IS CRYPTOCURRENCY HERE TO STAY?...Remittance networks, maybe “Settlement coins” are private...

IS CRYPTOCURRENCY HERE TO STAY?

Hello!I’m Chris Dannen

from Iterative Capital Managementin 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