my earnings in high school and into college were dedicated to buying concert tickets. In high school, this is probably my favorite show, I managed to score tickets to Live Aid in Philadelphia. A bunch of my friends and I went, including some of my family members. And one of the people I brought was my current wife, but who was at the time not yet my girlfriend, despite my best efforts—but eventually she became my girlfriend, and eventually my wife.
Ed Black: Wow. So, rock concerts were not just fun, but they were formative to you in fundamental and important ways. And have you continued to go to rock concerts? I got to ask now, now that I know your wife is your wife through your rock concert, have rock concerts played any other role in your family?
Ed Baer: Sure. My wife doesn’t go to as many shows as I do, but starting at a pretty young age, I got my kids going to live music. And one of the things we’ve tried to do, and this was at my kids’ insistence, is they’ve wanted to see some older, more traditional rock bands in addition to more modern music. Their theory is they wanted to see these bands before they’re dead, and so The Who, Black Sabbath, AC/DC and others have been on their list.
Ed Black: “See them before they're dead”—that just makes me feel so good, given that these bands were my contemporaries. Black Sabbath and AC/DC, were these the concerts you sought out both old and young? That’s your music category?
Ed Baer: Not so much when I was younger. Definitely The Who—I’ve been to see The Who probably a dozen times or more. But lots of different things. My taste tends to run more that direction now than it was when I was younger. So, I’m probably more heavy music now than I was previously.
Ed Black: Interesting. It just goes to show, a few years in the markets and you’re a heavy metal fan. Alright, one more question, then we’ll let you go: In a peanut butter and jelly sandwich, what is more important, the peanut butter or the jelly?
Ed Baer: I'd say the bread, frankly. To me, a peanut butter and jelly sandwich requires white bread. I grew up on the East Coast and that means Wonder Bread, and that’s what I grew up with.
Ed Black: Wonder Bread—it “builds strong bodies 12 ways.”
Ed Baer: Is that the expression? I don’t remember the expression.
Ed Black: When I was a kid, but I’m old. And white bread, specifically?
Ed Baer: Yes, that is correct. So, on the very rare occasions that we purchase white bread today—my kids are both out of the house and in school, in college elsewhere—I will eat over the course of a week, three or four peanut butter and jelly sandwiches. Otherwise, I don’t really eat them that often.
Ed Black: An interesting combination—a heavy metal fan who loves Wonder Bread. I wonder if those two things go together. Thank you, and thank everybody who listened, for joining me on the most current edition of the R&G Tech Studio podcast. The R&G Tech Studio podcasts are available on the Ropes & Gray website, on the R&G Tech Studio page. They are also posted and available through all of the normal streaming services everywhere you get your podcasts. Thank you so much.
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