Peer-to-Peer is a series of Q&A style interviews with members of the Chia community. This interview is with Gene Hoffman, CEO of Chia Network Inc. and Co-CEO of Permuto Capital. This is the second XCH.today interview with Gene, the first one was in January 2024.
Editor’s note: Embedded links below were added by XCH.today for context.
Hi Gene, thanks for taking time to chat today. Top of mind for readers is probably the recent news published by Permuto Capital about the switch from a 33 act filer to a 40 act filer. Let’s start there.
Did Permuto Capital originally consider filing as a 1940 Act filer?
When we first started to design and build Permuto we engaged with two other major law firms to use the ‘40 Act path. It was frustration with their lack of a solution that led us to the Single Stock Voting Trust path. We were repeatedly told by the law firms that having two classes of stock in a ‘40 Act entity was novel and not likely to be approved quickly, if at all. As such, the current SEC communications that they expect that exemptive relief to be available has been a positive surprise.
Given that the 1940 Act process is much more involved, is this starting the process back at square one? How much of a delay can we expect until the first trust approval?
We are not starting at square one. All of the relevant divisions have thoroughly reviewed the S-1 and regardless of which final filing form we take, that work will just transition over. The only real remaining work is the exemptive relief itself and the minor changes required, like substituting U.S. Bank in as the trustee in place of CSC – for example.
What is your confidence in receiving the required exemptive reliefs?
Nothing in life is certain but we have every reason to believe the SEC does ultimately want to see the Permuto Trusts trade.
I’ve seen some pessimistic interpretations of the SEC’s request as a means to purposely delay or hamstring the filing. What is your take on why this request is coming so late in the process?
While we too have some concern about how late in the process this was brought up, we have been seeing the right things happening to get us across the finish line. In our early conversations with senior staff, they seem to think the delay is going to be shorter than some of our initial fears timing wise. However they are having to do some internal work to get themselves coordinated on what timing we should expect.
You had mentioned that the advantages of this new structure include allowing for AC/DC certificates on ETFs and bonds. Were these suggested by the SEC? When can we expect these relative to AC/DC certificates on dividend-paying stocks?
These were not suggested by the SEC but are a pretty obvious impact of using a ‘40 Act structure instead of the single stock voting trust. We are especially excited about the ETFs because we can more quickly have a diversified dividend flow. That allows us to more quickly set up securitizations of DCs and we expect the institutions involved in those securitizations to hold those DCs on chain for the ongoing fee discount. I would expect us to have at least one high dividend ETF in our first 10 trusts.
We’re also excited that the ‘40 Act path doesn’t require a national exchange listing. Having that be optional means we can take on additional underlying companies that pay very small dividends and make them available on chain only – where the ongoing operating costs are significantly less.
What different considerations exist for creating AC/DC certificates for ETFs and bonds?
Other than an opportunity to partner with some of the major ETF sponsors, we expect an AC/DC of an ETF to be very similar to the ones for a single company. We will still aim for the annual Dividend Fee to be about 14 and 7 basis points on DTC or on chain. We may also opt to not nationally list some of the ETFs as well.
We’re not as far down our planning on the bonds side so can’t comment on that yet. We’re going to be focused on equities for the initial 6 months post go live though.
Another advantage the blog post mentioned was the ability to “cash create”. How would this work logistically and would it use the upcoming buy-with-ACH feature? Also when ACH?
We have had issues with our intended partners on ACH but we believe we’ve gotten through them so “soon” on ACH. However Permuto is a different analysis so we are likely to support ACH and wires to purchase ACs and DCs. We are also likely to take wUSDC and XCH. Once you send an amount of cash and instructions for share delivery, we will use a broker-dealer to buy the underlying shares and deposit them into the trust so that we can deliver the ACs and DCs back to the buyer.
Congratulations on the recent SOC 2 Type II certification. Was this a necessary prerequisite to work with some of the partners needed for the Permuto launch? And is there any remaining tooling or development needed?
We have already had demand for a SOC 2 Type II from partners and users around CAD Trust and the World Bank’s initiatives. This just streamlines that and quickly addresses security concerns at companies and financial institutions looking to use the Chia blockchain in production. There really isn’t any additional tooling or development work. However there is a set of ongoing feature improvements like more closely integrating TibetSwap, Offers, and automatic dividend reinvestment that we will continue to improve and hope to have more of ready on day one with the delay.
With the delay, is it safe to expect pre-farm sales (through MM or ACH) to continue until Permuto revenue can be realized? Are there plans to further leverage the pre-farm to fund other initiatives or projects?
We expect no real changes in course or speed of our sales of the pre farm. The goal is to taper that off as soon as revenue arrives from the trusts with the added point that we will continue ACH sales to support the AC/DC market, providing liquidity at TibetSwap, and peer to peer gaming.
You had mentioned “Dunktober” isn’t just about AC/DC certificates. What can you tell us about the other projects and developments in the works, and when can we expect to hear more?
We’ve had a lot of very interesting conversations with major financial institutions who are excited about ACs and DCs. Some of those are likely to be something we can talk about even before we get the first trusts effective.
For better or worse, Permuto has taken up a lot of the community discussion due to its potential scale and impact. What are other priorities CNI is focused on besides Permuto?
Internally we’re moving some focus past the Permuto/Cloud Wallet world and into wrapping up peer to peer gaming, but especially getting Proof of Space 2.0 working end to end and preparing for the fork/Chia 3.0. We’re first getting the “fat” plot files plotting and proving end to end, then we will kick off parallel tracks for a much improved UX for plotting and re-plotting and a track that is about implementing the highly compressed new plot format.
Looking further out, there are a couple of projects we hope to see launched by third parties, like Amberoon’s Manatoko VC and Not.bot from Julia.social, over the next 6 months.
Thanks for taking time to chat, Gene. Is there anything else you would like to share with XCH.today readers?
There is a lot of heat and light around on chain equities but we are one of the very few projects about to trade registered equity with liquidity because a walled garden or registered wallets will not be required to buy and sell ACs and DCs. The win is getting real cash flows into DeFi natively in One Market.
