The future of blockchain, virtual currencies and tokenization of the economy. Michael Jackson, a partner at venture capital investment firm Mangrove Capital Partners and former COO of Skype, shares his vision about ICOs, cryptocurrencies and blockchain.
LFF: You are a non-executive director of blockchain.com, a popular cryptocurrency wallet provider. What unique insight has this given you into the new crypto world?
MJ: We believed there was only going to be one Bitcoin. Now there are thousands. We thought that there was just going to be one wallet provider. Now there are many. And we believed that it would take a very long time for cryptocurrency to be adopted by the institutions. That’s happening much faster than we imagined in fact. Although Bitcoin is now ten years old, in the last year we’ve seen tremendous interest from institutional investors private holders, family offices and custodians looking for professional services for managing and investing in cryptocurrencies of many sorts.
I'm a big believer in Bitcoin. It's been around longest and tested most.
LFF: Is Bitcoin here to stay?
MJ: I’m a big believer in Bitcoin. It’s been around longest and tested most. It is the most popular. It’s still small regarding global asset value, but it does have governance around it. It does have an adoption around it, and it does have a brand around it, and often this is what drives something forward. So it has a place in an emerging crypto-based economy.
LFF: What efforts are going along behind the scenes to power faster transactions?
MJ: One of the criticisms of the Bitcoin network has been that it’s slow. When you can only do seven transactions a second, the costs of running it are huge. You inherently have a considerable transaction cost, so clearly everybody knew that new technology would be needed to add on to Bitcoin to make that work. That’s changing now with the Lightning Network, a decentralised network using smart contract a functionality in the blockchain to enable instant payments across a network of participants. It is built around much faster transaction times, and cheaper transaction costs. People are now moving hundreds of millions of dollars’ worth of Bitcoin around on a 30 cents transaction cost which is much lower than anything else and more stable than anything else. This instant transfer of money is something which will in time transform the financial markets again because it’s a parallel system rather than a serial system. So correspondence banking, for example, disappears and becomes unnecessary in a Bitcoin world.
People are now moving hundreds of millions of dollars’ worth of Bitcoin around on a 30 cents transaction cost.
LFF: How do you see both legislation and product development into fitting the new world?
MJ: There are a lot of things that virtual currencies are very good for. There is a lot of stuff that virtual currencies are very bad for and we talk about traceability and we talk about money laundering and all of these things because bitcoins and virtual currencies can very quickly be like cash. The industry itself has matured as well to recognise that free transfer of money in an anonymous way is not compatible with the society that we all want to live in and the financing of terrorism and all of these things. It’s an irrepressible wave of regulation that you can’t fight. We are working with KYC wallets for example. There’s a Luxembourg based project today which is analysing the whole history of the virtual currency world to detect anomalies and money flows and things like that, and they’re finding them. Regulators can use these to intercept transactions and to trace them.
LFF: How well equipped is Luxembourg in the field of blockchain?
MJ: Blockchain technology is computer technology. It’s been around for actually rather a long time. Other systems have been built on similar distributed technologies over time. Blockchain is an extremely efficient way of turning a serial process into a parallel process, as well as having the power disintermediate. Luxembourg’s very strong in being able to gather the different sectors of the community: the government, the financial providers, the regulation and put them all together in one room. As an example, the government supported Infrachain, and is positioning Luxembourg as a Blockchain competence hub.
The financial centre is solid today in managing asset portfolios, and these asset portfolios are going to be tokenized at some point. The efforts that Infrachain and the government are making together with the regulator can spearhead these developments.
Crypto asset markets are new markets. It's a very volatile environment now.
LFF: Some liken crypto markets to the beginning of the capital markets? How do you see that?
MJ: Crypto asset markets are new markets. It’s a very volatile environment now, and you certainly need to understand and appreciate it. In some countries gains on crypto have been taxed as gambling gains and it’s probably not far from the truth. We’re in a gambling market, and that’s how the capital markets were or where the derivatives markets were twenty years ago when these products began to come along.
We’re seeing the large financial services providers getting more and more interested in this. Where we’re seeing activity now at Blockchain.com, is demand from family offices who want a professionalised mechanism for playing in this area. They’re fully aware that their money could be lost, just as you do with options trading and so many other things.
As this market becomes more institutionalised as products, predictions and methodology becomes more advanced, we’re beginning to see that mature and this is happening now where Goldman, CME and people like that are developing products and selling product to their more avant-garde, more advanced institutional clients. I think it will take a long time before the more stable and mature financial industry moves into this are. I think we overestimate how quick it’s going to go but I think we underestimate how deep it’s going to go.
LFF: What do you expect we will see over the next 12 months?
MJ: I think what we will see over the next year or so is real product come to market that allows people who don’t understand to access products managed by people who do understand. The way we’ve always done it in the financial services markets and to give a channel for people to be exposed to this new cryptocurrency asset class. I’m also seeing the hedge fund managers from the late nineties who built up funds and financial portfolio management companies back then moving into this area and providing expertise because they’ve been working in it for twenty years. Also providing drive because they know what they’re doing and but also providing a product that people want to buy, because they understand it. Much of the industry so far has been driven by youngsters with no experience of the financial markets at all who invented these things.
Much of the industry so far has been driven by youngsters with no experience of the financial markets at all who invented these things.
LFF: What should investors look for in an ICO and how can they navigate this space?
ICOs are a new form of fundraising.
MJ: ICOs are a new form of fundraising, allowing companies to issue coins or tokens or an instrument representing some value in the company. An ICO is in some ways similar to an initial public offering.
Traditionally, we´ve done that only with equity, but now we can do it on other projects or components of the ecosystem within the company itself. It does make it a bit more complicated as an investor because you don’t quite know what you’re investing in.
There was tremendous enthusiasm for ICOS at the back end of last year. Since then it has fallen off a bit, as many people were raising capital based on hot air, but the underlying trend is there. But while the amount of ICOs has fallen over the last quarter, the quality has increased, and I think that’s a good sign for the future for people who want to drive their business in that way and funds are beginning to understand that as well.
LFF: Can ICOS become efficient for start-ups?
MJ: One of the great benefits of an ICO is, it allows a start-up to create a product, create an ICO around the product and sell that participation in that product to their users and people who believe in it. They no longer need to go to financial institutions and can go directly to their user base in many environments that’s very useful, particularly in new technology and advanced thinking where the industrial side of financing hasn’t caught up.
They no longer need to go to financial institutions and can go directly to their user base.
LFF: How do ICOs change the venture capital industries operating model?
MJ: ICOs significantly changes the way Venture Capital (VC) operates because traditionally VC capital provides early-stage funding. In the past, VC has been able to take the pick of the pie and dictate the terms of the deal. If the popular companies can now raise capital from their user base, the VCs are now competing with the users, and the users probably value the company more than the VCs do in fact. I think for the more established projects, where more analysis is needed, then ICOs have no place. Concerning Private Equity (PE), it depends on the sector. If you’ve got industrial projects, where you’re looking to build management, then PE has a powerful place. But once again if it’s a mass market product, then PE has a less stable place in financing the business. So it changes. It doesn’t take anybody out, but I think early-stage venture is the first place which is touched.
LFF: A lot of people in the crypto community are talking about this being the death of the financial services industry?
MJ: We hear this in a lot of places, and one has to be somewhat optimistic about it. It will change the financial services industry as new products come along, as costs get taken out of the system, as things become more efficient. But the fundamentals of the financial services industry are acquiring trust, requiring distribution, requiring confidence in the system. They need to be part of the cryptocurrency, the ICO, the tokenized economy going forward and their assets that we’ve built up over the last thirty years within the Luxemburg financial system and the financial system of Europe and broader. Those skills and assets need to come into this community, and there’s plenty of opportunities for people to participate in this new economy.
Certain parts of the Luxembourgish ecosystem are going to be challenged because inherently some of the products aren’t needed any more. The transfer agent function disappears. Correspondence banking disappears. But it doesn’t mean those people are doing that go — the skills that they use in the correspondence banking that are just as relevant everywhere else. It’s the natural cycle of the industry.