6/5/19, 5(26 PMINTERVIEW: Blockchain Capital's origin story is steeped in gaming lore |

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I N N O V A T O R S

INTERVIEW:Blockchain

Capital’s originstory is steeped in

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6/5/19, 5(26 PMINTERVIEW: Blockchain Capital's origin story is steeped in gaming lore |

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Wgaming lore

June 5, 2019

hen the sons of legendary investment

banker Paul Stephens met Mighty Ducks

star Brock Pierce, they were avid World

of Warcraft gamers and he was amassing an empire

of digital goods exchanges where players could buy,

sell, and trade valuable in-game items and virtual

currency. Together they would go on to form

Blockchain Capital, the first venture capital firm to

fund the blockchain ecosystem and were early

investors in 70 of the best known crypto brands

that include Augur, Bancor, BitFury, BitGo, BitPesa,

Bitwise Asset Management, block.one (EOS),

Blockstream, BTCC, Coinbase, CoinList, Circle,

Filecoin, Harbor, KIK (Kin), Kraken, Messari, LedgerX,

Orchid, Radar Relay, Ripple, Securitize, and 0x.

Fifteen years later, the trio remain the closest of

friends.

Having been there at the birth of the industry, Brad

Stephens shared with me what the early days of

crypto were like and his vision for the path going

forward. The following is an edited transcript of our

discussion:

Modern Consensus: Blockchain Capital today is

one of the largest investors in the crypto space.

How did you first get involved?

Stephens: Well, before there were

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cryptocurrencies, there were video game

currencies, and Brock Pierce was considered “The

Godfather” of the industry.

I got to know Brock in 2004. He was 24 and running

IGE, a digital video game marketplace which was

kind of like an eBay for virtual goods where

Warcraft gamers could buy gold for their characters

or sell their super fire swords and other game

items. Bart and I were playing Warcraft and were

huge customers. We loved his company and what

he was doing so we flew down to L.A. to meet him

and structured a deal to invest along with Maverick

and Goldman Sachs.

Brock was the first to corner the market in digital

goods before anyone even knew there was a

market to be had. He had bought out five or six of

his competitors and had this super profitable

business, but it was all being done in the gray

market. Publishers didn’t like the trading of goods

outside of the game because it broke up the

balance of gameplay for someone who had put

hundreds of hours into earning the fire-winged

dragon. They wanted to keep a purity of gameplay,

which was important to these game worlds. There

were auction houses in game but the publishers

wanted to control them, control inflation, and keep

the economies of these games robust and intact

without artificial third parties coming in like Brock’s

company. Technically, trading outside the game

was a violation of the terms of service, and there

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was an ongoing battle between Blizzard and IGE for

years, but it was a wonderfully profitable business

and that’s how we first got involved.

A competitor at the time was Mt. Gox, which

was an online exchange for Magic the Gathering

game items started by Ripple and Stellar

founder, Jed McCaleb. Bitcoin was added in 2010

and Mark Karpeles bought it in 2011. By 2014,

Mt. Gox was handling over 70% of the world’s

Bitcoin transactions when mysteriously 850,000

Bitcoins disappeared. The loss was valued at

nearly half a billion dollars and stigmatized the

nascent industry. Earlier this year, Brock

launched a “Gox Rising” campaign to try to

resurrect it. Why?

This is actually his third run at Gox. Brock tried to

save it in 2014, and actually tried to buy it before it

failed.

In 2012, IGE had moved to South Korea which had

become the center of the universe for online

games. At that time, one out of four Koreans were

spending on average 30 to 40 hours a week in one

of these online worlds, whether it was Aon or

Lineage 2. We ended up merging with our biggest

competitor in South Korea, ItemBay then

ItemMania. We then had something like 99% global

market share for video game secondary market

sales.

It was at that time that Brock came to the board

6/5/19, 5(26 PMINTERVIEW: Blockchain Capital's origin story is steeped in gaming lore |

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and said, “I want to buy a Bitcoin exchange called

Mt. Gox.” It was similar to ours, a digital goods

exchange. Billions of dollars of video games goods

had been sold on our exchange for over eight years

and hadn’t been hacked. Our technology was very

stable. We probably could have absorbed the Mt.

Gox business without their corrupt technology and

could have saved the industry the black eye that is

the Mt. Gox legacy.

Did you decide to buy Mt. Gox?

We didn’t, but it did get us excited about Bitcoin. I

had no idea what Bitcoin was at the time, so my

brother and I went on a six-month exploration

project to find out. We talked to cryptographers and

video game people, everyone we could, and looked

at Micky Malka’s letter to investors for his first fund

at Ribbit Capital, which was the best paper out

there on Bitcoin.

Most of the content was coming from Wences

Casares, founder and CEO of Xapo, who was

considered “patient zero” of the crypto movement.

He was the single most important person for the

spread of Bitcoin throughout Silicon Valley and the

tech community. The libertarians knew of it,

anarchists knew of it, but the technologists had not

heard about it until Wences went to a few YPO

(Young Presidents’ Organization) events and started

teaching people about what Bitcoin means and the

history of the ledger. He had this personal narrative

of how his family’s wealth was wiped out three

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times in the last hundred years due to currency

manipulations and hyperinflation in Argentina, and

how Bitcoin is the panacea for all these problems.

YPO was this club with leadership circles for

influential CEOs and a lot of crypto pioneers first

heard of Bitcoin from these talks, including Fortress’

Pete Briger and Mike Novogratz, then Tim Draper

became excited and the overall VC community

woke to it. That was the start of a lot of awareness.

The entrance to the Blockchain Capital office is

a museum of mining rigs from companies that

are now defunct. Why?

It’s a reminder of where we came from as well as…

haha, don’t be in mining. In 2013, we started mining

and got to about 1% of the global Bitcoin mining

network, which was much easier to do back then.

We had these hand-welded mining rigs and were

making tons and tons of Bitcoin but we exited in

2014 because it became financially superior to

purchase Bitcoin instead of mining it. Equipment

suppliers were flaky or more likely corrupt, “testing”

the gear for weeks before shipping. Most of them

went out of business. Friends don’t let friends mine

crypto.

The Winklevoss twins amassed 1% of the world’s

Bitcoin during that time as well.

I think they bought 1% of all Bitcoin at the time, not

1% of mining hash power. Much bigger!

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Sounds like 2013 was a good year to get in on

Bitcoin.

It was except we wanted to spend it and there were

no exchanges or wallets yet. That’s when we funded

GoCoin so we could spend it at retail, and Xapo so

we could have a crypto credit card, and Coinbase so

we could sell it back into fiat.

You invested in Coinbase, now valued at $8

billion, instead of Mt. Gox, which went bust—

smart move!

Coinbase was the only crypto exchange with a bank

account. They were banked by Silicon Valley Bank,

and Silicon Valley Bank banked only them. It was

the single most important bank account bringing

the crypto world back to the fiat world, and our

single biggest insecurity for 2013 through 2015.

Had Silicon Valley Bank pulled their banking

relationship, Coinbase would have died and crypto

wouldn’t have taken off for years.

Back then, no one would bank crypto. There were a

few very expensive, questionable banks in Europe

that stepped in to fill the void, and Kraken ended up

getting some of those relationships, but overall the

banks were scared to touch crypto. If you have 99%

of your business in a safe, stable area and 1% in

crypto, you could have 99% of your accounts frozen

if that 1% winds up doing something that is deemed

illegal. Banks are highly aligned to not do anything

that could mess up their core business.

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In 2013, you, your brother, and Brock Pierce

founded Blockchain Capital. How did you decide

to roll the dice and fund such a high risk

industry?

Well, we had already been funding a bunch of

startups off of our Stephens Investment

Management Group, which is our family office, and

wanted to invest in a VC fund that was specific to

blockchain. We met with Brock to find a blockchain

fund and there really wasn’t any. Terra had a

Bitcoin fund where they held Bitcoin like a

custodian but they weren’t doing any venture yet.

Mickey Malka of Ribbit had made some investments

in crypto, but most of his fund was fintech. So

together we decided to start the first crypto fund.

We did it on a no-fee no-carry basis and went in a

third, a third, a third.

It was originally called Crypto Currency Partners,

which we folded in our earlier investments. We

basically went around to the early crypto CEOs and

said, “Bobby Lee of BTCChina, give us $50,000 of

your stock and we’ll make you a $50,000 limited

partner in the fund. Steve Beauregard, give us

$50,000 in GoCoin and we’ll make you a $50,000

limited partner.” The investors in the fund were the

CEOs or founders of our portfolio companies. We’d

invest in their company and the CEO would invest

in the fund, with a few exceptions like Coinbase.

Our pitch was you got the industry right but there’s

risk. Give us some of your equity and we’ll give you

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25 pieces of other equity so if your company fails, at

least you’ll have a piece of your competitors. The

companies were happy to work together because

they were invested in each other. They were cross-

pollinating, and growing the ecosystem together.

There wasn’t as much competition as there was

coopetition. Everyone was trying to help each other.

That was Fund I, and the good thing for us was not

only did we get exposure to the first 30 crypto

companies which included BitGo, Chain, Circle,

Coinbase, Kraken, but we also had 20 of the CEOs

as limited partners which gave us access to

information and connections that proved

invaluable.

For the first year and a half, we were the sole VC in

town. Bart and I ran the fund and Brock was out on

the road bubbling up deal flow. When we closed

Fund II in late 2014, there were still no institutions

willing to touch crypto yet.

Then in the summer of 2016, after we saw what

happened with The DAO and how quickly they were

able to raise $150 million, that was our aha

moment when we decided to do an ICO ourselves.

We began working out the details of how to do it

compliantly and in April 2017 launched Fund III

which created BCAP, the world’s first security token.

In 2017, ICOs were all the rage. Ensuring you

were compliant with U.S. securities laws must

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have been expensive and time-consuming, but

obviously the right move considering the

current environment. Did you consider the raise

a success?

Definitely, BCAP was one of the best performing

tokens of 2018. We were the first ICO to mandate

KYC/AML [“know your customer”/anti-money

laundering] and were uncertain whether it would

crush any demand, but we knew we needed to play

within the SEC’s framework for securities. We erred

on the side of caution and thankfully the sale was a

fast success, raising the entire amount ($10 million)

in 35 minutes, even with KYC. But our decision was

easy, we were obviously a security.

BitGo is now custodying it, Coinbase hopefully

soon. Having professional custody and trading of a

VC fund, which is an absolutely illiquid asset class

that’s now liquid, is very exciting.

We created a structural path for other people to

create security tokens by complying with Reg D

506(b), basically mirroring the high yield debt

offering. No one had any clue how to do a security

token through the U.S. legal system back then. We

were the first to figure it out.

On Tuesday, the news broke that the SEC is

suing Kik Interactive for conducting an illegal

$100 million securities offering of digital tokens

from its 2017 ICO. What effect do you think the

current SEC actions will have on the crypto

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markets?

With Kik, we get into the grey zones. They’re well

backed and with a respected team and it could take

forever to get sorted out, but at least we have a

case to start the dialogue. We’re about to see the

Howey Test finally applied to crypto. From an

investor perspective, capital formation will

definitely take a pause as we see how friendly or

not the U.S. is to innovation and crypto. This will be

a defining case as to whether the crypto industry

needs to move away from the U.S. Innovation won’t

stop but overly zealous regulation from the 1930s

with limited flexibility may make the U.S. a hostile

environment for our industry.

What is the likely effect on Bitcoin if the tariffs

from the trade wars tank the global economy?

As we have seen for half a decade, when there is

global economic chaos, Bitcoin gets more attention

as a safe haven inflation-protected asset class that

is not correlated to other asset classes. So trade

wars, implosion of Venezuela, Brexit, Chinese

pending devaluation of the yuan, all drive Bitcoin

interest.

After a long crypto winter, Bitcoin started to

make a steady climb, crossing over $9,000 twice

in the past few weeks. Even though right now

it’s back under $8,000, people were getting

excited about the prospect of breaking through

$10,000, a price we haven’t seen since February

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2018. What is your outlook as we make our way

through 2019?

Well, 2013 to 2016 was about creating a fertile soil;

2017 a thousand trees flourished; 2018 was about

pruning out the weak, the corrupt, and the dead;

and 2019 the strong and well are thriving.

We’re in a period of BUIDLing, the fundamentals

are there. We closed our Fund IV at $150 million in

February 2018 and have been investing heavily in

RegTech, leading the rounds in Securitize and Radar

Relay.

We need more onramps and we’re about to witness

more established companies shifting to crypto.

We’re seeing the arrival of institutional custody that

has created a lot of new large buyers. Major players

jumping in like JPMorganChase, Fidelity, Amertrade,

E*Trade, Square, and NYSE give a ton of credibility

that this isn’t a fad that is going to go away.

What do you think the effect of Facebook

GlobalCoin will be as it debuts early 2020, before

the U.S. presidential election? What happens

when 2 billion people adopt a currency no

longer controlled by a government?

I believe Facebook’s aggressive push into crypto is

the single largest news of the year, and has the

chance to grow our ecosystem, wallets, and users

exponentially. Purely from the global adoption

perspective, Facebook has the ability to pop us into

over a billion users, especially with the unbanked

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who are now folding into the global economy. It

signals a huge leap forward for financial inclusion.

Facebook GlobalCoin is going to increase

awareness of digital currencies and Bitcoin,

particularly across the major fintech and payment

companies that are in the Facebook consortium.

Do you think the efforts by the U.S. government

to break up big tech has anything to do with the

rise of crypto?

Perhaps. Long term the establishment of supra-

sovereign currencies should lead to the weakening

of nation-states which I personally believe is a huge

global net positive. A country’s currency printing

press is the most powerful weapon of control, and

as that control gets eroded by global currencies

owned by individuals instead of countries, we are

ushering in a new era of globalization driven by

individuals with choice and freedom.

0x Augur Bancor Bitfury BitGo

BitPesa Bitwise Asset Management

block.one (EOS) Blockchain Capital Blockstream

Brad Stephens Brock Pierce BTCC Circle

Coinbase CoinList Facebook Filecoin

GlobalCoin Harbor IGE Jed McCaleb

KIK (Kin) Kraken LedgerX Mark Karpeles

Messari Mt. Gox Orchid Radar Relay

Ripple Securitize Stellar Wences Casares

Winklevoss Brothers YPO

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MARTINE PARISMartine Paris is a Silicon Valley tech reporter who

follows the money across AI, robotics, gaming,crypto, and blockchain. Disclosure: She owns an

insignificant amount of crypto. Follow her onTwitter.

By Martine Paris 0 Comments

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