Benjamin Tsai’s (’01) New Course Unlocks Cryptocurrency for Financial Engineers

Benjamin Tsai (’01) is the co-founder, president and managing partner of Wave Financial, an SEC-registered investment advisor focused on blockchain and cryptocurrencies, with over $1 billion in assets under management as of March 2022. He is the creator and portfolio manager of Wave Select 5 Crypto Index Fund, BTC Income & Growth Fund, Kentucky Whiskey Fund and other strategies for wealth management. Prior to co-founding Wave, Tsai’s career in finance took him to such places as Tokyo, Hong Kong and Singapore. He credits his UCLA Anderson MBA experience with helping him transition his work from engineering into “hardcore finance.” He’s now come full circle back to Los Angeles and is teaching Introduction to the Finance of Blockchain and Cryptocurrency at his alma mater. Taught for the first time during the fall 2021 quarter, the second class just wrapped with plans to bring it back for future cohorts of Anderson Master of Financial Engineering students.

Q: How did you come to be teaching a new course at Anderson?

We began discussions around teaching a crypto and blockchain course a few years ago. Those conversations led to what seemed like it might be a one-time talk on these topics with Master of Financial Engineering students. It went well, the response from students was enthusiastic, and I was asked to put together a course for the MFE program in 2021.

Q: What do you hope your students take from this course?

That’s a really good question.

I would like our students to be comfortable with the understanding of cryptocurrencies.

They don’t have to love crypto. They don’t have to invest in it. But I want them to understand what it is. I want them to be able to know from which sources they can get factual information on crypto. I want them to be comfortable having a conversation when they see crypto-related discussions on the news. I want them to understand why there are people who are excited and what they’re excited about and, if they wanted to be involved, how they can be involved.

I also want them to see how the crypto space plugs into the total financial ecosystem. I’ve always told students and I truly believe that crypto is just like another asset class that has been added to finance, similar to commodities a few decades ago. You have equities, you have fixed income, you have credit. Outside of that, you have real estate, you have commodities and now you have crypto. It’s just another asset class that people can invest in. And it comes in different forms and different exposures, with different levels of risk. I also get into what to do with crypto, how to use it and so forth.

Q: How do you pull together the source material for the class?

When we first started putting the course together, I created the syllabus and sent it in. They said, “Great, and can you tell us what books you recommend?”

And I told them, “Crypto is going so fast, there aren’t really any books, per se.” But from an approval process you need some books listed on the syllabus. So, I have some acquaintances who used to work at the Wall Street Journal and they’ve written some books on basics of Bitcoin. So, I listed those and they were well received, but we don’t really use textbooks in class.

From a content perspective, I basically sat down and carved out all of the categories or the areas that are of interest in the crypto space.

There’s the basic background behind crypto, the classifications, and the regulations around it. We talk about the current infrastructure for financial transactions with crypto, with the trading platforms and all the players associated with that. Then we get into the more exotic topics, like derivatives or futures and options.

We then go into centralized financing, where you can do lending, borrowing and prime brokerage and so forth. Then we continue down that path and we get into what’s called decentralized finance, which is an alternative version of finance enabled by the blockchain. It’s crypto finance that is really about a communal financial system that doesn’t have a centralized person driving it. That is the ideal, the utopia, that the crypto people are trying to head toward.

From there forward, there’s the whole NFT discussion, and then there is the tokenization of hard asset discussion. Then we go on to more practical applications, such as the things I do as an asset manager. What does a crypto asset manager do? What are some of the products we offer? Well, we do treasury management and we do wealth management.

Finally, I have one class on enterprise applications of blockchain. That’s not pure crypto finance, but I thought one class on the topic was fair, as a lot of it is finance-related. We talk about what else you can do with a blockchain, like ID systems and supply chain management.

The source material basically comes from my experience working on the finance side of the crypto world. I’ve spoken with a lot of exchanges, a lot of custodians and other service providers, which makes me more experienced and knowledgeable than most. On the operational side, I run a number of funds, so we can talk about the trading I do with derivatives, futures and options. That’s the content that comes from my traditional finance background.

Q: Let’s be very honest: There are a lot of crypto skeptics out there. When a crypto exchange recently went bankrupt, there was a bit of schadenfreude going around. What is your response to those skeptics?

I think that is a very fair question. I get that a lot: There are skeptical students in the class who decide to join it just to kind of see what the heck is going on. I appreciate their giving it a try, even though they’re skeptical.

I’m not here to get people to invest crypto or not. I’m here to describe what the infrastructure is and what is happening. What are the developments, and what are the dreams and aspirations of these crypto people as they build new infrastructure? Not all of it will be successful and not all of it will work.

The dot com boom and bust came and went, but it’s not like we got rid of the internet, right? The Amazons of the world, the Googles of the world — they grew from the ashes of that evolutionary cycle. Google was not the first search engine. Amazon was not the first e-commerce site. Facebook was not the first social networking site. But they came after many, many, many different iterations, and they were the success cases.

So we’re now going through the millions of iterations of what crypto finance could be. We’re pushing the regulations, and that is where we’re at. I’m a big believer in regulations because as long as I know where the guardrails are, I know how we can build properly. That’s why I’m a believer.

Q: The important thing about the Google or Amazon, or about the work you do with your clients, is that you’re caring about your client. It’s not about the currency, it’s about managing other people’s money. Am I right that there’s a vast responsibility that comes with your work?

I’m glad you mentioned that. And I want to put it even more bluntly.

Wave Financial is an SEC-registered investment advisor. We’re regulated. We’re required to have clients’ fiduciary duty in mind. It’s a choice we made to become registered investment advisors. We intentionally decided not to go down the broker dealer route. We’re not a broker dealer of crypto. We’re a registered investment advisor of crypto because we want to stand on the same side as the client facing the crypto market. And this goes back to what you’re saying: We manage assets for clients, we take that seriously, and I take that attitude toward how the crypto ecosystem is built.

Q: What at the assignments and the course requirements?

We have three assignments, two in the first half of the class, one in the second half. We have a midterm and then a final project where everybody makes a 10-minute presentation, with a five-minute Q&A. I thought the presentations this year were excellent. I was extremely impressed.

I’m pretty open as to what people want to explore. There’s a lot of creativity. For example, somebody wanted to establish an interest rate curve for lending USD on the blockchain, which exists in traditional finance. I was stressing to people that this is the beauty of being in a new space. In traditional finance, if you wanted to build a similar curve, you’d find that somebody already did it. It’s very hard to come up with a unique, new thing in traditional finance. In crypto finance, the infrastructure and business on top of it are all green field.

Q: Is the crypto space heading toward a time when Amazon will take payments in Bitcoin?

That is a fair question and it’s something that I think, as crypto practitioners, we struggle with also.

In the original Bitcoin whitepaper, the idea was that it was going to be used for settlements, but I’m not sure if everybody agrees that that is the best way to use it. Crypto currency is a very efficient way to move a lot of capital in a very short period of time. But it's not necessarily convenient as a system to do settlements.

At the end of the day, the U.S. dollar as a currency is still the best thing to use for settlements. If tomorrow Amazon said customers could settle in gold bars, would you actually want to settle in gold bars? The answer is no. You don’t want to sell in gold bars, you want to settle in dollars because that’s the currency we operate on. I don’t see that shifting very far from there.

With that said, there are crypto-savvy banks whose backend infrastructure is set up to use blockchain to transfer large values of money. With them, I know I can wire five, 10 or $100 million to one of our counterparties instantaneously. So, outside of payment systems, there are many other applications, some of which are investment-oriented. Those are the uses we see now for crypto.