Happy Thanksgiving! I have so many reasons for gratitude — including you, dear reader — and I hope you feel the same way. If one of those reasons is a tender, succulent turkey, all the better.

As usual, this is Taylor, CEO of Hedgehog, the crypto portfolio manager that shows you see everything in one place, across all your wallets and exchanges. Speaking of gratitude, I'm incredibly grateful for the team building Hedgehog ❣️ I know every CEO says this, but seriously, what a bunch of smart, hardworking, warmhearted individuals. 10/10 would hire again.

In the previous newsletter, about the messy death of exchange FTX and how it's affecting the broader crypto industry, I told you, "I will follow up soon with a note about our product roadmap in light of recent events." This is that note.

Over the past year, I've mentioned several times that the team is diligently dedicated to upgrading the Hedgehog, and version 2.0 is right around the corner. (Yeah, it's been right around the corner for… a while.)

A big reason for the delay is that Hedgehog 2.0 includes custody, meaning Hedgehog will hold funds on behalf of customers. It will be our responsibility to keep your assets safe. One big piece of the puzzle is already in place — Hedgehog is registered with the SEC* to offer personalized crypto investing advice, which means we are legally obligated to act in our customers' best financial interest.

Our upcoming custody system has been architected to prioritize the security of your funds:

  • Individual bank accounts are created for each user to handle deposits and withdrawals.
  • Individual custody accounts are created for each user to store assets (which are never lent out).
  • Any assets that are deposited, purchased, or managed on Hedgehog belong to you (not to the company).
  • Your assets are never commingled, loaned, or borrowed against.

A month ago, you could have argued that Hedgehog was being overly cautious, and that as a startup we should optimize for speed without worrying quite so much about safety. Now, post-FTX, that argument should be laughed out of the room. I'm proud that this team decided to do things the difficult, rigorous way. Today, we are one of maybe two registered investment advisers that have taken this approach.

In addition, we're exploring internally how we can provide as much transparency as possible about Hedgehog operations without jeopardizing any confidential information. It's a tricky balancing act, but committing to transparency is crucial but we're more than willing to dedicate the extra time and resources.

*Being registered as an investment adviser does not imply a certain level of skill or training.

There you go. Definitely expect more details in the future! Until then, perhaps some crypto news?

As the industry digests the shocking FTX revelations, people are chattering nonstop about proof of reserves, or better yet "proof of solvency," as Ethereum creator Vitalik Buterin blogged. Vitalik describes the technical problems that exchanges will encounter when attempting to demonstrate that the correct amount of funds is available, as well as a few promising solutions. He concludes with optimism that a better world is possible:

In the longer-term future, my hope is that we move closer and closer to all exchanges being non-custodial, at least on the crypto side. Wallet recovery would exist, and there may need to be highly centralized recovery options for new users dealing with small amounts, as well as institutions that require such arrangements for legal reasons, but this can be done at the wallet layer rather than within the exchange itself. On the fiat side, movement between the traditional banking system and the crypto ecosystem could be done via cash in / cash out processes native to asset-backed stablecoins such as USDC. However, it will still take a while before we can fully get there.

The Block published a skeptical article about proof of reserves: "On the face of it, the transparency is a welcome move," reporter Adam Morgan wrote. "But proof of reserves is just a single snapshot and doesn't show the full picture, experts say." One of those experts is Wayne Trench, the CEO of Hong Kong-based exchange OSL. In a note to customers, Trench explained:

[W]e are of the opinion that such initiatives have limited value as the proof-of-reserve snapshots do not reveal audited fiat reserves, client and company liabilities, company loans or much of the other required information necessary to ascertain the financial health of a firm operating in this space. On the flip side, whilst we acknowledge that traditional structures aren't bullet proof either, we strongly believe that things like regular and transparent audits, the segregation of client assets in bankruptcy remote trusts and being subjected to tier one regulatory supervision and oversight currently provides significantly higher levels of investor protection.

His perspective sounds a lot like the Hedgehog approach to financial architecture that I touched on at the beginning of this newsletter. Basically, no shortcuts.

Trench particularly stressed that OSL is an entity subject to government oversight, one which "employs the same governance controls that are commonplace in large, regulated businesses, including segregation of duties, first, second and third lines of defense, conservative risk management practices, stringent AML and KYC procedures, rigorous counterparty due diligence assessments and regular reviews of trading and settlement limits."

Don't get me wrong, regulation also has downsides — the people making the rules are not the ones actually running businesses, so it's easy for them to invent nonsensical "best practices" and accidentally stifle innovation. However… for example, the CEO of a public company like Coinbase, which must disclose its key financial metrics to investors and the world at large, could not go around simply lying about whether the exchange was profitable. Which is apparently what FTX CEO Sam Bankman-Fried was doing.

Tldr: Wayne Trench is a solid name. His mama did him right.

And now for the most fun topic of all: taxes!

CoinDesk published "The NFT Creator's Guide to Year-End Tax Planning," which walks through the necessary steps for NFT artists. Some of the ideas in there never would have occurred to me, for example: "Due to the experimental nature of blockchain, [CPA Justin Macari] encourages creators with boundary-pushing NFT projects to claim a tax credit for research and development under Section 174 of the tax code." Who woulda thunk, that NFT art might count as research and development!

As it happens, my colleague Sonya recently chatted with Hedgehog's very own tax guy Lorenzo Abbatiello, a CPA who specializes in crypto taxes, to see what tips he had to share with you all. Lorenzo's key advice: "Being very intentional with your wallets," especially making sure to plan "how you set it up, how you move money back and forth, how you pay people."

It might be a little late for this year, but in 2023 "you want to set those fundamentals." Lorenzo explained that "when you're commingling expenses and different kinds of expenses" things get confusing very quickly. The goal is for your financial flows to be cleanly auditable should the IRS come calling. Use individual wallets for different purposes, e.g. paying subcontractors versus paying yourself.

Tldr: It's definitely better for the IRS not to come calling. But if they do appear on your doorstep, hopefully you can show them something that makes sense.

I didn't remind you, but you still remembered the weekly giveaway, right? Right?! Reply to this email with your favorite Thanksgiving food for the chance to win a bundle of cozy, comfy Hedgehog swag.

Gobble gobble gobble,
Taylor

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