Unchained - Trends in Crypto: Marco Santori, Michael Sonnenshein and Barbara Minuzzi on 2017 and What's Next

Episode Date: April 22, 2018

In this live recording of a panel discussion at the CoinAlts Fund Symposium, Marco Santori, president and chief legal officer of Blockchain, managing director at Grayscale Investments, and Barbara Minuzzi, cofounder and managing partner of Ausum Ventures take stock of the 2017 year and discuss a range of trends they're seeing in the industry. Santori describes what the ICO wave was like from his seat as one of the most in-demand lawyers for ICOs, and why he doesn't actually think that securities (such as a SAFT) can later transform into something that is a non-security. He also talks about how big corporations are thinking about use blockchain technology -- and why we haven't yet seen much activity on that front in the market. We talk about the current clouds over the industry -- custody and regulation -- and Sonnenshein explains why investors choose Grayscale's investment products, such as the Bitcoin Investment Trust, rather that investing in the coin directly, and  Blockchain.info: https://blockchain.info Grayscale Investments: https://grayscale.co Ausum Ventures: https://www.ausum.vc Thank you to the CoinAlts Fund Symposium for hosting the panel: https://www.coinaltsfundsymposium.com For more on regulatory issues, check out these past episodes: Perianne Boring and Amy Kim of the Chamber of Digital Commerce on crypto regulation: http://unchainedpodcast.co/the-chamber-of-digital-commerces-perianne-boring-and-amy-kim-on-why-us-crypto-regulation-is-complicated-and-confusing The Tax Rules That Have Crypto Investors Aghast: http://unchainedpodcast.co/the-tax-rules-that-have-crypto-users-aghast How Crypto and Blockchain Technology Should Be Regulated: http://unchainedpodcast.co/how-crypto-and-blockchain-technology-should-be-regulated Jerry Brito and Peter Van Valkenburgh of Coin Center: http://unchainedpodcast.co/how-coin-center-is-helping-define-the-big-fuzzy-gray-area-of-blockchain-and-cryptocurrency-law Caitlin Long on How 'Utility Tokens' Are Now Legal in Wyoming: http://unconfirmed.libsyn.com/caitlin-long-on-how-utility-tokens-are-now-legal-in-wyoming Former DOJ Prosecutor Kathryn Haun on What the SEC Subpoenas and FinCen Letter Likely Mean: http://unconfirmed.libsyn.com/sxsw-episode-former-doj-prosecutor-kathryn-haun-on-what-the-sec-subpoenas-and-fincen-letter-likely-mean For more on custody issues, check out the episode with Mike Belshe of BitGo and its acquisition of Kingdom Trust: http://unchainedpodcast.co/mike-belshe-on-what-bitgos-kingdom-trust-acquisition-means-for-crypto-and-how-security-will-develop-in-the-future Thank you to our sponsors! Ethereal Summit: https://etherealsummit.com Quantstamp: https://www.quantstamp.com StartEngine: https://www.startengine.com/unchained Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. This is a special episode of Unchained on Trends in the Cryptospace recorded at the Coin Alts Fund Symposium in New York City. My panelists for Marco Santori, president and chief legal officer of blockchain, who was also a previous guest on the podcast, Michael Sonnenshine, managing director of Grayskill Investments, and Barbara Minutesi, co-founder and managing director of awesome ventures. We had a fascinating discussion, which included Marco recounting what 2017 looked like for him, as one of the most in-demand lawyers for ICO issuers. I highly recommend you check out this episode.

Thanks for listening. On May 11th and 12th, some of the most interesting humans from around the globe will come together in Brooklyn for the Ethereum Summit, hosted by consensus, to collaborate on building the decentralized future. To register and receive 10% off, go to atherialsummit.com

and enter the code Unchained 10. This episode is brought to you by Quant Stamp. Quant Stamp is building the first smart contract security auditing protocol designed to secure all smart contracts at a cost-effective and scalable manner. The technology is being developed by a team of PhDs with over 500 Google Scholar Citations. To learn more, or request an audit, visit www.com. This episode is brought to you by StartEngine, a security token offering platform focused on issuing regulated ICOs.

StartEngine has helped over 150 companies raise capital. Go to startengine.com slash unchained for a 20% discount. This ad is not legal advice. Hi, everyone. Welcome to this panel on trends in the crypto space. Oh, Laura. My apologies, I forgot to mention one thing. This panel is being audio recorded for Laura's podcast.

So just wanted to let the audience be aware of that. Hi, everyone. Thanks for joining us. So to my left, I have Marco Santori, who is... What's your title? Council or? President and Chief Legal Officer. Oh, very fancy.

President and Chief Legal Officer of blockchain.info, which is a crypto wallet. We've got Michael Sonnonshine of Grayscale Investments. What's your title there? Managing Director. Managing Director. And Barbara Manuice. Hello, Barbara. Who's of awesome ventures, and your title is General Partner?

Yeah, GPN co-founder. Great. All right. So we're going to be discussing crypto trends. and why do we actually just have you each go through and sort of describe your background, what your company does, Mark I want to start? Sure. I'm Marco Santori. As Laura said, I'm the president and CLO of blockchain. We're the most popular digital currency wallet in the world, over 24 million wallets.

And we also have an API. And of course, the data tools, the blockchain explorer, which you've all seen, if you've seen any charts on crypto over the last, I guess, Yes, six or seven years. Before blockchain, I was a partner at Cooley. I led the FinTech team at Cooley, and of course our blockchain technology efforts. And most recently, I was an author of the SAFT project, White Paper. Hi, I'm Michael Sunnenshine, a managing director at Grayscale Investments. Grayscale is a wholly owned subsidiary of a company called Digital Currency Group.

DCG is the largest conglomerate digital currency organization globally. We have a venture capital arm, a large balance sheet that holds digital currencies, and several subsidiary businesses, one of them being Grayscale. Grayscale is purely focused on digital currency as an asset manager, and so our business model looks similar to that of iShares or Vanguard or Wisdom Tree. And to date, we've launched eight distinct investment funds. We now manage about $1.6, $1.7 billion across the eight different funds that we run. And I think for us, we're really trying to bridge that gap between the global investment community

and making digital currencies accessible for different types of investors looking to speculate on and participate in the digital currency asset class. Okay. I'm the co-founder and managing director of Awesome Ventures. I have been on investment boat for almost a decade. first very traditional finance and then equity in real estate. I finally started to manage my own funds on venture. Has been five years now. Biotech, fund of funds in emerging managers, and then awesome with a hybrid venture and hedge fund. Great. So let's start talking about the 2017 year in crypto, which I think we can all say was sort of the year that put crypto on the map.

a mainstream way. What do you make of that year? What were the important developments and sort of where do you place it in the broader story of mainstream adoption of crypto? I'll start. Sure. So I've been working in the digital currency space since the beginning of 2014. I've spent time with CEOs of publicly traded companies, heads of banks, heads of insurance companies, family offices, every geography under the sun you can think of. I can't tell you for how long this was a taboo topic. Investors thought that digital currencies were for drug dealers and human trafficking. They thought that digital currencies were a farce or a joke and they were going to go away. Laura, I know you're previously from the press, so I'm not going to blame all of this on the

press. I'm still from the press. Yes, you are still from the press, right? Okay, so I'm going to say the press hasn't done the best job of actually explaining, demystifying, making it clear what digital currencies are, how they can be transformative. And that narrative started to change during 2017. That changed because some fantastic companies in the space were doing very successful rounds from some very prominent investors. That changed because the price of digital assets started to take off. And suddenly the narrative around digital currencies in popular press outlets became about digital currencies creating the springboard to financial inclusion, starting to disrupt payment systems, starting to create entirely new business models or create jobs globally. And this is one of those weird phenomena where a asset class came along for the first time that was never around before. And somehow retail investors got into it before institutions did.

And that's because of fantastic companies like blockchain, like Coinbase and others that have really made this a place where investors can actually participate. And so there's been a lot of volatility, but I don't think I've ever been more excited about who has gotten drawn into the space over the past year and kind of where we are turning from maybe that first inning to second inning of kind of where digital assets are in their life cycle. Yeah, and actually, so Marco, I know you weren't at blockchain at that time, but I am kind of curious to know here, you know, in the U.S., we were all very aware of, like, everybody from mom and pock investors to teenagers to people who had mortgages to pay in loans that were thinking about taking out even more debt to buy crypto. We know that all those people were getting in. But what was blockchain not infocene in terms of adoption like elsewhere in the world? I think like everybody else we saw an enormous uptick. So to give a sense of blockchain's footprint, we have a lot of wallets, right? If you were to combine all of Schwab's customers and TD banks customers and E-Trades customers,

you still don't get the number of wallets that we have. And it's very much a global phenomenon. The U.S. is not our largest market. The U.S. is our third largest market. And we saw abroad around the world, really the same thing that people saw in the United States was a tremendous uptick in volume, in user activity, an exchange volume, in payment volume, you know, actual transfer volume. And in one day, we added the entire population of Berkeley to our wallet count. I mean, it was unprecedented. But, you know, as to why it happened, I think there are a lot of factors, but really, I think we all really know why it happened, right?

It happened because people discovered you could pre-sell tokens. I mean, it's not a lot of magic to this in my mind. That's what separates 2017 from 2016, is that there were, for 2016 in the years before, there were a few different entrepreneurs, a few different examples of people taking risks and pre-selling their tokens. But it was still kind of frowned upon by the community. it hadn't really reached its pinnacle. In 2017, people started doing this with abandoned, and in some cases reckless abandoned, but that's clearly what validated the multi-chain framework

that people think about crypto in now. It was 2017. People never really, I think, took heart around the world that this crypto thing was going to happen, and there were going to be a great variety of tokens, a great variety of blockchains at any stage in the process. And then 2017 happened. People discovered you could bootstrap these networks by selling the tokens.

And that worldview was validated. And so you're saying that it was actually the speculative fervor that also drove adoption in these developing markets? I wouldn't call it speculative fervor. I think that's a loaded term. I think that it really, the click happened on the issuer side and not on the purchaser side. development teams who had grand plans and grand ideas for new networks figured out a way to actually

get these things bootstrap to get them launched. And that was by selling those tokens. But I mean, in terms of the number of wallets we saw being open on blockchain. Yeah. So in terms of blockchain's wallet, so people don't come to blockchain to speculate. If you want to speculate, it's a poor tool for that. We're not what you use to speculate. We are what you use to use. cryptocurrencies. In fact, it's difficult to draw a line between speculative use and consumptive and functional use for most people. I actually think this is another simple idea. And once you've moved your crypto off of the exchange that you bought them on, in fact, off of exchanges entirely,

that's use, that's using them as a store of value, something more than just a speculative tool to sell for a dollar and time the market, or sorry, to buy for a dollar and sell for two. You your crypto to blockchain when you want to use it. Oh, interesting. Okay, so you're saying in those developing markets, people, well, I guess you don't know, but do you have a guess as to what kind of the main uses were for them? Yeah, I mean, look, in the United States, even after the events of 2007, we still trust our banks. You guys do.

I'm sorry, it doesn't sound good to say, but you do because you go back to the bank and you give them your money and they hold on to it for you. In most of the world, that's not the way people think. People don't trust banks in most of the world. And we provide a tool for people. We provide a software tool so that people can hold their own crypto. We are the best in the business at it. We have 24 million validations of that happening.

So, you know, it's a remarkably different perspective on things. We give people the tools to store these things themselves, to use these things themselves, because we are not in exchange. And so you actually referenced this earlier, sort of like what the difference was in 2017 that we saw on the industry side. Michael and Barbara, do you also want to add kind of like, you know, obviously we did talk about what was going on in the market side. But then where are we as an industry? Like what needs to be built, what has been built so far, what's been proven, what hasn't, things like that. Yeah, sure.

You want to start? You want to start. Yeah, so I think, you know, there's a lack of certain tools that need to become available that will further validate crypto as an asset class. This is everything from quotation systems, order management systems, seeing further validation on the custodial side, portfolio aggregation tools. The market around crypto assets at the moment is, entirely outside of the existing framework around which assets that are used for investment

currently flow through. Digital currencies, Bitcoin are not sent through DVP accounts or through your prime brokerage at Goldman Sachs. They are not necessarily yet held by custodial solutions that would be yet deemed to be qualified custodians. And so I'm very much of the belief, and certainly on the front lines, of witnessing that there is a lot of institutional capital that wants to move into this space. And a lot of the aforementioned things that are missing are being worked on. Some of the entrepreneurs that we're investing in on the venture side of our business are building those very types of tools that are necessary to bring those types of institutions into the space. But again, to Marco's point, you have a lot of different things going on in the

space, whether it's token issuance or speculation or financial inclusion. It's very difficult to see which of these is going to emerge the fastest or if there's other use cases we're not even thinking of yet. And as more and more folks come into the space and that begins to solidify, you're going to see massive movement of capital. But at the moment, there's a lot of things kind of representative of a nascent market around crypto assets that are not allowing a lot of people to participate. Yes. I think we are moving away from the early days of crypto. That was extremely speculative. and in fact, if I would name 2017 in the crypto space, it would be speculation, the word that I would use. I think everyone was speculating, trying to get what was going on.

We are still trying to get it, but in a way that is a way more solid, and we can understand what's going on. So I think now in 2018, we see exactly what he's saying. Like we have a lot of custody companies coming in, just a few that will deliver a real solution for funds, venture funds, hedge crypto funds. And then for that, you have more trust. You can see institutional, you can see real money coming into this market. And that's how I see things becoming more solid. The Ethereum Summit, posted by consensus, is anything but your average blockchain conference. Join builders, philosophers, policymakers, artists, and humanitarians from around the globe on May 11th and 12th at the Knockdown Center in Brooklyn for two days of storytelling and knowledge sharing around how we can build our decentralized future together using blockchain technology.

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two-thirds, or by two-thirds from the highs of late 2017. I think now it's maybe more like 50% or something. I'm not totally up on the numbers, but, you know, what do you see happening right now? I'll start. So we spend a lot of time with hedge funds around the world. In fact, I don't think there's a city in the world I can go to where I can't fill up a day or five days worth of meetings. And I think what I'm seeing and experiencing that was not the case six or 12 months ago is no longer needing to do any Bitcoin or digital currency 101 or 201 with any of these investors, which is great. It's a time suck. And quite frankly, there's so many good resources out there for people to be doing that on their own that it's not a great use of our time.

I think that there's no one theme, though, with the types of investors willing to deploy capital into the space. And so I think we're very... fortunate to call us clients of ours and our products, everyone from global macro funds to tech focus funds, to deep value funds, it really runs the gamut. I think a lot of these folks are looking at a couple of different narratives as to why they're getting involved. One is certainly around digital goal, the digital store of value, and that's a narrative that I think has been pretty well covered in the press and actually positively, Laura. And I think people get get it, that Bitcoin and perhaps some other digital assets can be a gold 2.0 or a digital store

of value. I think there's a lot of investors that are also looking at the riskiest end of their portfolio allocation in recognizing the merits of digital currency investing in the context of a diversified portfolio and that they probably can't find other risk assets with the risk reward profile that digital currencies have. And again, because there's now that backdrop that allows them to invest in this, that allows them to write in their quarterly newsletter to their LPs, hey, we made an allocation to Bitcoin or we made an allocation to Ethereum or whatever it may be without getting backlash. I think the investors are recognizing they can't afford to not be there. I don't think we're seeing traditional hedge funds betting everything they have on

the space, and I certainly hate to use the word even bet. What they're doing is making an allocation of anywhere from 50 to 150 basis points. that makes them participate in this and that forces them to pay attention to it. They recognize that it's early days and that they're going to need to be patient on it. But if this goes to zero, it's not going to be a material drag on performance. And if it does some of the things that we think it can do, well, it becomes a really meaningful driver of returns for traditional investors. And so I think many in the investment community look at it as almost like a call option.

So we're seeing more and more of these institutions coming into the space. and I think the only other thing I'd add to that, Laura, is that, you know, Bitcoin continues to be that kind of gateway into other assets. But I'm also starting to see now, probably since the beginning of the year, interest and involvement beyond Bitcoin and people looking at creating diversified portfolios amongst crypto assets. And how are they also deciding whether or not to invest in things like, you know, the different crypto hedge funds that have popped up, so which are already going under? also some of the few VC firms and then, you know, investing with something like Grayscale,

what's the difference to them and how are people making those decisions? Yeah, so I think there's different types of investors, different risk tolerance, different time horizon. You know, the Grayscale family of products is for people that can make at least a one-year hold period on the investment that they're making. That's what all of our products statutorily have. And we're not for people looking to make a quick buck or, you know, make a quick trade. I think people are either pursuing one of several strategies. They make a targeted allocation and they stick with it. They'll maybe put 80% of the dollars they want to deploy into a target allocation like that

and then maybe keep the other 20% in actual coins themselves. There are a lot of investors who are increasingly interested in the venture side of the business and deploying capital into private companies. The only issue there is that unless you're truly a VC and you can build a pretty diversified portfolio of different companies attacking different vectors of the space, you're making exceedingly targeted bets that have very, very long timelines before they'll pay off. And so I think investors are recognizing that the proliferation of the asset class as a whole, the best and probably most liquid way to play it is to get exposure to the coins directly,

be it through a product like Grayscale or buying coins directly if they have the mandate and legally can do so. And is the distinction between whether or not they would choose to go with Grayscale versus just buying the coins, just what you mentioned about the legal ramifications or custody or like what are all the different factors that would, you know, push them to buy the Bitcoin Investment Trust as opposed to just Bitcoin? Sure. Yeah. So what we're offering are products that have QSips that are DTC eligible. And so when it goes in front of the risk committee and the chief compliance officer and the attorneys and the accountants and the auditors,

it's something they can wrap their head around. It's no different than someone buying GLD instead of buying physical gold directly. And so a lot of the funds that we're interacting with by mandate can't self-custody. And so it's an issue for them to even think about buying digital currency directly. I think another thing that a lot of these firms are taking into account are they look at what they do. They're investors. They're smart. They're strategic.

But then they rely on prime brokers and banks to handle all the assets that they're invested in. why would they suddenly depart from that and start self-custodying something and burden themselves with that? It's just a departure from their comfort zone. I wonder if in a few years these won't be the same, these factors won't have the same level of significance. Would you say so? It depends. I think some of that will come through increased guidance from, you know, the IRS, the SEC around the treatment and taxation of these assets. I think it'll also come through seeing more qualified custodians popping up in the space that will allow people to do a little bit more of that on their own. Right, which I think we're going to start seeing

pretty soon. So let's actually talk about that, those trends. What are you seeing there in terms of the infrastructure that needs to be built out and what is being built out? Yeah, so I think there are no shortage of companies coming up in the world, certainly around custody. Custody is this big, black, dark cloud that hangs over the entire industry. Everyone wants to have the best technology, the safest security option, et cetera. I unfortunately think that the banks who are bleeding in terms of seeing their deposits going to places like Coinbase or into gray scale products or wherever else people are buying digital assets, as much as they may eventually attempt to build their own custodial solutions, all of the custodial companies and wallet providers,

I think they're all acquisition targets. I don't think that banks are going to be to do any of this on the timeframe for which customers are going to want to see it happen. And so I think you have leaders in the industry like blockchain, like Zappo, but Zappo is only doing custody for Bitcoin. There's another firm called Ledger that's based in Paris that's doing a phenomenal job and working on a vault solution as well. So I think there are some really fantastic entrepreneurs that are building world-class companies that are going to become the B&Y melons of the digital currency ecosystem. And once that happens, do you have any prediction for how that will affect the space?

Like once we start to see a lot more of these solutions come online? More access points, safer solutions, less reasons not to get involved. The scorebed app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking. Nah, no more statistically speaking. I want hot takes. I want knee-jerk reactions. That's not really what I do. Is that because you don't have any knees?

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That's the powerful backing of Amex. Conditions apply. Great. So since you referenced dark black clouds in the industry, let's talk about regulation. What is the current... You want to talk about regulation? Yeah. All right. Where do you want to start? Which government agency? Okay, so I think what the industry is looking for is further guidance from the IRS. Marco, you were in the space at the time when the initial IRS guidance came out. We were all jumping for joy that

there was any at all statement from the IRS on the taxation of digital assets. But nothing has come out since then. So we'd love to see more around that, validation around how like-kind exchanges are going to or not going to be treated. You know, mining. There's a whole slew of things we'd like to see on the tax front. But to Marco's point, 2017 was largely characterized by a lot of token sales and ICOs. And what I'm seeing from my interactions with regulators and I spend a decent amount of time in D.C. Is they continue to throw these warning shots across the bow that are trying to establish for people what constitutes a security, what does not, what is illegal and what is not.

And I think it's starting to take shape. I think people are starting to hear and starting to listen. But there are, what, 4,000 enforcement attorneys at the SEC. and a lot of ICOs that occurred over the last year. And I think you're going to see further crackdown in that space over the coming months. But Marco, what do you think? I haven't been a big firm securities lawyer for literally weeks. Actually, I'm kind of curious to know what 2017 looked like from your end,

because as far as I understand, I think a lot of teams came to you, and they had certain ideas. and you had other ideas around what they could and couldn't do. So you can talk a little bit about how you had to steer them or what people thought was okay and what they eventually realized wasn't? Yeah, maybe I can. So there's a lot to say here. So maybe I can do this by way of telling a little bit of a story. So in early 2017, I was interviewed by the Wall Street Journal for token sales and ICOs.

It was still kind of gaining momentum. at that part of the year. And it was like one quote that made it into the article. And that happened on a Sunday. And I was quoted as someone who was advising people who wanted to do token sales.

The following Monday, it started at 9 a.m. Eastern time and picked up for the entire day. The email started coming in. The phone started ringing. And we had received

received, there was a point where we started to receive one inbound per business minute. Wow. And so you have to think about, like, who wants to talk to a lawyer that badly? It's just, it's just baffling. You know, and, you know, we started picking up the phones, but at a certain point, we had to stop and just sit back and think about what was going on here. And so we did. We stopped and we sat back and we started to collect an organized. the inbound and to do the analysis of what potential clients, what they wanted.

And the results were startling. The results were really shocking. The first third were, well, was not all that shocking. The first third were people who wanted to sell tokens that would eventually power cutting-edge decentralized networks, which is, of course, our bread and butter. It's what we're very familiar with. It's why we got up in the morning as a team, and we took those calls, and we did a lot of work there, and it was great. The second third, well, the second third was just people who wanted to sell securities.

People who thought they could access liquidity by selling a token that they wouldn't have otherwise been able to access had they just sold a piece of paper or a PDF document. And those people, well, we didn't call them back because you can't access liquidity that you couldn't otherwise access. just in virtue of inscribing the contract into a blockchain instead of into Microsoft Word. A security is a security, is a security. It doesn't matter what form it takes. There's nothing special about tokens that make them securities. The last third, though, was absolutely fascinating.

Not people who wanted to sell securities, not people who were building decentralized networks. It was, and I'm changing the names to protect the innocent, Folgers, Nike. Gillette. People who sold real-world goods that didn't have anything to do with blockchains. But what they wanted to do

was combine a lot of different parts of their business into one thing, into one token. What they wanted to do was, well, sell a token that stood for a pair of Nike's. And again, I'm making this up. This is not one of the inquiries we got. One token, one pair of Nikes. Simple.

What is it? It's a coupon. It's a gift certificate, right? But they wanted to sell a billion of them at a time. And they wanted to sell them all in one day. Probably two investors at 80 cents on the dollar. And those investors taking on very little risk aren't going to make a 10x return, but they may make a few percent. They'll turn around and act as underwriters and sell those to the market because they are, after all, just coupons. They are Nikes. They're redeemable for two Nikes. And then Alice and Bob and Johnny on the street get 10 percent. off their nikes. Who doesn't want that? Consumers do. Showing over and over again. They do.

That's fine. That's interesting. But what was really fascinating about, they wanted to layer a loyalty model on top of it, because you can track and you can visualize and you can trace the movement of tokens on a blockchain, which you can't really do with coupons. And there's a secondary market for them, which there isn't really for coupons. So they wanted to layer a loyalty program on top of it, whereby if you held $5,000... Nike coins consistently between the dates of October 1st and December 31st of 2017. On December 31st, you were invited to the Nike VIP party with LeBron James and Tiger Woods, and you could party all night with your favorite sports stars.

And then for the rest of the year, you were a Nike ambassador. And at the end, and for that entire year, not only do you get 10% off your shoes, in addition to the 10% you would have gotten with a token, there are additional loyalty elements laid on top of it. Fascinating stuff, but what does it do? It incentivizes people, not like securities incentivize people, to make money when the company makes money, but to tie incentives to the growth of a brand,

which is just fascinating stuff. It means you're financially incentivized in the growth of the brand. So that if I wear Nikes, I'm not just talking about how fly my Nikes, are, I'm also talking about how nobody wears Adidas anymore, and Reebok has played out because I'm financially incentivized. So that's a very long explanation of where I think the market could go. I think that the world of tokenized securities is enormous. It will be a $14 trillion market, but it will be tiny compared to the world of tokenized literally everything else. That's interesting. That's a trend that I don't feel like I've really seen in real life. Is that

something that's coming on the market or how did you advise those teams? Are they working like are these corporates working on this stuff? Well I think there's still a tremendous amount of regulatory uncertainty. That's that great cloud that you're talking about. There's still a tremendous regulatory amount of regulatory uncertainty around how those things can

be issued. Did anybody come here to make 10%? I mean, no, right? You all came here to Lambo on altcoins, right? And make 10,000% and because you missed Ethereum or maybe you made it, but should have made more.

There's no robust set of investors, right, who are here looking for a stable return. First of all, I'm like the only crazy person talking about this stuff. There are some other folks out there, but we're few and far between. I think this is a very long-term perspective. I think that everything out there that can be tokenized will be tokenized at one point in its life. if our policymakers can take a long-term perspective on it. But as far as you understood last year, like that's kind of loyalty points on a blockchain thing that you described.

What are the legal issues there? Like, what would be the... I think all of the legal issues. All of them are there. I mean, you've got consumer protection issues. You've got anti-money laundering issues. But I'll tell you one of the reasons that this is powerful is because right now, if you look at a coupon, I can tell you people don't look at coupons.

But if you do look at a coupon, find one, turn it on the back. What does it say? No cash value, not redeemable. All the money transmission lawyers know this stuff. The payments lawyers know this stuff. You have to do that because if the coupon itself can, if you can go to the issuer with a coupon and redeem it for money or non-transferable, right? If you can transfer it to somebody else, then you enter into a regulated regime.

And Nike's not going to do that. The Gillettes, the Folgers of the World, are not going to do that. What tokens do, and we're struggling with the penumbra of this now, the outline of this, whatever, the silhouette of this right now, but what tokens do is they shift regulatory burdens, hopefully, to the people who are best equipped to support them. And that is exchanges, right? It's the exchanges that ought to be regulated. it's the exchanges that do the high-risk activity that is potentially prone to money laundering. It's not Nike.

Nike makes shoes. But they can't do this unless you can offload that risk, offload that regulatory burden to the folks who have anti-money laundering policies, compliance officers, and all the rest. So that's one of the really powerful elements of this vision, which we still haven't seen much of the beginnings of, but I think is out there. Laura, I just want to add to that. So in 2017, for about as many of those proposals that Marco had in his inbox or calling his office, I probably had about 10% of them in my inbox or LinkedIn account every morning. I did every single person in my organization. I think I also had about three or four people a day offering to write a white paper for me in 24 hours so that I could tokenize something and do an ICO. And I mean it, like that actually happened. And so we saw, certainly a digital currency group at the parent company level, a plethora of ICOs throughout 2017. Now, as probably the most prominent venture capitalists in the space and a long-term VC investor, I think we very much take the view that we want to see the capital formation process become easier. We don't want it to only be reserved for the who's who of the VC community.

We want to see other people be able to get involved who maybe don't work for, you know, injuries in Horowitz or Union Square Ventures and be able to participate in and support other entrepreneurs. But as we saw so many of these ICOs, I think there were kind of three big things that stood out to us that caused us to not participate. I think one was the team behind a lot of these projects. These were people that had no real track record of success. So it would be very difficult to put money into something for someone who has, you know, no track record of doing anything, let alone kind of giving you a token in exchange for some future promise of some great project. I think we also often question the legality around this, so spending a lot of time

with the SEC. My interactions with them were very much of the school of thought that there's 80-plus years of regulation as to how assets are raised in the United States and by American investors, and by and large, this was a pretty big, you know, misstep on a lot of people's parts and how they were structuring their projects. And then I think the third thing was very very important. valuation. You know, why should, you know, Michael and Marco, two great entrepreneurs, be able to do a traditional venture deal, raise $3 million at X valuation, but somehow if we were to tokenize and do an ICO, we'd be able to raise $300 million at an insane valuation, right, for the exact same project at the exact same stage of its life cycle and kind of where it was.

And so kind of looking at those three things, you know, cause us to stay meaningfully on, on the sidelines on the ICO front throughout 2017. And now because of the news that the SEC is kind of looking into the ICO issuers and their legal teams and their advisors, how is that affecting the entrepreneurs in the space? Like what different decisions are they choosing to make? I mean, I think we're like, so DCG now is probably about 130 portfolio companies and a lot of them have done ICOs. I think any of them that haven't already done so, to the best of my knowledge, for the most part, have tabled any plans. that they had to do an ICO. Generally speaking, without naming any particular company within our portfolio,

a lot of people could just do it because the market was frothy and people were willing to give them money and people felt that they wanted to participate in their vision or whatever it was that they were building. But these days, I think we're still seeing a tremendous, you know, amazing shift of human capital of people leaving banks or established companies to pursue projects in the digital currency economy.

ecosystem. And so I don't think that a slowdown in ICOs is by any means stopping talent from coming into the space or building projects. One other issue I wanted to bring up is utility tokens. I think for a while there was a question of whether or not that was actually going to be a thing. I think we got some indication that actually that probably would be. Finally, Chairman Jay Clayton of the SEC did make some comments that indicated he did think that there might be something where you could issue it as a security and that later in its life cycle, it may not be security. Marco, do you want to give me a high five? Yes, I'll give you a high five. But I mean, that's, I don't think that's what, yeah, I don't think that makes sense personally. Oh, yeah. Interesting. Well, but I thought, but that was my

interpretation of your soft white paper. No, it's a common misconception and I was, um, delighted and simultaneously horrified to hear the chairman make that comment. But it was obviously an offhand remark in a public setting. It wasn't the official position of the SEC or anything. No, that's not. So there really aren't, there's no real precedent of any asset out there transforming from a non-security or from a security into a non-security. Really, there's nothing really in history as someone who, by no means has done exhaustive research on this issue, but, man, a lot of it.

There's really not a lot of history there. No, if people use the SAFT framework, then what they did was actually something that there's abundant precedence for in history. You sell a SAFT, which is a security, that's a piece of paper, and that thing is a security. You file your Form D. you comply with the rules of 506B or 506C, whatever it might be, for a private placement. And that thing is always and forever from beginning to end a security. And the issuers take that money. They use the money to build this thing, this good, this thing that has a use in commerce, this token.

And they give the token in exchange. The token never was a security, and at no point in its lifetime would be a security. There's no transformation. In fact, there's a lot of history for this, but you don't need to read the books. You know it intuitively. If Bob has a whole bunch of expertise and tools and wants to go pull gold out of the mountain, maybe he has to go to Alice, who doesn't have the expertise in the tools, but does I have the money. Says, Alice, I need a million dollars to pull the gold out of the mountain.

Okay, I'll write you a check, but you've got to write me a security in exchange for that check, so I get a percentage of the gold. Okay, fine. That is, then, of course, to complete the thought, Bob goes and uses the money to mine the gold, and gives the goal to Alice. This is a relationship that has existed since time in Memorial. So, no, in the SAFT framework, there's no transformation between a non-security to a security. The SAFT piece of paper is a security.

The token, if you do it in the way that the white paper lays out, should not be a security. So hopefully that's helpful to tease that apart. Okay, so you're viewing them as separate things. Well, that's how we think a court would view it, too, regardless of what SEC says, regardless of what the press says. That's the framework. That's how this stuff is treated by issuers, by investors, by purchasers. So we did see in Wyoming these new blockchain laws that were implemented,

and one of them basically carves out what we would recognize as a utility token as a class that is not a security. And their sort of like requirements for it, one is that the network is live. Do you think that that is going to be something we'll see coming out of the SEC as well, that tokens that run on a live network are not considered secure, that fall in the utility side of things, that they're not securities? Yeah, so, I mean, you know, you mentioned Wyoming, but they're not the only people to take that position. Obviously, that's the position that we took in the white paper,

that functional securities that are goods in commerce shouldn't be securities. But FINMA, the Swiss regulator recently, came out and also took the same position. They said, look, functional tokens, things that work. Things, when you buy them, you're not relying on the efforts of the issuer to give you something that works anymore. Once they're functional, these things shouldn't be treated as securities. The Wyoming amendments take the same position. I can't imagine that somehow the whole world is going to adopt our reasoning in the Saffd White Paper. I think it's going to be a very uneven framework across the globe.

It is right now with securities, right? But I think that we're going to see more and more people, hopefully, if they look at this right, whatever the complexities are, once a token is actually functional and does what its creators said it was going to do, it might be speculative, but that doesn't make it a security. Well, a lot of teams now are shying SAFs. What do you think about their concerns? Do you agree with them? Do you disagree?

You know, why do you think there's concern now about the SAFT? I think there's a lot of reasons to be concerned about the SAFT. I don't think they're legal. I think they're primarily policy-based. We did extensive legal research and analysis on this. I still haven't heard solid legal objections to the SAFT framework. But every issuance is different. And so you can't be for or against the SAFT.

That's like saying, saying, I believe the blockchain is moral. It just, there's so much wrong with the statement, right? But I also haven't seen people shying away from SAFs either. The last three big raises, I think, were done using SAFs. But, I mean, we didn't invent the thing, right? The SAFT existed long before my team got a hold of it and looked under the hood and see, could this be used for good instead of evil? And so I think as to objections, this is what you asked about.

What are the objections to using the SAFT framework? I think they're really good objections. to it, frankly. And the largest ones is that it keeps, I'm pointing at the crowd again, but it keeps the wealthy at the table, which isn't really what this is all about. It demands compliance with the securities

laws. It demands that pre-functional tokens be sold only to accredited investors. And that keeps the wealthy at the table. It gives them an upper hand. It gives them an advantage over those who aren't, over those who are not accredited. In fact,

As an accredited investor, you can participate in a Rule 506B or 506C offering of a SAFT or whatever it is to buy tokens prior to their functionality. But then once they're functional, well, you probably got them at a discount and you can sell them to the people who didn't. It's a built-in advantage. And that's not fair. And I don't like that. I think it's more an objection to the securities laws that require that kind of framework, that it is an objection to the SAFT framework. but it's still there and it's it's it's it's it's it's it's it's it's it's it's it's it's it's unfortunate I think that's a credible objection I'm curious to know and I don't

know if any of you would know at the table but I'm curious to know if anybody's made that argument to the SEC you know I could just sort of put myself put myself in their shoes and say that oh you know our mission is to protect investors and so what we're doing is we're protecting everyday people who don't know what they're doing from losing their shirts on these speculative investments you know but I don't know, do they recognize that by their own actions, there may be also perpetuating inequality? Like, I really don't know what they think, and I don't know if anybody said those things to them, but I'm kind of curious to know if there's been a discussion like that or what

you guys think about that debate. I think it's a political question. I think that, you know, you either believe that only those who can bear the risks ought to take the risks, which is the reasoning behind the accredited investor rules, right? You have to be rich in order to make risky investments in the United States. That is a political issue, and either you agree with it or you don't. It doesn't have a lot to do with tokens or SAFs, even though that's somehow become the focus of this global conversation. But, you know, again, I think those are political sort of questions of philosophy. I mean, no doubt investor protection is one of the core tenants and core missions of the SEC. But

when I think you try and compare the size of the market that we're talking about to the market that the SEC has long been regulating, monitoring, and watching, perhaps they just have bigger fish to fry for the moment. And maybe that's why our industry is waiting so impatiently for more guidance. So maybe too little too late, like most things, when regulators are trying to catch up with trends and innovations. One thing someone told me about at a conference was that there are some people that are thinking they should switch it to some sort of knowledge-based test rather than accredited versus non-accredited. I think it would be very difficult to implement.

We'd probably need like blockchain identities or something before and some way to ensure people wouldn't be able to cheat on the test. But I don't know. What do you think of that? This is like really futuristic, but I just kind of wanted to float that. I actually, that's the first time I'm hearing of it. So you're catching a little off-guarding to think about that for a minute. I mean, with our products, we're making use of general solicitation under five.

of 6C. So that's something that we have historically and continue to rely on, that we're dealing with sophisticated investors who are very much knowledgeable and aware of suitability requirements and that this is extremely risky and an asset that's very volatile to invest in. And so I think the idea around investor protection in that sense is that, you know, should someone lose their shirt on an investment or it goes belly up, that they have sufficient, you know, net worth or sufficient income that this is not going to put them out on the street. Doing this around something around knowledge, hard to say. Really hard to say, Laura.

It's not hard to say. It just doesn't. It doesn't, I don't think it works. Look, again, it's a political issue. The law as it stands today is what it is. It says you have to be rich to make speculative investments in the U.S. The knowledge requirement, I guess, is interesting, but it has nothing to do with tokens. That's nothing to do with crypto.

It's not a crypto issue. It's a political issue around investor protection that it's existed much longer than token has. So much longer than tokens have and blockchains have. So is it a good idea? Well, I mean, it would take literally an act of Congress. Yeah. I mean, this is also, the SEC is a disclosure regulator, right? And so provided that the proper disclosures are made about any given investment,

regardless if it's a paragraph long or it's as long. long as war in peace, you know, is that long enough or is that sufficient enough to warn investors about the risks of what they're touching, regardless of their net worth? Yeah, well, I guess we'll see how that plays out. Something else I wanted to bring up was that these ICOs were billed as a way to kind of see the network and get a lot of users on the network, and yet, you know, we had all these ICOs last year, and I don't know if we could really say that any of these networks have a lot of adoption other than Bitcoin and Ethereum, which, you know, that was the case even before. So we now, we're seeing these ecosystem funds pop up.

And I saw some people making fun of this idea on Twitter, but I wanted to get your opinion on that. Maybe for the benefit of the audience. So an ecosystem fund is where the issuers of the token want to incentivize more development in that network. And so they create this fund to basically, I guess, give grants or something to other developers that might want to create apps on their platform. Well, I believe the names say it all, like ecosystem fund.

We are talking about this new wave that talks about decentralization and empowerment. And when you're talking about an ecosystem fund, you're really talking about really building it together, building in a way that if it's well structured, if it's well managed, you have the right governance and right incentives, you do pretty well. I think ecosystem funds, it's one of the trends, and if they're well done, they will help a lot the ecosystem as the names name is.

It seems to me like a symptom of having too much capital too early, right? I mean, there are, and I don't judge any particular project, but what else are you going to do with the money when you have it all up front? You have to put it to work somehow, And if you can't deploy the capital to hire the developers and all the things you need to do to achieve the goals you set forth in your white paper, if you just cannot deploy the capital that quickly, you can't let it sit there. You want to put it to work. And an ecosystem fund seems like a great way to do that.

Michael, any thoughts? No, I just think the unfortunate part to Margo's point is that when a lot of these funds have so much capital, oftentimes inexperienced entrepreneurs are not converting that capital back to something. something more stable and often taking a lot of price risk in things like Ethereum or, you know, whatever it may be. So if you raise your ICO last year and, you know, are sitting on $100 million of Ethereum and that's now, you know, down 50% from there, well, that's a really bad place to be in not only for just your project, but God forbid the SEC invokes rescission rights around your ICO and you have to return a bunch of money to investors. So, you, you

I think the idea of an ecosystem is really an interesting concept. I think, again, I think to your point about governance, you're trying to create a decentralized platform for innovation and trying to draw in talent. There's nothing wrong with trying to draw people into your ecosystem or create the proper incentive structures so long that philosophically and the governance doesn't deteriorate. But again, kind of new and not all that time tested.

Some folks that are doing that in a new way, is like Zcash, for example, kind of with the founders reward and kind of giving tokens back to a lot of the folks that are contributing or are data scientists there. But again, super early for a lot of these types of projects, and it'll be interesting to monitor them. And one other trend I wanted to bring up, we're sort of running out of time is that,

as we saw at the end of 2017, CryptoKitties took off in a big way, and after that, a lot of people were talking about non-fungible tokens, and then we saw the ERC-721 standard developed, which is the standard for basically it's the non-fungible version of ICOs, I guess you could call it a very simple way to create non-fungible token. And then on top of that, CryptoKitties itself got investment from USB and others. What do you think is on the horizon for that? Do you think that's going to be a big market?

And if so, in what ways will it take off? And who do you think we'll be buying these crypto collectibles? Yeah, so our parent company invested in CryptoKitties along with a couple. of other really well-known VCs like injuries in USV. You know, the CryptoKitties project itself, Laura, as I was telling you before, kind of reminds me a little bit of tomogachis and people kind of taking care of, you know, this little thing, whatever it may be. But I think it's a good use case and a good example of how the tokenization of an asset,

be it tangible or intangible and uniquely identifiable, very well does belong on a blockchain. Another place where I'm seeing this, which I think is super interesting, is in a project called Decentraland, where there's a new virtual reality platform with different parcels of land that are being bought and sold by different developers to build out various types of projects. And there's a native currency associated with it called mana. And so again, you have this other kind of non-fungible asset that people are assigning value to and different plots of land in different jurisdictions. you know, have varying degrees of interest by the community and there's a thriving secondary market for them the way there was for CryptoKitties towards the end of 2017. Yeah, one of the things that I wonder, though, is as far as I understand, I think the

crypto-Kitties market sort of like took off like a rocket and then like kind of went down fairly quickly as well. So I just sort of wonder if this is going to be like where there's like a lot of fads that happened, but like, you know, that fizzle out pretty quickly. I don't know what you think about that? Too early to say. Really too early to say. Yeah. Okay.

Well, any last thoughts from all of you on trends and innovations in crypto? Look, these guys have been talking their books all day, so I'm just going to do something. Just be super direct about something. There's a serious lack of talent in the crypto space, available talent. To the extent that you are interested in this space and you want to get involved building blockchain, the most popular wallet out there is hiring. So please feel free to come by and say hello. I'm going to say something that I hope resonates well with this crowd, which is driving myself and my team nuts at the moment. There is an unfortunate narrative that because digital currencies are on the front page of the Wall Street Journal every day,

CNBC has a Bitcoin price watch in the lower left-hand corner, which was not there six months ago, that somehow because of the frequency with which you are all interacting with this, that somehow it means that every single person under the sun has gotten involved in the space. And I will be the first to tell you that it couldn't be further from the truth. I think it's great that this is becoming more normal. People are understanding this better, but don't mistake the frequency with which you're interacting with something or how well a certain story in the press is picked up

or the fact that journalists love to write about interesting things, be it hacks or thefts or, you know, asset raises, whatever it may be, suddenly means that every single person is involved. It couldn't be further from the truth. And if we're talking about talking books, how many people did you guys sign up, like in the first quarter of this year, right? Like millions of new wallets? And, you know, my team is raising millions and millions of dollars every week

from new investors into our products. So it's still early days, and there's plenty of opportunities out there. Yeah, I think there's a lot of information also out there. So the more exposure you get and not just reading the news, I think the news can be really miscommunicated. And then if you just go through real information that talks about the technology and how the investment work in this field, it's really worth going deep and understanding.

It's the future, it's happening now, it's early, but the more you get into, the better it will be for your future in general, especially as an investor. Speaking of talking of books, I'll say if you don't like the other press out there, then you should follow my two podcasts, Unchained and Unconfirmed. Unchained is the long one. Unconfirmed is the short, like slightly newsier one. And that's where we get into the weeds and talk of details. And it's not all like about hacks and about how Bitcoin is like the new PayPal and stuff like that. So anyway, thank you all.

This was great. And thank you all as well.