Posts from crypto

One of the use cases that has eluded cryptocurrencies to date is “means of exchange” (something you would spend).

I wrote about this a couple years ago and showed this transaction in that blog post:

That was a payment I made to a caddie named Kris after he carried my bags one morning six years ago.

We played today and he was carrying a friend’s bag and I asked him if he still had that Bitcoin and he smiled and said “absolutely.”.

That made me feel good but the truth is nobody should be paying for anything, including caddying services, with something that can appreciate 123x. That’s just not rationale behavior.

Which is why stablecoins, cryptocurrencies which have price stability built in to them, are one of the important sectors in crypto right now.

There is the “dollar pegged” approach, like Tether (which may not actually be dollar pegged) and USDC (which is actually dollar pegged). One of the issuers of USDC is Coinbase, a USV portfolio company.

There is the Libra cryptocurrency, which USV is involved with as a Founding Member of the Libra Association. Libra will not be pegged to a specific fiat currency, but will have a reserve made up of many fiat currencies so it will have price stability.

And then there are stablecoins that are asset backed but not fiat backed like Dai.

Finally there are stablecoins that attempt to deliver price stability programmatically. I am not confident that approach will work.

I am confident that one way or another consumers will adopt cryptocurrencies that are price stabilized and when they do they will start transacting in them. And that will unlock a lot of utility that has so far been elusive.

Juan Benet, founder and CEO of our portfolio company Protocol Labs, developer of the IPFS and Filecoin protocols, gave this talk last fall.

I like Juan’s statement, about 10mins into this talk, that “what Bitcoin did to money, Web3 does to everything.” That is obviously a very big statement/ambition, but I agree with it.

Here is Juan’s talk:

Last year, during its annual “crypto week”, our portfolio company Cloudflare shipped an IPFS gateway. I wrote about that then.

This year, they have shipped an Ethereum gateway.

It is great to see a very large Internet infrastrcuture provider build and ship crypto gateways.

If you are a small developer looking to create decentralized applications, having a web-scale provider offering IPFS and Ethereum gateways is really helpful.

I expect to see Cloudflare continue to extend the number of crypto protocols they support with their gateways.

And that will be part of what needs to happen to get to a world of truly decentalized applications.

If you are interested in developing on the Ethereum protocol and want to understand how the Cloudflare gateway works, this blog post explains it well.

A new blockchain & cryptocurrency project, Libra, was announced today. Libra has been incubated by Facebook. USV will be one of the founding members of the governing body, the Libra Association. Libra is a stable, fiat-backed cryptocurrency that will launch inside some of the world’s largest consumer-facing applications. We believe Libra has the potential to be the catalyst that brings the entire cryptocurrency and cryptoasset market into the mainstream.

When USV invested in Coinbase in early 2013, our rationale was that digital currencies and digital assets (like Bitcoin and beyond) were a breakthrough technology, similar to TCP/IP, HTTP and SMTP. But we also knew that it would take significant investment in the surrounding infrastructure to make them useful for businesses and consumers, just like it did with the Web back in the 80s and 90s. At the time of that investment, we wrote:

“There is much that must be built on top of of these digital currencies to make them work well enough to support real business at scale”

This has proven to be true. If we look back at the past 10 years since the invention of Bitcoin, we have seen a lot of infrastructure built to support an increasing variety of use cases. But there is still a long way to go.

We think about the crypto sector as the intersection of Finance 2.0 (“Money Crypto”) and Web 3.0 (“Tech Crypto”), and what we have seen is that the “Money Crypto” use cases have been the earlier to materialize, especially “slow money” use cases (those that don’t require high throughput):

For consumer use cases (including both Finance 2.0 and Web 3.0 use cases), the biggest barrier to date, beyond technical scalability, has been the rollout of crypto wallets to mainstream consumers. As of today, there is still no mainstream web browser with crypto built-in, no mainstream phone with crypto built-in, and relatively few mainstream applications with crypto built-in. As that changes, crypto assets have the potential to move from being curiosities for enthusiasts to being default internet and financial infrastructure.

Once we have crypto-compatibility built-in to applications, browsers, and phones, many new behaviors and use cases will emerge. The financial system, in general, will become more accessible (smartphone adoption is outpacing bank account adoption globally). Payments can become faster, more reliable and less expensive. Magical new user experiences will be possible due to interoperability and reduced friction, the same way that the Web’s native interoperability unlocked countless new use cases and experiences. And, perhaps most importantly, we will open the door to self-sovereign digital identities (private keys) that are the underpinnings of user-controlled privacy and control of data.

So as we think about the potential drivers for mainstream crypto adoption, a simple, fully-collateralized, cryptocurrency used inside the world’s largest applications, touching hundreds of millions or billions of consumers, is perhaps the most promising one. It is our hope that Libra will serve as a major on-ramp to cryptocurrencies and cryptoassets, to the benefit of the entire ecosystem.

USV will be joining as a founding member of the Libra Association, the governing body that will manage both the Libra technology and the Libra Reserve. As one of the initial 20 members of the Association, we will have the opportunity to participate in design and policy choices that will shape the network. It is worth noting that Facebook will be just one equal member of the Association, which was an important factor in our decision to join.

This will be a large and complex undertaking, as there are many unresolved and challenging questions, involving the technology itself (security, privacy, path to decentralization), the regulatory environment, and the nature of the ongoing governance. In some ways, the initial Association resembles a constitutional convention, where the main goal is to draft the long-term governance mechanisms themselves.

To be clear, we view this as both an ecosystem investment and a financial investment. In addition to participating in the governance process at the Libra Association, USV plans to invest in the Libra Reserve, which will provide the stability for the currency. This is an unusual type of investment for us, but we have learned that investing in the crypto sector requires us to explore a variety of new investment structures.

We appreciate that Facebook invited USV to be an initial founding member of the Libra Association and we take our role in that seriously. We will advocate for those things that USV values most: openness, transparency, decentralization, and permissionless innovation. We think that those features will help accelerate adoption within the entire crypto ecosystem — including our many existing investments in the space — and also help Libra succeed in its goals.

This has also been posted on usv.com.

Given all of the discussion of SEC regulation of the crypto sector on this blog over the last week or two, I thought I’d post a video of a discussion of the topic at last month’s Token Summit in NYC.

As expected, the SEC sued USV’s portfolio company Kik this week. Here is Kik’s response to the news:

This part of Kik’s response explains that the SEC is stretching the interpretation of the Howey ruling (from almost a century ago) in its efforts to claim jurisdiction of crypto token regulation:

For the reasons set forth in our Wells Submission, the SEC’s complaint against Kik is based on a flawed legal theory.  Among other things, the complaint assumes, incorrectly, that any discussion of a potential increase in value of an asset is the same as offering or promising profits solely from the efforts of another; that having aligned incentives is the same as creating a ‘common enterprise’; and that any contributions by a seller or promoter are necessarily the “essential” managerial or entrepreneurial efforts required to create an investment contract. These legal assumptions stretch the Howey test well beyond its definition, and we do not believe they will withstand judicial scrutiny.

https://www.prnewswire.com/news-releases/kik-responds-to-sec-complaint-300862114.html

I believe that crypto networks are different than companies and that crypto tokens are different than securities. I look forward to seeing these issues debated in a court of law instead of the basement conference rooms in DC.

If you are interested in supporting Kik’s case, you can do so by contributing crypto tokens to DefendCrypto.org.

During the past week, I have traveled through airports using TSA Pre and Clear and plan to travel internationally soon using the Global Entry system. I have recently renewed my TSA Pre and Trusted Traveler accounts.

I am also in the process of renewing my NY State Drivers License and am going through the process of getting an “Enhanced” one.

Here is what one needs to do to get an Enhanced NYS Drivers License:

Enhanced

• is Federal REAL ID compliant
• costs an additional $30 on top of the regular transaction fees
• requires an office visit to prove your
  • identity- *if your name has changed bring in marriage certificate(s), divorce decree(s) or court order document(s)
  • NY State residency
  • U.S. citizenship
  • date of birth
  • Social Security status
• shows your full legal name (first, middle, last) as listed on your legal documents
• shows your residential address (where you live)
• has an American flag displayed on the document

And, because I am an investor in a friend’s bar and restaurant businesses, I am in the process of submitting a NY State Liquor License application which requires the following:

• a photocopy of BOTH your driver’s license and your passport
• a fingerprint ID card which is obtained at your local precinct
• two passport photos
• three months of recent bank statements

In each and every experience, I am doing much of the same work over and over again. Copies of passports and licenses. Bank statements and utility bills. Fingerprints (digital or ink-based). Retina scans. Social security cards. Birth certificates. Marriage licenses. Completing questions about bad behavior (or lack thereof). Etc. Etc.

It makes me want some sort of identity service in the cloud, that I control, not a third party, and not the government, that I could authenticate with using fingerprints, retina scans, or two/three factor logins, and then digitally “sign” all of these forms.

My fear is we will get there but it will be the government or Facebook or Google or Apple that builds this. It would be quite useful but also quite scary for a single entity to control all of that information for each and every one of us.

This Unchained Podcast with Patrick Gibbs of the law firm Cooley and Ted Livingston founder of the Kin cryptocurrency project is a great discussion of the Howey Test that the SEC has put forward as the framework through which to evaluate whether a crypto token is a security.

Here are links to some interesting parts of the discussion:

1/ Ted Livingston explains who Howey was and the details of that case.

2/ Patrick explains why Kin (and most crypto tokens as well) is not a security.

This is the kind of stuff that mostly interests law nerds, but it is very relevant to all developers who are building crypto tokens and putting them out into the market. So it is worth getting knowledgeable about this stuff.

And if you want to support this Kin case as it works its way through the court system and ends up creating a new precedent that could supersede Howey, you can do that here.

Over the last year, the SEC has been investigating a significant number of token offerings that took place in 2017. While some of those offerings were scams or worse, many of the ones that are being investigated by the SEC are serious projects, started by some of the top cryptographers and computer scientists in the world, and backed by the leading token funds and venture capital firms in the US and around the world.

Sadly, the SEC looks at crypto tokens and sees securities that they want to regulate as such. They cannot seem to understand that not all of these assets are securities, they cannot seem to understand that most are commodities, currencies, or utilities like frequent flyer miles. They cannot understand that crypto tokens are unlike any assets that have come before them and that crypto tokens need new regulatory structures. They cannot understand that their unwillingness to come up with new rules paired with their “regulate by enforcement” strategy is hurting the crypto sector, pushing it offshore, and is causing most of the new projects to raise capital outside of the US and/or put together legal structures that look like Frankenstein monsters.

I have seen this play out in multiple projects and also in the exchange sector, which I posted about over the weekend. For as long as I have been involved in the crypto sector, I have been advocating and advising that companies work with the SEC, cooperate with them, and educate them. But that has not worked. I am frustrated. So are many others. Even one of the SEC Commissioners has gone public with her frustrations.

One of the crypto projects that the SEC has been investigating, where I have had a front-row seat, is the Kin project that was birthed by USV’s portfolio company Kik, where I am on the Board.

Kin is a digital currency (not a security) that is in use in over 40 mobile apps now. Last month over 1mm users earned Kin in one of those mobile apps and over 300,000 users spent Kin in one of those mobile apps. Kin is one of the most used crypto currencies in the world.

And yet the SEC won’t agree to settle with Kin on reasonable terms. Instead they want to force Kin to become a security, which would decimate its appeal as a digital currency. Imagine that a user had to go to a securities brokerage firm like Schwab to purchase a token in order to be able to use Apple’s App Store. That is crazy and yet that is essentially what the SEC wants Kin and many other crypto projects to agree to do.

So today, Kin has launched DefendCrypto.org which is a crowdfunding effort to fight the SEC in court. Kin has contributed $5mm worth of BTC, ETH, and Kin to the effort. And others are contributing their crypto assets as well. You can do so here. I have contributed a number of my crypto tokens to the effort this morning.

Whatever funds are raised by DefendCrypto.org will be used by Kin to fight the SEC in court, to help secure a favorable ruling that could well set a precedent for the entire sector. Any funds that are left after this legal battle will be set aside for other similar legal efforts in the crypto sector.

It is my hope, and Kin’s hope, that DefendCrypto.org will be an inspiration for the many other important crypto projects that are silently battling with the SEC to come public and raise capital from the crypto sector for their fights.

The SEC is regulating by enforcement, not new rulemaking, and worse, they have taken a divide and conquer strategy. It is time for the crypto industry to come together and fight back. I hope that Kin’s efforts with DefendCrypto.org represent a watershed moment/movement that will pressure the SEC to think and act differently toward this important new sector.