IS CRYPTOCURRENCY HERE TO STAY?
Hello! I’m Chris Dannen from Iterative Capital Management in New York, NY. Large scale miner, investment manager, and wholesale dealer.
1. Getting oriented Seeing past the propaganda to understand the cryptocurrency landscape
Public cryptocurrency blockchains ○ eg., Bitcoin, Litecoin, Ethereum ○ Free software ○ Managed as open source / open allocation ○ Strengths: programmable; robust enough to compete with Fedwire or SWIFT ○ Weaknesses: Unclear why that’s necessary (this talk will address)
Crypto-assets on public chains ○ Unregistered securities ○ Better crowdfunding? Debatable! Very expensive for one; security issues (and securities issues) for another ○ Utility tokens (eg., casino chips) ○ Could be useful, but network must be complete before launch; ICO’s pointless ○ Registered securities (“crypto - bonds”) ○ Could reduce price volatility (more on this later)
Private & Permissioned Blockchains ○ Sometimes called “DLT,” blockchain optional ○ No cryptocurrency ○ Shared database between stakeholders in a consortium ○ Could be useful in certain supply chain finance contexts
Why important? ○ Programmable money = scalable extensible financial technology ○ “culture of automation” in entrepreneurship ○ IOT bots will be big spenders ○ Privacy and security are problematic in legacy environments
2. Are cryptocurrencies headed for regulatory oblivion? Perceived barriers to development.
Quick technical lesson ○ Public, open source, free cryptocurrencies are generally mined. Mining is not legally contentious. ○ Generated by miners, who sell them on exchanges or to OTC dealers
Quick technical lesson continued ○ Private, permissioned, or trusted digital currencies are sold at ICO or given away for free. ICO is legally contentious. ○ These coins are often secured by “Proof of Stake” consensus
Regulation and compliance ○ Cryptocurrency is fully regulated by CFTC, SEC, FINCEN ○ Regulators focus on the ingress/egress, money transmitters and exchanges ○ Will get treated as forex or commodity ○ Initial coin offerings (“ICOs”) awaiting guidance, mixed statements from SEC
ICO regulation unclear ○ JOBS Act already has a crowdfunding license (Title III) ○ SAFT notes are a work-around for pre- selling tokens, but legality is unclear once tokens are re-sold by initial purchasers
For the purposes of this talk ○ We will focus on cryptocurrencies and mining ○ ICOs are the territory of other “specialists"
3. What should be viewed with skepticism? Many “specific uses” of blockchain are extremely limited
Off-the-shelf blockchains ○ Microsoft and IBM private chains ○ PayPal competitors (eg., Dash) ○ Ripple and other remittance tech ○ Partners or competitors for MoneyGram and Western Union ○ Extremely limited use-cases ○ Perhaps for Fortune 50 & their consultants
ICO “investments” ○ Offerings to bootstrap new networks ○ “Consortium” building by legacy companies ○ ________ on a blockchain
ICO-drunk-marketer-entrepreneurs ○ “This is the new IPO!” ○ “Build a community!” ○ “Create a channel for customer engagement!” ○ Nonsense, if the coin price is floating against USD!
Basically everything else ○ If it’s not free, open source, and completely peer-to- peer, then it’s probably better done with traditional technology stacks, and it will never be infrastructure like the Web we have today.
4. Where’s the impact? How will the world change if cryptocurrency reaches scale?
Trustless networks as SAAS infra. ○ Petri dish for free and open source software ○ Self-funded version of the old foundations ○ Similar to a pure software postal system ○ Coins = stamps; convey information and/or value across time and space ○ Triple entry accounting for everyone ○ Values: equality, accessibility, fairness
Impact on legacy businesses ○ Public blockchain networks don’t “compete” with banking systems ○ Do compete with traditional enterprise software suites from MSFT, Google, Oracle. ○ Highly extensible, cheap security, global reach, no firewall needed.
How crypto-networks benefit software services ○ Serves many small business functions with industry-leading security and low cost: ○ Payment processing ○ Micropayments (data or content) ○ Value transmission ○ Secure information transmission ○ Accounting and auditor tooling “natively” ○ Middle office functions easy to build
Why more than one network ○ Bitcoin underlies the others (for now) because it is the most secure (ie., most mining hashpower) ○ More specialized second-gun networks (Ethereum, Qtum, EOS, NEO Cardano, Ripple) are traded primarily for BTC ○ BTC has widespread and deep liquidity; many others don’t
The “second generation” blockchains ○ Cash to Bitcoin’s gold ○ Each “cash” priced in accordance with the market’s perception of its free -ness, open source-ness, fairness ○ Can compromise on security in ways Bitcoin can’t and won’t ○ As a result, can be faster, have more features
Why Bitcoin is special ○ It was there first ○ Hauntingly brilliant design ○ Most hashpower ○ Mathematically provable ledger ○ Robust ASIC chip industry ○ Widespread acceptance ○ Brand recognition
5. What should be taken seriously? Recognizing real potential
“Blockchain not bitcoin” is a popular (wrong) narrative ○ You only hear this from enterprise software vendors! ○ Cryptocurrency is the breakthrough: Bitcoin and a handful of other non-incorporated projects too ○ Open allocation governance is key to decentralized systems, but isn’t pretty
Cryptocurrency and automation ○ Increasing culture of automation requires machines that hold and spend money ○ “Machine - compatible forex” system allows automation of financial transactions at very little expense ○ Incredible for international entrepreneurship
OTC trading of these coins ○ At least $10B of volume per month ○ Parallel financial system emerging around these cryptocurrencies ○ Special considerations around custody, pricing, and managing net exposure ○ Will take 5-10 years to mature
Ethereum + Banks ○ Banks will issue private digital currencies (Zelle, et cetera) ○ Ethereum has highest potential of bridging the gap between private blockchains and public ETH chain ○ This would be a huge win for public blockchains ○ Big banks probably aren’t smart enough to do this; some medium-sized banks will be
Remittance networks, maybe ○ “Settlement coins” are private blockchain -style networks ○ Ripple and Stellar could make international payments a commodity ○ Remains to be seen if any single “settlement coin” can reach ubiquity without network effect of cryptocurrency ○ No relation to eponymous cryptocurrencies
6. Obstacles to growth What could go wrong?
Coin prices never stabilizes ○ High velocity, deep markets are necessary to reduce volatility ○ Volatility reduction is necessary before businesses will hold a lot of crypto on balance sheets ○ If hedge funds start speculating and get big positions, markets will not calm for years
Hardware makers consolidate ○ Small number of ASIC hardware makers that specialize in Bitcoin chips ○ If these hardware makers dominate mining, smaller players may turn away from networks, leading to cessation of growth ○ ASIC resistant networks would flourish
6. Who should get involved? What should one do about all this?
Energy companies ○ Energy companies are in unique position to build on top of this infrastructure
Commodities traders ○ Understanding the needs of software and hardware engineers around future automation allows for educated position- taking
Anyone with industrial facilities ○ Anyone with access to cheap power should mine with ASICs on select networks ○ Mining is the equivalent of being a large shareholder ○ Holding coins is like being a small shareholder; your ownership of the network is purely symbolic ○ Miners can be “activists”
Anyone who needs dry heat ○ Indoor farms ○ Underground facilities ○ Already using a lot of power? Add mining
THANKS! Any questions? You can find me at: chris@iterative.capital
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