Blockchain Coinvestors Webinar

The following is a transcript of the Blockchain Coinvestors webinar ‘Blockchain Inevitabilities’. The webinar with the supporting slide show can be watched at:

https://www.blockchaincoinvestors.com/webinars

Introduction

Hello. We would like to welcome you to this Blockchain Coinvestors webinar. This webinar will focus on some ‘inevitabilities’ that we believe will inform and impact the investment thesis for blockchain and associated areas like Fintech and electronic commerce over the next few years. The goal of this webinar is to share with you tailwinds that may impact your personal investment strategies.

We need to share a disclaimer at the outset that even though we are ourselves investors and Blockchain Coinvestors manages funds, we are not providing this as direct investment advice and we are not soliciting in the course of this webinar. Each investor listening to this needs to make his or her own investment choices and decisions and should not rely upon any of the content that we are about to present.

Blockchain Coinvestors

Blockchain Coinvestors is the world’s leading venture fund of funds focused on equity investing in Blockchain companies and projects (http://www.blockchaincoinvestors.com). We are very fortunate that through our own investments in a number of the world’s leading blockchain venture investors we are investors in eight of the fifteen blockchain unicorns and we have a wide net of additional investments in the space.

Some of the companies we’re invested in include Coinbase, Ripple, Kraken, Block.One, Circle, Dfinity, Figure, and Bitfury. Investors should be aware that we may have vested interests in some of the specific examples used during this webinar — those are of course the examples that we understand best.

Summary List of the Ten Blockchain Inevitabilities

So without further ado, let us list these 10 inevitabilities. These tailwinds that we think will strongly blow into the Fintech arena and will impact investing strategies of everyone on this call:

1. Exponential Innovation will Continue

2. Highest Returns will come from Early Stage

3. Fixing the Internet will be the Core Focus

4. Blockchain Protocol Breakthroughs will be Applied

5. Large Corporate Players will Fully Engage

6. Governments will see they have to Play Now

7. Native Digital Monies will be Ubiquitous

8. New Products and Infrastructure will Emerge

9. Native Digital Assets will Replace Paper

10. Enormous Value and Wealth will be Created

Each is discussed in turn.

1. Exponential Innovation will Continue

In terms of the first tailwind — exponential technologies — we don’t need to tell anyone that we are living in a time of unprecedented innovation. Over the last 25 years, we have seen every industry and every geography around the world impacted. Whether we’re talking about artificial intelligence or the Internet of Things, the life sciences revolution, clean technologies, or in the case of our focus, blockchain and new digital assets and monies, these compounding technologies are driving the world rapidly into a fully connected digital world.

This is a phase we call the Fifth Era, and we’ve named our firm after it and have written extensively on what we can expect as we enter this new world. It has already been the greatest value and wealth creation time that humankind has ever passed through. We think it’s inevitable that this will continue and that this compounding of innovations will accelerate and drive us forward. So this is our first inevitability.

2. Highest Returns will come from Early Stage

This innovation has created enormous wealth. One indicator of this is that we’ve seen a dramatic shift in the world’s most valuable companies. 15 years ago, state-owned enterprises, large banks, pharmaceutical companies, energy companies would have been on top of the most valuable company lists. Today, the most valuable five companies in the world are technology companies all based in California and in the Western United States where we are based. These companies are not only considered the most valuable because they’re highly profitable and they’ve built scalable, global technology-enabled businesses, but also because the world’s investors expect that their little g — their growth rate — will continue to drive them forward.

If you look at private investing, it’s even more remarkable. The supporting page shows the 25-year annual returns for different asset categories from an American perspective. Fixed income is providing annual returns of perhaps 3%. The public markets, SNP and Nasdaq 10 or 11% over the long term. The US Venture Capital Index over the same timeframe returned 24% Net IRR annually. But that hid the reality that early-stage venture capital at 32% per year return was perhaps the highest returning asset class in the world.

We believe that it is inevitable that this will continue because the world’s most important innovation trends are being driven by new technologists and disruptive companies that are applying these technologies first. The bulk of the value is being captured very early too. So this is the second of our inevitabilities.

3. Fixing the Internet will be the Core Focus

What’s driven much of the value creation of the last few years is the rolling out of the internet and the beginning of the creation of a digital economy for the world. Over the past 20 years, we took 4.5 billion people and connected them. We gave them accessibility to the world’s information and the world’s products and services. We created a high degree of interactivity and flexibility and scalability into that infrastructure. And it created some very valuable companies — the companies that built the infrastructure upon which every industry and every country now relies.

However, remarkable as it has been, this has not been without issue. Today we find ourselves confronted by an internet that is severely challenged. It is first and foremost a communication platform. The internet and the protocols upon which it sits like TCP/IP was created to enable communication between scientists at places like DARPA and Stanford and MIT and CERN and so on. These scientists, these academics, were trying to collaborate and share information, but they were not planning to create a commercial commerce-based global platform. As a result, they didn’t worry about embedding concepts of security into the internet. Today with phishing and spoofing and social engineering and out and out hacking, cyber-security has become a fundamental challenge for today’s internet and for all of us as users and for all of the companies and governments that effect much of their communication upon it.

The same is true for identity and trust. The internet that we have was not intended to let us know whom we are communicating with in a reliable fashion. We trust that when we receive a package of data from another node, that it comes from the people we think it came from whereas, in fact, we’re increasingly seeing the corruption of content in motion and spoofed and fake websites being created to confuse and take advantage of this inadequacy of the internet that we have today. We need better concepts of identity, and we need to know that we can trust the people with which we are interacting in this new digital world.

The internet we have has also become highly concentrated raising concerns in many quarters.

Then the last two points, which are very important for today’s webinar — the Internet we have has no concept of native digital payments and native digital assets. The internet that we have today relies upon the completion of payments and the movement of assets in the financial systems and payment systems that we have built outside the internet.

This sets up the third of our inevitabilities. We believe that the main focus over the next 20 years will go to fixing the internet that we have and that innovators around the world will be working to make our digital economy more secure, more trustworthy, and more distributed. We will need to have native digital assets and payment systems and monies, which we will return to later.

4. Blockchain Protocol Breakthroughs will be Applied

In amongst this, in 2008, an anonymous individual or group of individuals created the bitcoin blockchain white paper and built a protocol to enable a peer-to-peer electronic cash system or digital money that was called bitcoin.

In retrospect, this white paper is of fundamental importance because in order to create a distributed sovereign-less form of digital money that could be relied upon, trusted, and which is highly secure, the writers of this white paper needed to figure out solutions to the fundamental limitations of the internet that we have today. Embedded in their white paper, are some very important concepts about each of those variables. Cybersecurity is embedded into the bitcoin blockchain. It also includes a new concept of identity and a way for us to trust others who we don’t know personally. By definition, bitcoin, and the bitcoin blockchain was distributed at birth. And not only did it support a native digital currency, bitcoin. But it also paved the way for digital assets too.

So this is a very important phenomenon. And it’s the next of our inevitabilities. Whether we end up using something exactly like the bitcoin blockchain protocol or whether we modify it in various ways, we think that it is inevitable that the new digital economy of the future will have something like the blockchain protocol embedded in it. And we know that leading theorists like, for example, Marc Andreessen agrees (Marc was part of the Mosaic and Netscape team that built the browsers that we all rely upon today). Marc says if he had only imagined the blockchain protocol at the time he was building Mosaic and Netscape, he would have embedded it in because it enables a digital economy to be more robust and have less of the issues that we’ve already discussed.

5. Large Corporate Players will Fully Engage

Our next inevitability is becoming obvious every day. This is that large established corporate players will get fully engaged.

In 2016 and ’17, a lot of people were just beginning to scout out this new emerging area. In 2019 we think it’s fair to say that relatively few of the world’s Fortune 1000 companies have no ongoing initiatives in this space. When large companies get active and involved and put dollars to work in supporting innovation, it greatly changes the playing field for the young emerging technologists and gives them much more support and brings a lot of assets and capabilities to the space regardless of what the area of the domain of technology is. Blockchain is now entering this new phase of global development supported by large corporate players.

In 2019, we also saw the announcement from Facebook and from a very large consortium of leading banks and financial institutions and payment systems that they wanted to launch a new digital money called Libra and that it would be able to be hosted in a wallet that Facebook would create called Calibra that, in turn, would be deployed amongst hundreds of millions and, likely, several billion users. This was itself a major announcement that indicated the engagement of large corporate players and which also provide impetus for the next three tailwinds.

6. Governments will see they have to Play Now

One of the most important aspects of the Facebook/Libra announcement was the response that it got from governments around the world. On the one hand, the American government responded quickly that they had expressed concerns to Facebook. Leading amongst these concerns was that the Facebook Libra coin was to be pegged to a basket of currencies that, whilst it would include the US Dollar, was not driven by the US Dollar. It would also include the Yen and the Pound Sterling and the Euro and, potentially, others as well. This set up the very real conversation around the creation of a digital reserve currency. As Facebook/Libra is a private sector initiative, that was a great concern to the central bankers of the world.

The response from the British Bank of England was a little bit unexpected. Mark Carney, the governor, speaking in Wyoming, not only fully embraced the concept of a reserve digital currency, but talked about how it should be fixed to a basket of currencies that included others than just the US Dollar, which is the de facto reserve currency today.

The Chinese response was almost more important in the sense they not only said that they were already working on a native digital money — a native digital Yuan or RMB — but in addition, they said that it might launch in 2020. This means that the need for legislators around the world in different jurisdictions to take this area seriously has never been higher. It also means we’re leaving a phase of consideration and study into a new phase of execution.

7. Native Digital Monies will be Ubiquitous

During 2020 it will be incumbent upon every government to make sure that they have their own strategies and have native digital currencies because once one country launches one, it significantly changes the way global commerce can be carried out.

In the case of China, we expect that the Chinese digital currency will be used in their sphere of influence. This is very broad. It encompasses foreign aid and trade in Africa and Latin America and across parts of Asia and Europe.

This is our next inevitability. Governments now have no choice but to embrace digital currencies and that this means that native digital monies will become ubiquitous.

8. New Products and Infrastructure will Emerge

For institutions to embrace this area they need products and infrastructure that are institutional grade. This doesn’t just mean that they need more sophisticated and regulated and compliant products, but they also need them to have more of the features that they expect in the investing and trading and commerce that they’re involved in today.

The infrastructure to support these new sophisticated crypto products is being built out now. For example SFOX — where Matthew is Vice Chairman — is able to allow traders operating in cryptocurrencies or digital monies to trade across the combined order book of a number of compliant digital exchanges utilizing algorithmic trading tools, which is something we would expect in other markets like foreign exchange but is relatively new to this area of cryptocurrencies. The same is true in crypto custody, where companies like Anchorage and SFOX are providing institutional grade custody for traders and partners who don’t want to take on the risks of their own custody of cryptocurrencies.

We think that 2020 will see a large number of announcements around this area of institutional products and infrastructure with many big banks and financial players beginning with creating blockchain indexes and registers for assets that they plan to turn into native digital assets.

9. Native Digital Assets will Replace Paper

It isn’t just about digital monies. It’s also about digital assets. The United States represents the largest set of stock markets in the world. However, the United Kingdom, Japan, China, and the Euro area are very important players too. We know that all of the exchanges in each of these countries are looking closely at the creation of digital assets that will allow the investment and subsequent trading of investment assets in native digitally enabled ways.

This is not a new thought. In the 1980’s we had the big bang when the public equity markets were moved to be more focused on desktop electronic trading and when open outcry and paper-based trading was eliminated. We saw a dramatic shift not only in which of the world’s financial markets became more important and more significant in terms of global trading but also in which specific players on those markets were able to make the transition.

It is interesting to consider that the famous names of the pre-big bang era in the UK, Greener Dreyfus or Simon & Coates mostly fell out of leadership positions in the public equities markets and instead were replaced by new names like Blackrock and Citadel and DRW and Virtu who embraced new electronic trading and high-frequency trading.

We see this shift to native digital assets as an inevitability that will also apply to other asset categories because whilst public equities are mostly now digitally traded, the reality is the majority of the world’s assets are still paper-based. More than half of the world’s assets are real estate related and most of that is transacted on paper, and so too most private equities and most funds are still paper-based investments opportunities.

In 2019, we’re already seeing some traction. There have been a number of tokens already created. Two examples are Blockchain Capital’s BCAP is powered by Securitize which is a digital tokenized venture fund, and the Aspen coin which again is a Securitize enabled digital token for a portion of the ownership of the St. Regis Hotel. These are examples, but we believe that in 2020 the initial focus of digital assets is going to be around tokenized funds and other asset-backed opportunities. There will also be great focus on building out the infrastructure to support all this just as we have already described with regard to digital monies. Both digital monies and digital assets require new infrastructure to be build out before institutional players can participate.

It isn’t just about digital monies and digital assets. We know that there are many enterprise applications of these new technologies. Just as large corporations embraced the internet and changed their businesses around the realities of electronic commerce or digitally-enabled supply chains, so we anticipate that they will also embrace these new immutable and distributed technologies. Just one example is Walmart working with IBM on finding ways to improve the food supply chain globally.

Interestingly enough, Walmart has also filed for a patent for its own digital coin. Just as Facebook launched Libra, we will see other very large corporations beginning to launch their own digital assets to enable their own payment systems and interactions with their users and customers and suppliers globally.

10. Enormous Value and Wealth will be Created

All of this is creating enormous wealth.

Just as the internet ushered in a time of unprecedented wealth and value creation globally, so we think the second phase of fixing the internet we have, and enabling it with more security, better identity, more distributed activity, and native digital monies, and native digital assets, will create enormous new wealth and value creation opportunities. We are beginning to see the emergence of new unicorns as a result.

So this is our final inevitability.

Conclusion

We hope you found this of interest. For those of you who want to learn more about blockchain, please take a look at ‘Blockchain Competitive Advantage’, our bestselling book that is available on Amazon, Apple, Smashwords, Goodreads, and every good online bookstore in ebook, paperback, hardback and audible.

For those of you who want to learn more about Blockchain Coinvestors please visit www.blockchaincoinvestors.com or just reach out to myself or any other member of the team. We’re always happy to talk to people about our investing strategies.

With that, I will bring this call to a close.

Thank you.

Matthew Le Merle is co-founder and Managing Partner of Fifth Era which manages Blockchain Coinvestors, and of Keiretsu Capital