Barry Silbert, founder and CEO of Digital Currency Group, which has invested in 130 crypto ventures worldwide, describes his company, its strategy for investing in the crypto space, and how his perspective on the development of the space has changed since he first launched in 2014. He also explains why he’s not a big believer in decentralization, like many others in the space, why he’s not bullish on ICOs, and why he also is a bigger proponent of Ethereum Classic than Ethereum. We also touch on regulation and how he thinks that will affect the development of crypto, why Grayscale launched an investment vehicle for a little-known cryptocurrency, and why he’s excited about Decentraland. Plus, he reveals what Wall Street says publicly about crypto vs. what it says privately and reflects on his role in the New York Agreement — a failed attempt to bridge a divide in the Bitcoin community.

Thank you to our sponsors!

Altlending: https://altlending.com

Blockdaemon: http://blockdaemon.com/unchained/

If you’re interested in sponsoring Unchained or Unconfirmed, email Raelene at laurashinpodcast@gmail.com.

Episode Links:

DCG: https://dcg.co

Barry Silbert: https://twitter.com/barrysilbert

Grayscale: https://grayscale.co

Genesis: https://genesistrading.com

CoinDesk: https://www.coindesk.com

New York state Bitlicense: https://www.dfs.ny.gov/legal/regulations/bitlicense_reg_framework.htm

Decentraland: https://decentraland.org

GBTC: https://grayscale.co/bitcoin-investment-trust/

Radar Relay: https://www.radarrelay.com

The Unchained interview with 0x, the decentralized exchange with which Radar Relay works: http://unchainedpodcast.co/will-warren-of-0x-on-why-decentralized-exchanges-are-the-future

Blog post announcing the New York Agreement: https://medium.com/@DCGco/bitcoin-scaling-agreement-at-consensus-2017-133521fe9a77

Unchained podcast on the failure of the compromise: http://unchainedpodcast.co/what-bitcoins-history-says-about-its-future

Transcript:

Laura Shin:

Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin. If you’ve been enjoying Unchained, hop onto iTunes to give us a top rating or review. That helps other listeners find the show.

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Laura Shin:

My guest today is Barry Silbert, founder and CEO of digital currency group. Welcome, Barry.

Barry Silbert:

Hi, Laura.

Laura Shin:

Something I find so interesting about you is that even though you have a more traditional financial background than other people in the crypto space, you previously played a role as a sort of renegade, or at least somebody who found and was able to capitalize on a new niche, so in that way, it’s not like that dissimilar from what you’re doing here in crypto. For listeners who don’t know your pre-Bitcoin background, can you describe what you used to do?

Barry Silbert:

Yes. So after college, I graduated from Emory in ’98. I became an investment banker and worked on a lot of bankruptcy and re-structuring deals during the last internet bubble and bust, and eventually decided I wanted to itch that entrepreneurial scratch that I had, and I left banking to start a company called Second Market, which, you know, was a really interesting time to be doing a FinTech startup because this was…actually, it would have been kind of 2004 when I did it. Starting a company wasn’t all the rage, and there wasn’t a whole lot of money out there, and you know, raised a few hundred thousand dollars and started a company that basically we sought out to build a stock market for private companies.

At the time, the only way that founders and employees and investors could get liquidity was through an IPO or an M&A exit, and I thought that that was just totally crazy. You worked 10 years of your life, and you still, you know, were making 50 thousand dollars a year, and so yes, I launched Second Market, and I think we were successful in creating this whole new path of liquidity that’s become pretty common now.

Laura Shin:

Yeah, and that was mostly for companies that were not yet IPOed, which is a much more common trend nowadays, right?

Barry Silbert:

Yeah. Well, we were lucky because Facebook came along, and Facebook was one of these situations where they had such success, and they had such a large employee base that got stock that had just a lot of money tied up in the stock, and a lot of investors were on the buy end, and so we were successful in creating a market for the Facebook stock, which definitely put Second Market on the map, and then that helped made it…it made it like socially acceptable for a company to allow their employees to get liquidity, and it made it possible for investors to get involved in these companies before an IPO, and so we were really active with Facebook and Twitter and LinkedIn and a bunch of other companies before they went IPO.

Laura Shin:

And so you have this successful company, and then you left it all to get into Bitcoin. How did you learn about Bitcoin, first of all?

Barry Silbert:

You know, everybody’s Bitcoin journey is…I find it so interesting, and for me, you know, being like a former banker and then I guess a FinTech entrepreneur, I didn’t first get excited about Bitcoin from a technology perspective. For me, it was in 2011, I heard about it for the first time, and it might have been around one of those first articles that came out about Silk Road. I think it was around that time, and I had just read a book by Charles Hugh Smith entitled An Unconventional Guide to Investing in Troubled Times, and essentially, and this was kind of post credit crisis, so this is 2011.

At the time, I still thought that we were going to have another leg down in the market. I thought that we weren’t through the worst, and so I was reading this book, and it was talking about places where you could put money that should perform well in periods of dislocation, and if I remember correctly, the conclusion of the book was, you know, it was like buy gold, it was like invest in yourself, buy farmland and things like that, so I was really…I guess I was very open to the idea that there were going to be investments out there that were not going to be correlated, that would perform well kind of in the financial apocalypse, and that’s when I heard about Bitcoin, and so like most people, I spent easily six months being a complete skeptic, but I kept on coming back to it.

I kept on…I had all these, you know, the typical it’s not going to work because of, you know, government regulation or the code’s going to be flawed, or whatever the case may be, I had all of these objections and all those reservations, and eventually, I came to the conclusion, this would have been early 2012, that Bitcoin really did have the potential to save the world, and if I didn’t have the cojones, as they say, to do something, I would regret it the rest of my life if I didn’t at least put some money into it, and so I started buying Bitcoin in 2012.

I remember the first Bitcoin I bought, you know, of course it was ______ 5:44 Mt. Gox, and I think it took me like 30 days to figure out how to Mt. Gox, and I opened up like a dwolla account, and I tried to wire money from my bank, which got rejected. Eventually, I got money there, and so I started buying Bitcoin in 2012 below 10 bucks, and I put, you know, enough money into it to matter, and you know, the price went from like 10 to 15, and then it fell back down to 5, and so early on, for me, it was really all about the digital gold’s use case, and so that was my first foray into Bitcoin, is you know, just buying it as purely a speculative investment.

Laura Shin:

And then you’re saying that you felt like, you know, you needed to show that you had the cojones to get involved, so how did you then go from just buying it…by the way, that story about dwolla and Mt. Cox, like so many of the Bitcoin entrepreneurs have told me that story. Did you lose the money that you put into Mt. Cox?

Barry Silbert:

No, no. I was lucky enough or smart enough never to keep anything at Mt. Cox.

Laura Shin:

Oh, I see. So you put it into a hardware wallet?

Barry Silbert:

Yeah. Well, eventually, I believe I moved it initially…no, I had a brain wallet. If you remember those, it was basically it was a 15-words. It was actually called BrainWallet.org or .com or something, and so I moved it off of Mt. Cox into a brain wallet. It was some of the initial folks that I became friendly with in the space were…you know, it was Erik Voorhees and Charlie Shrem and Peter Vessenes and Ira Miller, folks like that, and so they helped me kind of set up a wallet system, and eventually blockchain, I guess, .com came out, Peter Smith’s company, and eventually moved it onto that. So I was way clear of Mt. Cox, fortunately, when that happened.

Laura Shin:

Oh, lucky for you. So to finish actually where that question was going, how did you shift from just buying Bitcoin to launching Digital Currency Group?

Barry Silbert:

So I think like most people, you know, you go through like these…there’s like these five phases of kind of Bitcoin acceptance. You start off as being dismissive, like this is stupid or not going to work, and then you get to being, well, you know, maybe it might work, but I’m skeptical, and then you get to the point of being intellectually curious, where you start reading and listening to podcasts and things like that, and then you get to the point where you’re ready to put some money to work, and so that’s where I was.

The kind of last phase is evangelism, which I clearly fell into eventually, but so I was buying Bitcoin in 2012, and the price went from like 10 to I think it was like 50 or 60 or 70, and I thought I was super smart, so I started like using my Bitcoin everywhere I could, and I remember buying gift cards through a gift, buying like thousands of dollars of diapers from Amazon when the price of Bitcoin was like 50 bucks.

Laura Shin:

Wait, like using the gift card, or…

Barry Silbert:

Well, you would like, you know, use the Bitcoin to buy the Amazon gift card, and then you would use the gift card to buy things, because I think in the early days, we were all eager to help accelerate the adoption, the usage of Bitcoin, so we were using it everywhere we could, and so I have not gone back to calculate how expensive those diapers actually were.

Laura Shin:

I urge you not to do that.

Barry Silbert:

But anyways, so I was…you know, price went up, and I was at the point where, like anytime you make ______ 9:23 on an investment in a short period of time, you know, it’s smart to take money off the table, but I was still very, very excited about the potential for Bitcoin. I think at that point in time, I started to appreciate the potential for, you know, not just cross-border payments, but you know, like ledger, the use cases of blockchain, and it was around that time that the initial kind of class or cohort of companies started getting formed by entrepreneurs that were actually backable, because prior to that, you know, it was a lot of people just running around, you know, not even forming entities, just kind of rolling out products, and so I decided that instead of selling the Bitcoin, I would actually use the Bitcoin to invest in these companies.

And so at the time, so my first investment was in CoinLab, which was Peter Vessenes’s company, and so CoinLab was the first company that Tim Draper invested into, and I was very worried about reputational risk, because I was running Second Market, and I knew that, you know, having Tim Draper being the first guy to write a check into the company, if the whole Bitcoin thing imploded, it would be Tim’s name that got sullied, not mine. So that was the first check I wrote, and then the next one was probably BitPay, that Tony and Stephen were living in separate cities. They had not yet quit their day jobs to go full-time at BitPay, so put some money into BitPay, and then probably Coinbase was next. That was when Brian was coming out of YC, and so that was kind of the next phase.

It was like okay, moving from Bitcoin into investing into the companies, and the idea was, one, this infrastructure’s really important, like in order for Bitcoin to be successful, you have to have the wallets and the exchanges, and you have to have the merchant processors, but also, it was a way for me to diversify out of Bitcoin but stay exposed, and the thinking at the time was, you know, if Bitcoin ends up not being the winner, and at the time, I don’t think there was really anything else, if Bitcoin ended up not being the winner, I was confident that Brian and Tony and Stephen and others would re-orient their platform to whatever the winning currency is, and so with angle investing, which I had been doing a lot up to that point. I’d probably made, in non-Bitcoin deals, I’d probably made 20 or so angel investments, I’d just started seeing a lot of great companies getting formed in 2012, 2013 and just started doing a lot of investing, and eventually, it got to the point at Second Market where if you talked to any of my employees at the time, I wouldn’t shut up about Bitcoin.

I mean, you know, it just has that impact on people, and eventually, I was having some board meetings. My board at the time was Chamath Palihapitiya from Social Capital, and it was Lawrence Lenihan from FirstMark, and Scott Murphy, former Congressman, and you know, we were having a dinner, and I was like, guys, like Bitcoin, it’s something that I’m really passionate about, and I was explaining it to them, and I said we should go buy a bunch of it, and they said you’re crazy, and then the next board meeting happened, and I was like, guys, we’ve got to do something, and we decided that we would use the Second Market platform to raise money for a fund that we would launch, and that’s what became the Bitcoin Investment Trust in 2013.

So we launched this, you know, ETF-like vehicle, but it was a private vehicle, set up a Bitcoin trading desk to buy all the Bitcoin that was coming into the fund. We at Second Market, we bought 3 million dollars of Bitcoin, I think the price was about 100 bucks at the time, so we ended up making a couple hundred million dollars off of that investment, and it kind of got the point in 2013, 2014 where, you know, for me, as much as I loved Second Market, you know, my first baby, I felt like we had accomplished mostly what I had set out to do, and I decided that I wanted to dedicate the rest of my career towards this, the space, and got to the point where I was ready to step down running Second Market.

We were going to spin out Second Market, and then we were…the plan was we were going to combine all of my angel investments with the Bitcoin Investment Trust business, the Bitcoin trading business, and it was so coincidental, Nasdaq called and said, hey, we would like to buy Second Market. So we ended up selling Second Market, and then basically rolled it all up into what became Digital Currency Group in 2015.

Laura Shin:

Wow. Yeah. That’s quite the story. I want to ask, just out of curiosity, because this is like, you know, what you were…the time era that you’re talking about was quite a different period in crypto’s history.

Barry Silbert:

It feels like it was like 50 years in real person life.

Laura Shin:

Right. Right. So I’m just curious to know, back then, how did you think this space would develop, and how does that compare to what you think now?

Barry Silbert:

I would say things have happened in some cases, in some respects exactly as I thought that they would, meaning I knew that we would go through a period of time where we would have, you know, a bunch of companies getting started, a bunch of VC money coming in to support those companies, that we’d get infrastructure built, we would have a group of investors come in that were more risk-taking type investors that would propel the asset class forward, and I knew that eventually Wall Street was going to come, and I knew that eventually Wall Street was going to see the opportunity to trade it, to create products around it.

What I didn’t see, what I didn’t appreciate in kind of the 2012, 2013 time frame, and frankly, I don’t think most people did, was the potential to utilize…I mean, the term blockchain wasn’t even used, and so to use the blockchain for something other than recording the value or kind of ownership of Bitcoin, it wasn’t really something that I spent a lot of time thinking about. It was really more about, okay, how can we use this digital gold as a way to facilitate cross border payments? How can we use it as a way to, you know, disseminate the credit card companies?

And so when the Ethereum paper came out, I didn’t really embrace it, didn’t really get it. To a certain extent, still don’t really get it, and so I think from an investing perspective, things have played out exactly as I thought that they would, but from a utility perspective beyond speculative investment, I’m constantly surprised about what’s happening and what’s being attempted.

Laura Shin:

Oh, when you say that…you also said from a utility perspective, meaning what people are using it for, or…

Barry Silbert:

What people think it could be used for. You know, if you kind of look at the landscape today, there’s really not a lot of traction for any product for any use case beyond speculative investment, and there’s nothing wrong with that, but we went through a period of time in 2015, 2016 where blockchain was all the rage and enterprise blockchain was all the rage, and blockchain was going to disintermediate Uber and it was going to create new ways to, you know, track provenance and supply chain, and it was transform trade finance, and it was going to turn upside down clearing and settlements on Wall Street, and if you kind of look around the landscape today, none of that’s really happened yet, and not to suggest that it won’t happen, but I didn’t…in 2012, 2013, I didn’t expect that this technology would be used for those types of things, and where we sit today in 2018, I still don’t see it being used yet for those types of things, but certainly, I expect it will and I hope it will, especially given that we’ve made investments in many, many companies looking to do that.

Laura Shin:

Yeah. I mean, I think there are some. They’re not like widely used, and I don’t think they’re really revolutionary, but like there was the lettuce announcement with Walmart, and then I guess Maersk is launching this joint venture on trade finance, and…or not trade finance, but supply chain. Yeah.

Barry Silbert:

Yeah, I think a lot of…supply chain. Yeah. I think a lot of those applications, you know, one, most of them are being built on private block chains. Most of them could be…you could just utilize a shared database, because a lot of where those efforts have been successful is just convening all the right stakeholders to get them to agree on some type of kind of standard or information sharing, and I think that the real, true innovation is really going to be…it’s going to be done on these kind of public permission-less blockchains, and none of those, as far as I’ve seen, are being done on any of those types of blockchains.

Laura Shin:

Yeah. No, I agree. I agree all the like provenance stuff and whatever is really somewhat boring and not revolutionary, so let’s not talk about it more, but let’s…I’m going to give you the floor. What is Digital Currency Group?

Barry Silbert:

So Digital Currency Group is a company, and I’ll reiterate that. We’re not a fund, we’re a company that’s in the business of investing in companies, in incubating and building companies, in buying companies, and investing in digital assets. When I put the whole thing together from the pieces, you know, from my early Bitcoin investing days and angel investing days, in the Second Market days, I decided to set it up as a company to give us total flexibility so we can do really anything we want, you know, meaning a venture fund does certain things, a private equity fund does certain things, a hedge fund does certain things.

As a company, we can do anything, which is great. I set it up as a company so that we would have permanent capital, so I don’t have to worry about going to raise a new fund every three years. I get to make super, super long-term bets on people and ideas and tokens and digital currencies, and it also gives us the ability to one day go public, and so the companies that I looked at and look at as businesses that I would like to emulate would be SoftBank and Berkshire Hathaway and Naspers and companies like that, companies that I think have done a really good job being very long-term focused, being patient capital, and I think what’s unique about DCG is the network and the breadth of what we’ve created in just one industry. The ability to connect all the dots I think is super valuable for us, and I think it’s super valuable for all of the pieces of DCG, so what are the pieces?

So we have essentially three parts to our company. We have a venture investing piece. We invest typically at the seed stage. We like to be the first check into a company. We have invested now in 130, or a little bit more than 130 companies in 30 countries, making us the most active investor in this space. We invest across the entire spectrum of use cases, and so we’ve invested in 20 exchanges. We’ve invested in half a dozen, you know, digital rights and identity businesses. We’ve invested in companies doing enterprise blockchain. We’ve invested in businesses that are working on stablecoins and things like that, so that’s the first part, and that group of companies includes by and large all the companies that have gone on to, I think, have had success so far and have created a bunch of value, so it’s a really, really great group of entrepreneurs, great group of companies.

The second part of our business is we invest directly into digital currencies. We are not very excited about ICOs and don’t really invest in tokens by and large. Instead of investing in a lot of different things, we make a few very, very large investments and try to be a supportive, active investor in these tokens, and so instead of just, you know, writing a check and hoping that the community grows and the utility increases and awareness grows, we try to get involved and be helpful, and so today, there’s really only five that we have made a large investment into.

It’s Bitcoin, Ethereum classic, Zcash, Decentraland, and Horizon, which used to be called ZenCash, so that’s the second part of our business, and the third part of our business are companies that we own, so we own three companies currently. We own Genesis Trading, which also has Genesis Capital, which is a trading and a lending business. We own Grayscale Investments, which is the Bitcoin Investment Trust fund was kind of the flagship fund of the Grayscale Investment business. Grayscale’s the largest asset ______ 22:50 in the country, world probably for digital currency, but one and a half billion in assets and in management, and then we own CoinDesk, the media and the events business.

So, you know, scale-wise, size-wise, kind of last quarter’s end had about half a billion in assets on our balance sheet, and we’ll do probably a hundred million dollars of revenue this year, operating revenue off of our subsidiaries.

Laura Shin:

So I want to ask you about your strategy for how you choose, you know, the companies you invest in and also the different companies that you have here as subsidiaries or parts of DCG. The industry in general is always like espousing these ideals of decentralization, but your vision for DCG to be like in this model of Berkshire Hathaway, and then also even just when I listen to the areas that you’ve invested in, it doesn’t feel like decentralization is a big theme. Is that…what are your thoughts on that?

Barry Silbert:

I would say I think that that’s a pretty accurate read. I’m not necessarily…I’m not much of a believer in the idea that every business model or every concept is better of being decentralized, and you know, the early days of Ethereum, a lot of people running around talking about we can now finally disintermediate Uber or disintermediate Airbnb, disintermediate Twitter, and one, I didn’t really, then or now, see why those business models should be disintermediated. I think, one, I think it’d be hard to do, but two, just from a trust perspective, I trust that when I order a car from Uber, it’s going to show up. I trust that when I make a payment, my credit card information’s not going to get stolen, and so I think a lot of the business models that have been attempted, we’ve not really been very big believers from an investment perspective because we didn’t really see the problem that they were trying to solve.

I do think, however, that when it comes to money, when it comes to our financial system, when it comes to payments, when it comes to cross-border, you know, remittance and money flows, that entire space is right for disintermediation, and not necessarily decentralization, but disintermediation, eliminating all the middle men, all the friction points, all the unnecessary costs and all the opacity that exists. So I think a lot of our investments have been geared towards, okay, how do we…you know, if we’re going to be building a new financial system, what are the businesses, what are the pieces, what’s the infrastructure we have to invest in to make that possible, and so that, you know, that would be custody solutions, and that would be trading software, and that would be exchanges and wallets and things like that, less so…and while we have made a few investments in decentralized exchanges, it’s less so about, you know, disintermediating or, you know, decentralizing the entire exchange base.

Laura Shin:

And earlier, you did say you were very interested in permissionless innovation, and so this is like a bit of a nuance, but how does that square up, because a lot of these…you know, in fact, actually, you do invest in a lot of enterprise companies, so…

Barry Silbert:

Yeah. I think that the permissionless innovation, well, where I think innovation’s going to happen is going to be, you know, in the context and the construct of somebody looking at a process, looking outside in without having to worry about incumbents or inertia or anything and creating a new business model, and so I think the whole capital formation space is an area where we’re going to…we are seeing, obviously, some real innovation, and while I’m not a big believer in ICOs, by and large, I do think that the ability to create new forms of economic instruments that enable investors to participate in the growth of an idea, concept, and business, I think that that’s made possible by something like blockchain, and I do believe that, you know, in 20 years, the ability for somebody to support and invest in and benefit from the growth of an idea is not necessarily going to be limited to just buying equity, and that type of innovation, whether it’s innovation around new lending systems, whether it’s innovation around revenue share concepts, whether it’s innovation around tokenization of whatever type of assets, I think that’s not going to be done by Goldman.

It’s going to be done by somebody who’s experimenting and trying and failing and eventually hitting on an idea, and frankly, it’s one of the reasons why we’re so excited about Decentraland, which is this, you know, if you’ve read Snow Crash or Ready Player One, this idea of a decentralized metaverse, because it’s…the real estate, the land, in Decentraland is recorded in the blockchain, that has its own native currency called MANA. There’s real interesting ideas around how do you experiment. There’s actually Ripio is going to be launching mortgages for land within Decentraland, and in the real world, you know, kind of blockchain-ifying a mortgage and creating a new way for people to lend and borrow, there’s a lot of incumbents.

There’s a lot of people that you’d have to disintermediate. In Decentraland, it doesn’t exist, and so that’s all going to happen. Decentraland is an Ethereum-based platform, and so we’re going to see some really interesting experimentation in Decentraland, and that’s where, I think, we’ll see the innovation happen.

Laura Shin:

We’re going to keep discussing investments like Decentraland, but also regulation in Grayscale’s Investment Trust, but first I’d like to take a quick break for our fabulous sponsors.

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Laura Shin:

I’m speaking with Barry Silbert of Digital Currency Group. You have mentioned a couple of times now that you are not bullish on ICOs. Why is that?

Barry Silbert:

I think it’s a combination of a lot of scars that I still have from running Second Market, a regulated business, for 10 years, and you know, trying to understand and appreciate the viewpoint of regulators, the SEC in particular, and knowing that essentially the way that they view the world is, you know, you have the 1933 Act, 1934 Act, and you have a bunch of rules that have been put in place between then and now, you’re either compliant or you’re not. You either fall within the box of, okay, we’re following the ’33, ’34 Act, or you don’t, and there’s not really a lot of…there aren’t many examples where the SEC said, okay, we’re going to create new rules for you.

We were, and I was very involved with the Jobs Act. I spent a couple years of my life, I made something like 100 trips down to DC to meet with members of Congress, and the SEC policymakers to get the Jobs Act done, and one of the pieces was crowdfunding, which would enable anybody to invest in startups, and ultimately, the final rules that came out, you know, the actual rulemaking was designated or delegated to the SEC, it’s just not a workable construct to raise money, and I think that was, you know, by and large, by design of the SEC to kind of look out for investors and make sure that the frauds were not using crowdfunding, so having spent 10 years of my life, you know, running a regular business and knowing how thing SEC kind of thinks of the world, the idea that anybody could put up a white paper and put up a website and go raise money from the masses, it just goes against everything that I have come to see or appreciate that the way the rules work in the US.

It doesn’t mean that I’m not philosophically supportive of the idea of removing barriers. It doesn’t mean that I don’t want to see cup formation become easier. I just know it’s just not legal, so for us, as we started seeing all these token projects get launched over the last few years and we pretty much saw all of them, the analysis for us was, okay, number one, is there even a purpose for this token? You know, I think a lot of the projects early on were, hey, we’re going to introduce a token that you’re going to buy to use our product, whether it’s, you know, a gaming platform or something like that, and to us, it just didn’t make a lot of sense to add friction to a product that didn’t need a token, do for us, number one was is a token even necessary? Two is, is the team behind it capable of executing on this vision?

Having invested in startups now for 15 years, it takes 10 years mostly, for the most part, for an idea to succeed or fail, and that’s a really long time, and so is the team behind it, are they…have they demonstrated success anywhere in their lives to lead me to believe that they could be successful at this? The next is, you know, is the valuation reasonable? And so if you kind of go through those three checks, that for us eliminated 99 percent of the tokens that we saw, and then the last check was, okay, are they going to do the offering in a legal way? And for the first 12, 18 months, most of them were not complying with kind of the rules and regulations, and so, you know, again, ultimately, I think the whole ICO market’s going to go away.

I think it’s going to evolve, and the question now is are security tokens going to be a thing? I think there will be some utility tokens, but I’m not convinced that utility tokens are a good investment. They may be something worth trading around, maybe like a commodity, like a natural gas or copper, but as a long-term investment, I’m not convinced utility tokens will have a lot of appreciation, and then security tokens, the question that I have is just because you record ownership of equity or financial instrument on a blockchain, does that make is any better, any more liquid, any more valuable than one that’s recorded, you know, at a transfer agent or at a law firm?

And I’m not convinced yet that it does. You know, having run Second Market and run the market for Facebook stock, it was hard to create a liquid market in Facebook stock, and that was a multi-billion dollar company. To create a market, a liquid market in a security token, you know, that has a 10 million dollar market cap with, you know, 50 holders or whatever the case may be, I’m just not yet convinced that that’s the future of capital formation.

Laura Shin:

So here we’ve got things like your portfolio company, Kraken, being pretty publicly antagonistic towards regulators. On the other hand, another portfolio company, ShapeShift, seem to have like preemptively made some moves towards compliance. They’re transitioning toward requiring accounts. Regulators are indicating they’re only just getting started in this space. I even know some of your portfolio companies have issued utility tokens in ICOs. I don’t remember literally every company you invest in, but I think like maybe Brave or did you invest in Protocol Labs?

Barry Silbert:

Yes, yes, yes.

Laura Shin:

You know, so in that regard, like when you look at kind of what’s going on amongst your portfolio companies and you bring this, you know, history that you have when dealing with regulators, how do you feel like this reckoning between crypto and regulation’s going to play out?

Barry Silbert:

Well, one I’ll highlight, on the investing side, our target ownership in companies is 2 to 5 percent. We don’t take board seats. We don’t take active roles in the day-to-day or, you know, management decision making in these companies. It’s very much a bet on the entrepreneur, and then we get out of their way, and we help to be supportive, so the one, you know, of our companies that have conducted token offerings, certainly if they reach out to us to get our input, we provided input, certainly did our best to connect them with the lawyers to do them kind of properly, and there are a few that we participated in. So for example, Protocol Labs, we invested in the company initially, and then when they did the Filecoin offering, we invested in that, and I think that that’s in the kind of long list of tokens that are potentially going to be valuable utility tokens.

That’s one that we were very excited about, but I think from a regulatory perspective, it’s still unclear what the future is going to be from a regulatory modernization perspective. You know, is the SEC going to update rules to create clarity, or are they going to stick to referencing the ’33 Act, the ’34 Act, and the DOW Report as guidance and then use enforcement actions to essentially kind of create policy? I don’t know. I mean, in our dialogues with the SEC, both directly and through our companies, they come across as being forward thinking. They come across as trying to do the right thing.

I think they recognize that there’s going to be regulatory arbitrage, that it’s going to exist, where there are going to be countries that are going to say, you know, bring your ICOs here, bring your tokens here, but I think the SEC also recognizes that for the most part, most that come to the developed world is going to follow the SEC’s lead, and so frankly, I just don’t know where things are going to check out, and so for us, we’re pretty much sitting on the sidelines and waiting for clarity, because there’s no reason for us to rush into any of this.

Laura Shin:

And this is such a flashpoint, but I’m so curious for us opinion on this. You’re, again, your portfolio company Kraken, the CEO, Jesse Powell, who was pretty recently on my podcast, he’s been especially critical of the New York BitLicense, and a bunch of your portfolio companies, actually, did go through the process to obtain one, while others just left New York state. What is your take on the BitLicense?

Barry Silbert:

So being a New York based company, and I was asked to testify when Ben Lawsky, who was running the DFS was trying get a BitLicense. You know, we had a front row seat to kind of see how that evolved and came about, and frankly, Genesis, one of our companies, has a BitLicense, and seeing the large stack of paper and the many legal bills that they endured to get up the license, you know, I think it’s fair to say that the BitLicense that was created did not reflect a structure that certainly I advocated for, you know, which would have been…it would have been…I’ll take a step back and say, look, I think the license itself in New York was…it was going to happen.

Like, there was no possible outcome that it wasn’t going to happen, so all of us New York companies in the investors in this space, we could have been part of the solution, or just let it happen, and so we definitely did out best to advocate for something that was less expensive. We advocated for something that was easier for smaller companies to get, and I think there are some points that we won on, there’s some points that we lost on.

I do think that over time, any company in a developed country that is touching the banking system is going to be regulated up and down, and it remains to be seen if there is a model out there that exists that enables you to either not touch the banking system or do it in a way that enables you to not become regulated by lots of different regulators, and look, I think it’s an unfortunate reality, but I do think that it is an important step to bring more capital into the asset class, to get more infrastructure built, and then I think eventually we’ll get to a point where consumers and businesses and investors can actually bypass many or most of these regulated on-ramps and off-ramps because they’ll be utilizing either Bitcoin or something like Zcash or something like Horizon that, you know, preserves privacy and anonymity and enables you to, again, kind of operate on the let’s call it kind of the Bitcoin superhighway without ever having to get off. Does that make sense?

Laura Shin:

Yeah. Why are you and Ethereum Classic believer, but not an Ethereum believer?

Barry Silbert:

Well, one, I am a believer in the potential of smart contracts as a concept. I’m a believer in Ethereum as a technology. I’m a believer in the incredibly capable and passionate community that exists in both Ethereum and Ethereum Classic. What I have historically not been a believer in and am still not is the investment ops side in ETH in the token. The reason why I’m excited about Ethereum Classic is, I guess, two-fold. Number one, from a potential perspective, from a utility perspective, Ethereum Classic provides all the same optionality as Ethereum from a smart contract platform perspective.

If smart contracts are going to become a thing, if they are going to power business processes, if they’re going to power DApps. Ethereum Classic is equally capable to deliver on that promise as Ethereum, number one. Two is from an economic or monetary policy perspective early on, the Ethereum Classic community looked to Bitcoin and its cap supply as a way to create clarity for investors around ultimately what the number of tokens that would be outstanding, so Ethereum Classic is capped, and there’ll be no more than about 230 million ETC tokens ever created, whereas Ethereum is by design uncapped.

ETH will continue being created into perpetuity. Next, the Ethereum Classic community holds sacred the idea of immutability, and essentially not changing history, and as you know, the creation of Ethereum Classic came out of the DOW hack and the decision to essentially reverse that hack, and the Ethereum Classic community, which I’m a big believer in, is the ability form a small group or a large group or anybody to kind of change history, I think is something that shouldn’t be tampered with, and you know, on top of that, Ethereum Classic, fortunately has not been used for any ICOs, and so as the ICO market dies down, as that demand for Ethereum goes away, as the projects start to look to liquidate the Bitcoin and Ethereum that they raised, it potentially is some pretty meaningful headwinds for Ethereum specifically.

Laura Shin:

But there’s so little developer activity on Ethereum Classic compared to Ethereum.

Barry Silbert:

I would actually argue if you look at all of the different networks that are being developed and supported out there, Ethereum Classic’s actually one of the most active developer communities. Certainly nothing can compare to Ethereum, of course, but Ethereum Classic has three different developer groups that are working on it right now. There’s 35 full-time people working Ethereum Classic spread across three different groups, and that community is focusing on things like stability and security and scalability and less so focused on building and rolling out ICOs and DApps and things like that. Ultimately…

Laura Shin:

But aren’t the DApps the main kind of point of these smart contract platforms?

Barry Silbert:

I don’t know. We’ll see. I mean, as of right now, no DApps are being used, and this is, again, why I’m…

Laura Shin:

Does Decentraland count as a DApp?

Barry Silbert:

Well, it hasn’t launched yet, so it’s a…yeah, it is a DApp that hasn’t launched. So I look at Ethereum Classic, which trades are roughly 5 percent of the value of Ethereum, and I look at an incredibly passionate community, which reminds me of the early days of Bitcoin. I look at a passionate developer group, which are I think some of the best developers in the world. I look at an easy to understand monetary policy that investors can get their heads around. I look at the fact that there are no ICOs that have been done on ETC leads me to believe that if things turn out badly for Ethereum, ETC may benefit from it.

Certainly, the move from proof of work to proof of stake in Ethereum is likely going to result in many miners of ETH moving over to ETC, and you couple all of that with the fact that it’s trading at 1/20th of the price of Ethereum, from an investment perspective, I think it’s the…it has the best risk return profile out of all tokens out there right now.

Laura Shin:

Interesting. Yeah. I wonder, you know, when you say that you’re sort of waiting for the ICO thing to die down, ICO’s brought in 6.5 billion last year, and already this year, they brought in 12 billion, and the year’s not over yet, so…

Barry Silbert:

Right, but if you look at the past few months, it’s down 80, 90 percent year over year, so I think…I believe that by the end of this year, early next, certainly the quality of the projects that we see raising money right now are terrible, and so I think we’re at the longtail right now, and then really the question is is the next evolution of ICOs, is it security tokens, is it financial assets, is it tokenization of fixed assets, you know, hard assets, is it NFTs, and if it is, can that propel the same level of investor interest as this first wave? I don’t think so, at least not in the next couple of years, but who knows?

Laura Shin:

In a way, what Decentraland offers, aren’t those sort of like NFTs in the sense it’s like real estate and you own it?

Barry Silbert:

It’s actually I think one of the best examples of an NFT. The way that Decentraland is set up is there’s 90 thousand parcels of land. I think roughly maybe a third to half of them are allocated towards districts, so there’s a University district, there’s a Vegas district, there’s a fashion district, so each one of those districts is owned by people who staked MANA, which is the currency in Decentraland, and then I believe about a third of the 90 thousand are owned privately, meaning Decentraland ran an auction at the end of last year where those parcels of land were sold, and so each parcel is non-fungible. It has its own coordinate, and there’s been a lot of excitement around the potential for Decentraland, and I don’t know what the timing is, but there are a number of parcels that were not yet sold in the first auction, which was sold in the next auction, so each one of those parcels has its own price, its own coordinate and its own owner, and if you kind of look at what the most valuable parcels are, they tend to be right around the central, the spawn spot, the place where you’re going to drop into Decentraland.

People think that that may be like the 5th Avenue, the Broadway of Decentraland, and so that, you know, is going to attract premium prices, and then next to roads, those tend to be higher priced parcels. Next to some of the bigger districts tend to be higher priced parcels, and then the ones in the middle of nowhere are priced less.

Laura Shin:

Right. Well, maybe someone will make a Decentraland version of ______ 48:41 or something out there and become valuable. You recently launched a new investment trust in what was previously known as ZenCash and has now changed its name to Horizon. This privacy coin was little known until it made headlines for becoming the victim of a 51 percent attack earlier this summer, and as of last night, it was ranked 79th on CoinMarketCap. So how did this crypto asset make the cut to become one of Grayscale’s few investment trusts?

Barry Silbert:

So it started with one, my belief that probably in 2019, I think a big theme is going to be privacy coins, privacy-focused tokens, and if you look at the list of what’s out there, we’re already very excited about Zcash. I think the team is fantastic, the vision’s great, but I think if you look at list of other privacy-focused tokens out there, many of them, most of them are really focused on primarily providing private money as the only or the main utility, and so what was interesting to us about ZenCash or Horizon was the vision to utilize this network for not just private money, but private interactions, things, whether it’s messaging or file sharing or accessing the web, and so it’s a bigger, broader vision than just private money, and so for me it was, okay, privacy focused, you know, tokens are interesting, bigger vision, and then when you meet the team, the people that are behind it, I think it’s one of the highest quality groups of individuals, one of the most passionate communities out there, and then you couple that with a market cap of, what is it, it’s probably less than 100 million dollars right now, it doesn’t take a lot to go right for that project, for that token to create meaningful value for people who are really supporters.

So we got excited about it first as an organization, and when we get excited about one of these things, we want to make sure it’s accessible to as many investors as possible, so Grayscale launched a trust modeled after the Bitcoin Investment Trust for it.

Laura Shin:

And just to draw out for listeners, what are the differences between Horizon and Zcash?

Barry Silbert:

So Zcash is very much focused, at least today, on private money. Horizon has introduced the idea of a staked node network that could be used to secure lots of different, again, kind of utility around private sharing of, again, messaging or file sharing or communication, so it’s actually a fork of Zcash, or I think Zcash forked I think is maybe ZClassic, and then this forked off of it, so its grandmother was Zcash, but it’s taking a slightly different approach to creating a broader set of tools and utility for the network beyond just private money.

Laura Shin:

And speaking of all your different investment trusts, what do you think will happen to the Bitcoin Investment Trust is an ETF is approved?

Barry Silbert:

Well, a few things to highlight. Number one, the Bitcoin Investment Trust was modeled after the SPDR Gold ETF, and so when we set that up in 2013, the expectation all along was at some point in time, the SEC would approve these ETFs, and at that point in time, the Bitcoin Investment Trust would go through the process to get approved as an ETF, so we fully expect that the Bitcoin Investment Trust will be the first, or one of the first ETFs to get approved when the SEC decides that they’re ready to allow Bitcoin ETFs to exist on a national exchange.

Laura Shin:

So basically, at that point then, it wouldn’t…you wouldn’t need to be an accredited investor to buy it. You wouldn’t have that one year lock-up period to trade it, stuff like that?

Barry Silbert:

Well today, it’s traded on the OTCQX market under symbol GBTC, so our model is one year after launching these funds, we look to get them traded on the OTCQX market, so the Ethereum Classic investment trust is now publicly traded as well under symbol ETCG, so the Bitcoin Investment Trust, if you wanted to buy shares in the public market, anybody who has a brokerage account, you can go to that account and type ______ 53:08 and buy it. However, to buy shares directly from Grayscale at the NAV price, you have to be an accredited investor.

At the point in time when Bitcoin Investment Trust becomes an SEC, reporting SEC registered product on a national exchange, then it won’t look any different to what it looks today, and it won’t be any more accessible than it is today, the difference being is it’ll likely trade more at the NAV price, whereas today, it tends to trade at a premium ______ 53:42 price.

Laura Shin:

Recently, you launched your digital large cap fund, and as you mentioned, you also have the ripple investment trust. I know some of your portfolio companies, particularly the top tier exchanges like Coinbase, Gemini, and Circle, they are all declining to list Ripple because it seems like a security, so how did you choose Ripple and decide to also include it in your large cap fund?

Barry Silbert:

It starts off with investor demand, and as evidenced by the activity and the trading of XRP in the market cap, there’s clearly investor demand for it, and so for us, it was an easy decision to kind of just go through the list of tokens and do our own analysis around ones that kind of could be securities, and the conclusion obviously before we did this was that XRP was not a security, and it’s inclusion in the large cap funds, that…we don’t have discretion. That fund is a…it’s a market cap weighted, formulaic construct of a fund where it tries to essentially capture the top 70 percent market cap of the tokens, but there’s exclusions around tokens that are not traded in US dollar markets, there’s exclusions around lack of custody solutions. There’s exclusions around ones that may be deep securities, so XRP being included in that large cap fund means that it’s one of the largest, and we don’t believe it’s a security.

Laura Shin:

You’ve invested in a lot of exchanges, but I also saw you invested in Radar Relay, which is a relay you’re on and decentralized exchange 0x. What are your thoughts around what the future of DEXes will be, and how will they affect decentralized exchanges?

Barry Silbert:

That’s a fantastic question. I go back and forth on this. So one, Radar Relay, it’s a fantastic team. They are really…they’ve accomplished a lot, and they have great traction, and their volumes are certainly growing. I wonder if and when institutional investors will utilize decentralized exchanges. You know, knowing just how hard it is to get trade approval from a hedge fund or a bank or any ______ 56:05 to even trade with our…you know, Genesis trading is a regulated, regulated by the SEC, regulated by FINRA, has a BitLicense.

You know, it’s a process to get approved, so what I wonder is when or if the institutional flows will find their way onto decentralized exchanges, and until that happens, I think from a liquidity perspective, it’ll be hard for those types of exchanges to compete, but I do see the value, obviously, in the concept of a decentralized exchange, and if any model, you know, could be disintermediated through the use of smart contract technology and tokenization of assets, it’s an exchange business, so I would say cautious, optimistic, but as you point out, of the many, many decentralized exchanges out there, I believe that’s the only one that we’ve invested in.

Laura Shin:

You just mentioned Wall Street, and I know that in previous remarks, you have said that what Wall Street says publicly about crypto is differently from what they say in private. What are those differences?

Barry Silbert:

Well, look, I think the Jamie Dimon quotes have been fantastic, and there’s plenty of anecdotes of people who, being in the JPMorgan building meeting people about XYZ, you know, digital currency related, when Jamie makes these comments, what we’re seeing right now is despite the drop in prices, despite the drop in volumes this year, the level of engagement and the level of seriousness that we see coming out of the Wall Street institutions and banks is at an all-time high. There’s plenty of commentators that say that Bitcoin’s dead. There’s plenty of commentators that say that, you know, the bubble’s burst and it’s over.

Behind the scenes, it’s kind of full steam ahead right now, and what’s pretty clear is nobody wants to be first, but everybody wants to be a really fast follower. Certainly, no one wants to be last, so I do think whether it’s what Goldman has announced they’re doing or what ICE is doing, I think one of…something is going to I think kind of break open that dam, and it’s going to be very, very popular and very socially acceptable for a bank to be offering to their clients, customers to access this asset class pretty quickly when that happens. When it happens, I don’t know, but when it does happen, it’s going to happen very fast.

Laura Shin:

And what impact do you think it will have on the crypto markets, because everybody made all this, you know, hub bub over how the future is we’re going to like bring all this money into Bitcoin and everything, and obviously, now we’re just seen this massive downturn, and then now everyone’s saying like, oh, Bakkt is going to be huge, but like what do you think is really going to be the effect of all these things?

Barry Silbert:

I would guess, I will predict that by the end of 2019, the conversation, the commentary on let’s call on CNBC is not going to be whether this asset class is a tulip bubble or a Ponzi scheme. It’s not going to be about, you know, blockchain-ifying this and that. It’s going to be this asset class is here to stay. What is the proper allocation, and how do you allocate that money? I think we’re 12, 18 months away from that, and so all of…you know, again, whether it’s Goldman or Bakkt or…the future’s are…these are all just contributing towards the normalization, contributing towards the infrastructure that’s required for that the be possible, and we’re…I’ve got to say, we’re…the pipes, they’re being laid right now, and the decision makers are all coming to terms with one, the idea that this is not going away, but two is this is going to create significant opportunity, and in some cases, significant risk, and they’re not going to want to be left out, but it’s going to take some time.

Laura Shin:

You obviously, I’m sure, recall about a year and a half ago, the Bitcoin community was at an impasse. Actually, that lasted for three years, but ______ 60:42 scale the network.

Barry Silbert:

What, is everything’s great now?

Laura Shin:

Yeah, well, you tell me. So at that time a year and a half ago, you brokered what became known as the New York Agreement. This is the sort of compromise that said, okay, some people want one megabyte blocks, some people want SegWit to scale the network. Why don’t we do both? And a lot of people came to decry this, what they called a backroom deal, and ultimately, it fell apart. So what’s your take on what happened and the role that you played?

Barry Silbert:

So I swore that I would never speak about this time period again once we got it behind us, and what I’ll say is I think my role, my involvement at the beginning was trying to take advantage of the relationships that I had built over five years in this space, trusted relationships that I had built, and convene, and you know, when a meeting was proposed on a very well-known Silicon Valley Google group, I put my hand up and said, look, I’m happy to try to get people together, and I knew it was important to invite the participation of the key stakeholders, the developers, the miners, the businesses, and much to my surprise, as I started chatting with folks, everybody was…everyone was just so mentally drained at that point from the fighting and the negativity that people were willing to kind of have a conversation, and to me, like I was clear to me early on that this really was not a technology debate.

It was really more of just a lack of communication or misunderstanding, and my goal at the time was to try to get SegWit activated, and how that happened, I didn’t really care, but I knew I could convene, and I convened, and two of the three stakeholder groups showed up, meaning the miners and the companies, the developers either, you know, given the decentralized nature or lack of leader for Bitcoin development didn’t show up, though invited. The companies and the miners came to agreement pretty quickly, and that’s what became the New York Agreement, and ultimately, the first piece of it got down. It was activated. The second piece didn’t, and people moved on with their lives.

Laura Shin:

Well, do you feel like you learned any particular lessons from that, or…

Barry Silbert:

I love the honey badger description of Bitcoin, and I’m sure you know that, and anybody who doesn’t know what I’m talking about, just Google honey badger video, and it just…it was further confirmation about, to me, about just how resilient Bitcoin is, and again, I didn’t care at all what the resolution was to that, you know, that whole conversation, whether it was SegWit or SegWit plus larger block size or nothing, and the fact that Bitcoin didn’t die after the either the half success or half failure of SegWit2x I think just kind of further reiterated or re-confirmed in my mind that you just can’t kill Bitcoin.

Laura Shin:

All right. Well, that’s a great note to end on. Thanks, well, actually before we go, where can people learn more about you and DCG?

Barry Silbert:

Our website is DCG.co. If you have a great idea and you’re looking for a supportive investor, read out to our team.

Laura Shin:

Great. Well, thanks so much for coming on Unchained.

Barry Silbert:

Thanks, Laura.

Laura Shin:

Thanks so much for joining us today. To learn more about Barry and DCG, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review, and subscribe on Apple podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn, and if you’re not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Raelene Gullapalli, Fractal Recording, Jennie Josephson, and Daniel Nuss. Thanks for listening.