Tuesday, March 6, 2018 

TokenReporter: what becomes of VC in the blockchain world?

The Update

A reminder: This week at TokenReporter we’ve instituted a few changes. First, the newsletter will cost $20 a month or $100 a year (it is $60 a year for a limited time if you’d like to invite friends.) If you’ve received this newsletter in your inbox then you’re golden - I’m grandfathering in the 5,000+ folks who have been reading this for a while. This small amount of cash allows me to add a new mid-week post as well as hire some new talent so be on the lookout for changes in the system. I encourage you to tell friends and neighbors about the site and the newsletter.

Second, we’re expanding the newsletter to twice weekly, with a bit more token discussion coming to you every Wednesday. Look for it in your inbox this week. While you’re looking forward to that, why not take a glance back at last Wednesday’s?

…If there is anything we have learned about modern tech it's that everything is in flux. Today decentralized applications are considered crypto moon shots or, worse, moon bat fiction. In a few years–I'd wager by 2020–they will be a valid alternative to centralized data storage and application control. Today, the token economy is a white-hot mess. In the future, it may be the de facto standard for early company-building.

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What to reach 5,000+ crypto fanatics? Email joanna@cabalpartners.com

A quick thought

I was talking with a new acquaintance about crypto, and very quickly realized he was a devotee. “I wish stores would take ETH,” he said, as we talked about different payment methods that all seem to require hundreds of banks and credit unions to get on board in order for their consumers to use them. The problem, according to him, is that bankers and hedgefunders can torpedo the ETH price with a snide comment, and they’re going to do so for as long as they can.

My perspective is that we’re really at the early end of the adoption curve. If crypto is going to be adopted for use in stores by consumers, a few things have to happen. The value has to stabilize, so that there aren’t million dollar pizza stories. There has to be incentive; for a consumer to change behavior, there has to be a benefit to them to do so. Financial payment products compete, even if it’s on something as simple as 2% cashback on purchases. Here, a store could offer a card or app-wallet that you load up with ETH, and in exchange for spending it in store, you get 5% off the purchase. The key problem is trust: how do people trust crypto as a thing that represents value, buying power. How would you trust a retailer’s wallet to not be funny money that has no value, either in store or to the outer world? These are the problems to solve.

Two token sales to watch 👁️

Instead of talking about token sales to fund startups, let’s step back this week and look at securities. A security token is one that invests in a fund–essentially, one token invests in multiple startups.

The problem is that many VC and fund managers might expect the success or failure to be evenly distributed across the fund (bad companies fail, middling ones stay flat, good ones 2x or 4x their return.) That’s not how it works out. A small number of companies will outperform every other company in the fund put together. The path to not fail as a fund is that every company in the fund has to have the potential to succeed exponentially.

22X is a fund with 30 companies and $22M in investments from VC and angels. Startups in the fund have investors from as diverse a pool as Walmart, 500 Startups Accelerator, Deutsche Bank and more. Startups are pretty diverse as well, from blockchain companies to digital freight, to personalized healthcare for women using AI and biomarkers. Have a read over the whitepaper, and see what you think.

Blockchain.capital is a similar idea, but with different backgrounds and a different mix of companies. They believe that blockchain offers a better, faster, cheaper way of exchanging money, so all of their investments are in companies using blockchain as the underlying tech in their startups. Instead of doing a token sale, they’re using AngelList and being backed by a syndicate from there.

And, because it wouldn’t be me without a project from one of my favorite sectors, health. Medcredits.io is a health startup that is working to put telemedicine and a medical record on a blockchain, and using ETH smart contracts to connect patients to doctors. Currently in beta, it’s using dermatology as the demo. If it can expand to other physicians then it may earn a chunk of the $200M USD anticipated as the telemedicine market by 2024. Here’s the whitepaper.

The Good, the Bad, and the Ugly 😊😠👹

😊GOOD: Bloomberg reports that on Feb. 28th the US Commodity Futures Trading Commission (CFTC) responded to its staff inquiries and allowed its employees to trade in cryptocurrency under the condition that no inside information should be used in the transactions. The decision met with criticism. Angela Walch, an associate professor at St. Mary’s University School of Law, claimed, “It could absolutely skew their regulatory decisions.”

A spokeswoman for CFTC Chairman J. Christopher Giancarlo explained that no person owning Bitcoin should “participate in matters related to Bitcoin, as it presents a conflict of interest.” With the anonymity of transactions on the blockchain, it all comes down to employees’ ethics. Still, banning employees from trading in cryptocurrencies would infringe upon their rights.

 

Whereas the IRS treats cryptocurrencies as property for tax purposes, German Federal Ministry of Finances decided not to subject to taxes purchases with digital currencies, but to treat them as equivalent to legal means of payment. Under this law the operators of crypto exchanges can be exempted from taxes and the conversion of crypto—fiat is considered as a “supply of services” and the intermediary for the exchange will not be taxed. Good news also awaits miners, whose services are considered voluntary, thus also not taxed. This is a win for traders as Germany becomes another crypto-friendly state in the EU.


😠BAD: Once again China is zooming in on the cryptocurrency market. After issuing a complete ban on ICOs and fiat–crypto exchanges in September 2017 and the information blockade on related domestic and foreign websites, traders still have found a way to bypass the restriction by accessing offshore exchanges.

Yicai informs that China's Public Information Network Security Supervision agency now focuses on the foreign crypto exchanges and platforms that moved abroad. Yicai reports, “Chinese regulators will conduct a review of domestic bank accounts and online payment accounts for businesses and individuals suspected of helping domestic investors to make digital currency transactions at overseas exchanges.” These harsh measures aim to eliminate the blockchain financial fraud, pyramid schemes, and money laundering.

Despite the anti-crypto policy, Chinese fintech thought thrives. JD.com, Chinese e-commerce giant known as the “e-bay of China,” is launching AI Catapult—an accelerator for blockchain technology infused with artificial intelligence. Six startups partnered up with JD to explore this new technology in a global e-commerce setting, most notably CanYa, a company that in their White Paper claims to be “the ultimate link between cryptocurrency and the real world.” Seeing how this partnership unfolds in the face of Chinese restrictions will no doubt be interesting.


👹
UGLY: On Feb. 27th, Microsoft co-founder and philanthropist Bill Gates slammed digital currencies in a Reddit AMA. For someone who in 2014 said, “Bitcoin is better than currency in that you don't have to be physically in the same place,” in 2015 he claimed, “We need things that draw on the revolution of Bitcoin, but Bitcoin alone is not good enough.”

This Tuesday Gates argued against the anonymity ensured by cryptocurrency, saying, “I don’t think this is a good thing.” He went on to explain that “[t]he Government’s ability to find money laundering and tax evasion and terrorist funding is a good thing,” and as an example pointed to the purchase of fentanyl (a strong prescriptive painkiller) and other drugs. Cryptocurrency “is a rare technology that has caused deaths in a fairly direct way,” said Gates, “I think the speculative wave around ICOs and crypto currencies is super risky for those who go long.” The comment met with wide criticism exposing faults in Gates’s argument.

Gates’s personal opinion isn’t in line with official Microsoft’s politics. Microsoft had already incorporated blockchain technology in Windows Azure with Coco Framework, welcomed back Bitcoin to Windows and Xbox online stores, and allied with Hyperledger to aid Mercy Corps and U.N. International Computing Center in development of blockchain identity initiative.

The wave of negativity continues this week with a $10 billion dollar lawsuit filed against Craig Wright, the self-proclaimed creator of Bitcoin, who allegedly forged his ex-colleague David Kleiman’s signatures to steal his Bitcoins. The filing states, “It is put forward that Mr. Wright conspired against the ignorance of Mr. Kleiman’s family after his death in 2013. Because Mr. Kleiman’s heirs were unaware of their family member’s bitcoin efforts and potential bounty, “Craig perpetrated a scheme against Dave’s estate to seize Dave’s bitcoins and his rights to certain intellectual property associated with the Bitcoin technology.” The legal battle may be a long and tiring one and pull at the very roots of Bitcoin.

News 🆕

Once again big banks show discontent with crypto. In his annual report filed with the US Securities and Exchange Commission (SEC) on Feb. 27th, JPMorgan named cryptocurrencies and the blockchain technology “potential disruptors to financial institutions and payment processors.” Another similar statement was made by Bank of America last week, which recently barred its customers from using cards to buy crypto. The Bank claimed the new technology poses a fundamental threat to their business model. Goldman Sachs, on the other hand, filed a report with SEC on Feb. 26th that considers cryptocurrencies and blockchain as business risk from the perspective of the banks ownership stakes in cryptocurrency-related fintech startups like Circle.

It’s not just the big banks having trouble in the face of this fintech revolution. Regional U.S. banks are bound to stay far behind, unable to afford expenditures that would allow them to adapt to the rapidly developing industry. Perhaps the U.S. banks should look to their counterparts elsewhere for inspiration as a Liechtenstein-based family bank has become one of the first banks in the world that allows clients to directly invest in cryptocurrencies.

Disclosure

We will run advertising in the newsletter and if would like to appear at the beginning or end of this newsletter please email joanna@cabalpartners.com We do not expect that we will run a token sale to fund this newsletter but Victor or I may run our own token sales later in the year.

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