By Jon Matonis
Saturday, August 11, 2012
Fred Wilson is a venture capitalist and principal of Union Square Ventures. On his popular blog, he recently solicited feedback
(for the second time) on the bitcoin cryptocurrency. I was tempted to
reply directly on the blog, but with over 400 comments posted already I
did not want to be lost in the scroll.
My reply is directed first
at Fred for sparking the discussion but also to those many other
investors pondering bitcoin deals. Throughout, I will refer to bitcoin
investments as investment in bitcoin-related deals as opposed to a
direct investment in the currency itself which an entirely different
Let’s get some basics out of the way. First
of all, an investment in a bitcoin entity will be a gut-wrenching,
difficult investment to make if a particular VC has an inherent
fundamental belief in any of the following: (1) the cashless society as
promoted by the anti-cashists; (2) capital controls enforced at national
borders; (3) the appropriateness of any government monetary policy; and
(4) the taxation of income.
For a VC, this can be a
soul-searching exercise. But it does not mean that the decentralized
digital currency is political by nature. It means that through its
cryptographic nature bitcoin reduces the monetary Statist to
irrelevancy. Bitcoin has some pretty powerful and disruptive byproducts.
optional, user-defined transaction privacy, the use of money for
purposes of identity linking falls by the wayside. True, it enables a
paper cashless society but not with the attributes that the
tax-efficient anti-cashists want. Without government checkpoints for
financial institution wire transfers, bitcoin capital flows freely,
without limits, and perhaps anonymously. The harmful tools of
centralized monetary policy would also not exist. And finally, the
taxation of income that began in the United States in 1913 would operate
on the honor system — the honor of the taxpayer, that is. This could
be welcome news for some as a progressive income tax was a fundamental
tenet of Marxism.
In his first post, Fred mentioned “the emergence
of currencies that are not controlled by nation states in my lifetime.”
He clearly acknowledges that significant ramifications result from the
“decoupling of currencies from governments,” but I wonder if he has come
to terms with what that actually means.
What sounds cool and hip
because it is technologically advanced can also turn a lifetime of
engrained political assumptions on its head. If a VC happens to believe
that Greece’s problems can be solved by eliminating anonymous paper cash
transactions and that the taxation of income is morally justified, how
does he reconcile that with bitcoin dominance?
Definitely not for
the faint of heart, those skilled and experienced venture capitalists
entering the arena will be
playing with fire. This is not a game of
targeting an app and throwing seed money at developers located in
Silicon Valley or Silicon Alley. Nor is it like catching the social
media wave or jumping on the mobile payments bandwagon.
is the quintessential disruptor for not only does it disrupt
established primary-level players in the field of payments, like VISA,
Mastercard, and PayPal, but it disrupts the very nature of monetary
authority. Bitcoin is disruption within supreme disruption.
to recognize this maxim, especially as a venture capital investor, can
be fraught with pitfalls. Regulatory acquiescence will be tempting, but
counter-productive. In a company’s strategic plan, relegation of bitcoin
to just another national currency type among equals fails to exploit
its incredible transformative properties. The venture capitalist could
become boxed in by the lack of courage to set legal precedent, by the
unwillingness to go overseas, or even by the reluctance of the board. To
be fair, there will be VC plays in the regulation-friendly exchange
space and processor space but they won’t be the home runs!
home runs will be transformative and that just may not be possible for a
NewCo in all countries. I maintain that it is more a game of multiple
jurisdictions that leverages the relative strengths of competing legal
jurisdictions for the best foot into the global infrastructure.
made an early, and deliberate, strategic decision to embrace and
promote the online gambling business. They executed it brilliantly and
Gibraltar is now home to the industry’s leaders like publicly-traded bwin.party
[BPTY:London]. Just as with online gambling, some jurisdictions around
the world will be more bitcoin-friendly than others. Negotiating that
outcome is the real frontier.
Many readers have commented
and agreed that the investment opportunities will revolve around
bitcoin-related services more than any type of client software play or
attempt to control the mining and transaction fees. While I generally
agree, I also think that a new company does not have to be bitcoin
Also, keeping bitcoin value in bitcoin on the
block chain will be the key. It may be an opportunity that moves
significantly beyond an existing business model simply by having bitcoin
in its arsenal. For example, a third-world e-commerce platform could
bring massive shopping to the unbanked by leveraging the non-national
and frictionless attributes of bitcoin. Or, asset vehicles could be
designed that transfer inter-generational wealth without the need for
trusts or trust administrators.
So, my advice to VCs seeking their piece of the block chain is study the FATF blacklist of 15 non-cooperative countries,
go to airports you never heard of, and most importantly, surround
yourself with management teams that mentally embrace bitcoin’s powerful
For further reading:
“Cash Is Essential For A Free Society”, Stowe Boyd, August 10, 2012
“Secure multiparty Bitcoin anonymization”, Edward Z. Yang, July 20, 2012
“Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against Its Regulation”, Nikolei M. Kaplanov, March 31, 2012
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