On November 2nd, Lisa Ellis, Senior Research Analyst, covering payments, processors, and IT services, at AllianceBernstein, and Andreas Wallendahl, Director of Strategic Initiatives and Business Development at ConsenSys, the leading Blockchain Venture Studio, were the featured guests at the third NetForum peer-to-peer discussion on Blockchain and ICOs, joined by 25 professionals from PE & VC funds, Family Offices, and startups. Thanks to Mark Schlossberg, Principal and Financial Advisor at Bernstein, for hosting this NetForum event.
This discussion was so thought provoking that for this Key Learnings I deviated from the usual practice of summarizing the discussion and engaged in further research that I am sharing with you.
So much smoke, there has to be a fire…
Blockchain is generating so much noise that there isn’t a single person in tech who is not thinking “Am I next to be disrupted?” or “How do I get ahead of this?” Blockchain has become one of these things that people don’t really understand but feel they should pay attention to. People know it’s not going to affect them today but if they don’t pay attention to it, they will be sorry one day soon because they will have missed out or gotten wiped out. The NetForum attendees were similarly split between experts, and new entrants still looking for their place (or investment thesis) in the new space.
It’s Not about Bitcoin, it’s about Blockchain…
The field of crypto-currencies and Bitcoin was for a long time a fringe movement. Two years ago, a new narrative emerged: “Forget Bitcoin — Blockchain is what will change the world!” The focus on Blockchain, separate from Bitcoin, removed a layer of stigma that allowed mainstream enterprise players to enter the field — it was a brilliant marketing maneuver. Banks, industrials and a broad assortments of enterprises, as well as governments and NGOs, have since shown an unprecedented appetite for experimentation with a new disruptive tech platform. It is hard to find anyone today to dispute that, at least conceptually, Blockchain is revolutionary and could change the way businesses, and even economies and countries, are run.
Revenge of Bitcoin, Battle of the Clones…
But the Bitcoin and crypto-currency “fringe” would not be marginalized. Interest in Bitcoin exploded in the last 6 months as its value continued an inexorable rise. This attracted even more interest from investors looking to participate in the rapidly rising asset class, driving up prices… Further, Bitcoin’s success and scarcity spawned alternatives and imitators, giving birth to token offerings in new Blockchain networks, aka Initial Coin Offerings (ICOs). Hundreds of ICOs have taken place around the world in the last 6 months to fund the launch of new Blockchain projects that would have never been otherwise funded. Some of the NetForum attendees had portfolio companies contemplating “tokenization” of existing business models to take advantage of the easy money, and others were looking to back or had backed companies that were involved in the crypto-currency value chain, including exchanges, wallets and auditing tools.
It’s all about Politics, the advent of “Decentralism.”
Blockchain projects going over the head of the traditional early stage financing gate-keepers (aka VCs) and raising hundreds of millions through unregulated crowd-sourcing? That does not sit well with the VC community. But that should have been expected.
The guiding philosophical underpinning of the Blockchain movement is the decentralization of decision making, or a revolt against hierarchical decision making structures. I call this “Decentralism,” a political philosophy that wants to co-opt neo-liberalism (as well re-emergent authoritarian movements in failing neo-liberal states…). Born out of a conclusion that current governmental institutions had failed society, and were incapable of evolving to meet 21st Century Society needs, Decentralism advocates for a devolution of economic and political decision making to networks of actors governed by codified consensus-reaching mechanisms and motivated by the opportunity to share in the rewards of their collective effort. Its advocates foresee the rewriting of the Coasian theory of the firm and the emergence of new economic actors to replace corporations. The political component has a libertarian tint, attacking the foundations of the Nation-state, but could as easily lead to neo-socialism (the return of the Kibbutz?), the collapse of elite-driven globalism or the rebirth of transnational, post-nationalistic decentralized institutions. As liberalism strains and some strive to fix it, others are willing to push it over the cliff.
The System Strikes Back
Taking VC’s out of the equation is an expected outcome of an ICO, it’s in fact the point. Except that issuers of ICO’s found it convenient to cut VCs into private sales of tokens prior to selling them to the public, in order to have their cake and eat it too! And most conveniently they also assumed that they could ignore Federal, State and most international markets’ securities laws and engage in every known prohibited activity known to your friendly regulator.
The behavior was so egregious that regulators woke up and started whispering or sometimes shouting threats — Chinese regulators banned the whole enterprise, though the extent of enforcement is unclear. A number of foreign jurisdictions are rushing to come up with new regulatory frameworks in order to become the preferred situs of off-shore (non-US) ICO issuances, e.g., Singapore. US regulators, arguably not wanting to kill “free enterprise innovation,” have broadcast that they were paying attention to this new market, with the thinly veiled expectation that self-control would emerge, thus buying time to create a new, or adapt the existing, regulatory framework for ICOs. And that seems to be working — significant new Blockchain projects are starting to take the position that their token issuances are traditional private placements for US purposes and that they must comply with securities laws. If that view becomes prevalent, then ICOs will basically become private placements, offered to VCs and strategics, or taking advantages of existing crowd-sourcing regulations. And to some extent, the genie will be back in the bottle. Or not.
In the meantime, Institutional Blockchain Projects Continue to Advance
How is the noise around ICOs impacting the adoption of Blockchain technology in the enterprise? Surprisingly, it is an accelerant. Enterprises working on Blockchain projects are hurrying to establish them as the de facto standards in their respective industries lest a well funded startup disintermediates them out them of the value chain. The availability of funding from VCs and ICOs keeps the pressure on incumbents to move now.
Financial Services. Our NetForum experts singled out the financial services industry as one where large scale application of Blockchain technology is possible and expected, as demonstrated by a dizzying array of experiments, albeit mostly still at the Proof of Concept stage. An excellent study by the Federal Reserve Board (if you are into a comprehensive analysis), listed the expected benefits of Blockchain in the financial services sectors as follows:
- Reduced complexity (especially in multiparty, cross-border transactions).
- Improved end-to-end processing speed and availability of assets and funds.
- Decreased need for reconciliation across multiple recordkeeping infrastructures.
- Increased transparency and immutability in transaction recordkeeping.
- Improved network resiliency through distributed data management.
- Reduced operational and financial risks.
But as was noted by our experts, there are significant bottlenecks to adoption, not least of them serious issues of security, scalability and cost of transactions effectuated on a Blockchain. Since many of the FinTech Blockchain experiments are on private Blockchains, the time and effort needed to coalesce around solutions to these issues is manageable and will likely be solved.
Asset Tracking. Our NetForum experts next highlighted that asset tracking is an area where promising Blockchains proofs of concepts have proliferated. Supply chains of all types involve the transmission of a myriad paper and/or digital artifacts from one party to another, accompanying the good from the factory to the warehouse to the store to your home, such as Purchase Orders, Certificates of Insurance, Governmental Permits, among others. The potential for loss, fraud, and excessive red tape is not only a major drag on commerce but can also lead to environmental, health and national security hazards. A Blockchain-based supply chain, where these artifacts are posted to the Blockchain to be authenticated and tracked while protecting trade secrets (e.g, pricing data), could drive significant cost efficiencies and transparency to the process. The ensuing benefits to food, medical, and other physical supply chains are unmeasurable. Similar benefits can accrue to soft supply chains, such as music and software, where a Blockchain and its Smart Contracts could control not only the transfer of ownership of an asset from one owner to another but also the disbursement of the appropriate payments to the IP holders.
There are many predicted benefits to a Blockchain-based digital economy. But as discussed in this Harvard Business Review article, Blockchain is a foundational technology and foundational technologies can take decades to permeate through an ecosystem and transform it. That’s what happened with the networking protocols that underlie the Web. Hence, there is reason to be concerned that the inevitable failure of most Blockchain projects and their ICOs to live up to their near term hype will engender financial carnage that will eventually retard the advancement of these otherwise socially beneficial technological breakthroughs.
November 25, 2017
(c) 2017, Laurent Ohana