Unchained - Unconfirmed: Spencer Bogart on Bitcoin's Maturation and the SEC Overhang on Crypto

Episode Date: March 9, 2018

Spencer Bogart, partner at Blockchain Capital, discusses why he think Bitcoin's growing pains are a sign of success, how the SEC regulatory gloom could affect the development of crypto and how a liquidity crunch could affect crypto hedge funds. We also take a peek at the coming platform wars. Blockchain Capital: http://blockchain.capital/ New crypto hedge funds: https://hackernoon.com/the-fate-of-crypto-hedge-funds-ca5850e8421c Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey everyone, here is this week's episode from my new podcast, Unconfirmed, insights and analysis from the top minds and crypto. In case you haven't had a chance to listen or subscribe already, you can check it out here on the Unchained Feed. My guest this week is Spencer Bogart, partner at Blockchain Capital. We discussed the maturation of Bitcoin, the regulatory overhang on crypto, and which tokens might be considered securities. If you like the episode, be sure to go to the feed for Unconfirmed, insights and analysis from the Topmines and Crypto and subscribe today. Hi, everyone. Welcome to Unconfirms. The podcast that reveals how the marquey names and crypto are reacting to the week's top headlines and gets the inside scoop on what they see on the horizon.

I'm your host, Laura Shin. This episode is brought to you by OnRamp. Your branding and website are the first things your users will see. And in the current Wild West of ICOs and blockchain startups, you need to stand out from the pack. OnRamp is a full service creative and design agency that will help amplify your brand with perfect website, logo, collateral, or custom design project. Get big results in no time by visiting ThinkOnRamp.com. My guest for today, for Unconfirmed, is Spencer Bogart, partner at blockchain capital. Welcome, Spencer. Hey, Laura, thanks so much for having me. What's been on your mind recently?

Oh, so much, so much. Always going on with the crypto markets. But, you know, one thing that's been on my mind recently is thinking about some of the tremendous growth that we've seen and then also thinking about the corresponding tremendous growing pains that come with that. And I think that nowhere is that more evident than with Bitcoin, right? So there's a lot of very public friction within Bitcoin. I think that's a lot of very public friction within Bitcoin. I think. think it's worth kind of diving in to understand what's going on here. I think it's actually a healthy and normal degree of friction, but the narrative around Bitcoin seems to suggest otherwise. And I think that at the core here, what we have is that Bitcoin is disruptive not just to its entrenched incumbents, but also to itself. Right. So Bitcoin is kind of its own organism and it's growing into its most valued use cases. And I think that overall that's a good thing. And when you say that what use cases are you talking about? Because obviously, if I think a lot of people look at price as their indicator of how well something's going.

And obviously we've seen a pullback in Bitcoin, a major pullback from its all-time highs. Yeah, I mean, I think that, first of all, price is a decent indicator over any reasonably long horizon, but over short horizons of weeks or even months, I don't know that it's a great indicator, right? But in general, I think that as we see a network grow from a total value of a million dollars to something that's worth $150 billion, we should expect that there are going to be significant growing pains. And I think, again, a lot of it is that we have mental models revolved around kind of traditional businesses, and those mental models don't necessarily drive with what we see in crypto markets. Right.

So I think that as Bitcoin has grown from being a really tiny network into a $150 billion network, it's outgrown some of its original developers, some of its use cases, some of its companies. And along there, at every point, there's considerable friction, right? So, you know, to take a step back here, you know, Bitcoin has outgrown some of its original heavy contributors, kind of like Gavin and Jason and Jeff Garzik, who contributed heavily to Bitcoin's code base in the early days. And I have nothing but respect for both of those people. They were the right people at the right time to be working on Bitcoin. But since then, Bitcoin's gotten a lot bigger and it's brought in a lot more talent into the space, right? And so

in at least some senses, it has upskilled its contributors. And, you know, that's not totally dissimilar from a traditional company, and this is what I'm talking about when I say are mental models for evaluating traditional businesses, right? This kind of growth is not necessarily dissimilar from a traditional company, which oftentimes a startup will outgrow their founding team, right? Their founding CEO and CTO are often replaced when the company reaches a certain level of growth and traction. But the difference is that in those circumstances, those breaks tend to be very, very clean, right? They're deciding to greet upon behind closed doors, and they happen gracefully. This is not the case with crypto, right? There is nobody to go and make those

decisions to tap somebody on the shoulder and say, hey, listen, you've done a great job. Thank you for all that you have done. We're at a point now where actually we need to bring in somebody that's better than you, right? And I think that because of that, there is a lot of very public friction that we see. And so what would you say was the use case for Bitcoin previously and what is it transforming into now? Yeah. So, I mean, I think that, you know, in the early days, micro payments were viable on top of Bitcoin, right? In a day where there was very little transaction volume, there was very little demand for block space, and therefore you could include a transaction with little to no fee involved. That meant that it was viable to send transactions for as

little as five or ten cents, right? But in a world where today where Bitcoin transactions cost a couple of dollars, obviously it's not economically viable to send five or ten cents. And so along the way, you know, I think that Bitcoin has at least temporarily, and I hope that Lightning Network and and other layered solutions might be able to reenable the micropayments use case. But at least for now, Bitcoin has outgrown that use case, right? And there were companies that were built around that as well. Some of the people that have been in the industry for a long time might remember ChangeTip, which was a popular company that allowed you to send a tiny tip anywhere down to 10 cents

to people on a social media forum, on Twitter, on Reddit, et cetera. Now, naturally, that business model kind of became invalidated as micro payments were priced out of Bitcoin, right? But that's also a natural sign of the fact that now there is more demand for block space. People want to use the network more. If this was a restaurant, more people want to come to a restaurant, and that's a good thing. So it's more a sign of success than it is a failure. And so in what ways is Bitcoin being used now? Like, I don't think a lot of people would say that it's taking off in the payments arena, right? Yeah, I agree. It's, you know, the payment story, I think, is a little bit overdone. And, you know, there was a number of kind of

companies built around that space originally. And again, I think it's something that I hope will be reenabled at some point. But given the current circumstances, it's not incredibly viable. You know, one way that Bitcoin is being used today is as a digital gold, as a store of value, right, as is often discussed in the market. And I can speak to this, you know, as a venture firm that has contacts around the world, you know, we collect random anecdotal stories from all over. One of my favorite ones that I like to share with people is a doctor down in Brazil who's converted his medical practice one day a week into a Bitcoin consultancy center. And he does that because he makes more money that one day as a Bitcoin consultant than he does as a doctor. And all he's really

doing as a quote unquote Bitcoin consultant is he's just helping other people in the area, other doctors, et cetera, move a very small percentage of their net wealth into Bitcoin. And they're not doing it because they want to speculate on the price of Bitcoin. They're doing it to protect their wealth. They're terrified of wealth confiscation. It's something that's happened to them historically, and they're concerned it will happen again in the face of big public deficits that are currently going on in Brazil. And so earlier you also talked about how you felt like the community around Bitcoin has been, I guess, morphing a little bit. And so talk about that a little bit more. You know, what do you see happening in that community?

Sorry, could you say it again, the morphine? Oh, you said the developers around Bitcoin, you know, in the early days it was Gavin and Jeff. and now it's moved on to other people. Like, what do you think is happening in that regard? Like, what kinds of people are coming in? How are they changing the protocol? Oh, yeah, absolutely. So, you know, I think that there's so many people that contribute to Bitcoin.

I mean, I forget on the most recent release, I think it was 150 contributors or something. So, you know, there's certainly too many to name. But I think overall the development focus for Bitcoin is on something that I think is very, very healthy. And this is on win, on win, win, And when I say win-win-win, I'm thinking of efficiency, functionality, and privacy. And so mostly I feel that Bitcoin Protocol Development evolves in a way where we'd like to add additional functionality without compromising on efficiency. Or we'd like to add additional privacy without compromising on efficiency. And now historically, that's been a trade-off, right?

So it's very hard to find things that do improve functionality without adversely affecting efficiency. So without talking on such a high level, maybe to talk more specifics, right, Monero optimized for privacy, and that came at a cost, right? And, you know, anybody that works within the Monero community will tell you this, right? Like, it's incredible. We added something fantastic that gives you a lot more privacy by interacting with Monero than with Bitcoin. But the adverse effect of that is in terms of efficiency that now transaction sizes are considerably larger than they are a standard Bitcoin transaction, right? And similarly, if we look at Ethereum, Ethereum is optimized heavily for functionality.

And I think that's a great thing. It's allowing a lot of people to build really incredible things. things on top of Ethereum, but it's also come at the expense of efficiency, right? The Ethereum blockchain in terms of total size is now more than three times as large, even though it's been around for about one-third the amount of time, right? So there are various tradeoffs, and I think that within the Bitcoin community, mostly what we see is ones that don't involve people compromising in one particular area. These are win-wins, right? With MX Platinum, almost every purchase may with your card can be covered with points, including new tastes, new fits, and virtually everything in between.

That's the powerful backing of Amex. Conditions apply. At Medcan, we know that life's greatest moments are built on a foundation of good health, from the big milestones to the quiet winds. That's why our annual health assessment offers a physician-led, full-body checkup that provides a clear picture of your health today and may uncover early signs of conditions like heart disease, and cancer. The healthier you means more moments to cherish. Take control of your well-being and book an assessment today. Medcan, live well for life. Visit medcan.com slash moments to get started. So I think one other thing actually, which might account partially for your bullish stance on Bitcoin, is that at least right now we have this sort of, I guess you could call it, a regulatory gloom that's hanging over the crypto space. But I have a feeling that that could lead. Bitcoin relatively unscathed. Do you think that's the case? I do. I mean, I think that of all of the

crypto assets that are out there, Bitcoin is the least at risk as we see an increasing kind of regulatory crackdown on the space. So mostly, I mean, there's a lot of different regulators, right? And it's funny because a lot of these crypto assets, they have features of many different types of asset classes, right? They can resemble simultaneously resemble commodities, currencies, fintech companies, payments companies. And as a result, every regulator under the sun seems to think that it falls under their jurisdiction, right, which kind of makes sense in that light. But overall, the 900-pound gorilla in the room is really the SEC here, right? And the SEC, by definition, is concerned with securities, right? And the SEC has a pretty established framework for how to think about whether something is a

security or is not a security. And I think if we consider that as a spectrum of crypto assets that are at risk of being deemed a security, which could have negative liquidity effects, which we can jump into if we want to. But Bitcoin is at the safest end of that spectrum, right? So it is the least likely to be deemed as security. And, you know, we can talk a little bit about how maybe that framework works, but overall, I think that that bodes well for Bitcoin amid kind of a regulatory crackdown. All right. Yeah. Let's talk about the issue about Bitcoin, whether or not it could be a security and also the liquidity crunch in crypto. But before that, a quick word from our fabulous sponsor, OnRamp. If you're starting up a new project or needs some design or branding help on

an existing one, OnRamp has you covered. OnRamp is a full service creative agency that has helped numerous companies, including many in the crypto space, maximize their brand awareness, gain traction, and accelerate growth. OnRamp has a passion for assisting brands and boosting business results and can help with everything from website and logo design to social and content strategy. Focus on your core technology and leave the rest to OnRamp. To learn more and see how they've helped passionate entrepreneurs achieve their dreams, go to think onRamp.com. I'm speaking with Spencer Bogart. So let's keep going in that vein about whether or not Bitcoin could be a security.

I think it's pretty unlikely. What are your thoughts on that? Yeah, I think it's extraordinarily unlikely. Right. So the SEC has a pretty established framework for thinking about whether or not a particular asset is a security. And a core part of that framework is the Howie test. Right. And, you know, again, I'm definitely not a securities attorney.

So take everything I say with a grain of salt here. But in general, I think the prongs there are that people are investing, money, so they're investing some capital into a common enterprise with an expectation of profit that is based primarily upon the efforts of others, that common enterprise. And in the case of Bitcoin, there was nobody that said, hey, okay, I'm going to sell you 10% of all Bitcoin in existence. I'm launching this new crypto asset. It's going to be called Bitcoin. I'll sell you 10% of the tokens. Then I'm going to take the money that you give me and I'm going to try to build out this ecosystem. Instead, what happened was software was released to the world. Some

people in random parts of the world started running that software, which meant they started mining it and they started supporting the network. And so they didn't contribute capital and it wasn't into a common enterprise. Most people that participated, especially in the early days, didn't have much of an expectation of profits. So really none of the prongs of the Howie test seemed to fit Bitcoin. So on the risk spectrum, it is definitely on the safest side from being deemed a security. And you also mentioned a liquidity crunch earlier. I know you have thoughts around how that might play out in the market. What are you thinking about there these days? Yeah, so there's a couple things I think at play here. So one is just a liquidity crunch that

could come from many tokens being deemed securities or even exchanges that are concerned that some tokens could be deemed to security. So if you think about this world of crypto assets, most of them trade primarily, if not entirely, on crypto-specific exchanges. They don't trade on the New York Stock Exchange. They don't trade on NASDAQ, right? They trade on these specialized exchanges. And what the SEC has said recently is that if any of these exchanges are trading something that the SEC considers to be a security, then those exchanges either need to stop doing that immediately and de-list those tokens and not facilitate any exchange of them, or they need to go to the SEC and register, which of course involves a whole bunch of more of costs and time delays that a

lot of them would like to avoid. So if we think about this kind of regulatory crackdown, there could be a liquidity crunch on a lot of tokens, if it's, if a concern rises that they exchanges will delist those tokens, because that would mean that anybody that's participating in that market has nowhere to exchange them, or at least not efficiently. And so that could cause kind of a liquidity crunch. And so we have like all these new hedge funds that have come into the space. How is that going to affect them? That's a really good point. You know, so I think that over the past maybe 12 to 18 months, I think there's been over a hundred hedge funds that have been launched basically just to focus on the crypto ecosystem, right? So we have over 100 hedge funds that have essentially gone long the

same basket of assets at the same time. Inevitably, we are going to get big pullbacks in this market. We've seen that at the start of this year, right? So we're going to get months like March and February where we're going to see 20% pullbacks. And my sense is that the LPs, the limited partners that invest into these hedge funds, don't have the stomach to see. see when they get their monthly return that says, you know, your fund is down 20%. I don't think they have the stomach to tolerate that, right? So I think that what they're going to do is they're going to redeem from those funds, which means they call up the hedge fund. They say, hey, send me back my money. In order to do that, because the hedge fund is fully invested

in these assets, it must sell some of the assets that it holds, right? And so they, even if they don't necessarily want to sell at current prices, there are forced sellers, right? And that drives price down further. And so I think that what could happen is, again, after these first rocky couple months of the year that we've seen, I think that some of the LPs in these funds are going to be redeeming. It causes the hedge funds to be for sellers, which drives price down even further, and again, has kind of a vicious cycle involved with it. So this sort of leads me to believe that you right now maybe are somewhat bullish on Bitcoin, but somewhat bearish on the rest of the market? Is that correct?

It all depends on time horizon, right? So that's all. always the caveat here in the rub, but I'm super bullish on the entire asset class over any reasonably long period of time. That includes the tokens. That includes most of what we see out there. But over a short term, I do expect that there could be some rough waters ahead. And if so, I think that the thing that's going to be least affected is going to be the large cap assets and the ones that are least likely to be deemed securities and are the most decentralized. So that basically leads us to Bitcoin. Now, that's not to say that Bitcoin won't be affected by this. right? I mean, the market, the crypto market kind of trades as a unit. So, you know, in a broad-based

pullback, I would expect Bitcoin to also pull back. And what are the factors around that? Is it because it was not sold in a sale? It was mined because we don't know who launched it. Like, is it all those reasons? Because I sort of almost feel like since it was the first and no one knew what they were doing, no one bought at that time or got involved at that time thinking about profits necessarily. but is it really just about whether or not the purchasers are thinking about profits? Is that literally kind of like what could put something at risk of being considered as security? I think so. I think that's definitely a healthy piece of it, right? But there also needs to be some common enterprise that is receiving that capital and that is the primary basis for expectations

of profit, right? And in the case of Bitcoin, that just doesn't really exist, there is no common enterprise. But for all these tokens with all these issuers, there are people, I mean, unless they choose to be anonymous, which if they are choosing to do that, then nobody trusts the token. So it's kind of this like Catch 22 now. Is there literally no way for someone to be a known issuer and release a token without bringing these regulatory risks on themselves? You know, I think that we should really highlight. It's not just, it was the organic growth of Bitcoin, right? So it was people participating kind of as they came along to the network and started to run the software. There was nowhere to originally even buy Bitcoin. You had to just

participate in the network, right? So I think that we might see some projects that will follow kind of a similar approach, and they might do that in terms of kind of an air drop type strategy where they just give out their tokens to particular holders of another chain or another asset. And in that way, they're not raising any capital, and it might help them avoid kind of some securities regulation. But again, I'm definitely not an attorney in the space. Right. Right. Okay, well, let's look forward a little bit. you thinking about in the future, and this could be on a longer time scale, what are you expecting to happen maybe like this year or next year? And what trends are you looking at in the space? Yeah, that's a good question. So I think that I don't know if we'll really see it kind of come

to a head this year or maybe, I mean, it's always uncertain with any of these things. But I think that we're going to see some platform wars involved here, right? So we have a lot of different, whether it's Ethereum, Eos, Tezos, Definity. We have a lot of platforms, all of of which seem to overlap in a lot of their intentions and use cases, right? And I don't think that all of them can survive. And what we have right now is a few of them that have these giant war chests, right? So Eos and Tezos, they have a vast amount of capital at their disposal to either try to attack other chains or to try to incentivize developers to build on top of their network instead of a competitors. Right. And so I think that towards the end of 2018 and 2019, we might start to see

that's really play out. And it could be a very long, protracted and nasty battle between some of these platforms that kind of have overlapping use cases. And how do you think they might incentivize developers with that war chest to build on their platform? Is it like through grants or what? I think so. I, you know, it kind of remains to be seen. But so far, you know, you've seen some subtle examples of people coming along and saying, you know, essentially doing the venture investment from maybe capital that was raised or helping give them a grant to develop on top of it, which, you know, those two could look very, very similar, a grant to somebody or an investment in their company that they're building on top of your network, right? But I think that largely

it's going to involve financial incentives to come and build on top of them. And just for you, I don't, I don't know fully kind of your, you know, what your everyday looks like, but do you know if there are certain developers who maybe are already developing on Ethereum that seem to be interested in trying to develop on these other platforms when they launch? You know, I actually haven't seen a lot of that. I think that for a lot of developers, it's kind of the proof is in the pudding here. So a lot of these, I think they're calling themselves 3.0 or 4.0 platforms, whatever number we're on right now, they need to be out in the wild and actually have their networks launched and proven that they can be relatively secure and stable in an environment that a developer

actually wants to invest their time into. In the meantime, right now, you're asking developers to give up their time, which is in very high demand to build on a platform that is very uncertain for a use case that is very uncertain. I think that's a difficult proposition. Yeah, I would say for Tezos and DFINITY, I think the appeal would probably in the direct financial incentives where if their proposals get adopted, then they can be directly financially compensated directly through the protocol because of the way the governance systems are set up. But I do think that one of the big hurdles is going to be obviously the fact that Ethereum has a really big lead and a lot of developers probably will want to stay in the same ecosystem that other

developers and apps are on. So it might be kind of difficult for some of these other platforms to pull talent away. I think that's exactly right. Yeah. That's largely the same way that I'm seeing it as well. I think that the network effects around some of the kind of developers is a little bit difficult to overcome. That doesn't mean that you, you know, when you have a multi-billion dollar war chest or a hundred million dollar war chest, you know, you might, you might, you might, might be able to get that kind of movement. You might be able to break the ice there. Yeah. And it's such early days that I'm sure, you know, it's like you can look back at the early days that internet and be like, oh, Yahoo, that was the clear leader or excite or Lycos or

whatever. So I'm sure three years or whatever we're going to, five years, 10 years, whatever, whatever the time scale is, we're going to be like, what were we thinking? But anyway, well, thank you so much for coming on the show. It's been great having you. Thanks so much for having me, Laura. for joining us today. To learn more about the topics we discussed, be sure to check out the links in the show notes of your podcast episode. Also be sure to follow me on Twitter at Laura Shin. New episodes of Unconfirmed come out every Friday. If you haven't already, rate review and subscribe on Apple Podcasts. If you like this episode, share it with your friends on Facebook,

Twitter, or LinkedIn. Unconfirmed is produced by me, Laura Shin, with help from Elaine Zelby in Fractable Recording. Thanks for listening.