This is a very exiting time in human history. And that’s because the technology that is likely to have the largest impact on the economy, on government and society has arrived. But it’s not autonomous vehicles or AI and biotechnology. It’s actually the technology behind cryptocurrencies like Bitcoin. It’s called the blockchain. This is the most important innovation in a generation it represents nothing short of the second era of the internet.
Let me explain what I mean by that. When you use the Internet today to send and move and share information you’re not actually sending an original unique thing. You’re sending a copy and you’re retaining an original. For most kinds of information that’s okay in fact for many kinds of information it’s a huge asset means I could send the same email to a thousand different people. It means I could host a website and anybody can access it. It means like the type of entry and the Wikipedian is available for all to see so it’s kind of like I have my own printing press for information and it’s had a very powerful democratizing effect on how we share an access and how we communicate.
Except when it comes to things that have value like state. Money being able to send a copy is actually a terrible idea . If I owe you 20 dollars for something that I send it to you, it’s very important that when you receive it, you know I don’t still have a copy. If I could copy that money and I could copy it over and over again then the money would be worthless.
It’s great to have a printing press for information, it’s not so great to have a printing press for assets or for money. This is something that cryptographers called the double spend problem. It’s been an issue for a very long time and because it’s been a difficult problem to solve. Even though the first era of the internet created tons of value a lot of it was captured asymmetrically by middlemens and intermediaries we still rely on for a whole bunch of important things.
These intermediaries are familiar to many: you have banks brokers and other financial intermediaries. But you also have governments and digital conglomerates and big social media companies like Facebook. These companies and intermediaries do a pretty good job but they have some specific limitations: there centralized which makes them vulnerable to attacks. Sending money overseas takes three to four days, costs ten percent on average. They exclude big parts of the population. There are about one and a half billion people in the world don’t have access to financial services. They capture data about us which is problematic, because it means we can’t use that data to organize our life we can’t monetize it, and it could be used against us in some way. So even though the Internet has created all this value, intermediaries still capture a disproportionate amount. And perhaps not a fair amount.
What if the internet were entering a second Era. From an internet of information to an internet of value. Pwered by blockchain and cryptocurrencies. And on this internet of value not just information like emails and PDFs and things like that, but assets: money, stocks, bonds, identities, votes could be moved and stored securely and peer-to-peer. And we’re trust was not established by third party immediately, but through a combination of collaboration consensus and clever code.
You have to ask yourself: how much would that kind of technology be worth? The internet by some estimates it’s worth trillions of dollars. Except the Internet as we know it is a free utility that was built by a combination of governments corporations volunteers academia. Unfortunately it wasn’t really monetizable in traditional sense. Lots of companies built on top of it, created lots of value, but the underlying protocols you couldn’t own. Blockchain is different! As early stakeholder in this network you can participate in the growth of the second ear of the internet by owning Bitcoin, by owning Ether, by owning some of the other foundational protocol tokens that make up this economy. If the first area of the internet is worth trillions of dollars what’s the second area going to be worth? In all likelihood it’s going to be worth more because the first era of the internet takled information based industries: media, publishing,.. The second era of the Internet is tackling value based idustries like financial services which are much much larger.
We hear a lot about the asset value that we’ve seen in this marketplace going from twenty billion dollars this time last year, to around three hundred billion today. People ask themselves quite rightly: is this a bubble? And to be sure, there are certain assets which are massively overpriced, and there are others who are almost certainly going to fail. But looked at another way this is the early innings of one of the biggest investment opportunities in a generation.
Some of the leaders of the old paradigm have a slightly different view. In December of last year Jamie Dimon said that bitcoin was fraud. This is something that’s very common: leaders of old paradigms have a hard time embracing the new, they treated with derision, with dismissal sometimes even with anger. But usually history is not on their side: In January of this year mr. Dimon walked his statement back he said okay, I’m sorry, good point, it is not fraud, but please stop asking me about Bitcoin, I just can’t take it.
This is the beginning of something to last and it’s going to impact every single industry. Take financial services so the industry. It is a complicated one, that performs many different roles in the economy but in the end it really does eight essential things: gives people way to store value, move value, prove who they are, to access credit, to exchange financial assets, to seek out risk capital, to start a business, to manage and mitigate risk, and to account for organized information inside of the company. Every single one of these different functions of the financial industry is going to be transformed.
What’s amazing about blockchain with this new operating system for the global economy we’re also seeing the emergence of the new asset class which has at least seven different types. I don’t want to say this is exhaustive but this is what we’ve seen so far. I’m going to spend most of my talk walking through these seven different types and explaining why they matter.
The first one the one we know very well: it’s cryptocurrency Bitcoin. Bitcoin was designed to be cached for the internet a way to move value peer-to-peer without an intermediary in a trustless manner. What was amazing about Bitcoin is that it worked. It worked so well that it’s set off this spark which is caught on like wildfire and captured the imagination of people in every single industry. When we wrote the book of the book blockchain revolution bitcoins value was around seven billion dollars. Today it hovers somewhere between 100 and 150 billion dollars and bitcoin has become a lot of things: it’s become the most secure payment network in the world, one of the largest computers in the world, it’s also assistant where billions of dollars of value is store every single day that’s used by tens of millions of people and with the invention of new scaling techniques and solutions, like the Lightning Network, Bitcoin could ultimately fulfill the promise of its creator and become not only money in the sense of a store of value and money in the sense of global payment system. But there are other cryptocurrencies as well, Monero, Z Cash, Bitcoin Cash, Dash. Now what’s interesting about certain ones of these is that they focus on one specific implementation in this case it’s privacy they might think well why would you need privacy and transactions, well obviously there are lots of reasons and there’s applications for this technology even beyond for instance. So for example JP Morgan’s chlorin blockchain uses the underlying technology of Z cash called zero knowledge proof in a wide variety of proofs of concept of different assets. Because if you’re buying a share in a company and you’re trying to amass a position so you can take it over, it’s important nobody knows who you are. Is this cryptocurrency phenomenon a risk or an opportunity for banks? The first time ever JPMorgan and Bank of America said either annual risk assessment that cryptocurrencies could potentially disintermediate big parts of the organization. But on the other hand it’s also a brand a massive concert it be a big opportunity. So Goldman Sachs is the largest investor in a company called Circle which announced recently the acquisition of a cryptocurrency exchange of colognian so Goldman Sachs has participated in directly in the cryptocurrency building the second category are platforms so the one that most of you would be familiar with its ethereal who’s heard of the theory of just raise your head yeah so just put it right so people in the media say atheria that’s going to take over Bitcoin the theorem is the new Bitcoin that is a fundamentally ridiculous thing to say because they do very very different things Bitcoin was designed to be secure medium of exchange internet etherium is a general purpose platform that allows you to build what’s called decentralized applications smart contracts so smart contract basically is business logic written in code and condemning what a typical business agreement does of a guaranteed execution enforcement and payments where you don’t need intermediaries like banks motorsports etc to enforce the terms and aetherium has also become the proto investment bank in essence for this entire industry last year we heard six billion dollars and I see no activity happen in the blockchain space somewhere around half of that happened on the etherium network using a standard called year since 2001 dreads of new applications new companies new projects are built on atheria which gives a very powerful network of facts and you can think of aetherium the network kind of like the grip of the city of syrup and the application that runs on the network is kind of like the car ether the token is the fuel or gas in crypto language that powers the application along the grid so the more applications that get built the more users they drive more transaction volumes they transaction time they create more than like Tokyo is known as a supply of quantity and greater rate of growth is known and fixed over time so as a result you think all these applications will be built on aetherium then demand tribute there obviously is going to go up but ether is not the only one since it came out dozens of new protocols platforms have emerged that tried to challenge it with certain ways these so-called third-generation block chains basically try to solve for a few different things right the first ones scalability right now if you wanted to run the Nasdaq on the etherium network you couldn’t do it there’s not enough network capacity to manage that many transactions that doesn’t mean it won’t happen in 1993 you couldn’t run Netflix on the Internet you couldn’t even download a webpage but of course technology self improves and eventually it was able to do that still these new platforms are focused on scalability interoperability we can’t have hundreds of block chains that can’t talk to each other otherwise what’s the point so that’s very important customers using smart contract capability being multi-asset and multi industry it functions and interestingly enough be public but with the ability to do private implementations there are lots of legitimate enterprise and non enterprise use cases where a private off chain or side chain transaction that makes sense so if you look at the market today roughly a third of the value of all crypto assets fit into this category all platforms in the vast majority of Isis kills that happened before so called utility tokens and there are lots of very legitimate use cases for utility tokens however I’m very skeptical that all of the tokens that were launched last year were utility tokens in fact I think many of the projects that launched had no legitimate use case before their token which is actually not necessarily a bad thing but what they should have done is just issued on the blockchain and that leads me to the next network before I do that this uncertainty that’s been created in the regulatory is creating a ship from I suppose to other kinds of tokens now last year at the peak of the crates we saw countries in China and Korea and elsewhere I’m really clamping down on this since that in Korea and have loosened up quite a bit and we’ve actually seen a lot of progress from regulators in the United States and elsewhere still what happens with technology is that the technology braces happen and when the technology races ahead the regulations like mine and that gap creates uncertainty and that uncertainty creates volatility where people don’t know what the rules of the road are and they’re trying their best to figure it out so we need to create a system where the rules and the technology if not in harmony are at least generally at second and this leads me to the next category which are security tokens so I think the total value of actual security tokens is making the tens of millions of dollars there were a few examples of projects that did this last year but I think that this category is ultimately going to meet and eclipse the value of all other crypto assets because it’s worth taking a step back and putting it into perspective the value of the crypto asset market today is 300 million dollars the value of the global equity market is a hundred and ten trillion dollars the notional value of derivatives outstanding is over six hundred and fifty trillion dollars and there’s no reason why other kinds of assets shouldn’t be native digital assets that clear settled moves store manage across block chains and this is particularly true where there is no underlying physical asset so a stock or a bond stock is really just a contract that entitles you to a fractional share of a common enterprise and a share of that company’s earnings or cashflow a form of dividends or what happened so all events and contracts of all of that business logic will be collapsed to a toga you don’t need clearing houses and exchanges and broke cages and agents and all the other third parties that go into moving shares between people you know the value mission the time it takes to make a stock transaction in most markets is still T plus 2 or T plus 3 in two or three days but it should be two or three seconds so I think that the next couple of years it’s not unreasonable to assume that trillions of dollars of new securities will be listed on the blockchain beyond that our tokens that are backed by physical assets in the real world now these are a bit more complicated as you can’t just put it all on the blockchain at the end someone still needs to take physical delivery of an asset like say gold or silver oil and natural gas receiver or any other commodity but we can take the clearing and settling in the processing and turn it into a peer-to-peer transaction now what’s really exciting about natural asset owners established markets like gold and oil but what I call frontier markets like air or water or cargo so there’s a theory of economics called the tragedy of the Commons where there’s an asset that sits in the Commons that nobody comes in and all the people in the comments use it and ultimately exploit it and the outcome of that are negative externalities that are borne by society so we all experience it a great example this is carbon right there’s carbon in the ground whose apartment near who burn it we use it and the cost is informed by the company that burns that it’s borne by the planet it’s borne by society could we create marketplaces for carbon for example where it’s not just governments and big companies that get to benefit from reducing the footprint could it also be that individuals get to benefit as well so you go to the store and you make a purchase and it’s carbon neutral by candy store world war two as a loyalty points team with a carbon neutral predator so all of a sudden we get in how individuals to get financially compensated for reducing their impact on the planet back is that I think could make an enormous difference my favorite category are crypto collectibles so who here has a crypto kitty raise your hand that’s pretty good actually [Music] so crypto kitties it’s amazing basing distributive application one of the most successful ever period where you can play that we can have a digital facsimile for a physical asset like gold we can have a digital effects only for physical asset like art or diamonds or a bottle of wine which each one is unique and we can use the blockchain to track individual assets and if you needed any more validation I’d recent bartlett’s invested 12 million dollars in crypto kiddies at last week the final category are crypto fiat currencies and stable coins so we heard a little bit about crypto yeah purchase a unique collectible digital asset that is not fungible and not replicable so there’s only be one version of the crypto Kitty and at the peak of the market mania in December a crypto Kitty sold for its equivalent ether value over $100,000 and peaked in January at around 250,000 dollars and this became very personal for me what a good friend of mine told me that keepers is basically the argument goes like this bitcoin is too volatile to be used as a medium of this gauge merchants won’t accepted landlords won’t acceptance so we need something that’s more stable there are two ways of doing this one is for a government to basically issue its own currency on the blockchain created crypto fee i another is via this system called a stable point which basically make tries to manage the price within a certain band because it’s pegged to an ass in the real world like gold or dollars or through sort of a dynamic supply system they end up skating very serious with his girlfriend and I asked him how serious he said what we’re thinking of breeding our crypto kiddies together to create a crypto baby so I guess that’s a new spin on let’s get a dog right so Elon Musk says silly and fun things are important and the same thing is true for this what crypto kitties demonstrates that you can actually have unique digital assets and there are tons of different kinds of unique digital assets not just crypto kiddies it could be everything right at stake the coins have become increasingly popular but they’ve also attracted a lot of heat it’s sort of odd like if you want to have the equivalent of a fiat currency why would you trust a small corporation to issue it why wouldn’t you just trust the government you may trust Bitcoin more than you trust VI but your point you trust yet more than some little statement claim that’s being issued by the company right so a lot of people figured well it’s going to be the ECB or it’s gonna be the Bank of England or it’s going to be the Fed that art music film land or assets and virtual worlds which is already a huge established market especially in gaming and even potentially you could ICO an individual you could do a Kim Kardashian ICO and sell collectibles that represent parts of her family fortune we’ll see how far that dance I don’t know if there’s any buyers and rumor but there’s a huge huge opportunity for crypto collectibles and then the other thing is that in the same shoes that crypto fiat currency wrong sorry to disappoint the first crypto fiat currency if you want to call it that is this thing called a petrol in Venezuela now the petrol has a few things that are going against it it says that it’s backed by an oil in the ground there’s no evidence of that they say it’s a centralized there’s no evidence of that either and there are lots of reasons to believe that it’s a scheme by the all of arts politicians to enrich themselves but what’s interesting is that Venezuela Iran Russia these are the countries that have talked about doing tripped up fiat currency what do they all have in common well they all have a lot of oil they all are not great standing with the United States and they’re all suffering from sanctions so the Venezuelan government sees the crypto fiat petrol as a way to circumvent sanctions I don’t know if it’s going to succeed I would probably bet against it I certainly would encourage anybody to put near it but what it demonstrates is that this can actually work and if anything it’s a rallying cry for more responsible governments parts of the world like Switzerland and Europe and the United States to get on top of this so that makes you can leave and yeah I always put a photo of Tom to my dad especially in Europe because it’s a really like you know your favorite audience so yeah unsurprisingly Trump banded which shows that even in the world of crypto old laws why so that’s seven categories of crypto assets and crypto assets are one component of the blockchain revolution there are lots of other use cases that don’t involve assets but the technology that’s driving these assets I think is the most exciting part so I want to talk briefly about regulations so just to be clear regulators are not the enemy regulation is good but the regulation needs to be done correctly you know we need to stop fraudsters and criminals from issue in my SEOs and ripping people off but on the other hand we can’t go too far as to stop the innovation from spreading it’ll give you good example so in 19th century England the government of London introduced these things called the red flag laws and the red flag laws basically said that if you wanted to operate a motor vehicle what they call then a horseless carriage at the time you needed three people a driver spotter and a man walking in front of the are waving a red flag which makes you wonder is it the point of car so that you have freedom an autonomy and you can go anywhere kind of defeats the purpose of there’s some man in a top hat waving a red flag refined so their logic was basically that you got horses and pedestrians people who don’t know what this thing is you need to alert them of this new oncoming contraption and those laws were on the books for decades and some say that it’s the reason why in the UK ended up seeing leadership in automobiles to the United States is because of the unintended consequences of regulations so regulators need to think very hard about this which is how I get to this welcome to Sunday trip though Valley so I’ve been here for three days I’m thinking of moving here it’s terrific I’m not just saying that because older gave me a cake last night I’m saying that because this is an interesting petri dish of innovation that’s that’s happening in Switzerland you might originally think that well there’s a bit of regulatory arbitrage happening here that the reason that companies and projects of domicile is because of a more favorable treatment and that’s true but what’s happened over the past four years is actually quite remarkable so the crypto Valley Association has over 650 member companies in the past two years over 3,000 very good jobs have been created adjustment in cryptocurrency and blockchain industry during the lakeside partners and at least a thousand of them are in zoo a city with 20,000 people which basically means that if you’re having a coffee at a coffee shop you’ve got a 5% chance of sitting next to some of the worst of the cities which is kind of amazing so with good regulation smart regulations can create the conditions to actually build real wealth and real value and it’s important because there’s lots of different businesses here that blockchain can transform everything from financial services to manufacturing sherry economy to the energy industry and everything in between and I wish I could go into more detail but we’re running out of time so there’s lots of reasons why this technology is important ways in which it could change the world there are also a lot of reasons why that might not reach its potential so many that in the first edition of blockchain revolution we dedicated a whole chapter to it said show scoffs reasons that blockchain might fail and there a lot of reasons can the technology scale how will it be government will government’s react positively or negatively how will incumbents treat this new technology will they embrace it will make crushed implement co-opted is watching a job killer and of course will distributed autonomous organizations gain sentence and enslave humanity and creates kinda which you know is a possibility at least I just as much the Terminator was.