On The Brink with Castle Island - Matthew Le Merle (Blockchain Coinvestors) on investment opportunities in the blockchain industry (EP.49)

Episode Date: March 9, 2020

Matthew Le Merle, the co-founder and Managing Partner of Fifth Era, Keiretsu Capital and Blockchain Coinvestors joins the podcast. In this episode we discuss:  - Matthew's career arc and how he came to understand the potential impact of blockchain technology - Building Blockchain Coinvestors, and the investment strategy of investing in blockchain venture capital funds - Predictions and analysis on institutional custody, stablecoins, Bitcoin adoption in emerging markets and more Learn more about Matthew and Blockchain Coinvestors at:  https://www.blockchaincoinvestors.com/  

This week on the podcast, we had a fun conversation with Matthew Limerle. Matthew is the co-founder and managing partner of Fifth Era in Karetsu Capital, which is the most active early-stage venture group in the United States. Matthew and his wife, Alison Davis, are also the founders of blockchain co-investors, which is a blockchain fund that invests in venture funds and it co-invests alongside those managers. We love chatting with Matthew because he has a measured yet optimistic view on this industry, and it's a view that's informed by his impressive career experiences. Prior to launching his investing, career, he spent 20 plus years as a strategy consultant with McKinsey, A.T. Kearney, Monitor Group, and Boos & Co. He was also previously the SVP of Strategy and Corporate Development at the Gap. Alongside Allison, he's the author of five books, including Blockchain Competitive Advantage, which debuted in 2019. This was a fun conversation, and we got into a lot of different topics. We talked about central bank's efforts to create digital currency. We talked about the emergence of Bitcoin in developing countries and how Bitcoin, ways against potential stable coin options. We also spent some time talking about the tokenization

of traditional assets like real estate and fund LP interest. And we talked at length about institutional adoption, whether that be on the custody side or on the exchange traded product side. And Matthew had some really interesting perspectives on both. I think you'll enjoy this conversation. So without further ado, here's our conversation with Matthew Lemurl. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac,

the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of constituted easing. You print a couple trillion dollars, and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Matthew, thanks so much for joining us today. Great to be with you, Matt and Nick.

So we've got a lot to talk about a lot going on in the industry, certain a lot happening in the fun landscape as well. Before we dig into all of that, why don't we start off and could you set the stage for the listeners and maybe introduce yourself and tell us a bit about your background? My name's Matthew Lemurl. I'm based in San Francisco and London. And the last 20 or so years have been an early stage tech investor in internet, fintech and now blockchain with my wife Alison Davis.

We have our own family office, but the principal funds is blockchain co-investors, which we'll probably talk about more on this call. And then I wear a couple of other hats too. I am chairman of Securitize, the security tokenization platform, vice chairman of S-Fox, the U.S. is original crypto prime dealer. And then I also am an advisor to various other projects in the space. So you're quite a prolific investor. and Corezzo, I believe, is the most active early stage investing group actually in the world.

So how do you divide up your time and what's your overall investment strategy across the broad range of your portfolio? Thanks, Matt. That's a very broad question. But if I could give you a bit of the history, Alison I had come here 35 years ago and settled in Silicon Valley, brought up our family here. And in our early careers, we were both senior partners of large consultant firms. It was about 20 years ago that Allison became CFO and Head a strategy for BGI BlackRock, which is the world's largest asset manager. And following that, we began to do our own early stage tech investing. So it's been about 20 years now. And quite early on in that process, I realized it's very hard to be an active tech investor by yourself

as an angel. And so I joined Koretsu and Band of Angels. And over the years, we grew Kuretsu to be what it is today, which is 55 chapters around the world and the most active early stage investing organization. But from a strategy point of view, Alice and I sort of stick to what we know best. So we're internet, fintech and blockchain investors. We tend to invest in companies close to home, so primarily Silicon Valley or Western United States based. But we also manage a highly diversified blockchain investing vehicle called blockchain co-investors. And that provides us global coverage as well. So I'm glad you dovetailed into blockchain co-investors. And this is perhaps most relevant to our conversation.

So could you maybe set the stage a bit and talk about what is blockchain co-investors? What's the approach? And how are you thinking about investment opportunities in the blockchain space? The history here is that we were fintech investors. Allison also sits on public company boards like Royal Bank of Scotland and FISA, which owns first data and others. And about 2013, she chairs the Innovation and Technology Committee of RBS and the British government and the Bank of England asked RBS for a point of view on blockchain and Bitcoin.

And Alison went on her own journey of discovery and met a lot of people. And at the end of that process, agreed to be chairman of the advisory board of blockchain capital, which is a leading blockchain VC based in San Francisco. And so we found ourselves getting more and more involved. Allison was right on board from day one. I'll tell you I took a bit longer to understand exactly why this set of technologies is so important. And after a couple of years, being quite active investors in blockchain projects and companies, we said we wanted to do this in a more systematic way.

And so we decided that our strategy would be to invest in the best blockchain BCs globally, Asia, North America and Europe, and do that through a fund-of-fund vehicle. And for full disclosure, I guess I should say we are investors in Castle Island, very happy investors in your fund, and as well as others like blockchain capital, Pantera, IDO, Fabric, 1KX, and a number of others, Future Perfect and so on. That's great. I actually didn't know that origin story. So it's fascinating to hear it.

Stepping back, one of the things that I love about this technology and this industry is that there are so many reasons to be excited about it. and everyone's origin story almost starts from where they have a base level of understanding. And so you see a lot of gold bugs get into this technology because they see Bitcoin as a potential rival for a digital version of gold, for instance. A lot of people in the financial services world will look at this and say there are just a lot of processes and settlement steps that could potentially be made better if we were to use this type of a technology.

You see others that look at some of the data privacy concerns that we have with data monopolies. and they look at cryptographically secured data and identity as a potential breakthrough. So for you, I'm curious, what was the initial, you mentioned that you were skeptical at first. What was the turning point where you started to appreciate the disruptive potential of this technology? I already mentioned. Allison embraced the notion right at the outset and she's a payment and financial services expert. In my case, I'd spent most of the 90s and a lot of the zeros working with the world's leading technology companies, people like Microsoft. and Cisco and HP and later on Google and eBay and Amazon as a consultant, working on building out their businesses and sort of expanding the internet that we have today.

And I was very much in that mindset that we're moving towards a digital economy. The internet is really what's driven us down this path. And when I first got interactions with the blockchain community, they would say things like, this is going to be bigger than the internet. internet. And I couldn't accept that notion. I just spent 20 years of my life on creating a digital economy, digital world with clients and investing behind that thesis. It was a real challenge to think that anything would be bigger than what we've already created and we already have four billion connected people globally. I think what for me was the turning point was when I began to think about

the things that were very broken about the internet that we have today, things like it's lack of security, its lack of native forms of identity, the challenges we have with trust about the individuals we do business with and the content that we're increasingly being exposed to. And obviously the absence of native digital assets and native digital monies. And I think the light bulb went on for me, and eventually the reason why Alison and I wrote our book was that we appreciated that blockchain and the conceptual break. through of the blockchain protocol could actually solve some of the most challenging issues that the internet has. And in that sense, blockchain doesn't need to be bigger than the internet.

We're now the opinion that these technologies will be inherently a part of the digital world that we're all moving towards. And in that sense, they become very, very important. That's really well said. And that's actually a good dovetail into some of the content that you've been putting out. So you mentioned the book and I want to talk about that a little bit. also been putting out some great webinar content over the past a couple of years. And one piece that I particularly enjoyed was your 2020 prediction segment. And I want to spend a little bit of time talking about some of these predictions. And maybe the first that I'd love to get your perspective on is this prediction that G7 and EU entities will start to announce digital monies. Talk a little bit about

this. And how do you see this unfolding with stable coins or central bank issued digital currencies over the next year or two? I'm laughing actually, because when we wrote this back in a believe it was November, we drafted these predictions for 2020. We thought this was a bold prediction. Obviously, today, four months later, it seems like an obvious statement. At the beginning of 2019, most central banks and most governments were very skeptical about the need for anything other than their traditional approaches to currency issuance and management. There were exceptions. I think Mark Carney at the Bank of England would be an example, but most of the world's central bankers were leaning back and we're not really believing. And yet here we are in March of 2020.

And today, I think every central bank in the world is working on some sort of CVDC central bank digital currency initiative. And some like the Chinese have announced that they will definitely be launching. Others are still in more of the exploratory phase. So I feel like this particular prediction, the train definitely left the station since we issued it. But the more fundamental question is why. Why are digital currencies important even at the central bank level? And it's fundamentally that the way we go about creating, issuing, using monies hasn't really changed very much, certainly since the gold standard was removed in the 1970s. Yet the world has become highly digital and highly connected. And the internet we have is essentially a communication

platform but was never really built to be a commerce platform. And I think central bankers are beginning for the first time to really understand that we've built technologies today that would enable them to manage their monies, issue them, make them available to the banks and to other constituents in much more efficient ways and would also enable things like on us netting, which I can explain if you're interested, but would allow central banks to do a lot of efficient money management rather than doing it in a relatively inefficient way as they do today. While we're on that, could you say a little bit more about that and maybe explain some of the benefits of that netting? A lot of us are wondering what the digital yuan will end up being.

And there's a lot of choices too. So we tend to say money and we assume all monies are equal. But of course, we can configure monies to accomplish different things. And just to give you an example, I think no one's quite sure today whether the Chinese are going to issue a retail-focused digital money that could take the place of the types of monetary systems being used by AliPay and WeChat would essentially be a digital money that would be available in every app, online, everywhere, for all of us to use, or whether, on the other hand, they're going to create more of a wholesale CBDC, which would be a money that would be used for the central. bank to issue major transactional interactions with the leading banks and other players. Just double-clicking

on the wholesale version, obviously China has an enormous sphere of influence today around the world, and they make a lot of money available to other countries, and those other countries spend a lot on Chinese products and services and infrastructure and the like. And those transactions today go through the traditional monetary system, and they may actually include being translated into other currencies, including US dollar. Well, conceptually, China would not need to do that if they had a wholesale digital yuan. They could simply say, we're crediting Brazil with a trillion dollars, and Brazil's going to buy a trillion dollars worth of goods from us, and we're just net it off on an account, on a ledger. And no money needs to change hands. So that sort of on us,

is I think at the core of one of the value propositions of digital money. And if you actually look at Facebook and Libra, I think it's also one of the driving rationales for why that's such a compelling idea. So, Matthew, a lot of folks in the crypto industry will remark that most currency or most money is already digital. If you look at the US, two is maybe in the range of 15 trillion, and the fraction of dollars that are in existing physical form is maybe one and a half trillion. So I would say most dollars are already digital. I know you touched on this a little bit before,

but how would you contrast our effectively digitized monetary system with a genuine CBDC? What is the real difference there? Would it look any different from the kind of retail user perspective? Yes. I think the analogy that will help people understand, is in large corporations, information has been getting digitized increasingly over the last 30 years, but the form of that digitization has been changing. So obviously, we began with unconnected computers. We eventually connected them into mainframe-based networks. We then obviously had more distributed

computing power in the hands of smaller devices, and the network became more important, and the central mainframe became less so. And eventually we've started porting a lot of the intelligence into the cloud in truly decentralized and distributed forms of computing. Well, to use that same analogy, whilst it's true that money was digitized several decades ago, it's still in version one. So just to give you an example, when one of us goes through Amazon and buys something, we say what we want, Amazon confirms we can have it, there'll be a dialogue about where we want it sent, and all of that will happen in real time,

and then we'll say we want to buy it, and we may use a card, then Amazon may say, yes, you've bought it, but the truth is the transaction is just beginning, and it will go out of payment gateway, it will go through all sorts of payment networks, merchant acquirers and merchant issuers and banks and the networks themselves, Visa and MasterCard,

will all have a hand in the movement of that money. And it is true that it is digitized, but it is not very efficient and it is quite costly and it is also often quite slow. And so in just the same way, the reason I use the analogy was because mainframe computing allowed us to digitize data, but it was slow and expensive and clunky

and we've made the world's information much more efficient Well, I think we're doing the same with digital monies. And so monies that are born native that can travel instantaneously between people attached to a communication and where money can change ownership in a flicker of a moment, that's where we're heading. And I think Bitcoin is the first example of that on a global scale. But obviously, the central bankers think that they can take that technology and use it at the sovereign level for their own CBD.

I think if we have to look at the catalysts for the enthusiasm for CBDCs in the last couple of years, the biggest one people would point to would be Libra. It seems to me that a lot of those initiatives maybe weren't strictly response to Libra, but certainly made things seem a little bit more urgent for the central banks and that they didn't want to be out-competed by the private sector. do you see this rise of enthusiasm for CBDCs as a vindication of what's being built in crypto or a phenomenon which is kind of totally orthogonal and independent of the crypto industry? I don't actually see it. I guess it's both. There's no question that 10 years ago, someone did something quite amazing, whoever Satoshi Nakamoto was,

in trying to create a truly decentralized, trustworthy, secure, distributed money without a central bank as it's backer. That group of people or person or man or woman, whoever it was, actually solve one of the world's most complicated problems. And so Bitcoin has to be held up as a quite remarkable thing, just like the Internet itself is the notion that anyone can transfer money, a value, to anyone else. else sight unseen without knowing them in real time is truly extraordinary. At the same time, traditional financiers and bankers have been working on making money more efficient for a long, long time. We do understand some of the biggest issues, just as examples, and one of the reasons why we are still in version one of digital money. Today, we can't cope with micro-transactions. So whether you're a video game player and you're accumulating value in a game and using

it to buy and sell things. Those increments of value are so small that the costs of today's payment systems actually don't make them work unless you turn them into virtual currencies that are occurring within the context of a software, an MMRP or a virtual world or something. Well, in the real world, we're moving into a world of the Internet of Things and connected devices where we do want to be able to do fractional microtransactions in real time, at no cost. And today's payment systems can't cope. And everyone understands that. So the pressure has been building up on the traditional side of the slate. And Bitcoin was unleashed on the innovative, disruptive, if you will, side of the slate. And those two things are now merging together.

And I think the understanding of the value of a distributed digital money is now being more broadly understood. And conversely, some of the challenges of implementing that in the context of large companies and financial institutions and governments is also now being worked on with great intent. And this is just monies. Of course, later on, we can talk about assets because it's even more true in the world of digital assets. That's absolutely right. I mean, one of the things that's been really fascinating to watch over the past few years is just developing nations and how these developing nations are interacting with blockchain technologies. This could be central bank issued digital currencies, but it could also be Bitcoin. And so one of your other predictions in these 2020

predictions was that developing nations will embrace Bitcoin to an even higher degree than they've already embraced it. What do you see as some of the catalysts for this prediction and how is it playing out so far? This goes back to my earlier observation that it took me a while to get on board and to understand this. I think often the more you know, the harder it is for you to see, how different things could be. And that last conversation we just had based on Nick's question around why our digital distributed money is beneficial to government-backed fiat currencies is a sort of a complicated conversation.

Well, part of the reason it's complicated is because all of us, that is you, me, Nick, and three or four billion people like us actually do have reliable, relatively trustworthy money, and payment systems which work. And we aren't fearful of them. We use our US dollars or our euros or our pounds and things get done and it works. And that's part of the reason it's hard for us

to truly appreciate the power of these new technologies. But there's four or so billion people in the world who cannot trust their sovereign bank monies. They probably don't trust their governments. They certainly don't trust the monies that their governments issue. And they're exposed to hyperinflation and devaluation and expropriation and other very concerning and real threats. And in many cases, if you're in Venezuela or Zimbabwe or Argentina or Greece or India for that matter, you have seen money disappear from your bank account or from, in some cases, right out of your hands several times in your lifetime.

So those three or four billion people need a distributed digital money that they can trust and that is not issued by their government much more than those of us in North America, Europe and for a large portion of Asia. And right now, the right answer for them is Bitcoin. Now, later on, it may be something else, but today Bitcoin does represent a way for them to hold, and transfer and share value without being dependent on the government monies that they just can't trust. One thing I've noticed in the last year is the increasing importance of stable coins,

not just with the potential launch of Libra, which it appears now may well be backed on a one-on-one basis by a sovereign currency as opposed to creating a basket. but just the growth of private stable coins, Tether, USDC, die, true USDA. In terms of offering individuals in the developing world, an alternative to their local currencies, do you see stable coins as a valid alternative? And as much as they don't require that users become accustomed to a new unit of account, I think generally people understand the risk profile of the dollar, as opposed to Bitcoin, which is much more volatile?

So for me, I'm not a very sophisticated person in some respects. I try and keep things simple. So in my mind, I use money to do transactions, and I use money as a way to store my wealth. And for me, those two things really are very different. And so I care a lot, obviously, about volatility in short-term transaction environments where I thought you wanted 100.

$100 and now you're asking you for 110 and that seems weird because only a day's gone by. But when it comes to where I post my money in the stock market or in fixed income or real estate investments, I know that things go up and down and the stock market rises and the stock market falls, but it doesn't really matter until I need to sell. And so for me, volatility over the long ball doesn't really matter. I care much more about the upward trajectory. if I have enough wealth and enough investments that I'm not forced into a position to sell. But I care a lot about volatility in the payment system and in everyday transactions. And so I think if you think about it that way, I do think that stable coins, or at least

stable monies, is absolutely necessary to fuel the payment system and everyday transactions. But I think the volatility in Bitcoin really doesn't matter if you're going to hold it for five and 10 years and be a long-term investor and use it as a way to manage your wealth over the long term. And so I tend to skew that way. I think that we will rely on stable coins of one or another. I tend actually to think most of them will be CBDCs, Central Bank, distributed currencies that are made to be stable rather than distributed independent stable coins, but obviously we'll see how that shakes out over the next few years. Yeah, I guess the risk with the current crop of stiva coins is you're still ultimately

dependent on a single entity to backstop the system, and that's a more fragile situation than effectively sovereign currency, which is issued by government. And so, for instance, you'd be exposed to some of the enemies that issue these things are offshore, like in the case of Tether, so you always are exposed to. the risk of effectively those banks failing. I like the way you put it where you say that effectively, if you have a long enough perspective, that Bitcoin is a savings device, makes sense.

I guess you could think of it as the volatility being the cost of exposure to that asset, which has certain nice properties. So even though it's volatile, it's still a useful savings device, which is something that I think many people have not caught on to yet. or it seems like an alien concept to people from traditional finance. Well, I think that, you know, in traditional finance, we do think that risk is the distribution of expected outcomes, which is defined in a way by the volatility of the asset.

But we care about that a lot because we have the notion that we need to occasionally buy and sell, and you don't want to have to sell low and buy high. So you care about being on the wrong side of volatility. However, for those people that have a lot of wealth or for those people that are willing to wait a long time and be patient, volatility itself isn't really such a negative factor. What you care about is the upward trajectory of the value of the asset. And the volatility around that trajectory is something you can manage to. And as you know very well, there are some reasons to believe that the long-term value of Bitcoin may be on an upward trajectory. So if I can cope with the volatility, then it looks like a pretty interesting investment.

Matthew, I want to transition a little bit to market infrastructure. So both you and Allison have a long history in traditional financial services. And you're quite bullish on banks eventually getting there in terms of offering custody. Where are we now? Why haven't the banks come in and started to offer digital asset custody? I mean, to me, you look at the large global custodians and every year the price to custody goes down. So it's a margin compressed business. Digital assets represent a huge potential growth vector. Why haven't we seen banks start to offer these services yet? Well, they are beginning,

but I think that there are some good reasons why it doesn't make sense for a large established financial institution to be at the very forefront of new technology. And some of those reasons we've already mentioned, some of these crypto assets don't have an ultimate guarantor standing behind them. The risks of hacking and other forms of cyber security issues make them rather more complicated. They are, to some extent, bearer instruments, and those are always complicated to deal with, especially when their technology enabled. And I think it was true that going back 18 months ago, most of the customers of most of the big financial institutions weren't actually asking for exposure to crypto assets. So I actually believe Larry Fink when he said a year or more ago, that's a black

rock, when he said, my customers just aren't asking for this. Now, I think that's beginning to shift. So I do think that there's more institutional interest in having some sort of exposure, modest though it may be to new digital assets and digital monies. And that demand is beginning to appear in most of the major financial centres. So when I try, travel to London or Zurich or New York or San Francisco, Chicago, or Tokyo, Hong Kong and Singapore, I am hearing an increasing interest by multifamily offices and institutional investors for getting a small exposure. It's only a small percent of those entities, but it is a growing percentage. So what then happens to the big institutions is now they have a choice. And the choice is either

serve the customer and give them what they need or tell the customer they can't serve them and let them go elsewhere. And when it's a handful of a fraction of a percentage of the customers, maybe you just let them go elsewhere. When it starts becoming several percentage points, you just can't afford to have them leave you and go elsewhere. And conversely, when you look at the very steep growth of Coinbase and finance and Cracken and others, you start saying, oh my gosh, this is becoming real. And that's where the banks ended up 2019. So we're seeing initiatives to provide crypto access and crypto custody in most major financial centres.

By number, it's only a small percentage of banks, but they're very well-known banks. So just to use an example in Zurich, you'll have Julius Baer and Mertie Bauman, who are traditional private banks. And then you'll have new digital banks like Sibor and Sigmund and Falcon that are all now providing digital money access and custody. And I think the penetration rate will increase amongst the banks, but amongst the world, however many it is, 10,000 banks, right now we're getting to 100 or 200. It's going to be a long time before we get to 10,000. I think what you're saying about following the demand of the customer is really such a pivotal point there. If you think about the

types of customers that are asking for these services, it tends to be the most technologically sophisticated of the customers. It tends to be the millennial customers. So if you believe that we're going to have this large intergenerational wealth transfer with the baby boomers over the next 10 years, then these are the types of customers that will become more and more important to these institutions. So you could really imagine a big tailwind here in terms of adding these services, not to mention all of this wallet infrastructure to add public blockchains would theoretically be extensible if you believe we're going to live in a world where security tokens are a lot more prevalent. and then the banks have to be involved in something like that.

I agree wholeheartedly. And then I'd add the third, which is obviously the CBDCs, the central bank digital currencies, will themselves require institutional digital wallets and digital exchanges and digital custody and digital settlement. And the banks get that. So by the end of 2019, I think they all appreciated that this wasn't just about serving millennial retail customers. This is soon going to be about coping with sovereign digital currencies.

And so they don't have a choice now. They have to start building the infrastructure. Staying within that realm of regulated financial services and some of the opportunities there. So when we think about the ETF applications, the various denials that we've seen over the past several years, Winklevoss, Bitwise, recently Wilshire Phoenix, the two big issues had historically been custody, which is now becoming more and more of a solved a problem with Fidelity launching a qualified custodian. Several other emerging startups have qualified custodian status. The other issue is just around spot market manipulation and the fact that a large percentage of the overall spot market is on these non-surveiled exchanges outside

the United States. I mean, that's really the sticking point for now. What's your prediction on the path forward for exchange traded products? Do you think that we'll see an ETF anytime soon? At one level, I don't think that we're quickly going to be able to resolve the questions that the SEC is posing as it turns down ETF applications. And I know a lot of people are working very hard on the questions that they've asked. But the key questions around what proportion of the trading is fake and what leads and what follows in setting price discovery and how much are the leading cryptocurrencies potentially managed, the prices managed. by the fake volume. It's a very difficult question to answer. And I know Bitwise and I know Gray Scale and others, where we are investors, by the way, are working on those topics. In a way, I feel like it doesn't really matter. I think that as institutional investors want Bitcoin, as an

example, Bitcoin exposure, they will find a way and the way that they will move towards will be the most efficient and easiest, most accessible. So whilst a government registered and approved ETF would make life enormously easier for large institutions. At the same time, we're seeing very large capital flows into the grayscale products and the Bitwise products because they are still relatively easy for institutions

to invest in. I'm hopeful that by next year, 2021, we'll have some approved ETFs, but I do think the SEC is asking questions that are very difficult to answer. That makes sense. So, Matthew, I want to talk a little bit more about blockchain co-investors. So there's a lot of ways that you can play this market if you're setting up a fund. And certainly over the past few years, we've seen a lot of different fund structures.

It seemed like the first wave of dedicated crypto funds were all using the hedge fund model. Then we've seen the introduction of just a traditional venture capital model. Now we're starting to see some hybrid models. How did you think about this when you were looking at setting up blockchain co-investors? and what does the LP mindset look like in terms of evaluating these structures? So the reason there are lots of different structures and approaches for creating funds is that the world's a complicated place and it does actually make sense to use different vehicles for different types of investing.

Again, I tend to sort of think in a rather simplistic fashion. So to me, there are traders and there are long-term investors. And traders are people who understand price and they go and they trade around that in order to make money. And when they create vehicles, their vehicles therefore tend to be short-term vehicles that enable people to benefit from the fact that the trades that they're making are constantly being marked to market. And so the value of their funds can have a NAV, a net asset value that is being regularly marked up and down. And those vehicles, they don't have to be short-term vehicles. They can sometimes be perpetual or long-term vehicles, but they'll often have redemptions associated with them, and we call them hedge funds, even though they don't all hedge. And there's a very fairly

well-understood way to create those types of funds. I think those make absolute sense if you're going to be trading in crypto currencies and monies. But when it comes to long-term investing, over the last few decades, we've settled on a different type of approach. We use long-term vehicles, typically 10-year and more lifespan. And we have what's called the Venture Fund model, which is oftentimes a 2 and 20, 2% management fee, 20% carries sort of a model. And that fund brings with a lot of benefits, because it allows the investors, the VCs, typically the GP, to take a long-term view to make investments and work with the companies over an extended period of time, not be under any pressure to trade in or out of those investments. And that seems to work very well in the

world of emerging technologies and startups. So for us, this is chalk and cheese. These are completely different worlds. And the one that we understand very well after 35 years in Silicon Valley is the venture model. And so when we thought about blockchain, our primary focus was on how do we gain exposure to the largest number of the most successful blockchain projects and companies. And we wanted to do that through a venture capital mindset and a model where people could be patient. So our strategy is to invest in the top 10 or 15 blockchain VCs globally. Through them, we are investors in 10 of the 16 blockchain unicorns already and about 100 other companies. But we don't invest in crypto hedge funds and we don't take a short-term trading mindset at blockchain co-investors.

Not that it's not a completely legitimate thing to do. I think you can be a great crypto hedge fund manager and you can be a fund of crypto edge funds, but that's just not our expertise. That makes a lot of sense. So when you have conversations with these various GPs at venture funds, do you see clear buckets of strategies emerging here? Are there any categorizations that you think about when you're evaluating managers? Yes, thank you for asking. There's a longer conversation to this. I think the criteria for assessing a GP as we think about whether or not to invest in their fund is actually fairly conventional. It has to do with their backgrounds, their experience.

Hopefully they have already demonstrated the ability to be good VCs, a good venture capital GPs. Hopefully they've managed to fund before. You can do background checks and they stand up as being capable and solid individuals because you're going to trust your money to them for five and ten years. So you can't afford for them to be anything other than in it for the long term. But from an investment thesis perspective, I think that there is sort of a different blockchain VCs differ by geography and by industry vertical.

But I think the investment themes, we have a list of eight of them, but there are some that have to do with the underlying building out of the next wave of internet technology. So I would call these things, well, the protocols and the underlying monies that will be used to incentivize networks. the whole notion of distributed computing and storing and sharing of data and everything to do with the provenance of data and its reliability and security, identity and trust and so on. That's sort of the base level of things. These are horizontal, they are fundamental, and we know that we have to fix what we have if we're going to get to a digital world. The next block of things have to do, in my mind, primarily with transactions and trading and finance. They have to do with retail, wallets and exchanges and ways for people to handle these new monies. I think it includes decentralized finance and peer-to-peer and ways for people in the network to do business with each other directly.

But then it also includes all the institutional stuff. We need institutional wallets and exchanges and settlements. systems and trading systems and custody systems, if the biggest institutions that manage the most money and the most assets are going to enter this new digital world as well. So that's the middle block. And then I know that conventionally we would talk about apps. For me, right now, the two big strands that we're also tracking and worrying about getting coverage to, one has the enterprise usage of blockchain, which can be things like supply

chain management and trading, international trade. but it could also be about provenance of products and people and assets throughout the world as we interact with them. And then the last one actually in my mind has to do with content. With the internet, we settled on the advertising model in our browsers and our search engines and in our video games and in our entertainment platforms and social platforms. I think we are beginning to see that there's the possibility of shifting to a different way of doing content and entertainment and interaction where we get compensated for the value we bring and for the information we share and that others can't necessarily use our interactions to fuel an advertising engine. And I think that's

sort of like brave browser, if you will. But I think people are looking across every aspect of the way we use content globally and asking the question, can distributed networks and distributed ledgers transition us to new models of how we manage content and interaction? So those are the big themes for us. I couldn't agree more with that. So Matthew, I think that's a good transition point in terms of what are you the most excited about? And you mentioned the contents. I think that that's a huge unlock. I think there's that saying that what the smartest people do on their nights and weekends is what most of us will be doing during the week in 10 years. And you can certainly see a lot of the experimentation being done around content delivery and in games and things like that.

Just look like hobbies now, but they're probably going to be really big industries at some point. And some of this technology will unlock things that just otherwise could not be done, which is really the most important thing. And so what are you the most excited about in this industry right now? I know that's a very broad question, but where do you think that outside of maybe the money use case, we're going to start to see mass consumer adoption for this technology? Well, we've talked a lot about monies. We haven't talked much about assets. And actually, I'm very excited by that. More than half of the world's assets are still paper-based. Almost all the real estate in the world, almost all of the funds, almost all of the private investments, and a lot of the fixed income and related investments are

still paper-based. They haven't even got to the first iteration of digitization to go back to our earlier conversation. And those things that are digital, like public equities and large-cap reeds and certain types of fixed-income products, even those are still pretty inefficient. And I think the assets managers and the large banks and the exchanges all know that. So I think that the application of blockchain technologies and distributed ledger technologies to the world's assets is actually at least as big and probably a larger opportunity than applying it to the world's monies. And given my role as Chairman of Europe for Securitize,

I'm getting a lot of exposure to the biggest institutional players in the world, and I think they all agree now. And again, 2019 was a turning point. At the beginning of the year, they were leaning back and doing exploration. I think as we're here in 2020, they're actually now really working very hard to bring digital assets to the world and not just new to the world assets being provided through new digital distribution. I think they're also trying to figure out how to migrate their existing financial instruments, funds and ETFs and other things to a more efficient digital platform that the blockchain is enabling. I think this is a very big theme and I think that it's ramping up in terms of the acceleration of progress as more and more of these institutions begin to collaborate

and work on this together. One of the things that we hear a lot about traditional assets is just that blockchains could potentially make the trading and settlement of these assets more efficient. Maybe another argument would be that maybe these markets, the liquidity profile of these markets, could somehow be changed. Do you buy that argument that there would be potentially a liquidity play here that would be positive? Assets come in all shapes and sizes. And so the benefits of efficiency and effectiveness and collaboration varies by asset category. So to use real estate as an example, in my mind there's no question at all. Today, most of the world's real estate gets sold in auctions to small numbers of bidders who are very sophisticated to drive down

price and it makes for lower price discovery than if those assets could be made available to a much wider audience of smaller investors who could invest direct. And oftentimes the buyers of the assets are actually representatives, institutions, pension funds, insurance companies and so on, who are buying the assets on behalf of their own customers and investors. And if we had technology enablement of real estate, we would allow for a much richer marketplace with many more participants being able to buy much smaller lot sizes. I think price discovery would probably be higher. I think that the overall liquidity pool would be larger. And I think we'd also take out a lot of costs so the efficiency of the system would be better. And I'm quite hopeful that issuers would take

the cost benefits and reinvest them into higher performance so that we might actually get higher investment returns in those asset categories. So I begin with real estate because for me, real estate is obvious. I think that's also true in funds. It's very difficult today to invest in a private equity or venture capital fund to use two examples. And it's paper-based and there's a lot of process and a lot of time and energy and a lot of cost. And I think when you digitize those and you have digitized versions of venture funds or private equity funds, especially when you make them available through digital distribution, think Robin Hurd or Cracken or, in fact, bankamerica.com, then we should be moving in a much more effective and efficient direction.

Now, there are other asset categories where things are a little less clear to me, and small company investments would be an example where I see some benefits, but it's not quite such a compelling story. But overall, I think it doesn't make sense in a digital world for us to handle our assets on paper and in folders, and we will inevitably move towards the tokenization and digitization of all of the world's assets. That makes a lot of sense. We often talk about the promise, the industry, and for good reason, I think it's much better

to focus on the positives. This is also an industry that's kind of beset by controversy. In fact, just today, the Financial Conduct Authority in the UK, they issued a public warning about Bitmax, which is one of the biggest sources of liquidity, saying it's not regulated. and be advised, don't use it, basically. There's an interesting state of affairs today where most of the liquidity for both spot and synthetic crypto assets is actually in these kind of offshore

and unregulated or lightly regulated exchanges. What do you make of this state of affairs? Do you think it's likely to be pissed in this way with liquidity that's kind of fragmented between these offshore exchanges and the onshore exchanges? What do you think the equilibrium? is going to be there. I think I've already indicated to your listeners that in some respects, I have a fairly conventional perspective on a lot of this. And my view is that we need to protect

investors and ensure that they can make investments in ways where the bad actors and the bad actions and policies are monitored and squeezed out of the system. And I think what we learned in the ICO boom and bust was that the digital issuance of investments and the distribution of those investments globally through native digital platforms absolutely works. And it was possible for investors to make investments sight unseen in products brought to them by people they don't know. Unfortunately, of course, capital is always a magnet to bad actors. And so lots of the ICOs weren't real, and many of them were provided by people who had no intention of actually delivering on the promises in the prospectus in the white paper. They simply wanted

to take your money and run. I feel like we need to make sure that it's very difficult for those bad actors to prosecute their bad actions on us, the broader community. And I think that once you've lost money a few times, I think you end up being in this camp. So I think a lot of people who first embraced the ICO movement hadn't actually been early stage investors before and they didn't understand what 100% capital loss actually feels like, especially when you know it wasn't just because the business couldn't succeed. It was because the entrepreneur planned to steal your money. So finishing up on that rant, I think that we do need to make sure that digital actors

in this new digital economy act according to the rules of engagement. I think we do need to elevate the quality of this environment. And to a large extent, I think the way we do that is by beginning to squeeze out the bad actors and the marginal players. I think there's a lot of great players, great wallets, but all of them suffer when the ecosystem is also full of the bad actors. And I think, and this is just me speaking, but I think that that is one of the roles that government is supposed to play. It's supposed to establish laws and implement those laws to protect all of us from the bad actors in society.

And I'm hoping that we'll see more of that occur in this new world of digital monies and digital assets too. So maybe closing up here, you put out some great content. And what are some of the useful resources that you would recommend to folks, maybe other than your own content, which of course is great. What helped you come up to speed on this industry and what do you recommend to folks who are trying to do the same? So once I started deciding that this was worthy of trying to understand more, and it took me a while to get to that point, I'll tell you what, the things that really made a difference for me, Laura Shin has got this podcast online unchained and unconfirmed. I probably came in at, I don't know, episode,

picker number 50. But I actually went back to the beginning and listened to all of the initial episodes as I was driving around the Bay Area. I found that very helpful. A second thing is I did buy a handful of books online and there are some good blockchain books. I don't think most of us really need to understand the technology

any more than we need to understand TCIP to understand the internet and electronic commerce. So I gravitated towards the books online that were more about the applications and the uses. And whilst I did read about hash rates and Merkel routes and things, I know in practice I don't need to know those things. And then the third thing I would call out was I actually went on the Oxford University blockchain strategy course.

It's a six-week online course, and I thought that was very useful, just sort of solidifying my knowledge at the outset. And then, like everyone else, you want to become part of the community. So I started attending some blockchain meetups. Crypto Oracle holds some very good ones in cities around the world, but there are others as well. And I just try to give myself a lot more exposure. And you start coming up the curve and then you know what you need to know more about and

everything builds on itself. That's great. So Matthew, thanks so much for your time today. Where can people learn more about blockchain co-investors in the various things that you have working? So Alice and I, over the last few years, have written some books. And we put them, they're available everywhere, Amazon, Apple, paper, that are that audible and so on. There's one on investing, one on innovation, and then there's blockchain competitive advantage too,

which is specifically about this space and what we've talked about today. At blockchain co-investors.com, that's where we post anything we write or webinars that we hold. And for investors specifically, I'm not actually allowed to talk about our fund on this but investors that want to understand more about how we became investors in 10 of the 16 blockchain unicorns, they can go to blockchain co-investors to learn more. Well, Matthew, this has been great. It's always amazing to talk about blockchain things with you. It strikes a very opportunistic but grounded in reality tone.

So we really appreciate you taking the time today. Well, thank you so much. And as I said at the outset, we're very happy to be investors in Castle Island and looking forward to great things from you and Nick and your portfolio. This has been another episode of On the Brink with Castle Island Ventures. To learn more or to subscribe to our newsletter, please visit castlelisland.V.C. And a big thank you to all of our listeners, except those of you who believe in the underlying blockchain technology, but not cryptocurrency. You know who you are.