This is a guest post written by Ash Egan, a principal at Boston venture capital firm Converge.
Taking the morning Amtrak to Consensus 2017, I bumped into a fellow Boston VC — it was 6 a.m and I was waiting for the caffeine to kick in, but we energetically discussed the craze around cryptocurrencies, developments within the enterprise blockchain world, as well as what we were excited to see at Consensus.
Since last year, the blockchain ecosystem has matured and evolved enormously:
- In Q2, two pillar blockchain companies raised large rounds: enterprise blockchain provider R3 announced a $100 million-plus financing round and digital asset exchange company Coinbase raised at $1 billion-plus valuation.
- Ethereum’s Enterprise Alliance tripled in size, growing to 86 members comprised of players like Accenture, Intel, Microsoft and UBS.
- With dozens of recent token crowdsales, and a number happening right now, Initial Coin Offerings (known as ICO’s) look like they are becoming the de-facto investment vehicle for blockchain projects.
The blockchain movement is stretching beyond cryptocurrency entrepreneurs, corporates and venture investors, and into the periphery of retail investors. Coinbase, a leading digital asset exchange, is adding thousands of new users weekly (total users is 7 million plus) and this capital flood is showing in cryptocurrency market capitalizations. Today, eight currencies sit above the $1 billion market capitalization threshold (BTC, ETH, XRP, NEM, ETC, LTC, DASH, STRAT), and the total market cap is now above $100 billion.
After spending 72 hours at Consensus, with entrepreneurs building this new frontier, investors backing big visions, and corporates engineering their own role in the ecosystem, here are my takeaways:
ICOs are very hot right now
Investors are aggressively participating in the ICO craze, and experts in the space, like Balaji Srinivasan think the ICO investment structure is here to stay as highlighted in "Thoughts on Tokens." According to blockchain consulting firm Smith & Crown, more than 20 ICOs are expected to launch over the next couple weeks. Last year, there were 64 ICOs which collectively raised $103M, and this year we’ve already surpassed $100 million with more than 25 offerings.
"The token sale frequency and dollars raised through ICOs are bringing cryptocurrency back into the limelight."
Some of the notable ICOs: Brave, a blockchain-based web browser, had a highly anticipated ICO with its BAT cryptocurrency, given Brendan Eich’s background (former Mozilla CEO), and raised $35 million in less than 24 seconds. Storj, a decentralized cloud storage platform, raised $30 million in its May token sale. Likely the most anticipated, near-term ICO is that of Tez0s, described as "a new decentralized blockchain that governs itself by establishing a true digital commonwealth." Tez0s is regarded as a competitor to Ethereum, currently the second largest cryptocurrency by market cap.
Although first appearing in 2013, ICOs are now gaining steam and blue-chip like investors Andreessen Horowitz and USV are investing in token sales as well as the traditional seed and Series A equity rounds. For retail investors, ICOs are what the JOBs Act sought to legitimize: retail money going into startups.
The token sale frequency and dollars raised through ICOs are bringing cryptocurrency back into the limelight, and many are wondering how financial system players are reacting, specifically banks, governments and regulators.
Banks are Exuding Mixed Signals
The general belief is that banks and financial services companies are not fans of cryptocurrencies and open (public) blockchains, but are advocates of cryptocurrency’s underlying technology, blockchain.
At Consensus, those assumptions were questioned in one of the first public displays where a major corporation touted Bitcoin’s value. Fidelity CEO Abby Johnson gave a glowing review of Bitcoin, announcing that Fidelity users with a Coinbase account would be able to view their cryptocurrency balances on Fidelity’s website. Fidelity is also mining cryptocurrency and sees huge potential for Bitcoin and crypto’s number two player, Ethereum.
Historically, corporations have shown interest in blockchain’s technology via consortium participation (i.e. R3), or by developing their own system (i.e. JP Morgan’s Quorum). Enterprise blockchain activity is still moving at a fast pace, especially with Ethereum Enterprise Alliance tripling of members. In 2016, I covered some of the steps that enterprises need to take before adopting a blockchain-esque system.
Although Fidelity is advocating a positive view of Bitcoin, and Coinbase’s recent fundraise included New York Stock Exchange and USAA Bank and BBVA, there remains a large contingency of blockchain technologists and entrepreneurs who believe banks truly have no interest in public blockchains, only private, enterprise-run blockchains. One cryptocurrency entrepreneur told me that exchanges were constantly fearful of banks, and in one instance, a bank opted out of its relationship — effectively cutting off 25 percent of the exchanges’ customer base. Bank sentiment may still be consistent with Jamie Dimon’s "bitcoin is a threat" comments, and besides Ms. Johnson’s comments, no corporation has publically supported the value of cryptocurrencies.
Regulators Want to Regulate
Compared to the rest of the world, the United States is taking its time to regulate cryptocurrencies-especially given the degree of blockchain entrepreneurship happening here in the States. Japan, Russia, countries across Europe, and others are making statements to encourage cryptocurrencies- some have even allowed retail stores to accept Bitcoin.
To better understand how countries are regulating cryptocurrency, I stopped by the “Engaging with Central Banks on Cryptocurrencies” panel featuring representatives from Barbados Central Bank, Deutsche Bank and Rand Merchant Bank, as well as a few blockchain entrepreneurs.
In order for these currencies to survive, they need to be regulated.
Runako Brathwaite from Barbados Central Bank pointed out that many of the central banks are still in labs phase, but firmly stated: "In order for these currencies to survive, they need to be regulated." Many, especially early crypto adopters think that regulation, and involvement of any centralized institution undermines the privacy of users.
Federal regulation in the U.S. has had more noise than action. In May, Senators Chuck Grassley and Diane Feinstein called for a cryptocurrency anti-money laundering bill, but regulatory action remains stagnant. For Bitcoin and other cryptocurrencies to be universally adopted, some type of regulatory body will likely emerge. Until that happens, cryptocurrency will remain a niche category (it was not reported on in Mary Meeker’s Internet Trends).
To summarize:
- ICOs are becoming a legitimate investment vehicle for blockchain-based systems, and represent what the JOBS Act sought to do for retail investors.
- Corporates are mainly pursuing private blockchains, but may be opening their eyes to public blockchains, notably cryptocurrencies (i.e. Bitcoin).
- Banks, governments, and regulators are all taking different actions as the blockchain ecosystem develops – even with cryptocurrencies’ collective $100 billion market cap, cryptocurrency remains a niche market.
Photo of Abby Johnson via Singhaniket255 on Wikimedia (CC BY-SA 4.0).
