When trumpets were mellow
And every gal had one fellow
No need to remember when.
'Cause everything old is new again.
-- Anne Murray
One firm I find interesting - and no doubt, important - to the future of cryptocurrencies (such as Blockchain) in general, is Digital Currency Group (DCG, Private). Why interesting?
- First, DCG uses the word "Bitcoin" freely. None of the fear I report elsewhere at DCG.
- Second, DCG focuses on the underlying property that is simultaneously the greatest strength and weakness of the world of distributed ledgers, the absence of trust.
- Third, DCG may be the acid test for crowdfunding, a method of allowing individual investors direct access to private companies with a bright future, such as DCG. And this is the magic moment when investors first have access to crowdfunding, as reported in the New York Times.
In this chaotic new world of fintech, the need for an operator for the money-switch from the investment community to the fintech firms is beyond apparent. So what does it take to be effective in this function? Trust.
Trust is the grand inhibitor in the world of fintech. The underlying purpose of open-source distributed ledger innovations is to dispense with the failing trust-based transactions system called banking and finance. A great article that gives the reader a quick-and-dirty explanation of the problems of the existing trust-based system is "Blockchain Technology Could Put Bank Auditors Out of Work" by Kyle Torpey. Torpey quotes Peter Todd:
The dirty secret is [the banks] don't actually trust [their databases]. I mean, they don't trust their own employees. ... They don't trust each other. There's so many levels of mistrust here."
If they did trust all this stuff, why are there so many auditors? Why is there this massive infrastructure of labor-intensive human beings sitting there poring over transactions and trying to figure out where the money got created out of thin air. Where did the money disappear? Who moved what where? Was it all legit?"
How can a distributed ledger system help?
It could be something as simple as when I, as a bank employee, type something in, we really do want a cryptographic signature that's actually tied to my keycard or something. And that should go into a database. Well, what does that look like? It looks like a blockchain. I think where they're thinking of going naturally looks like blockchains, so when they hear all this blockchain stuff it's like, 'Oh yeah. This is roughly what we were looking at doing anyway.'"
This is the central original concept of Bitcoin/blockchain. In the original paper by the mysterious Satoshi Nakamoto:
What is needed is an electronic payment system based on cryptographic proof instead of trust…"
Incidentally, the point of Torpey's article is that distributed ledgers will eliminate the need for auditors. More than a few of us look forward to that.
Returning to DCG
Ironically, of course, in investing in a trust-free world, the thing an investor needs most is trust from another source. So one of several ways that DCG inspires trust is to be an ordinary corporate operating company, not an investment fund, with fees and the usual bureaucratic junk. This enables DCG to handle customers on a case-by-case basis, which is truly important in a world without patterns such as fintech.
This corporate structure liberates DCG to do more than put on dog-and-pony shows and the like. It enables DCG to perform some of the costlier functions of an investment banker - to send the management of companies seeking to raise funds in a different, more fruitful, direction. DCG partnered with Visible (Private) to identify what is most important in improving the ability of customers to raise funds.
The companies found, perhaps predictability to SA investors, that raising funds with DCG assistance was not so difficult. The inevitable time lag between plan and execution, in this Bitcoin world, creates the problem of investor desertion.
In other words, to keep the money flowing after the first investor commitment is critical. And to do that requires trust. But to build this trust requires frequent unsolicited reports to investors, akin to quarterly financial reports of publicly held companies. In other words, if you don't want your investors to leave you, keep them completely within the loop.
The special role of establishing trust in Bitcoin-land is characterized by Brett Bivens and Matt Preuss here, thusly:
Building a successful business in an existing market with well understood technology and a defined customer base is very difficult. Building something in a nascent market, like Bitcoin or blockchain technology, that has a history of poor public perception, technology that challenges long-held, deeply entrenched beliefs, and attracts competitors of all sizes -- from nimble startups to financial industry insiders to the banks themselves -- is even harder."
To Build Trust, Include the Trustworthy
Another stroke of genius at DCG is to include the trustworthy without capturing them. DCG advisors include Glen Hutchins, whose many responsibilities include a seat on the Board of Directors of the Federal Reserve Bank of New York; Lawrence Lenihan, of NYU's Stern School of Business, a fashion industry expert; Lawrence Summers, a name every SA reader recognizes; Gavin Anderson, a lead developer of the Bitcoin protocol - and the replacement for the mysterious Satoshi Nakamoto as lead developer of Bitcoin.
The Advent of Crowdfunding
So how does an investor who isn't a Big Boy get in on this DCG gem? Because of SEC (that citadel protecting the needs of investors) "research," you needed to wait until Monday, May 16. While we waited on the SEC for access to IEX (Private) - that innovative exchange designed to protect investors from the Big Boys, we also waited on the SEC for crowdfunding permission. Nearly four years after the President signed the enabling legislation, the crowdfunding moment has finally arrived.
Thank you, SEC, for being so careful. No doubt, that's what the waiting was all about: nothing to do with protection of the Big Boys' profits.
So now that crowdfunding is available as a source of money to DCG, surely DCG, above all the others, will understand the significance of such an open source funding opportunity. Well, in this veil of tears, maybe not. Says Samuel Asher Effron, in a recent article in the New York Times, there will be little interest in crowdfunding from firms like DCG, which can raise its money from the Big Boys.
When high growth companies are looking to raise money, it's not just for the money," he said. "They're also looking for validation, and they want it from venture funds or well-known angels. They won't get that from a crowdfunding offer."
The most DCG can raise through crowdfunding is $1 million, during a one-year period. Not enough to pay the electricity at DCG. Thank you again, SEC, for your protection.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.