Chapter 6: Fundraising Landscape

[Note: below is chapter 6 to Great Chain of Numbers]

According to CB Insights, venture capital (VC) firms spent $74 million across 40 Bitcoin-related deals in 2013; the two largest rounds were Coinbase ($25m) and Circle ($9m).1 Similarly, Garrick Hileman recently published data and found that roughly $97.5 million in VC funding went towards 36 Bitcoin-related startups during the same time frame and his findings are discussed below.23

Despite the increased media attention, even if these numbers are repeated again this year this may not help boost the performance for some VC funds.4 Even with the optimistic outlook many of the VC firms apparently now have their actual results at roughly 6.2% per annum over the past decade they have underperformed the Russell 2000.56 Why?  This is not to disparage the VC segment, rather like all industries some VCs are not as nimble at feeling and filtering out business models with revenue generating capabilities as many angel investors are.

Changes over Four Decades

Consistent with the theme of ubiquitous adoption of open-source software as well as cloud computing that has lowered the cost of developing software and (more importantly) the costs associated with launching new companies, so too has this trend lowered the threshold for technology for startups and investments.  Where previously the funding of start-ups was limited to deep-pocketed professional investors, namely VCs, the deflationary landscape has increasingly enabled greater numbers of individual investors – angels – to compete in the funding environment.

The new class of angel investors is more astute than the passive and non-tech-savvy high-net-worth investor of yesteryear.  Increasingly, angel investors today have deep domain experience.  Many have worked in the sector that they are funding, are entrepreneurs and experienced operators themselves and visionary at feeling out new business and innovative trends.  The historical barrier to entry for angel investing is one of risk quantification (followed by knowledge and coordination) given the magnitude of investment commitment.  With lower costs of starting businesses, this hurdle is largely gone.  Having angels with deep operational domain expertise is disruptive to the traditional VC universe.  They may be better attuned and friendlier with terms that are less predatory than the historical VC norm.

This is not to say that VCs will not flourish once again, however, as it stands, most angels began as entrepreneurs and learned how to generate sales and revenue firsthand.  Furthermore, as noted above, over the past decade technological costs have driven down expenses.  For example, relatively cheap cloud services like github and Compute Engine provide services (CaaS, SaaS and IaaS) that allow many tech start-ups to be leaner than before in terms of what funding they require to cover operating costs.7 On top of this are better organized angels who now have an entire ecosystem of choices to fund through such as AngelList, 500 Startups, Plug and Play, Y Combinator, SVAngel, Bitcoin Opportunity Fund and Boost.8 In fact, over the past six months, BitAngels.co have invested $7 million in 12 crypto-related projects globally and Plug and Play is providing both mentoring and seed funds of $25,000 to bitcoin-related ventures.9

Another way that cryptocurrency-related startups are being funded is crowdfunded IPOs.  This includes Mastercoin, which raised (at the time) $5 million in part by 4,700 bitcoins from “investors.”10 NXT and the upcoming Ethereum IPO have also included raising funds through bitcoin transfers.11 While I am not necessarily endorsing any of these particular fundraising models, this illustrates how small (and perhaps large) development teams can financially cover costs without seed funding by VCs.  And, in addition to crowdfunding sites like Kickstarter and Indiegogo, there are also sites that allow individuals to receive Bitcoin funding directly for their ideas, such as BitcoinStarter and CoinFunder.12

Consequently, it is premature to write off VCs or claim that angels are the only source to pool funds from.  In fact, a substantial amount of series funding over the course of the last two years in the Bitcoin realm has been from VC firms.  For example, Andreessen Horowitz has invested nearly $50 million in Bitcoin-related startups, including leading the $25 million round for Coinbase last fall.13 In February 2014, Marc Andreessen – the firms founding partner – explained to CNBC that,

“[Bitcoin] is mostly new opportunity.  For example, there is a lot of ecommerce today that just doesn’t happen because a lot of people around the world literally aren’t in modern payment systems where they can’t pay for anything.  There are a lot of merchants that can’t be profitable in a lot of categories because transaction fees are too high.  It’s a huge opportunity and everybody has the opportunity.  Bitcoin is an open technology, it’s open source, it’s freely available – anybody can participate.  So every established business that wants to take advantage of it, including people like Western Union, can do so.”14

While it is too early to predict how these investments will exit, VCs are still a potent market force.

Venture Capital Charts

In addition to the findings of CB Insights above, below are four charts reprinted with permission from Garrick Hileman which were originally published on February 24, 2014:15 charts 1

 

As Chart 1 (or rather Table 1) notes, this is the total of the known venture capital funded Bitcoin-related companies globally since 2012.

Chart 2 illustrates the division of what specific segments those companies are categorized under.  In his analysis, Hileman noted that mining hardware companies have generated over $200 million in revenue to date.  The unknown segment is for undisclosed projects that received VC funding.

charts 2

Chart 3 illustrates that as a percentage of the total VC funds, what geographical location they are located.16 Silicon Valley (i.e., the San Francisco Bay Area) based firms have received the lion’s share, at 51%.

To produce Chart 4, Hileman looked at the total value of the VC-funded projects ($97.5 million) and the chart shows the geographical dispersion of these funds; US firms received 70% of those funds.  While these numbers will likely continue to increase over the next year, it is unclear if the geographical trends will continue.17

Straight to the Source

Jeremy Liew is managing director at Lightspeed Venture Partners, which has invested in several startups in this space, including Ripple and BTCChina, and anchored the Boost BitCoin Fund.18 According to him, “I think that there are three use cases that will lead math based currencies to mass adoption. 1) Microtransactions (perhaps for online content, perhaps for digital goods in games) which are impractical using credit cards; 2) Cross border transactions (both C2C as in remittance, and B2B for import/export and ecommerce) where transaction fees are high; 3) Leapfrogging credit cards for ecommerce and m-commerce purchases in the developing world.  The developing world leapfrogged fixed line telephony to go straight to mobile telephony and that is the model that I would anticipate for math based currencies leapfrogging credit cards. Today a common form of payments for ecommerce in Russia, China and India is “cash on delivery” and that likely is the first payment method to be replaced by a math based currency.”

In terms of what specific segment of this space LSVP is interested in, “We are still in the infrastructure phase, making math based currencies easier to buy (exchanges), hold (wallets) and spend (payments). And of course to speculate on. The infrastructure will need to mature a little more before applications can be built on top of them to be able to drive mass adoption. Then it would be the three themes from earlier.”  Yet as to trying to predict which platform or what technology like smart contracts will spring forth, “I don’t know, all I know is that it will be exciting and transformative. Just as no one could predict the explosion of uses that got sparked by VoIP when we were still on POTS, so too it is impossible to predict what the “programmable” part of math based currencies will bring.  But it will be awesome.”

He raises a visceral point about unexpected innovations and their knock-on effects; Skype calls alone are now equivalent to one-third of all global phone traffic, providing new tools and lower transaction costs to every demographic group.19  Similarly, digital goods such as music, movies, games and books – a market that barely existed a decade ago – is expected to reach $80 billion in turnover by 2015 in the United States alone.20 In fact, according to Ofcom, 11% of American internet users regularly pay for digital online content.21 During my exchange with Mike Hearn, he expressed similar sentiment in terms of the untapped business opportunities in this space, noting that “right now it seems there are a billion startups exploring every possible angle on these ideas – most of the work that needs to get done though is fairly boring infrastructure type stuff.”  Laying the foundations for these platforms could be a business opportunity for the next several years.

As mentioned in chapter 2, Ryan Orr is a professor at Stanford University and chairman at Zanbato that is a partner in a new crypto-based incubator called CrossCoin Ventures.  He noted that, “with the recent wave of regulatory actions, I am personally feeling quite excited about how the “smart property” projects evolve in 2014.   It is starting to feel like smart property could be a much lower path of resistance for the bitcoin protocol as it establishes a “non-monetary” form of use that fulfills a valuable social purpose.  And thus it should not be viewed as a direct threat by regulators who are afraid of losing monopoly control of money. It is the “duality” of purpose of gold, where people can hold it under the auspices of non-monetary purposes, but also hold it for monetary purposes (eg. a hedge against inflation), that makes it so difficult for the governments to totally eliminate it as a form of money (even though the US government did try to do so in 20th century).  If bitcoin can develop a similar duality, where the ‘smart property’ use makes it legitimate, and then people also can secretly hold it as an uncorrelated hedge against government dysfunction, then that could be pretty interesting.  In sum, it feels like the ‘smart property’ could become the ‘formal, legal, legitimate’ face to the project that can develop independent of how the regulators rule on the use of Bitcoin for monetary purposes.”

What Angels Are Looking For

Jeremy Kandah, Managing Partner at BitAngels, is now leading a fund focused on decentralized applications that utilize cryptoledgers.  He argues that, “the new “2.0” protocols and projects like Mastercoin and Counterparty are the equivalent of computing languages such as Java and C++.  Today there are hundreds of computing languages but only about a dozen that serve as platforms for large billion dollar ecosystems.  If you are platform dependent you are selling yourself short and risk long-term vendor lock-in.  Nearly all of the projects in this space are open-source for a reason, as it allows portability to other cryptoledgers and decentralized platforms.  Open-Transaction (OT) is a good example of this as their toolkit and codebases are entirely open-source and as a consequence even if a fork were to happen with the Bitcoin protocol, which I am not saying there would be, but both the developers and users of that OT application could quickly migrate to another cryptoledger.”

Kandah explained that while there is a debate over whether or not Bitcoin itself is the TCP/IP foundation for the cryptocurrency world, there will still need to be a lot of infrastructure extensions built to enable the decentralized applications that these “2.0” projects propose to build.  This means that there is a continuous need for both developers and entrepreneurs to build start-ups and business models to bring value to the marketplace.  As he notes, “while I am ledger agnostic, there may be even a profitable way to utilize Namecoin’s functionality, especially since it uses merged-mining with Bitcoin and thus the transaction and confirmation network already takes care of itself.”

Ultimately he sees significantly greater decentralization and uses for user-defined virtual tokens and that entrepreneurs providing value in this way will increase utilization rates for the entire ecosystem as a whole.  According to him, “during our due diligence phase, when we look for value-added business models we look for teams that address a current market need and provide new solutions that are easy for the average consumer to interface with.  For example, there is likely a way to ‘gamify’ – to streamline how mesh networks can operate and interact with mobile devices connected to a cryptoledger, allowing a decentralized internet infrastructure to be built ad hoc across nearly any city.  Similarly, just as Uber and Lyft have decentralized the taxi industry, perhaps there is a way to utilize cryptoledgers and trustless asset management to provide package delivery services in a profitable manner yet competes with the level service from FedEx.”

Another analogy both Kandah and David Johnston mentioned was to keep in mind that while there have been newer versions of HTTP, the perfect is the enemy of the good, that mind share and the network effect behind a protocol is difficult to reproduce and ultimately funds like BitAngels are looking for teams that understand the value proposition (e.g. promise to deliver and create value) for customers.22 Customers who are more interested in security, safety and reliability of the applications that utilize a token exchange system and not necessarily the nuts-and-bolts of how a cryptoledger platform works.

In addition, I also spoke with Ben Davenport, an angel investor and a member of the monetization team at Instagram.  While he does not necessarily endorse one specific project, in his view, “colored coin technology allows such centralized assets to be traded in a completely decentralized way.  Every single equity in the world has a central issuer — the company itself. But imagine the power of being able to make a trustless trade of stock for bitcoin with a stranger, at a distance, with no 3rd party involved. With colored coins, I can construct a single atomic transaction which encodes such an exchange. That, to me, is the most important basic thing that colored coins can enable.”

Hakim Mamoni, co-founder of Seedco.in and founder of DealCoin, an in-person Bitcoin exchange platform, takes a similar view, arguing that “the true story of Bitcoin is that it is part of a larger decentralization movement that illustrates how humans are better at organizing themselves than previous systems.23 While ‘civilization’ has existed since the founding of Sumeria in 4500 BCE, generally speaking we have had the same type of top-down pyramidal structure reproduced year after year.  Even after the American and French revolutions, the communities adopted previously existing centralization methods because they had pigeons and horses and not the technology we have today.  Now we finally have the technological capability to reboot centralized systems and voluntarily self-organize.”

One specific problem he describes that could be mitigated and changed is the role of central banks.  “If you look at a person’s resume and you see a poor track record of past performance you would likely not want to continue with that member on your team.  And in looking back since the early 1900s, given the goal of creating stability, none of the central banks have done very well.  Thus for me, Bitcoin is the current killer app – Bitcoin wallets enable anyone to send money to anyone around the world enabling people to be their own bank.  Eventually other projects will create some featureset and functionality on top of that and we are currently moving towards exciting developments with projects like Ethereum, not just in changing traditional banking but in other ways to decentralize other systems such as telecommunication networks, food production and even energy production.”

Wireless mesh networking is a method for decentralizing telecommunications by enabling each node to relay data for the network.  Projects like Commotion and XORP are working towards providing end-users with decentralized wireless functionality.24

Mamoni also finds projects like Open-Transactions exciting, “I really like the ideas behind OT because users do not have to trust the server as contracts can move from one server to another in an encrypted manner.  Governments were designed and set up to help protect against bad actors cheating the system.  Yet if you merge governance with the new paradigm of these technologies, there is no need for these legacy regulations because everything is out in the open, everything is done by algorithm and mathematics.  Thus eventually I think regulators will likely embrace these types of technologies because it prevents fraud.  Consequently, Seedco.in is looking for a diverse array of startups that not only helps strengthen and grow the cryptocurrency ecosystem in general but provides bridges to the existing financial structure.  It cannot be done overnight and we believe there is a lot of value during this transition period.”

Another example that Mamoni sees as a use-case for a blockchain is for financial institutions that create the daily London Interbank Offered Rate (LIBOR).25 LIBOR is an interest rate average that leading banks in London estimate they would be charged if they borrowed from other banks and is published daily at 11:30am.  In 2012, a scandal arose in which it was discovered that member banks were manipulating the rate behind closed doors.  Yet according to Mamoni, if each of these trades were placed on a blockchain, the rate would be impossible – or at least more difficult – to game or rig as the blockchain is both secure and transparent for everyone to see.

Non-profit organizations and NGOs could also adopt cryptoledgers for similar transparent asset tracking.26 According to the Tampa Bay Times, of the $1.4 billion in donations received over the past decade, the 50 worst charities in the US spent roughly $970.6 million on solicitors.27 A public cryptoledger would give donors the ability to audit the charity in near-real time.  Coupled with a DAO, much of the administrative overhead at non-profit organizations (e.g., payroll) could be replaced entirely by AI.

This transparency could be utilized in other countries as well.  For example, on May 12, 2008, approximately 69,000 people were killed during the deadliest earthquake in China for the past 30 years.  Subsequently, aid and donations (totaling $11.2 billion) from around China and the world poured into Sichuan, the epicenter of the disaster zone.28 Yet after the dust settled, several investigations discovered that various organizations and institutions had siphoned off tens of millions of dollars due to a lack of transparency and accountability.29 The Red Cross Society of China (RCSC) itself failed to collect the funds donated to drop boxes placed throughout several hundred locations around China – four years after the quake.30 Cryptoledgers could be used to track donations and assets of a non-profit organization, reducing fraud and providing real-time transparency and auditing.  In fact, as noted in chapter 5, much if not all of the administrative overhead (e.g., paying bills, receiving donations) in such organization could potentially be replaced by a DAO.  This is discussed further in chapter 8.

In January I also spoke with a marketing manager for a San Francisco bay area accelerator that is looking for early stage startups that use the Bitcoin protocol within the verticals of software-as-a-service enabled tax and accounting solutions as well as smart contracts (SaaS enabled Wills, parameter-based or DACs-like business-to-business partnerships).  Or in other words, solutions that focus on small-to-medium businesses as well as consumers.

What was unique about the conversation was that they were interested in accounting solutions that involve the full cycle of automatic transfers to tax filing, which only one other group specifically mentioned and thus may be an undervalued niche.  Altogether this would involve project management compensation via cryptocurrencies which is a topic discussed in chapter 7 related to Coinality.

The manager also had confidence in decentralized autonomous corporations (DACs) seeing them as the wave of the future.  His teams thinks that the ecosystem will eventually outsource a majority of tasks normally allotted to many job types but specifically: accounts payable, accounts receivable, tax, other accounting processes, remittance (varying roles), emergency response (fund distribution), community investment (i.e., local school measures), REITs (community-based real estate investment), and community property management (lease interpretation for automatic service calls).  Thus building a company that focuses on designing DACs in those spaces will likely attract the attention of both outside investors as well as potential clients.

Asia

I had an email exchange with Zennon Kapron, founder and managing director of Kapronasia, a large independent research consultancy focusing on the Asian financial services industry.31 Based in Shanghai, Kapron has continual first-hand experience of the mainland marketplace.  According to him, acceptance applications are and will remain very important especially in Asia.  Right now, acceptance of any cyrptocurriences is still low outside of a few niche geographic areas. Why do more people have a Visa than an American Express?  Largely acceptance – Visa is just accepted in more places. Especially in Asia, the point-of-sale and merchant solutions similar to BitPay are very thin on the ground.  In addition, even with the myriad of exchanges out there, there are only a few that I would consider user friendly. Most require wiring money, which the average consumer might not feel comfortable with. Coinbase is an interesting example of an exchange that might have it right: you can link your bank account and make ACH transfers very easily.  That comfort is very important for at least the initial adoption of cryptocurrencies, however once the larger population has a balance of cryptocurrencies and acceptance is higher, the need to move into fiat currencies will of course be lower, so exchanges are not as important.”

While BitPay, BitPagos and BIPS have come to dominate large portions of the Bitcoin-based merchant ecosystem, aside from YesBTC.co, a Chinese or even Asian-based equivalent has not yet arisen to the same level.  Part of this has to deal with language and cultural barriers as Kapron noted and because not many websites use or accept cryptocurrencies in Asia, specifically in China due to legal issues.  In fact, after the People’s Bank of China statement on December 5, 2013 regarding the banning of payment processors for cryptocurrency exchanges (and categorizing cryptocurrencies as commodities instead of as a currency), ecommerce giant, Taobao, announced that it would no longer allow stores on its platform to buy, sell or trade in wares related to cryptocurrencies.32 Despite these hurdles it is likely that there are still opportunities on the edges in this segment.33 Furthermore, ACH is an electronic financial network in the US – even though it processed 21 billion transactions in 2012 worth a total of $36.9 trillion – according to entrepreneurs there is still scope to compete on the margins, and among the underbanked.

Continuing, Kapron notes that, “Asia is behind the West in terms of cryptocurrency applications and solutions so startups focused on ‘big’ solutions like exchanges, point-of-sale merchant solutions still have viability in Asia as, outside of exchanges in mainland China, the market for these applications is far from saturated.  There may be a number of start-ups running in stealth-mode that are developing these solutions, however, besides exchanges, there have been few if any public launches or investments in cyrptocurrency start-ups.  Of course some of the smaller solutions (e.g., tax-auditing plugins, bitmessage, twister, syncnet) also will have a market, but the larger solutions like exchanges and merchant acceptance solutions still have a big opportunity.”

Bitmessage and Twister were briefly mentioned in chapter 3; while technically feasible, it is unclear how policy makers will react to domestic businesses that develop anonymous and pseudonymous communication tools.

In terms of smart contract and next-generation platforms, “the technology ideas and algorithms behind the current batch of cryptocurrencies are ideal for potential smart contracts and other ledger applications. These would likely also be easier to implement as they would not necessarily need to be global, but could be limited to a smaller geographical area.  For example, you might have a real-estate focused ledger just for London or just for Paris.  Because of the limited geographical area, these would have fewer government and regulatory approvals and governments could also be involved in the creation and maintenance of the smart contracts without weakening the appeal of the system.  In other words, one of the primary goals of Bitcoin and other cryptocurrencies is that they can operate without government influence which many people believe has caused some of the current economic issues (e.g. quantitative easing in the US artificially supporting US exports through a cheaper dollar).  That would not be such a concern with smart contracts as long as there was a trust that the government would act in the best interest of the people.”

As noted by Preston Byrne in chapter 2, it is possible that institutions and organizations including governmental departments could build and maintain cryptoledgers to replace redundant functionaries.  A speculative way a central bank could utilize one is through a ‘proof-of-burn’ (POB) method described in chapter 3.  Just as the East German Mark (Mark der DDR) was converted and exchanged into the West German Deutsche Mark prior to reunification, the Banco Central de la República Argentina (central bank of Argentina) could one day declare that it was “issuing cryptotokens” to prevent the debasement of the peso.34 The BCRA could ask peso holders to convert their holdings into cryptopesos.   During the conversion process the physical pesos are recycled or destroyed and subsequently the virtual tokens are then tracked on a public ledger preventing double-spending and inflation as described by Wences Casares and Sebastian Serrano in chapter 2.  The likelihood of this type of adoption is of course debatable.35

While the People’s Bank of China is currently reviewing its policies involving cryptocurrencies, according to Kapron, “regulation will still drive the integration of and opportunities in cryptocurrency throughout the region.  Hong Kong and Singapore are typically known as some of the more entrepreneurial hubs in the region in terms of payments and financial technology in general.  If we draw generalizations from Bitcoin, the indications from regulators in both countries are very positive for cryptocurrencies and so it is likely that we will continue to see both innovative solutions for and acceptance of cryptocurrencies in both Hong Kong and Singapore.  In many respects this is great for the region as although both countries have large economies, they are still relatively small, both from a geographical and economic perspective, so almost similar to a free trade zone in China, Hong Kong and Singapore could end up being test-beds for cryptocurrencies. China already does this with Hong Kong for the financial industry in general, by the allowing the Hong Kong financial sector to innovate and change even though the mainland remains somewhat constrained. In addition, both Hong Kong and Singapore have a long history of country-wide payment innovations like EZ-link and Octopus which have largely thrived for many of the same reasons why cryptocurrencies also could.  The larger economies from both a population and economic size perspective like China and India will likely follow what happens in Hong Kong and Singapore as the risks for the larger economies are much higher, especially as both economies have capital controlled currencies. Smaller economies, especially those in Southeast Asia, have enough economic and political challenges and less influence in Asia’s overall economy, so will not likely influence integration.”

Over the past three decades, China has created 15 “special economic zones” (经济特区) that are allowed to set their own import regulations and duties and as a consequence are relatively popular for establishing joint-ventures and foreign trade operations.  Beginning last year, several other municipalities including Shanghai began laying the groundwork for ‘free trade zones’ which will create testing grounds for new economic reforms that are expected to further liberalize the financial sector.36

In January 2014 I interviewed Rui Ma, a Beijing-based angel investor with 500 Startups, a business accelerator which has invested in a number of Bitcoin-related startups including Bitdazzle and BTCJam.37 In her opinion, “cryptocurrencies are a solution to crossborder microtransactions as they provide business opportunities in segments that have been completely overlooked by the traditional banking sector.  I think mobile payments in particular are interesting for everyone – especially emerging markets – because internet finance has made large gains over the past year in China due to a lack of consumer (and small-medium enterprise) financial products in general across the board.  Though, this is not a business one or two angels can probably scale alone due to capital expenditures for traditional payment mechanisms but I am certainly interested in services based on top of infrastructure, and Bitcoin is pretty ideal for that.”38

Due to strict capital controls it can be difficult for high-net worth individuals in China to diversify abroad.  This issue is compounded with a dearth of domestic financial instruments in part because the country is still developing and because its financial sector is essentially oligopolistic (e.g., dominated by large state-owned banks).39 As a consequence it has been technology companies such as Alibaba and Tencent leading the way, creating innovations in the consumer market such as providing mobile-based mutual funds and 3rd party payment processing services.  For example, last year Alipay began offering a low-cost mutual fund (called Yu’E Bao) through a partnership with Tianhong (a Chinese asset management company).  With $42.6 billion in its fund and 49 million customers, Yu’E Bao has grown to become the 2nd largest mutual fund on the mainland.40  In January 2014, Tencent, the largest internet company in China unveiled a partnership with China Asset Management, the largest mutual fund manager in China to provide a similar service called Licaitong.41 Tencent has simultaneously integrated Licaitong with WeChat, the fastest growing social networking service globally, (with more than 600 million registered users).42 Tencent is also the parent company of QQ, which develops the biggest social media platform in China, with 816 million monthly users.43

Ma recognizes these market trends and changes and how cryptocurrencies like Bitcoin can play a role in.  Noting that “another issue in the mobile segment globally (not just in China) is payment infrastructure, which current protocols do not match up to the development and proliferation of devices and content and goods for consumption. Now that we can manufacture and distribute smart devices relatively cheaply and the data infrastructure is expanding rapidly, it is time for payments to catch up.  And this is where I think there is a lot of friction (e.g., institutions, old infrastructure, policy) that can be decreased, removed and even erased with cryptocurrencies, which are more secure, speedier, cheaper; and due to these three main benefits, much more scalable.”

I also spoke with Jack Wang.  Wang is a cofounder of a Bitcoin startup called Dearcoin that is developing consumer Bitcoin applications, including Bitpass, a Bitcoin-based authentication protocol.  He previously developed a Bitcoin exchange and merchant tool and has taught a Bitcoin class for General Assembly.44 He says that he likes “the concepts embodied in applications such as ‘colored coins.’ The biggest innovation that Bitcoin represents is a distributed, verifiable ledger system, and its use as a currency is just the first application.  In thinking through some ways in which Bitcoin develops, I believe there are multiple potential killer applications for this kind of system, especially as we move into an age in which 1) digital property becomes increasingly valuable and 2) verification of rights to all kinds of property becomes digitized.  If Bitcoin becomes the de facto system for digital property rights verification and management, the value extends way beyond just as a currency.”

Wang explained this by analogizing Bitcoin to the frequency spectrum in the wireless industry.  Where the ability to propagate and record digital rights onto the blockchain will depend on ownership of bitcoins, bitcoin owners can be thought of as owning these rights.  And according to him, “the applications can include anything that involves rights verification – contracts, stocks, titles to houses and cars, actual keys to houses and cars, digital files (music, art, etc.).  Longer term I see the fungibility, transferability, and divisibility features of cryptocurrencies replacing the use of fiat money in a lot of ways.  People cannot barter today because it is infeasible to trade a car for 5,000 sandwiches, but you can do that with cryptocurrencies even if they are not just just as a currency but as a colored coin or something similar.  Maybe we should start calling it cryptobarter.  This opens up a cornucopia of business opportunities and consequently, once cryptocurrencies are used for things besides fiat exchange, older institutions and business models are really in a bind.”

The problem, of course, is getting enough people to adopt the technology so that it can serve as a useful medium for these transactions.  Eddy Travia, based in Hong Kong, is the founder of the Bitcoin Institute and co-founder of Seedcoin which is the world’s first seed-stage Bitcoin startup virtual incubator.45 And he has some ideas about how this could be done; the areas he and other angels at Seedcoin are looking for are “any application that makes exchange clear and simple to end-users, like Hive which is a bitcoin wallet with built-in applications.46 Another area is for development teams to find out what people know and use regularly in their daily lives, for example CoinSimple will make it easier for merchants to switch among various payment processors, from BitPay to GoCoin to BIPS to BitPagos and other market players.47 So it means more merchants can accept bitcoin and thus more clients can use their services and seamlessly use any bitcoin payment processors chosen by the merchant.”

Travia adds, “we are also still busy helping basic infrastructure in certain countries, like a solid bitcoin exchange in Mexico (MEXBT) so once that part is done (exchanges and payment gateways available around the globe) the potential user base will grow significantly larger.48 It still needs to expand so that more and more entrepreneurs have a market large enough to support the investment into their applications and also have locally customised apps (language, regulations, etc.).”

He continues, “Bitcoin is also at the intersection between finance and technology so it will not be as easy as “email” or Android; local regulations and laws have to be considered.  When it comes to mass adoption, there are always laws taken into consideration.  Consumers are used to it with banks, mobile operators, credit companies because we do not bother reading the fine print anymore on all the contracts and thus there will likely be fine print with bitcoin services as well – people will have to get used to it.  Armed with this knowledge and understanding, Seedcoin is a channel for angel investors in a way, but also enables small players to become angels and invest into these companies.”

Potential business opportunities

While many users and commentators have been relatively fixated on one data point, one use-case, arguably, where the long-term Christensen-disruption and Schumpeter’s “creative destruction” will come from is trustless asset management.

The question for entrepreneurs and businesses is, as everywhere else, what are the unique value opportunities you can provide?  Business analysts experienced with requirements gathering may find opportunities designing and creating specifications for a smart contract for specific needs.  Similarly, programmers will be needed to take the design and implement and translate it into code in accordance with applicable regulation.  Commercial lawyers will be drafted in as advisers to draft and negotiate the contracts and review the code, perhaps even following through the steps originally synthesized by Nick Szabo fifteen years ago.49 Yet be aware that long-term, if history is a guide, it is likely that some of these smart contracts could eventually become open-source – and standardized – and thus alternate revenue streams will need to be found.50 When I put this question to Nick Szabo, he said that “traditional contracts are already typically treated by the legal community as open source rather than as copyrighted. The vast majority of contract clauses are boilerplate and I hope the same will be true for smart contracts code.  And in the cryptocurrency community (or more broadly speaking, the block chain community) we should not trust code that is not open source.”51

In fact, there is already an initiative called Algorithmic Contract Types Unified Standards (ACTUS) that is attempting to create a standard language and contract-centric framework to represent all known financial contracts in a reference database.52

For perspective I also spoke with Sean Zoltek, a New York-based corporate lawyer specializing in securitization and collateralization.  In terms of designing and encoding a contract into computational algorithms, “we can easily make a set of programmatic rules that have a variety of default replies based on historical track records and know with roughly 99% certainty how it would turn out.   In fact, we use standardized forms all the time.  Both the linguistic construct and existing legal framework have been built up over decades to support these types of contracts.  For example, I could draft a contract for a small business loan to include check-boxes that provide default conditions.  The user interface for such instruments already exist and have been simplified to where a party only needs to answer criteria such as type of existing loans, assets and length of maturity dates.  In fact, many of the contracts at law firms are much more sophisticated than a commercial bank due to the level of detail and case knowledge that we have.”

In his view this could be done today in a three or four page document or a few dozen lines of code, would be completely automatable and would not require an attorney to fill out.53  Furthermore because of its robustness built on previous case law, a judge could look at a smart contract and it would likely be enforceable.54 Zoltek believes that “smart contracts already can encompass this functionality.  For instance, based on the context of what kind of loan it would be, the next 1,000 transactions from the same bank service segment could literally be identical.  A small business loan is a good example because it typically involves $20 million in assets, $100,000 of inventory in the store or office and some kind of standard insurance policy.  We would not even need to worry about electronic chattel paper or letters of credit.  In addition, such a contract could accommodate would likely be fair for both parties involved because they could both provide input.  This is in contrast to the relatively one-sided terms of service that most banks provide borrowers today that are non-negotiable.”

According to him, since it is in the firm’s interest to help small businesses succeed, with simplified interfaces and default conditions (e.g., trust, escrow), “it could absolutely be done in computer code and would definitely make certain lawyers sweat.  This is in turn would mean our industry would move towards increased sophistication and specialization.  Yet on occasion there are nuances that are not entirely straightforward or streamlined.  There is the law and then there is how it is applied to circumstances hence the reason some party has to make judgment calls.  As time goes on and case-law is built, you eventually end up with cookie-cutter deals and which are automatable.  This situation is amplified with cryptocurrencies like Bitcoin through its low or no cost transactions, clearly defined allocation of value, transport of value and open algorithmic rules that everyone trusts.  You can potentially build on top of that mechanism providing more complicated transactions and instruments that are beyond what the Bitcoin protocol can currently do.  Thus once you assume how a typical contract works you build above it, and I see it as beneficial to all parties involved.”

In terms of open-source smart contracts, Zoltek notes, “There is an old saying in the legal profession, if you have language that works, use it.  Aside from litigation cases (which involve some original creativity), there is little creativity in a contract prose themselves.55 In fact, many briefs may reuse entire passages, citations and analysis of a previous case, this is a common practice as that material stood legal challenges.  In other words, once you have a good argument, you continue reusing it.56 Furthermore, once we produce the contract, it becomes public because it is filed with the SEC or some other institution.  In fact, no contract says “copyright GE” – it is just a contract.  As a consequence, if you can make our lives easier by automating things, we will have to branch off into more creative-based niches which is generally the trend the industry has been heading since 2007.”

In the meantime however, there is potential for experienced financial-instrument programmers and designers to work in this segment.  For instance, Sean Percival, a venture partner at 500 Startups recently explained that “[i]n the New York tech scene, a lot of engineers want to move over to startups, but their skill set is not a match.  This may be a case where their financial programming skill set is going to be a great match for bitcoin companies.”57

As noted by Szabo and others, the easy low-hanging fruit are financial instruments and other contracts executed by code, including crypto-based financial instruments that exist today.  For example, using open-source Cryptotrader software, programmers have been able to build and execute arbitrage bots used on fiat-cryptocoin exchanges such as BTC-e.58 The next logical step is to build a smart contract that interfaces with various cryptoledgers such as Bitcoin to Ripple or Bitcoin to Counterparty (or any ledger).  Another smart contract could be a simple invoice – repayable in a cryptocoin –  to bill clients for services rendered.59) Another is an assurance contract, which is how crowdfunding sites operate (e.g., I will deliver this product if I get X amount of pledges made by day Y).6061

During his Turing 2013 presentation, Mike Hearn mentioned that just about any repetitive work (filling out spreadsheets, opening bank accounts), anything that can be mathematically quantified and formalized can and will be replaced by automated agents.  It is the creative roles that will be difficult to automate.  Looking forward in time (by decades), Hearn sees other automatable segments powered by DAOs such as taxi providers, commodity deliveries (such as fruits and vegetables), units of computational time (cloud services), and even “smart roads.”62

In a sense a DAO is an autonomous agent, a computer that owns itself as an economic actor.  It earns money and pays for itself with money it generates and thus could alternatively be described as the first form of artificial life (though it is not intelligent).  If a DAO is profitable and successful it can self-replicate its codebase and thereby create a “child,” ceding its assets in the form of a “birth loan.”  If it operates at a loss, it could then “die” (i.e., purged from market).  This long-term perspective is important if you are looking to make any sizable investment in the segment.

Remittances, Value-Added Services, and Legal Considerations

In the United States there are multiple state and federal agencies currently assessing the impact of cryptocurrencies.  The exact policy implications are unclear at this time.  However over the course of the past year the US Senate, Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), New York Department of Financial Services and FinCEN (among others) have held hearings to gather information and occasionally provide regulatory guidance.63 For example, in a hearing held across two days, January 28th and 29th, the New York Department of Financial Services interviewed over a dozen witnesses regarding possible regulatory policies and witness testimony ranged across the entire spectrum.6465 The following day, on January 30, 2014, FinCEN independently issued two new rules that stating that both miners and investors are not money transmitters and thus did not need licenses.66

On February 19, 2014, California Assembly Bill “AB-129 Lawful money: alternative currency” which clarifies the possession and acceptance of bitcoin and other virtual currencies as money, passed unanimously.67 The State of Washington recently updated its statutes to state that, “Virtual currency, also known as digital currency or crypto-currency, is a medium of exchange not authorized or adopted by a government. There are many different digital currencies being used over the internet, the most commonly known being Bitcoin. In Washington, digital currency is included in the definition of “Money” in the Uniform Money Services Act (UMSA), chapter 19.230 RCW.”68 Other countries such as China and the United Kingdom have differing laws.69 On December 5, 2013, the People’s Bank of China issued a notice that banned 3rd party processors (such as Alipay and Tenpay) from providing renminbi (RMB) transactions with cryptocurrency exchanges.70 In contrast, on March 2, 2014, Britain’s tax authority announced that it was scrap its tax on Bitcoin trading.71

While these issues are being sorted out, there may be other areas in which regulatory uncertainty could be mitigated.  One way around logistical issues is to put transportation clauses that must be met otherwise various counterparty stipulations take effect.  That is to say, what if your state DMV does not recognize a particular smart contract or token transfer as an official legitimate means for exchanging your vehicle?  While you may find a legal work around, this could recreate a barter economy.  For example, in the event that a fiat-exchange system is shut down and price discovery in relation to that particular token is affected, users could trade other assets worth roughly the same value instead.

Another area where cryptoledgers and policy intersect is the transmission of the token.  Since tokens are transmitted on a peer-to-peer basis, they can be sent anywhere around the world near-instantaneously.  Thus if Alice had friends or family working overseas and in need of money, instead of using costly remittance services such as Eurogiro or Western Union which charge high fees for no value-added, Alice could send Bob any amount of Bitcoin for almost no cost (or other crypto-based token).7273  In fact, in 2012 Western Union generated $4.6 billion in transaction fees and had a net profit margin of 16%.74 A recent report from the World Bank found that the 232 million international migrants working abroad remitted an estimated $550 billion in 2013 – the top three countries for incoming remittances reached $71 billion in India, $60 billion in China and $26 billion for the Philippines.7576 Fees charged by various levels of middlemen providers, exchangers and compliance offices collectively add another $74 billion from this process, with no value added.  For example, the average African migrant is charged 12.4% in remittance fees, thus reducing that fee to even 5% would save Africans from the continent $4 billion.77 Globally the average fee on remittances is 9% and many banks charge an additional “lifting” fee that adds another 5% to remit it into local currency.78

In February 2014 I spoke with Alan Safahi, the CEO of ZipZapInc.79 Founded in 2010, ZipZap is the largest global cash transaction network enabling consumers to use cash to buy digital currencies.  In this manner it acts as a software-based intermediary between Payment Centers who collect fiat and exchanges that provide bitcoin liquidity.  According to Safahi, ZipZap is building both on-ramp and soon off ramp connections from physical cash to digital currencies around the world which they hope will someday provide a free remittance network, “I want the cost for remittance to go down to 0%.  Currently we have to charge fees for fiat on both ends however as time goes by eventually, we will only have to charge for fiat conversation out.  Ultimately we will go to a freemium model in which basic services like remittances are free through the use of cryptocurrencies like bitcoin.”

“We as an industry will have to provide value-added services on top of free remittance services to the edges that consumers would want to buy,” added Safahi. “It would be similar to the online gaming community which has successfully adopted a freemium model to provide additional product or enhancements the gamers gladly pay for.”

Safahi would like to turn the status quo upside down.  Whereas currently a customer has to meet certain rigid standards and then pay relatively high fees if he or she remits from developing countries (and in some cases gets rejected), he wants to make it easier for customers to transmit value that they own.  Accordingly, “it is my mission to make life easier for consumers, change it in a manner in which the customer comes first for any new financial services products not the service providers.”  ZipZap launched its global cash payment network in 2012 and has grown to 700,000 payment center locations.80 ZipZap also recently expanded into 28,000 new UK locations and continues to partner with more Bitcoin exchanges (such as Bittylicious, ANX, Kraken, CoinMKT, and BIPS Market) to allow customers to convert local currencies into bitcoins at any of the locations.81

I also spoke with Charles Hoskinson, creator of the Bitcoin Education Project and member of the Ethereum core development team.82 In terms of the impact DAOs and trustless asset management will have, he sees that, “the simplest way of looking at it is 3.5 billion people in emerging markets are faced with two configurations of property and contracts.  The first is that because of how institutions are organized and incentivized, those who are well-connected or whom are willing and able to bribe government officials are able to protect their property.  This is not a very stable structure as it is subject to any change in government (e.g., removal of politicians).  The other configuration is a grey system, a type of informal economy based on handshakes and under-the-table dealings.”

As a consequence he sees that “it is risky and difficult for residents overseas in developed countries to make educated investments because of a lack of clear rules and property rights.  When you have a stronger rule of law, such as codified contracts and arbitration mechanisms, then investing is not only more transparent but also safer and more efficient.  Projects like Ethereum that utilize a DAO, they present a strong 3rd option: they do not have to ask a government or institution for bribe.  Users also do not have to worry about a nebulous grey area.  Instead, you can put your trust on a ledger – in math – which then creates transparency.  Consequently, due its peer-to-peer nature it also transcends any jurisdiction and thus can be used by anyone to track and manage any asset.  This will change how business is conducted in both developing and developed markets.”

Because these are autonomous systems it will also change banking and the way capital is transferred, acquired, stored and managed.  Smart property tied to existing jurisdictions could likely be affected as well.  According to Hoskinson, “we have begun to see this already over the past 5 years in terms of fiat exchanges interfaced with bitcoin, but a DAO will only amplify both the uses and the impact on society.  For example, since at least 1991 there has been a variety of methods for building reputation systems – webs of trust – that incentivizes users to pay back creditors.83 With a blockchain you can now have a safe place to put an instrument or contract and people can digitally sign it.  Since it is publicly audited, other users can see its history and if it is reliable thus building credit scores.  In turn, business transactions based on clearly defined terms and services can be conducted on an exchange through a form of identity management.  This will completely transform how the flow of capital and investment work and will be a godsend to the 3rd world.  For instance, a person with a reliable DAO (or smart contract) could create a monetary instrument (a cryptocoin) and lend it to anyone on the globe in the form of a loan with specific terms and conditions.  This is done in an external, tamperproof system, a cryptoledger that is not controlled by an institution capable of abuse.  As a consequence, for developing countries, just as they leapfrogged copper wiring choosing to use wireless telephony, some may forgo building replicas of existing financial infrastructure and instead choose to use this virtual-based system through their mobile devices.”

The most successful mobile payment system currently is M-PESA, operated by Safaricom and Vodacom and serving 30 million users in East Africa (Kenya and Tanzania), the Middle East and India.84 It is a mobile-phone based money transfer and microfinancing platform; last summer, Kipochi integrated a lightweight Bitcoin wallet with M-PESA which enables Kenyans to bypass costly remittance fees charged by middlemen such as MoneyGram and Western Union.85 While some may ignore the possibilities of mobile banking, preferring desktops or even physical visits to bank branches, 43% of Kenya’s GDP is spent through mobile phones.86 In fact, according to a recent Reuters report, “M-Pesa has enabled 67 percent of Kenyan adults to access banking. Its transactions total about $1 billion per month.”8788 There are roughly 253 million unique mobile phone subscribers in Africa (many have two SIM cards) and an estimated 70% of the population on the continent are underbanked or have no access to a bank.89 Therefore cryptocurrencies and trustless asset management tools built on cryptoledgers that interface with mobile phones will enable and empower an entirely new demographic and consumer base to emerge from subsistence.  In fact, according to a 2009 report from Financial Access Initiative, half of the world is unbanked which leads to new opportunities for entrepreneurs.90

  1. See Bitcoin Startup Investing Snapshot: VCs Deploy $74M Across 40 Deals in 2013 from CB Insights, Bitcoin startup Coinbase receives $25m investment from a16z from ZDNet and Circle Raises $9M Series A From Accel And General Catalyst To Make Bitcoins Mainstream from TechCrunch []
  2. Following the Money: Trends in Bitcoin Venture Capital Investment by Garrick Hileman.  Note: Hileman used different chart numbering in his original publication. []
  3. Despite the enthusiasm, competence and funding, the likelihood of success is not a given for any startup.  And based on years of experience there are ways to try and mitigate and plan around known issues of founding a new company.  See Death and startups: Most startups croak 20 months after their last funding round from Venture Beat, The Venture Capital Secret: 3 Out of 4 Start-Ups Fail from The Wall Street Journal, Fighting co-founders doom startups from CNN|Money, Why Small Businesses Fail: SBA from About.com and How Many New Businesses Fail in the First Year? from eHow []
  4. Kauffman Foundation Bashes VCs For Poor Performance, Urges LPs To Take Charge from The Wall Street Journal and Most venture capital funds lose money from CNN|Fortune []
  5. See Venture Survey Finds Big Jump in Investor Optimism for 2014 from The Wall Street Journal, Venture Capital’s Sluggish Performance from DealBook and Venture capital kingpin Kleiner Perkins acknowledges weak results from Reuters []
  6. See the annual MoneyTree Report from PricewaterhouseCoopers and the ever-growing list of funded Bitcoin companies listed on CrunchBase []
  7. Compute Engine, github and Urbit []
  8. AngelList, 500 Startups, Plug and Play, Y Combinator, SVAngel, Bitcoin Opportunity Fund and Boost.  Each of these organizations provide different types of services, some are networking tools others are accelerators and incubators for entire development teams.  For example, see Seven bitcoin startups pitch for funding at Boost VC demo day from CoinDesk []
  9. See BitAngels Goes Global, Closing $7 Million (7,000 BTC) in Funding for Bitcoin Startups from MarketWired,Plug and Play Unveils Bitcoin Startup Incubator With Expert Mentors from CoinDesk and Currency Kings by Entrepreneur []
  10. Backed by $5 Million in Funding (4,700 BTC), Mastercoin Is Building a Flexible, New Layer of Money on Bitcoin from MarketWired []
  11. See What is Nxt? and Ethereum []
  12. See BitcoinStarter and CoinFunder []
  13. Why Bitcoin Matters by Marc Andreessen and Coinbase Raises $25M Led By Andreessen Horowitz To Build Its Bitcoin Wallet And Merchant Services from TechCrunch []
  14. Marc Andreessen sings Bitcoin’s praises from CNBC []
  15. Following the Money: Trends in Bitcoin Venture Capital Investment by Garrick Hileman.  Note: Hileman used different chart numbering in his original publication. []
  16. Following the Money: Geographic Dispersion of VC Bitcoin Investment by Garrick Hileman.  This is part 2 of his analysis, he uses different chart numbering. []
  17. In addition to Garrick Hileman’s data for Bitcoin Venture Investments, another open database of investment information can be found with The Bitcoin Database.  See also: Exclusive: State of Bitcoin 2014 Report Analyses Emerging Trends from CoinDesk []
  18. Lightspeed Venture Partners, Lightspeed Anchors Bitcoin Startups in Adam Draper’s Incubator from The Wall Street Journal and Why Lightspeed Venture Partners Sees Bitcoin as a Good Investment from CoinDesk []
  19. Skype calls now equivalent to one-third of global phone traffic from ArsTechnica []
  20. Global Digital Goods Opportunities by Sam Kwong []
  21. The Communications Market Report: International from Ofcom []
  22. Shakil Khan, founder of CoinDesk uses the analogy that Bitcoin has the potential to be an IP address for money.  See Shakil Khan: Bitcoin can be “money over IP”, but services must get more intuitive from CoinDesk []
  23. DealCoin []
  24. Commotion, XORP, 802.11s, Wireless Mesh Networking []
  25. My thwarted attempt to tell of Libor shenanigans by Douglas Keenan []
  26. BitGive Foundation, Bitcoin Not Bombs and Sean’s Outpost are probably the three most well-known charities that accept cryptocurrency donations.  See Bitcoin Helps Homeless Charity Sean’s Outpost go from Strength to Strength from CoinDesk and Jason King of Sean’s Outpost on Bitcoin and Charity interview by Jeffrey Tucker []
  27. The 50 worst, ranked by money blown on soliciting costs from Tampa Bay Times []
  28. China gets 76 bln yuan in donations for Sichuan quake from People’s Daily []
  29. County vows to correct misuse of post-disaster relief money from China Daily and Quake zone hit by yet another relief scandal from South China Morning Post []
  30. For more on this issue related to China, see Chapter 18 in Great Wall of Numbers.  See also, Red Cross donations not collected for 4 years from China Daily []
  31. Kapronasia and Bitcoin Singapore 2013 with Zennon Kapron []
  32. The December 5th notice does not really say that merchant services are forbidden.  It says that financial companies and 3rd party payment processors cannot deal with Bitcoin, and also says that bitcoin is not a currency.  The prevailing thought at the moment is that exchanging goods and services for bitcoin is like bartering, so merchant services should be fine.  The industry will only really know once something like BitPay actually takes off in China.   China Bans Payment Companies From Clearing Bitcoin, News Says from Bloomberg and淘宝新增比特币等虚拟币等禁售规则公示通知 from Taobao.  It may also be instructive to read虚拟货币本质上不是货币 from Sheng Songcheng, the head official of investigation and statistics at the PBOC. []
  33. A type of chicken and egg problem – the important point is whether domestic users can pay for wares in a cryptocurrency.  Since the majority of ecommerce in China is managed through Alibaba and Tencent, who in turn have backed out of supporting this crypto space, in the short run may only work for Chinese residents buying products abroad but in China itself there are several hurdles to adoption. []
  34. The German Monetary Unification (Gmu): Converting Marks to D-Marks by Peter Bofinger []
  35. Outside of academia, over the past years various people have discussed the role a cryptocurrency can play with respect to integration with central banks, including using to fulfill the bancor concept (international reserve system).   One recent example is the Bitnote thought-experiment from Wolfgang Münchau.  For more on bancor, see Reserve Accumulation and Intern ational Monetary Stability from the IMF, The Global Currency Conundrum and the “Babel Fish” of Money by Chris Larsen and Our flawed financial system is reflected in Bitcoin from Financial Times []
  36. Shanghai liberalises offshore yuan borrowing in free-trade zone from South China Morning Post, Shanghai Free Trade Zone: The next Shenzhen? from The Economist, China approves 12 more free trade zones from Xinhua []
  37. 500 Startups, BitDazzle, BTCJam []
  38. Interview on January 12, 2014 []
  39. Both citizens and expats are limited to international transfers of $50,000 denominated in foreign currencies per year.  For more details see Chapter 5 – Financial services in Great Wall of Numbers and Animal Spirits with Chinese Characteristics by Mark DeWeaver. []
  40. Tianhong’s Alibaba mutual fund grows to second largest in China from South China Morning Post []
  41. Text, Chat, Profit: Tencent Launches Investing on WeChat from The Wall Street Journal []
  42. And at least 272 million monthly users.  See China’s WeChat App Targets U.S. Users from The Wall Street Journal,China banking war heats up with launch of online investment app from Financial Times and How WeChat’s 600 Million Users Spell Out Big Profits For Brands from Jing Daily []
  43. See Tencent: China’s hottest tech company from CNN|Money and Chapter 12 – Social Media and marketing your brand from Great Wall of Numbers []
  44. Dearcoin, General Assembly and Bitpass []
  45. Bitcoin Institute and Seedco.in []
  46. Hivewallet []
  47. CoinSimple []
  48. MEXBT and  The bitcoin industry embraces what it was built to avoid—rules and regulation from Quartz []
  49. ‘Trustless attorney’ is probably a marketing term lawyers will avoid using; instead, digital currency attorneys may become the nomenclature. []
  50. With the advent of ‘zero-knowledge’ proof, there may be techniques like ‘obfuscation’ cryptography and homomorphic encryption that could enable proprietary contracts (e.g., obscuring information and applications in such a way that discerning the code would be impossible, thus the complete opposite of open source).  See Cryptography Breakthrough Could Make Software Unhackable from Wired, IBM’s homomorphic encryption could revolutionize security from InfoWorld and Cryptographic Code Obfuscation: Decentralized Autonomous Organizations Are About to Take a Huge Leap Forward by Vitalik Buterin []
  51. Personal correspondence, February 4, 2014 []
  52. Smart contracts will need data standards and the first six Contract Types are (PAM, ANN, SWAP, STOCK, OPTION, FUTURE).  See Project ACTUS, The Importance of ACTUS from Stevens Institute of Technology and Improving Systemic Risk Monitoring and Financial M arket Transparency: Standardizing the Representation of Financial Instruments by Mendelowitz et. al. []
  53. Designing financial instruments could become straightforward with ACTUS standardizations.  In contrast, a disproportionate allocation of resources is currently spent on arbitration, compliance and fraud protection associated with the contracts and instruments. []
  54. For example, the New York Uniform Commercial Code already has a body of precedents covering payment systems, electronic bank deposits, debit cards and a default set of laws involving electronic transactions within Article 4-A: Funds Transfers. []
  55. If you plagiarize a litigation brief, this is considered verboten.  Similarly, while using Westlaw and LexisNexis, the search results are copyrighted, but the actual content is not (i.e., how you got there is copyrighted).  In contrast, once a judge uses wording from a contract, it is in the public domain and others can use it. []
  56. In a termsheet the precedents remain the same as the only thing that is usually different are the items explicitly listed.  Other areas of law that are considered off-limits for copying are covenant analysis or collateral analysis.  According to Sean Zoltek and several other lawyers consulted on this manuscript, attorneys in general look for methods to reduce repetition and reduce the amount of drafting done on a set of documents.  Thus they may build a document 70% and then reuse or recycle portions of previous document which has a great set of covenants for the other 30%. []
  57. ‘500 Startups’ Recruits Ex-MySpace VP to Mentor Bitcoin Businesses from CoinDesk []
  58. Cryptrade is the open-source repository on github, Cryptotrader is a community of programmers and architects creating bots used on exchanges (e.g., for HFT arbitrage).  Be aware that anyone claiming to sell you a turnkey bot capable of arbitrage is likely scamming you, if it worked as stated, they would be using it instead. []
  59. Andreas Antonopolous used this as an example of smart contract he would build if and when Ethereum is launched.  See What is ethereum? (video []
  60. Mike Hearn uses this in his presentation (video) as an example of how a DAO and smart contracts can be used to replace taxation for public goods. []
  61. The private provision of public goods via dominant assurance contracts by Alexander Tabarrok []
  62. Mike Hearn (video) calls the initial phase of this DAO infrastructure the “TradeNet.”  He later uses hardware examples, yet it is the software that controls the smart property functionality within the hardware.  By “dying” he means that an inefficient taxi service-based DAO could sell itself as salvage material (to pay off debts) and/or restart and turn back on during potentially different market conditions.  Eventually there could be a “MatterNet” in which quadcopters can transport goods (e.g., like the Amazon air delivery) or urban infrastructure that rearranges itself based on real-time demand (e.g., automated vending machines being lifted by quadcopters to new locations based on market demand).  All of this again, is controlled by DAOs that may or may not reside virtually on a cryptoledger. []
  63. See Regulating Bitcoins: CFTC vs. SEC? from Mondaq, CFTC’s Chilton on Possible Regulation of Bitcoin from Bloomberg, Here’s how Bitcoin charmed Washington from The Washington Post []
  64. One of the topics discussed at the hearing was KYC which is ‘Know Your Customer,’ a banking regulation enacted to collect customer information for statutory compliance.  See Community Debates What’s Next After New York Hearings from CoinDesk and Understanding global KYC differences from PricewaterhouseCoopers []
  65. In February 2014, The Law Library of Congress published a detailed look into 40 jurisdictions with respect to the regulation of Bitcoin, “Regulation of Bitcoin in Selected Jurisdictions.”  See also Bitcoin’s Legality Around The World from Forbes and BitLegal which provides a color-coded map of each jurisdiction with relevant regulatory information.  KPMG recently published a thorough article regarding tax implications surrounding Bitcoin, Chomping at the Bit: U.S. Federal Income Taxation of Bitcoin Transactions. In addition, several of the 2.0 platforms have created an industry association called Consortium of Decentralized Applications (CoDA) to discuss and navigate the legal framework of various jurisdictions.  Similarly, the Digital Asset Transfer Authority (DATA) is a new self-regulatory organization focused on creating regulatory proposals and interaction with policy makers. []
  66. FinCEN Publishes Two Rulings on Virtual Currency Miners and Investors from Financial Crimes Enforcement Network []
  67. AB-129 Lawful money: alternative currency from the California Legislature.   Perhaps a ‘BitLicense’ will become integrated with the New York Uniform Commercial Code Article 4-A: Funds Transfers.   See California House Passes Bill Declaring Cryptocurrency Legal Tender from AltCoin|Press []
  68. Money Transmitters and Currency Exchangers from Washington State Department of Financial Institutions []
  69. Singapore’s government is currently taking a hands off approach towards cryptocurrency right now whereas Denmark plans to regulate and oversee its use.   At the end of February, Vietnam’s central bank issued a statement warning banks and credit institutions from using it.  See Singapore government decides not to interfere with Bitcoin from Tech In Asia, Bitcoins Spark Regulatory Crackdown as Denmark Drafts Rules from Bloomberg, Vietnam Warns Against Bitcoin, Invokes the Ghost of Gox from CoinDesk []
  70. China Bans Payment Companies From Clearing Bitcoin, News Says from Bloomberg []
  71. Britain to scrap Bitcoin tax from Financial Times []
  72. The Bitcoin network does charge a small nominal fee for some transactions, although most are processed without any fee.  A transaction drawing bitcoins from multiple addresses and larger than 1,000 bytes may be assessed 0.0002 BTC as a fee.  Furthermore there is a hardcoded block size of 1 MB, or 7 transactions per second.  For comparison, VISA’s payment processing centers handle on average of 2,500 transactions per second and are built to process a surge of up to 10,000 to 20,000 per second.  In order to change this, a hard fork must be implemented.  Long-term this creates a problem dubbed a “crypto tragedy of the commons.”  Ken Griffith recently pointed this out, noting that “Bitcoin transactions cost above $50 per transaction, which is very high, but it feels low because this cost is paid for through the creation of new bitcoins that equally dilute everyone’s bitcoins.  The person making the transaction doesn’t pay the fee, all holders of Bitcoins pay what amounts to an inflation tax out of dilution of their Bitcoin value. From the user’s perspective of sending money with Bitcoin, it feels practically free!”  While the actual transaction cost fluctuates (has been in the range of $40-$90 over the past 3 months), he does have a valid point that is usually glossed over.  See Transaction fees, On Transaction Fees, And The Fallacy of Market-Based Solutions, Bitcoin – A Jack of All Trades is the Master of None by Ken Griffith, Bitcoin needs to scale by a factor of 1000 to compete with Visa. Here’s how to do it. by Timothy Lee and Top secret Visa data center banks on security, even has moat from USA Today []
  73. The way the current system is setup, remittances and funds sent abroad go through multiple institutions via ‘correspondent accounts’ or ‘correspondent banking.’ []
  74. Will Migrant Workers Drive Bitcoin’s Mundane Future? from Bloomberg []
  75. Is Bitcoin the future of remittances? from CCTV and Remittance Prices Worldwide from World Bank []
  76. Migrants from developing countries to send home $414 billion in earnings in 2013 from World Bank []
  77. African Migrants Could Save US$4 Billion Annually On Remittance Fees, Finds World Bank from World Bank []
  78. Will Migrant Workers Drive Bitcoin’s Mundane Future? from Bloomberg []
  79. ZipZap []
  80. MoneyGram Joins ZipZap’s U.S. Payment Center Network from PRWeb []
  81. You Can Now Pay Cash For Bitcoin at 28,000 UK Stores from CoinDesk []
  82. Bitcoin Education Project and Bitcoin or How I Learned to Stop Worrying and Love Crypto at Udemy []
  83. PGP (Pretty Good Privacy) was released in 1991 by Phil Zimmermann, see: Cypher Wars from Wired []
  84. M-PESA and Enabling financial transactions for consumers and businesses: Safaricom’s M-PESA mobile money service by Filippo Veglio []
  85. Kipochi launches first Bitcoin wallet in Africa with M-Pesa integration from Kipochi []
  86. From oil painter to the C-suite from Financial Times and M-Pesa helps world’s poorest go to the bank using mobile phones from The Christian Science Monitor []
  87. Insight: African tech startups aim to power growing economies from Reuters []
  88. According to an email exchange with Michael Youssefmir, an engineer at Google who has previously published mobile data pricing on Ghana, “MPESA was successful because Safaricom had a monopoly and regulators failed to regulate before the system took hold. Successful mobile money systems in the class of MPESA must become defacto standards. The fragmentation and regulation that occurred in other African countries is exactly why we keep having to talk about Kenya and only Kenya. As a defacto standard that is resistant to regulation, bitcoin is an ideal currency and system to serve as mobile money in the developing world.” []
  89. Fewer than one in three Africans has a mobile phone from Reuters and The Sleeping Giants Of African Mobile Payments from TechCrunch []
  90. Half the World is Unbanked from Financial Access Initiative []
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