Macro

Episode 26: Flag Theory and diversifying your risk with Edmund Lowell

Ben Lakoff, CFA
January 6, 2021
56
 MIN
Listen to this episode on your favorite platform!

Edmund Lowell is the Founder & CEO of KYC Chain, an Advisor to SelfKey, Angel Investor and Managing Partner of Far Horizon Capital Inc. – the company behind Flagtheory.com

Flagtheory – “Legal methods to optimize and protect your business, increase your bottom line and achieve more freedom.”

Flags include:

1) Second Passport

2) Tax Residency

3) Offshore Entity

4) Offshore Bank Account

5) Offshore Assets – Gold / Land

6) Digital Security

7) Cryptocurrency.

We cover each of the 7 flags and also cover some updates on what’s happening in China and DeFi.

Enjoy this conversation with Edmund Lowell.

Listen on your Platform of choice:

Check out https://anchor.fm/investinalts for all the listening options (Spotify, Apple, etc.)

Show Notes

0:00:00 Welcome and context

0:03:00 Can you tell us a bit more about you and your background?

0:07:56 What is Flag Theory?

0:09:45 Walk us through the 7 different flags

0:12:50 What is the minimum exposure to flag theory for people?

0:15:51 What is the allure to get a second passport?

0:20:04 Tax residency

0:23:40 What are the common mistakes with offshore companies?

0:25:33 How to get an offshore bank account?

0:28:01 Where should you look for opening a foreign bank account?

0:34:59 What should you keep in mind about digital security?

0:39:01 Why should people invest in digital assets?

0:47:56 Risk associated with digital assets

0:52:05 What’s exciting you in the digital asset space the most?

0:57:30 Where can people find out more about you?

Show Links

Flag Theory

KYC Chain

Privacy Tools

Episode 1

SelfKey


Episode Transcript

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the asset allocation podcast. Today’s interview is with Edmund, LOL, who is the founder and CEO of KYC chain and advisor to self key, an angel investor and managing partner of.

Far horizon capital, Inc, which is the company behind flag theory.com. Flag very.com. I love it. You go to the website and it says legal methods to optimize and protect your business. Increase your bottom line and achieve more freedom. What is flag theory? We’ll go into this in much more detail, but these flags include having a second passport second tax residency, offshore entity off shore bank, account, offshore assets like gold or land digital security and cryptocurrency.

These are the seven flags. This conversation is very lengthy. And although these are personalized topics, we go over them and, and, and quite a bit of detail and as well as a little bit on China and defy, decentralized finance, what’s happening there before you listen, please don’t forget to like, or subscribe to the podcast.

It really, really helps. And I really appreciate it. Flag theory. There’s a lot here. Please enjoy and check it out. Please enjoy this conversation with Edmund Lowell.

Welcome Edmund. Welcome to the all to asset allocation podcast.

Edmund: [00:01:39] Thank you for having me again, excited to be here

Ben: [00:01:42] Good to see you. And you’re sitting in Chiang Mai Thailand.

So we have a, we have a drastic time difference right now.

Edmund: [00:01:50] We do. Yeah, it’s a thank you for joining me so late in your night, it’s nice for you to comment to me.

Ben: [00:01:56] No worries. If I was on the East coast, it’d be even worse. How’s everything looking up there in Chiang Mai in Thailand right now. this is being recorded in August.

It’s still kind of in the middle of a COVID worries.

Edmund: [00:02:09] Yeah. So COVID is. Actually, it seems to be being handled pretty well by the time government and the authorities here. So the cases are down. They’re letting people back in, if they’re on a business visa or they’re a elite visa holder they do have to go through in a quarantine for 14 days and what they call them, turn of state, which is basically a hotel in Bangkok.

They can’t leave for two weeks, but other than that the doors are open, which is pretty amazing. And not something that a lot of countries can say right now.

Ben: [00:02:35] Yeah, for sure. Well, I’ve been looking forward to this conversation, we’ve played in the same kind of fields for, for a number of years.

But I originally came here across you from flag theory.com. we’ll dive into this as well as wherever this conversation goes, but wanted to start off just a little bit of your background and how you got to address it in this sort of thing.

Edmund: [00:03:00] Yeah. For me, it really my professional career started in college.

I went to university of Northeastern where you’d go on a co-op while you’re in school. And for most of my life, I thought that I was going to be a defense attorney. I saw law and order on TV that looked really attractive to me. And at Northeastern I’m very grateful that I got to actually work in a court.

And I remember sitting. In a trial one day and this lady was on there for ridiculous charges. She was looking at serious time in jail and she had young kids and her defense attorney who was actually just a public defender, got her off scot-free off for some technicality. And she gets up, the defendant walks out, doesn’t even say, thank you to her lawyer.

And there was this moment where the judge and the prosecution and the defense lawyer looked at each other and were just like, And what did we accomplish here today? Nothing. And I just felt like from that moment forward, I didn’t want to be a lawyer anymore. Like, it was very clear cut and dry. So from then on, I was like, all right, what do I do next?

And I had a friend who was selling real estate at the time, so I became a licensed real estate broker. I started selling real estate, but in many ways I didn’t have great timing then because I got into it around Oh seven Oh eight. And that was the real estate market collapsed.

Ben: [00:04:10] Great timing. If you had a ton of capital just to buy up everything shortly thereafter, right?

Edmund: [00:04:16] True. But I was a college student with nominee assets to my name at the time. Really had to take a deep look at what am I good at at this point in my life and what can I do from here? And I’d always been really interested in entrepreneurship, but I knew how to set up companies. I knew how to file paperwork state because of more real estate investors.

So that’s where I started doing. I started filing legal entities setting them up and that’s really what flag theory eventually grew out of. So I started off just routine Delaware, Wyoming, LLC. We’d help you get a bank account. And then when I moved overseas, I was going to go to law school, but decided, all right, well, I better.

Defer this at least for a year and see what else I could do. And I’m glad that I did that. And that year has really turned into at this point, you know, almost a decade. And I moved overseas and that’s when I started doing more overseas incorporations, Hong Kong, Singapore off shore, helping people get back down, set up as well as thinking about where are you resident, where you sit and how does that impact your freedom, your taxes?

How do you maintain. An efficient structure for yourself personally, but do it in a legal way. So yeah, that’s, that’s kind of how flag theory started. And from there over a course of a period of years Recognize that, although we were setting up these entities, that kind of breaking point or the point that we the limiting factor in our growth was doing KYC.

So KYC is this document collection process. We have to collect all these documents in your client to send it over to the bank. You have to do the checks. And then the bank turns around and does the same checks can sometimes take months the client’s like, what are you doing? Like. Paid you a long time ago.

I don’t have a bank account yet. It’s like, well, something man, like it’s KYC, it’s the bank and was looking for solutions to that. Trying to find in software that was on the market. It didn’t really find anything that was serving our niche and started to build a software company that turned into KYC chain.

At that point. So we went through a couple of different accelerators. We went through four different accelerators with KYC chain or chartered bank to really get our product into the market. And from there we sort of had a breakthrough in around 2017 where we realized that, okay, even though we’d created an efficiency for the bank, We hadn’t returned a lot of value to the individual.

They were still having to go through this whole KYC process over and over again. And that’s how self key was born. But the project that I spend the most of my time on my now, so there’s, that’s kind of my story of the past decade and condensed down in demeanor. So so yeah, happy to get into it further.

Ben: [00:06:37] Yeah, there’s a bunch there for accelerators. That’s insane. no major pivots, still the, the original vision from the beginning within all of those accelerations.

Edmund: [00:06:50] Well, I don’t know if I can say that. I’d say there was a few pivots,

Ben: [00:06:53] but yeah, paces, I suppose.

Edmund: [00:06:58] Those accelerators didn’t take equity, which was really, really nice.

I don’t think we could have done four accelerators if they were all taking 7% or whatever. Y Combinator it takes, it’s kind of like the gold standard. These were, you know, supercharger was, was a corporate kind of run VC. Then we went through digital ventures, which was run by SA Siam commercial bank, which is the largest bank in Thailand.

We went through Accenture FinTech lab, which is of course another corporate and then also Cyberport. Which is a incubator based out of Hong Kong, which is really a government kind of run. It’s not government officially, but it’s sort of public private partnership type of thing. So, yeah, that was that was where we cut our teeth and those accelerators and really honed the business model.

Ben: [00:07:39] Oh yeah, they will do that. So I wanted to start the conversation with flag theory. So some of my listeners may be familiar, but for somebody that’s not familiar with it with FLAG theory, how do you introduce them? How do you explain it to somebody?

Edmund: [00:07:57] Yeah. So flagged theory is a concept that’s actually at this point over 50 years old.

And then when it first. Arose, basically the person who was. Came up with this concept so that you could plant these strategic flags in different countries around the world, and you could diversify your sovereign risk. So if you hold a passport only from one country, and you’re a resident full-time in that country and you’ve got a company in that country, you’re really tied to the future of that country.

You don’t have a lot of optionality. And what flag theory sort of suggests is that if you were to set up your citizenship, one country, your residency in another country, your company in another country, You’ve achieved a level of diversification that makes you not reliant upon a single sovereign state.

So that’s, that’s kind of at a core concept. What, what flag theory is about?

Ben: [00:08:46] Yeah. And that, that makes a lot of sense. And for the average American or any other nationality for that matter, a lot of people don’t think about this the amount of concentrated risk they have associated with that country in which they’re residing.

Saving investing all of these things. Right. it’s a really interesting concept to take a step back. We think about diversification all the time with our financial assets, but what about the sovereign risk?

I’ll be at small for,for most countries, but it is a risk. walk me through the different flags. There’s seven of them these days, right?

Edmund: [00:09:24] That’s right. That’s right. So the first flag is where are you? A citizen? And yeah, there’s a big difference between American citizens and all the rest of the citizens of the world, except for a rich area, which is that if you’re an American citizen, you have a worldwide tax obligation.

So no matter where you live, you are going to at least report to the IRS and possibly owe some taxes. But there there’s an obligation there. That’s very clear. And the second flag residency, if you’re not. An American citizen. Then essentially you pay taxes where you’re resident I’m, I’m simplifying things here, but generally speaking if you want to get into the exact details, you would look at the tax treaty of the country, where you were previously a resident and where the resident now, but generally speaking, if you’re president of the country more than 183 days, you’re resident for tax purposes in that country.

So the third flag, which is where you have a company is Another interesting flag to consider on the basis of where your resident, because if you’re a resident in a country which has something called a controlled foreign corporation laws or CFC laws, you can’t simply set up a flag in a country like BVI, British Virgin islands, and expect to pay no tax.

So it’s very important to consider how these flags interact with each other. You can already see how, where your citizen might impact. Where, where you pay taxes, where your resident impacts, where you pay taxes, where you have a company impacts where you pay taxes. And the fourth flag is where you have a bank account.

So we’re gonna keep your financial assets is oftentimes something really important to consider as well. Cause you don’t necessarily need to have your bank account in the same country. What you’ve set up a legal entity. So next flag is actually called playgrounds is what it’s kind of been.

Considered it at least from the, from the initial stages. We’ve kind of modified that to be more physical assets, so gold land things that are more difficult to move, right. They’re going to be in a specific jurisdiction. Then you have Information security things like email things like your servers.

If you run an internet business, which country are those located in, that’s going to actually make a huge difference if you get a subpoena. And you’re you’re, you have a non-US server in Iceland, or you have something in the U S that can actually establish a a nexus of your business. If you have a server in particular country.

So it’s worth considering. And then the last flag is digital assets. So this is. Kind of this new emerging asset class that I’m sure you’ve talked about on your podcast already of digital currencies, cryptocurrencies, Bitcoin, Ethereum, et cetera. So yeah, those are the seven flags as they stand today.

Ben: [00:11:55] Awesome. Yeah. And each of these flags could be an entire separate podcast book. Course everything on its own. So obviously we’re touching very, very high level on all of these. Originally there were like only three, right? Like 50 years ago. I think it was passport assets outside of your home country. And then maybe an address somewhere else or something.

Right. this is expanded quite a bit when you’re suggesting that someone starts to look into this a little bit, what are the low hanging fruit? What are the, you know, boil down at least do this. This is the bare minimum you should do. When thinking about flag theory.

Edmund: [00:12:37] Yeah. So I actually like to start at the end, which is the seven flag digital assets, because there’s no minimum buy-in right.

If you’re going to look to get a second passport and that’s really important to you, you’re probably going to spend at least a hundred thousand dollars upfront and that’s that’s if you want to make kind of the cheapest level donation. Right. If you’re looking to make an investment where you achieve some kind of interest to return, that could be half a million dollars, a million dollars or more digital assets on the other hand are something that’s outside of the borders of any nation state, especially if you’re holding an, a noncustodial wallet.

There’s no minimum buy-in you can buy. 10 cents or $10 million for the Bitcoin. It’s kind of up to you. And this is something that’s really a noncombustible wealth. It’s very, very difficult to prove that someone has cryptocurrency. It’s very difficult to prove that You know, it’s under their possession.

I mean, you could cross a border with the seed phrase in your mind. You don’t even have anything physically on you. And until governments can come up with some kind of mind reading device probably it’ll be difficult to prove that someone has digital assets. So I think that this is one of the best ways to diversify.

Your sovereign risk is to invest in cryptocurrency. Obviously you have to be careful there’s risks involved, and this isn’t financial advice, but if you’re looking to get started and you don’t have a ton of assets to your name, or just want to get something done relatively quickly without a ton of paperwork.

I think that that crypto is a great foot in the door to the space.

Ben: [00:14:07] Yeah. That’s great answer. I mean, I completely agree. And that kind of kicks you down this rabbit hole of non sovereign money and all of these other things that kind of peel back the, the remaining layers. with a passport. I’ve spent the last seven years abroad and this was something that I was kind of grappling with. Like, should I get another passport? I actually ended up even going to Turkey to look for, look at real estate when the Lira crashed by like 30%, because it’s 250 K you buy an apartment in a place like Istanbul. That’s been a sense center of the world for thousands of years. It’s not going to go away. And you, you get this massive discount on real estate.

And if you spend 250 K you get a Turkish passport and it seemed all great on paperuntil I realized, like, what the heck am I going to do with a Turkish passport? If I have an American passport, it’s just, it was my inner Jason Bourne. I just wanted like to flip through the passports before I went traveling.

But for an American or somebody with a stronger passport. What is the lure to get a a second passport. Obviously, if you have a a lower tier country passport, you would want to have a better one, so you can ease travel restrictions or things like that. But what’s the incentive for an American or a, an English British or, or EU passport holder to want a second passport.

Edmund: [00:15:33] Yeah. So I think. There’s a, there’s a few ways to answer that question. The first and foremost is that a passport is a, is a privilege, but it’s not a right. You cannot, a state can cancel your passport. If you’re American in, for instance, you owe more than $50,000 to the IRS. The treasury department can cancel your passport and you literally can’t travel anymore.

The only place you can go back to the U S period. Now if you sort of don’t want to continue to Have a debt to the IRS, the, the U S and have an tax obligation. Legally, the only way to rid yourself of that obligation is. So either be dead or to have a second passport and to renounce your us citizenship, you actually don’t need to have a second passport around your, your citizenship.

You can become stateless and people have done that, but it’s really not advisable. I wouldn’t advise for anyone to pronounce their us citizenship and become stainless because then you can’t travel anywhere. Then you don’t have the privilege to travel basically anywhere. So that would be a kind of tricky situation to find yourself in.

Edward Snowden comes to mind. And yeah, so, so I think that the sovereign risk thing is, is clearly there. If you’re not Edward Snowden, then you might argue, well, heck what am I ever going to do with the second passport? But the way that it’s been explained to me in the way that I like to think about is that it’s.

Just the best insurance policy that you can buy, no matter what happens in the world, you’re going to be able to have this backup document that allows you to travel. And I think for a lot of people that might be invaluable and it’s not something that you can sort of get once you’re in a point where you’d need it.

Right. This has to be thought out in advance. It’s like insurance, you can’t buy it after the fact. So that’s how I kind of think of it as is as the best second insurance policy.

Ben: [00:17:19] Okay, but don’t these governments, these days talk to each other.  if my passport’s canceled by the U S government, but I have an English passport don’t they just communicate that.

And they’re like, Hey, this guy’s got a second passport. We can see it canceled as well.

Edmund: [00:17:34] Fair point. There is, to my knowledge, there is no international database. Of individuals that any government can access at any point. Right. Do government share information with each other? Almost undoubtedly. Right.

But there’s a lot of laws and regulation around this and it’s not something that’s done haphazardly or done, probably as much as people think. People, I think have this view of government as these omnipresent entities. And in some ways they’re correct because they are siphoning a lot of data. They do have tremendous power, but I think we shouldn’t.

Overestimate the amount of power that actually they have, I think in many ways, the people are more powerful than the government. The government should fear the people, at least in a, in a country that’s upgrading effectively. At least I would argue that. So yeah, back to your question, I don’t think that they would.

Automatically know that you have a second passport there’s many countries that don’t allow for dual citizenship. Right. But these citizens of these countries in many cases do have a second passport continue their lives without having any difficulty. And although I’m not advising that, it’s definitely something that’s been done and indeed done by some politicians and members of government, because they themselves know how powerful it is to have this kind of alternative travel document.

Ben: [00:18:52] Yeah. And then obviously you have the benefit of feeling like Jason Bourne whenever you’re traveling and choosing whichever one makes the most sense. That’s the first flag, the second flag tax residency. another more specific question here, Americans and. People from Eritrea, which is small country in Africa, you know, we’re taxed no matter where we are, or at least we have to report it.

And I have a separate podcast, all about FEIE, and taking advantage of like the low hanging fruit as an American abroad.

But what benefits for Americans to get a have a tax residency somewhere else? Like walk me through the thought process there.

Edmund: [00:19:33] Yeah. So, I mean, there’s. There’s two ways that you can qualify for FEI, right?

You can either qualify under the the physical presence where you’re physically outside of the U S for 330 days per year, or you’re a bonafide resident for tax purposes of another country. And there’s all sorts of criteria that you would need to hit in order to get that. So you could potentially spend No, it depends because the U S runs their tax residency on sort of a three-year rolling basis in some instances, and this is not tax advice, but it is possible that you could spend say 150 days in the U S and you could spend the majority of your time outside of the us as a tax resident somewhere else.

And you wouldn’t be you would qualify for the foreign earned income exclusion. So that’s one reason. But to be honest with you, I think that flagged theory is, is. Ultimately the most useful to people who are not us citizens, because if they’re able to be a tax resident in a country that doesn’t have a lot of income taxes or corporate taxes, you know, there there’s many tax havens around the world, Monaco Cayman islands.

There, the list goes on there’s a lot. Then they could have a company set up abroad and they could earn income into that company and essentially be a. I have the lowest possible tax obligation that they could and not breaking into the box, which is really critical. They would be able to stand under a bright light and you know, if everything was kind of shined on them, they would be able to say, you know, Hey, I didn’t do anything wrong here.

Here’s what I did exactly. And, you know, show me where I owe tax. And most likely they wouldn’t.

Ben: [00:21:07] Yeah. And I think the most surprising thing there is obviously like BVI came in and all of these things, we all know that there are tax havens, but then you have places like portugal with the non NHR, non habitual residency, you know, and it’s filled with people British, who, you know, stay there 183 days a year or whatever, they’re tax residents. So they’re not paying any taxes on all of their income back home. They can still spend a good portion of their time in the UK. It’s it’s interesting to see all of these popping up around the world. Obviously, I can’t really.

As much take advantage of it as an American, but I do enjoy hearing these is and hearing how people are, are playing within the rules and, and really taking advantage of these things. The third one, third and fourth, well, third would be an offshore company. What are some of the misunderstandings that you see most around this flag when people try to pursue it?

Edmund: [00:22:11] Yeah. So I sort of touched on this earlier, but let’s say that you’re an American living in New York city and you think, Oh, I’m going to be clever and I’ll set up a BVI state and I’ll never have to pay any tax because I read it on some website that BVI has no tax. So to set up a company there and I’ll be scot-free that’s totally wrong.

The us has. Many different laws surrounding that. One of which is that I mentioned earlier, a CFC, a controlled foreign corporation law, where if you’re controlling a corporation from inside the United States, in this example and over 50% of the ownership of that company is American by default it’s designated as TFC.

Then for sure that that income would be, would be taxable and the laws around this change vary. Frequently the most recent change when Trump handoffs was something called guilty, where now you have kind of this obligation, if it’s a CFC to, to not be able to you have an obligation with the CFC to pay taxes on a yearly basis, based on the income that’s sort of accrued.

It used to be in the past companies like Apple Google would set up these complex structures and they would hold their profits off shore. The long short of it is that you can’t really do that anymore without getting into the, kind of the technical details. Pretty much you’re not going to get any benefit at all as an American living in the U S owning an offshore company.

So that’s kind of one of the most common misconceptions that I see is that. They read it on people read on a website, Oh, this is a tax-free entity. And in some cases it can well be but it’s much more complex than that. And you really have to dive into the unique situation of the individual. Yeah.

Ben: [00:23:39] Yeah. And that applies for all of this. Right. I mean, it’s tough to do broad brush strokes on all of these. It’s it’s very. Tailored to your individual circumstances, but also if it sounds too good to be true, it probably is like, if you’re reading it on a website, you’re not the first person to think about doing it, this method.

And that loophole probably has been closed, which is always good to keep in mind.  The fourth flag is offshore bank account, again, as an American, you know, you have all of these Factor. What’s the reporting that you have to report your bank accounts overseas, but a lot of foreign countries are not so willing to open accounts for Americans because of the, the additional paperwork that they then have to do.

What kind of steps do you recommend? Somebody looking to stake this flag, offshore bank accounts, where to start, what to do?

Edmund: [00:24:37] Yeah, sure. So I think first you have to think about why would you want to do this? And, and the reason we touched on before was the sovereign risk country and its financial health is very much tied to the banking system.

Right. And if you have. Bad debts in a banking system, you can actually have a systemic collapse, like we almost saw in 2008. So I think that’s become more well-known and there hopefully will be more protections in place for that. We’ll see the next time around. But you’re essentially putting all of your eggs in one basket.

If you have. Your retirement accounts, your bank accounts, all of your, your material wealth stored within one state. And that state has a downturn economically, financially. You could potentially be dragged down with that. So I think that there is a strong and imprudent reason to have. Bank accounts diversified in different jurisdictions.

As you touched on earlier, if you are an American, you do have an obligation to report. If the total across your accounts exceeds $10,000 in a given year you have to file something called AF bar to the treasury department. Actually no it’s defense, then you have to file it to FinCEN. So, yeah, something to keep in mind, it’s still perfectly legal and you can do it.

You could have a hundred bank accounts offshore and you can report and file all of them and not be in any difficult situation. However, it’s just something to bear in mind that, that you do need to do that on a yearly basis to report which bank accounts, if you’re an American.

Ben: [00:25:57] Yeah. the sovereign risk is not a, it’s not a zero risk.

I mean, the people of Argentina when it had hyperinflation 2001 or Zimbabwe or Venezuela, like all of these people that had assets in banks, you know, lost nearly everything.  I think the important thing probably here is not to. Diversify your risk as an American to the U S dollar in us banking system and open a bank account in Cambodia.

And actually, you know, you’re levering, you’re increasing your risk by putting, putting assets there perhaps versus de-risking. that’s probably an important note. I mean, where do you, where do you recommend people start looking for their second bank account? Assuming that they’ve, you know, they’ve got their Y hammered out.

Edmund: [00:26:51] Yeah. I mean, it depends on. What you’d want to have exposure to from a currency perspective, do you want to have dollars or euros or, or something else? There are certain jurisdictions around the world that make banking. I think just a lot easier. My favorite place to, to bank is Singapore, just because they have a really advanced financial infrastructure.

The country is. Really dependent on international trade and commerce. They’ll never implement something like capital controls in Singapore. At least it would be devastating to their economy. And I think that the politicians in Singapore are smart enough not to do that. So you’d want to pick a country that doesn’t have capital controls.

This countries that you mentioned earlier, Argentina and Venezuela, they do have capital controls and it’s very difficult to send money out. From the country. So it’s something where you’d have to have that bank account set up abroad. And then you need to have some source of income, you know, maybe from your offshore company paying into that account in order to actually even get money in, because it’s just very challenging.

Chinese citizens can only transfer abroad $50,000 per year. So even if they’d like to buy a lot of us real estate or open up a us bank account, they may find it challenging depending where their assets are currently to actually get that money into this, to the United States, which has been very, very popular over the past few years.

If you look at the real estate market in places like Vancouver, it’s been. Notoriously almost driven purely by Chinese foreign investment. There’s just been an unbelievable amount. And I’m not, I’m not making comment on whether that’s good or bad. That’s just how it is over the past decade. There’s just been an unbelievable amount of wealth.

That’s moved in places like Vancouver downtown Toronto. So yeah, not, not to pick on Canada, that’s happened to a lot of places, but you have this kind of

Ben: [00:28:36] Thailand, right? I mean, it’s very, very prevalent there as well.

Edmund: [00:28:42] Yeah. I mean, th the real estate prices in Bangkok and Hong Kong in vanilla, in Jakarta in these first tier Asian cities has just gone.

It’s become really, really hot to the point where in many cases, the government has tried to introduce cooling measures to try to dampen what they might see as an asset bubble in those respective geographies. It’s, it’s difficult though, as a As a government, I think, to effectively manipulate the free market in that way.

I’m not sure that that always has the intended outcome.

Ben: [00:29:13] No, most of the time it does not. Yeah, it’s it’s quite scary. And even the, the lower tier markets in Asia, I mean, you can just see the Chinese capital flowing in. You go to a place like Lau and these little, little towns and the. The giant organic developments and things.

That’s all Chinese money, Chinese investment.  Yeah, there’s a good book. The a hundred year marathon. I don’t know if you’ve read it, but it’s about China. Just, they’re going to be the number one superpower. That’s it. It’s all these little battles. They don’t really matter. Or four year election cycles. They’re there they’re eyes on the prize. Long-term right.

Edmund: [00:29:50] You’re completely right. You’re completely right. The way that the look, I’m not an expert on China, but from my experience, the way that Chinese think about wealth and think about generational wealth is very, very different than the way that Americans.

Think about wealth and you know, this four year election cycles where two parties are kind of fighting to the death. Look right now, it’s kind of messy in the state side. And you have China where you know, you. Have a much longer vision and timeline for what the country is developing into. And I see it as almost inevitable that the U S takes over, sorry, the China takes over the U S as the world’s superpower.

And I’m not alone in that thinking. You just said it. I think a lot of scholars have looked at that and it’s just sort of inevitable that it’s going to happen.

Ben: [00:30:33] Yeah. I mean, we’re, we’re trapped in the short-termism short-term thinking managing companies to quarterly earnings reports, four year election cycles.

It’s just shrunk into this very near term sort of thing. if you have somebody else compete competing, that’s looking very long-term you know, eventually they’ll probably overtake you, which is the unfortunate reality.

Edmund: [00:31:00] That Israeli. I mean, China’s really making a play with their belt and road and have been for decades.

It’s not something new, but they’ve made inroads and built infrastructure in, in Africa, in South America, they’re releasing a lot of soft power in the way that is different from the U S the U S many times rules by. Diplomacy, you know, speak softly and carry a big stick has kind of been the motto of the U S for a long time.

That’s how the most powerful military in the world it’s spend more than anybody else in the military. And China does have a powerful military, but they’ve taken a different tact, which is let’s make loans to these developing nations. That’s build roads and airports and ports. And once we control the port, once we control the roads, then you know, we can, we can control the trade.

We can, we can wield power within the government. There’s probably a lot of other things that they’re thinking of that I don’t even know about. Cause I don’t think about that

Ben: [00:31:50] Dams, like water, all of these things. I mean it’s infrastructure plays, right? There’s a very, very insidious. Yeah. Well that was a, that was a sidebar of AI in China.

it’s center on my mind whenever I’m in Asia. It’s just that once you see it, you can’t, it’s like the red, red coat convertible. Like you start noticing them everywhere.

Edmund: [00:32:13] Yeah. If you, if you haven’t been listening to the call, it’s just unbelievable to see how much of a different speed that everything works in China.

I mean, I took a tour as part of one of these accelerators. I mentioned earlier too. We bank, which is like the financial arm of this company we chat, which is actually just banned in the U S and, and I asked them, how many engineers do you have here? And they’re like, well, we’ve got like 600. And I was like, well, when did you guys start?

And they’re like, Oh, at the beginning of the year, they just hired like 600 engineers. And it was like, You know, you don’t see us companies in Silicon Valley moving that fast. It’s just the pace and speed of change and innovation in China is really, really unbelievable. If you haven’t seen it. It’s, it’s, it’s tough to battle.

Ben: [00:32:56] Yeah, it’s moving. the last two weeks flags, I want to cover those. And then I think when we talk about the final flag, digital assets, it’ll probably fit in with China and the things that are happening there as well. But the sixth flag is improving digital security. this is information, security servers, things like this same question as before what’s, what’s kind of the low hanging fruit.

Things to keep in mind with, with this flag in particular.

Edmund: [00:33:25] Sure. So let’s talk about one that basically everyone on this listening to the show has, is an email account, right? Do you have an email account with a well from 1994? Or do you have, you know, a proton mail account, both of which are free, one of which comes with encryption and the opportunity to use PGP and the other one is, is kind of, you know storing your messages in a different manner, you might say, or allowing you to send and receive messages.

And they don’t kind of give you that encryption option. So I, I think that encryption is really, really powerful. It, it allows It allows the little guy to have protection against the big guy, right? Like that’s what encryption means to me. I think that that’s something that’s really, really cheap really, really easy to get into.

If you want to talk about kind of like next level stuff, you could talk about having to VPN having a virtual private network so that your computer is encrypted. I mean, if you’re walking around and. Accessing wifi is that are open. You could be really easily subject to a man in the middle of attack, where someone is posing as a server, an open network, and they’re actually stealing all the data that’s going through there and performing.

What’s called a man in the middle of the tech. A VPN can help protect you against that again, not very expensive. And it’s something that’s that’s pretty easy to do. And now you can make your. IP address and it in your internet connection appears if you’re in a different country. So you could be in China and you can use a VPN and you could be accessing us Netflix, for instance.

So there’s a, there’s kind of a, I think good rationale and reason that you should use encrypted email and VPN is kind of a starter.

Ben: [00:35:01] Yeah. And I’ll link in the show notes, but privacy tools.io is a fantastic resource for all of these things. So they go through different encrypted mails, like proton mail is a good one.

And then ranking VPNs, you know? So those are kind of the first ones you can do. I’m curious, I’m curious on two things, one, had I sent you an email from an AOL or Hotmail email, would you have still sat down for an interview?

Edmund: [00:35:29] The first question? I think so. I mean, I consider email to be public record.

I think if you send something over email, you should consider that. Basically a lot of different entities may have that access to that. Now that is not a private mode of communication. You know, if it’s encrypted, I think it’s better, but I still think that you should treat email more or less like public record.

Ben: [00:35:55] Absolutely. And even, I mean, even with encrypted emails, like these things just in my mind become a honey pot because it’s like, okay, Anything you want to be secret. You’re going to use proton mail, which is the best known encrypted email. There’s a huge incentive to figure out what the heck it is.

People are sending their because it’s probably more sensitive than than normally email, right.

Edmund: [00:36:23] And that’s possible. And it’s also possible at some point in the future, that encryption is broken. That does happen on regular intervals. You know, previously thought secure. Encryption mechanisms are proven to be insufficient given breakthroughs in theater.

Ben: [00:36:39] Absolutely. And as soon as we get quantum computing, it’s all, it’s all gone anyways. Right.

Edmund: [00:36:47] Resistant technologies. But yeah, that is kind of the end game.

Ben: [00:36:50] Yeah. I mean, we, we’ve got a lot of problems when that happens, I suppose. the last flag is investing in digital assets. Crypto, this is something like Bitcoin.

This was also what you had mentioned kind of low-hanging fruit, easy way to get into the flag theory methodology. What else do you want to add on this one?

Edmund: [00:37:11] Yeah, I mean, I would love to talk about if we could defy. Cause I think that that’s kind of a really interesting development in the cryptocurrency space.

That’s really recent and maybe an interesting investing opportunity depending on, you know, kind of where you’re at and who you are.

Ben: [00:37:26] It is a very interesting investing opportunity. And I would love to talk about device. for my listeners, this in, in episode one with Alex mess managed, we talked about kind of, we appealed it appealed up in Ethereum, which was a, a bold move for like my first episode.

But we talked about. NFTs NFD, collateralized loans, personal tokens, a little bit of defy, but defy is de-centralized finance. And it has just exploded in this year to 2020. You know, it’s picking up steam last year, but yeah. What, what excites you most about this space?

Edmund: [00:38:07] To me? If you, if you look at like the macro situation, right in 2020, we’re sitting in a time and age where you have governments, sovereign yields are very, very low, right there.

They’re sub 1% and in some cases negative. So that’s the backdrop for what you have to invest in, in terms of an option is either fixed income at kind of this sub one or negative interest rates. Equities markets at, you know, a 20 year bull run up to this point. You’re not buying the bottom. Like it, it looks pretty expensive, especially if you compare the GDP to You know, the stock price of this and the overall value of the market cap market capitalization, it’s kind of expensive.

And so you have, you have bonds and equities, which traditionally, you know, traditional portfolio, 60, 40 bonds and equities, right. That’s it. And so I think for our generation, you kind of have to think it’s not where I want to put my money and you know, maybe it might make sense to put some of it there, but as an alternative asset, when you have this new asset class in cryptocurrencies that has come out.

And with defy, you have a way to even achieve yield on these cryptocurrencies, or if you’re holding a stable coin, the stable point. So I think of it almost as, do you want to earn less than 1% in a savings bond or would you like to have 12%. On a yearly basis on a stable point. Now, there obviously are some more risks in the 12%.

It’s not the U S government backing it, but I’ll take that 12% risk all day. I mean, that’s a nice, that’s a, that’s a, that’s a chunky interest rate in my opinion. And I think worth investing and you can also maximize the yield on your, on your safe Bitcoin or Ethereum by putting that into a smart contract, which can return the yield.

So now you have these  smart contracts. Whichever turning yield if you’re contributing collateral. And so that’s a really interesting way for either. Earning yield on your BTC or, or your EAs or alternative assets or on your stable coin, which I think of kind of as two different things. But that’s kind of like the the big picture and we can get into, you know, more details around that and what other people are doing that.

Ben: [00:40:19] Yeah. So zooming out a bit. How, where, where is this healed coming from? So the way that it works is I’m lending it to somebody who’s borrowing it. it’s just leverage, but traditionally you would be doing this lending, borrowing through a bank, which is a centralized party.

This has all been replaced by a smart contract, I can simply lock in my collateral, somebody else. Okay. And then somebody else can pull it out and do whatever it is they want to do with it. And each they’re paying into the protocol. I’m receiving the protocol and interest there they’re borrowing percentage.

So this is, this is what enables this yield. That’s being earned on these assets, right?

Edmund: [00:41:00] Exactly. And as you pointed out there’s many times no intermediary, or at least it’s been disintermediated so that the yield is returned to the investor as opposed to the middle.

Ben: [00:41:13] Right. obviously there, this is stacking risks on risks.

You’re already into this risky asset and then you’re lending it out through a, at times unaudited or. Audited, which means nothing, a smart contract to these people so that there are a number of risks. But the fact, like you said, I mean, you can get 10% yields on a stable coin. So you’re not going to lose any FX.

It’s backed by a dollar. It stays at a dollar rate and you’re getting 10, 12%, which means, you know, you double your money every six years which is substantial versus negative rates.

Edmund: [00:41:54] Right. And that’s what this stable coin with, with Bitcoin, you’re obviously taking the asset risk as well, because it’s not a locked against dollars.

So you could have Bitcoin rise or you could have it fall depending on what the asset does in a given year. But you’re just maximizing your, your yield in BTC terms. And I think, you know, if you look at BTC against this macro backdrop of. Governments around the world are facing this pandemic in this crisis.

And their response to it is let’s print money. Let’s turn on the printing press in the U S it’s trillions of dollars that they’re printing.

Ben: [00:42:30] And they’re not going to shut it down anytime soon ever.

Edmund: [00:42:34] Yeah, probably. Yeah. I mean, I, I think that it’s pretty clear that you know, we’re facing a deflationary environment and they had to do something.

And so printing presses is kind of like the obvious choice. I think it’s, it’s. I think it’s clear that we will see inflation at some point. And this is something that our generation hasn’t lived through. Right. The last time that there was rampant inflation was the 1970s. Right? So people don’t have a memory of what an inflationary environment looks like, but imagine the dollars that you have in your bank account are becoming worth less.

And less and less. And I think that we’re already seeing that in asset prices and may not be in the consumer price index where meat might not be more expensive. You might have the same grocery bill, but look at the NASDAQ. I mean, the NASDAQ is at an all time high when the economy is at an all time low and that’s driven by central bank intervention and money printing.

And the best inflationary hedge in my opinion is, is either gold or Bitcoin. Right. Good cryptocurrencies and crypto assets and not a loneliness. Right. Paul Tudor Jones came out this year and actually said that he thinks that Bitcoin might be the fastest horse that you can bet on in this inflationary environment.

So I think that it’s, it’s worth looking at, obviously you probably want to have an asset allocation where you’re balanced and diversified across different asset classes. But I think for a lot of people digital assets could be a component of an overall portfolio that, that, you know, Returns a semester, asymmetric returns, uncorrelated returns.

It’s also not correlated to the S and P 500 or the, or equities markets. It’s not correlated to the economy. So you sort of have this really interesting asset class, that’s uncorrelated to other asset classes, which is. Not really happened in our lifetimes besides the cryptocurrency. So it’s a very, very exciting time.

And you do have to be careful. There are definitely risks. I think one thing with cryptocurrency that I’ve learned is that you need to have a very open mind to learn and to understand what these things are. But when you open your mind, you run the risk of dealing with people who are running scams or people who are charlatans.

So you have to be. Both at the same time, very open, but very guarded, which is kind of not an easy thing to do. You have to have a good nose for, is this bullshit and is this, you know, altcoin just to complete. Nonsensical project that’s never going anywhere or is this actually backed by some kind of fundamentals that I think technically and logically makes sense.

Like Bitcoin, there’s only 21 million Bitcoin. You’re only ever be 21 million Bitcoin. And in us dollar terms, you know, there’s, there’s a. Non-zero chance that that will continue to rise in us dollar terms as they print more money. The cost per bit point in us, dollar terms will likely go up. It’s not guaranteed to go up.

There’s no fixed peg. But you know, traditionally if the historical track record of Bitcoin is any indication we’ll continue to trend in this direction because there’s a fixed, deflationary supply, as opposed to this inflationary government created Fiat currency.

Ben: [00:45:40] Yeah. I completely agree with a lot of that, and that was what spawned this podcast is looking for or an allocation to alternatives outside of the public markets, because you’re not getting an, a yield yield there.

There’s a number of really interesting asset classes, such as Bitcoin, such as gold, such as real estate, you know talk about Music royalties and all sorts of weird things that you know, offer another alternative to your traditional 60, 40 portfolio. My, my biggest fear with crypto with Bitcoin is that it just, it, it just is another risk asset.

Obviously you have the risk of catastrophic bug bug, or, you know, you find out that North Korea is behind its development and everything else or something like that. But. The, the risk that I see is that it’s just another risk gas that it’s displaying. These, these sound money, hard money principles, characteristics, limited algorithmically limited supply, all of these beautiful things, but ultimately it just was born in 2008 and two, this financial crisis.

And it’s been a tremendous bull market and it’s been pumped up. Just like every everything else. Right? that is always like one of my fears that it’s actually just a risk asset. It’s not the new digital gold uncorrelated asset.

Edmund: [00:47:10] I, I, I think that that will change. So in March we did see that Bitcoin behaved as a risk on assets.

You’re absolutely correct. And I think we have to look at that historical record, but moving forward, I don’t see a reason that Bitcoin should be correlated to. Other markets, especially the equities market they’re there. I would challenge anyone to make the argument that Bitcoin is somehow correlated to the profit margin of Apple.

It’s just not related there. They’re completely separate. They’re different things. They run in different things. However, in new liquidity crisis where liquidity dries up you’ll see everything sell off, including gold. Gold sold off in March, right? So it has performed as a risk asset during this last crisis crisis.

I actually will make the very bold prediction where I’ll probably be wrong. So I’m predicting the future. I predict that at some point, cryptocurrencies will not act as a risk asset. I don’t know when, but I think that that will change in the future. Speaking just briefly about another asset class that I think is, is under invested, is, is something called long volatility.

I’m not sure if you’ve, if you’ve heard of this asset class. I’ve been just geeking out on this asset class. The concept of like the dragon portfolio is it’s called it’s just it’s Austin. I love it. I think that it should have crypto in there. But I think this dragon portfolio is amazing and the concept of long volatility to me.

Is is really, really interesting. I think it’s unappealing to a lot of investors because basically you bleed, you believe you bleed, you believe you bleed you, you have to pay this carry costs. And then when there’s a spike in volatility, many times you’re positioned through options and, and other financial instruments to profit from that, that volatility that’s generally how a lot of these long volatility funds are working that you vary.

Depending on kind of who you’re talking to a point 72 or optimist, they have different strategies for trying to Not hedge the market, but, but go long when volatility, which effectively acts as a hedge against equity markets. So yeah, I don’t know how much you want to get into that, but that’s, that’s a really interesting space as well.

Not one that I’m involved in as an operator, but just as kind of a bystander and investor.

Ben: [00:49:23] Interesting. I can link those things. I think it’s a little bit outside of the scope of this conversation, but I would like, I like to ask, I mean, you’re, you’re keeping your finger on the pulse of the defy market and everything.

That’s, it’s very fast paced moving there, obviously. But what, what’s exciting you right now in this space most, and it’s late August, 2020.

Edmund: [00:49:46] Yeah. I mean, the big things that people are talking about are our flash loans. It’s yield farming under collateralized loans. I mean, there’s a bunch that’s happening.

It’s really tough to keep up just because it’s so fast moving. It really changes almost a week to week basis. What’s going on in  but yeah, just to speak about one of them yield farming is kind of an interesting one. So it’s wild. I’m not sure. Yeah. I don’t know if I want to recommend to anyone to get into yield farming, but definitely there’s people making money farming right now.

Ben: [00:50:18] Yeah. And then, you know, you end up with some token that’s called a yam token and you have no idea how you got there. Right?

Edmund: [00:50:26] Well, I, I kind of am annoyed with that project in that team because yam tried to copy what other projects have done. And they tried to release the secondary governance token. But they didn’t get their contract audited, which was.

Just a huge no-no in the space. I mean, you just, if you’re releasing a contract on the Ethereum main net, that deals with people’s money and you’re not getting that audit at first, you’re really acting irresponsibly in my opinion, very irresponsibly. So what happened was all these people put the money into the smart contract and effectively the smart contract failed.

And those people lost their money. They tried to invest in the new hot thing. They, they didn’t do their due diligence and the pro. The owners didn’t do their responsible actions, like getting the project audited and yeah, people lost some money. So that’s an unfortunate and Jose bad example.

Ben: [00:51:19] This is one of the risks of these move fast and break things.

What kind of projects, right. And this is it’s, there’s a yield, which means there’s a risk and you’re being compensated for this risk with some returns, which is the yield. I think that’s a, it’s a great point to, to, to state with all of this. You’re, you’re earning 10% you’re earning zero in your bank.

obviously There’s a little bit further out on the risk spectrum to get that 10%.

Edmund: [00:51:51] Oh, I would say so. Yeah. I mean, definitely, definitely. No risk, no reward though. I mean, that’s, that’s kind of what you’re. Responsible for as a, as a responsible investor effectively, what you’re tasked with doing is managing risk.

You could invest in, in sovereign bonds and have very low risk, but you also have very low returns. So it’s like, you know, what’s negative, possibly negative. I mean, the way that I like to tell people about negative thoughts. Because I can’t wrap my head around it. It’s like Ben, if I, no, nobody says if I offer you, you know, a cheeseburger today and then after 30 years.

So, so you give me the cheeseburger today and after 30 years I give you. 95% of the cheeseburger.

Ben: [00:52:39] Would you take in that order with a bite out of it?

Edmund: [00:52:42] Yeah, exactly.

Ben: [00:52:43] Thanks for taking, taking good care of it. Yeah, that’s what it is. Right?

Guaranteed loss of a 5% of that cheeseburger guaranteed.

Edmund: [00:52:52] And so who’s buying that, you know, intelligent investors are not buying okay.

Quite frankly, it’s it’s central banks or buying their own bonds so that they can print more money and then they buy more bonds so that they can print more money. And the cycle just perpetuates. I mean, this is something that’s been called by economists quantitative, easing. And now you even have things like MMT, modern monetary theory, which are even further out on the, the logic spectrum of like what could be considered a rational, you know, a central bank intervention to our economy.

So I, I just think that we sometimes give too much credit to economists and central banks to know that they’re managing everything responsibly. I’m not sure that that’s always the case. I think that there’s oftentimes misaligned incentives where the incentive to keep everything afloat now. And to forego that with future debt, there’s, there’s a very strong incentive for that.

Right. The Kenzie ans have this famous quote, which is like, you know, let’s print the debt now. Cause on a long enough timeline, we’re all dead anyway. So we’re not going to have to pay it back or grandkids to pay it back. And I think that’s, that’s a really dangerous mentality to have, but I think that’s, that’s how the world is right now.

Whether you look at government to look at corporates, the world is addicted to cheap money and cheap debt. But someday the Piper will be paid. And I hope that you’re holding onto long vol and gold and Bitcoin when that happens

Ben: [00:54:16] and guns and ammo, because that’s about the only thing that would perform well in those situations unfortunately,

Edmund: [00:54:23] passport

Ben: [00:54:25] Edmund really appreciate. Yeah. You coming on today, spending the time talking through this it was really, that’s really helpful. This is a infinitely fascinating area and you’re, you’re an expert. On all of these, so really appreciate it. Where would you like to leave my listeners?

Where can they find out more about you? Some of the projects you’re working on or do you want to send them.

Edmund: [00:54:46] Yeah, sure. I mean, flag theory.com is our, is our website for, for flag theory. I’m not actively involved there, but we have a team there who work with clients day in and day out and, and self key.org.

If you’re interested in having a non-custodial open source crypto wallet, that’s completely free to use. You can go to self care.org and you can download our wallet for iOS, Android, desktop, and yeah. Start, start buying some crypto today. So, and yeah, I want to thank you, Ben. Thank you for asking such intelligent and articulate questions.

His podcast has been a good opportunity and I appreciate it.

Ben: [00:55:17] Awesome. Hey, it was great to see you. Thanks for thanks for coming by and stay safe up there and Chang Mai.

Edmund: [00:55:23] Yeah, thanks for having me all the best.

Ben: [00:55:25] There you go. First off. Thank you very much for listening all the way through. I hope you got a lot of value out of that conversation as always.

You can find show notes, links, and [email protected] Please share this with anyone you think might be interested and derive any value from this conversation. And as always, you can reach out to me for any feedback or questions. Please give the video a like, or even better subscribe on YouTube or your podcast player of choice.

This really helps others find the podcast or the video as well. Thanks a lot. Hope everybody has a fantastic day and stay safe out there and invest wisely.

Cheers.


Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.