is cryptocurrency here to stay?...remittance networks, maybe “settlement coins” are private...
TRANSCRIPT
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IS CRYPTOCURRENCY HERE TO STAY?
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Hello!I’m Chris Dannen
from Iterative Capital Managementin New York, NY.
Large scale miner, investment manager, and wholesale dealer.
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1.Getting oriented
Seeing past the propaganda to understand the cryptocurrency landscape
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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)
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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)
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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
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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
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2.Are cryptocurrencies headed for regulatory oblivion?
Perceived barriers to development.
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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
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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
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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
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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
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For the purposes of this talk
○ We will focus on cryptocurrencies and
mining
○ ICOs are the territory of other “specialists"
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3.What should be viewed with skepticism?
Many “specific uses” of blockchain are extremely limited
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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
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ICO “investments”
○ Offerings to bootstrap new networks
○ “Consortium” building by legacy companies
○ ________ on a blockchain
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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!
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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.
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4.Where’s the impact?
How will the world change if cryptocurrency reaches scale?
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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
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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.
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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
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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
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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
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Why Bitcoin is special
○ It was there first
○ Hauntingly brilliant design
○ Most hashpower
○ Mathematically provable ledger
○ Robust ASIC chip industry
○ Widespread acceptance
○ Brand recognition
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5.What should be taken seriously?
Recognizing real potential
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“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
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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
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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
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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
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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
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6.Obstacles to growth
What could go wrong?
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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
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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
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6.Who should get involved?
What should one do about all this?
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Energy companies
○ Energy companies are in unique position to
build on top of this infrastructure
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Commodities traders
○ Understanding the needs of software and
hardware engineers around future
automation allows for educated position-
taking
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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”
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Anyone who needs dry heat
○ Indoor farms
○ Underground facilities
○ Already using a lot of power? Add mining