Crypto Cheat Sheet Q2 2018 Call — The Information (Transcript)
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Jessica Lessin: Hi everyone. This is Jessica Lessin with The Information in San Francisco and I am thrilled to welcome you to our Q2 crypto conference call.
Again, today we have the wonderful Alex Sunnarborg from Tetras Capital, who‚Äôs going to be sharing his views and answering your questions. It‚Äôs been another crazy quarter in crypto, from stable coins to new regulatory moves, big changes in the token sale market, we‚Äôre really excited to discuss it with all of you.
And we‚Äôre also grateful for Circle, to Circle, for being a supporter of this call. As you guys know, Circle is one of the leading crypto finance companies, has its full suite of product in the market, from helping people invest in crypto, pay with crypto, trade with crypto. The last call we talked about their acquisition of Poloniex and they‚Äôve just kept up the news cycle with 110 million raise and partnership with Bitmain just recently announced as well as the announcement of a stable coin. So, we‚Äôre also going to have circle CEO Jeremy Allaire and President Sean Neville on the call as well and feel free to address any of your questions to them, in addition to Alex.
I think with that, I know we have a ton of questions, I just got word that we actually last-minute had to expand the capacity of this conference call because we are literally breaking our systems over the number of people interested. So, with that, I will turn it over to Alex to share some quick thoughts before we get to Q and A.
Alex, good morning.
Alex Sunnarborg: Good morning. Can everybody hear me?
Jessica Lessin: I believe so.
Alex Sunnarborg: Cool. So yeah, record number of demand, people interested in crypto as anyone could tell who was at the blockchain week in New York last week. I think there was about 8500 people at Coindesk‚Äôs consensus conference, which was quite overwhelming to walk through. But, yeah, in general, I guess I‚Äôll frame this conversation with some just brief bullet notes on what has happened in the market really since the start of the year.
So, on January 1st, the crypto market cap was at about 800 billion. Within about 4 months from then, in April, we were hovering at about 250. So, the crypto market lost about +70% overall. I would add that a lot of that was concentrated in the altcoins. So, Bitcoin actually did a lot better than most of these alts in this downturn. Since then, we‚Äôre back up to about 400 billion. And it is interesting that Bitcoin has actually been outperformed by a lot of these altcoins on the way back up.
Alex Sunnarborg: So, I generally think the market doesn‚Äôt still make that much sense. We have seen a lot of progress throughout various projects. I would say it‚Äôs still kind of slow and there‚Äôs a lot of stuff still not launched. I had my presentation at consensus, I like to focus on the point of just, you know, the majority of decentralized applications are all still focused and built on Ethereum. What‚Äôs also interesting with a lot of the ERC 20 tokens is there‚Äôs a whole slew of these sort of next generation DAP platforms that still exist as ERC 20 tokens on Ether that are meant to transition over to their own blockchain in the coming months to longer. A lot of these new blockchain platforms that we hear about with this amazing throughput, or just various new scaling technologies, a lot of these really aren‚Äôt launched yet and that has a lot of comparison to the current state of decentralized applications too. So, a lot of the ERC 20 tokens represent tokens behind projects that are still yet to actually fully launch.
On the progress side, we saw recently an announcement that Abra was set to have their main contracts launched in about July. This is a project that we‚Äôve been waiting on since about 2015 and sort of across the various sectors. We‚Äôre starting to hear more and more about the launch of Cosmos, which was supposed to happen a couple of months ago, representing sort of this whole narrative of the interoperability type of protocols. I would say another big theme that we‚Äôre hearing about coming soon is this trend of securities tokens, which has really pushed by platforms like Polymath, that are around actually issuing these securities tokens; and then projects like tZERO that would be focused on actually trading and setting up exchanges for accredited investors to trade these sort of tokens.
Alex Sunnarborg: I think most of the decentralized applications that are still live, though, on Ethereum, if you were to look today, are still generally like games gambling platforms and decentralized exchanges, which are more or less kind of a hybrid of the two of them. But I will say that decentralized exchange volume is at least slowly moving up into the right, which is nice to see. I think part of the reason that we have seen this tick back in a lot of coins and really in some of these altcoins is sort of the hammer of regulation that a lot of people think have thought was going to happen soon, namely the FCC making actions on ICOs that conducted illegal securities offerings or the SEC basically demanding the delisting of those securities tokens from unregistered exchanges really hasn‚Äôt happened yet. There was a whole meeting that there was a lot of rumors going around that was supposed to happen, but a few weeks or months ago, just generally around if sort of the classification of Ether and Ripple had been talked about a lot, which really hasn‚Äôt happened. So, since, regulation hasn‚Äôt really clamped down. I think that‚Äôs been a part of the reason for the recent alt run up.
On more of the positive side, on the build out of the industry as a whole, I do think that institutional capital really hasn‚Äôt come into the market yet, and this is something that people have been waiting on for months to years as well. A lot of the reasons around that in the past has been this lack of regulation, which I would say still exists, but also sort of on the custody side. So, a lot of these institutions really can‚Äôt go through the difficulty of custoding these assets themselves; it‚Äôs a risk that they‚Äôre just not used to and not willing to take. So, we‚Äôve been sort of looking towards institutions and qualified custodians to offer a sort of crypto custody products. So, in the last few months, we‚Äôve seen a lot of movement with things like BitGo‚Äôs acquisition of Kingdom Trust, Coinbase rolling out their custody product, Ledger sort of rolling out their Vault product as well.
Alex Sunnarborg: Also, sort of on the institutional acceptance side, I thought it was interesting to see that the New York Department of Financial Services really recently approved Zcash essentially for trading and custody on Gemini. It was also cool to see that Zcash trading was added to Circle Invest as well. And just sort of on that trend is, like, new on-ramps, we also saw Robinhood, the low fee, or zero fee, stock trading app raise a couple hundred million dollars, a massive raise, and actually roll out crypto trading support. So, they‚Äôve already added Bitcoin and Ethereum in a bunch of states across the US to seemingly be a competitor to some of these brokerages like Coinbase. Back on the Coinbase side too, we saw them sort of push along their index product, seemingly going to launch an OTC desk soon, they‚Äôre rolling out a New York office, we have these continued rumors about Goldman rolling out their own sort of crypto desk.
And so, generally, I think the infrastructure is starting to be built. It‚Äôs not quite at the point yet where it‚Äôs resulting in a huge inflow of institutional type of capital into the markets, which I think is still coming, and then the last trend will really bring up. It‚Äôs sort of this trend around stable coins like you‚Äôve mentioned. So, really, I think there was about a five month low since we‚Äôve heard anything about Tether, but instead of really the narrative around stable coins starting to die down, we‚Äôve seen a lot of new projects launch, things like base coin and now this 100+ million dollar raise for this new stable coin that Circle is launching.
That‚Äôs sort of an overview of just some big trends I‚Äôve seen in the last few months. But I‚Äôll stop talking there.
Jessica Lessin: Awesome. Glad you mentioned your Department of Financial Services and Zcash listing. I was surprised a lot of people, at least some of the mainstream tech business coverage, was playing up that the Winckle [inaudible] were involved and, I think, to me, missed that angle. And I had heard that actually that had been many years, if not longer, or a year in the works. So, I think that was an interesting, maybe overlooked, development in the regulatory side. But great, excellent.
So, a lot of things to cover there and we had so many callers and so many questions. I will turn it over to you guys. As a reminder, please press star 6 to unmute yourself and ask a question and then star 6 to put yourself back on mute. And please address any questions to Alex or to the Circle team as well if it‚Äôs relevant to them. Please take it away.
Male speaker: I‚Äôve got a question if nobody is going to jump in.
Jessica Lessin: It‚Äôs on you.
Male speaker: Okay. It‚Äôs for Circle. I‚Äôm just curious about something. You‚Äôve been raising a ton of money related to Poloniex, and I‚Äôm wondering how much focus you‚Äôre going to put on in the short term to improving customer service and issues dealing with wallets that go down?Thank you.
Jessica Lessin: Awesome. Do we have Jeremy or Sean? I don‚Äôt know if you guys are on mute, maybe.
Interesting, they‚Äôre showing up to be on.
Jeremy Allaire: Can you guys hear me? I don‚Äôt know how to unmute.
Jessica Lessin: Yes, we hear you Jeremy. You‚Äôre good.
Jeremy Allaire: All right. That was a good guess, star 6. Sorry about that.
So, we‚Äôre here, yeah. So, there‚Äôs an enormous amount of investment going into customer experience on Poloniex, just at a high level, when we took over operations a couple of months ago, there was a backlog of over 170,000 customer tickets. We‚Äôve invested a huge amount in personnel, in operations, in engineering around that and we‚Äôve reduced that dramatically‚Ää‚Äî‚ÄäI don‚Äôt know the exact number right now‚Ää‚Äî‚Ääbut it‚Äôs in the sort of [inaudible] of thousand as opposed to in the hundreds of thousands. So, that‚Äôs been a major focus.
Sean Neville: About six thousands left.
Jeremy Allaire: 6000 open tickets from over 170,000.
Sean Neville: Just to be clear, it‚Äôs still too many. But beginning with 170,000, we took control. That‚Äôs some progress, and response time results has also been improved. That‚Äôs not to say that there are still some wallet infrastructure issues that we‚Äôre working on and resolving as well.
Jeremy Allaire: Yeah, I think the other piece is we‚Äôve migrated a lot of that infrastructure into Circle infrastructure and that‚Äôs everything from the cold storage infrastructure for the billions in assets that customers hold with us, which is moving into an insured and more secure cold storage model. And then also just the overall scalability of the infrastructure around wallets and [inaudible] developed all these. So, it‚Äôs been a huge, huge intense focus on that and we‚Äôre now at a phase where we‚Äôll be able to start focusing on new things that we‚Äôre launching on the platform, and one of the first, which we‚Äôve talked about it last week, was the introduction of US dollar coin and having a legitimate Fiat gateway for the entire crypto exchange ecosystem including Poloniex, but also more broadly through USD coin and Circle‚Äôs introduction of that.
Jessica Lessin: Great. Thanks Jeremy.
Male speaker 2: I have a question.
Jessica Lessin: By your way.
Male speaker 2: Thank you. Yeah, regarding Poloniex, it‚Äôs actually pretty small questions. What is the EPA, if any, for allowing European institutional investors to get on the platform? I inquired about that a couple of years ago and then I inquired again about a month ago, they said it‚Äôs still on hold. I‚Äôd like to get an update on that. The other question is if Poloniex will be pursuing the level of clearance similar to what tZERO is looking to get with the FCC and other financial clearing institutions of the government. Also, the third and last question, any plans for launching a Polniex coin similar to Binance coin?
Jeremy Allaire: Those are great questions. So, on the institutional piece, yes, we are now on boarding institutional clients. We have institutional sales and account management team that supports folks that are trading with us on the OTC side and also now expanding to the exchange side, and so there‚Äôs an organization in New York, London and Hong Kong which can help onboard clients. And so, what I would encourage you to do is route through Circle trade, through our website, and then that will get you to the team that they can onboard you in. And that‚Äôs a growing focus, it‚Äôs institutional accounts on the exchange.
On the registration and licensing around security tokens, yeah, I think we are focused on that and I can‚Äôt give a specific timeline, but our vision is that there‚Äôs a sort of opportunity to build token marketplaces that span the tokenization of everything, a really, really broad range of assets that span currency like assets, commodity like assets as well as securities. It‚Äôs a tremendous opportunity and we want to provide a market for those and we want to, obviously, do that in a legal way. So, what we‚Äôve said publicly is we‚Äôve got significant constructive engagement with regulators around this and there are some kind of square peg round hole issues, with respect to how security tokens work, versus, say, traditional securities, whether it‚Äôs in custody or settlement or other things; and certainly, the interaction of those with other types of nonsecurity assets is again something that you don‚Äôt really see in traditional capital markets but you do see here, so there are issues to work through but I feel very good about how constructive the FCC is and FINRA and others who, I think, see this as a very innovative commercial market but obviously want to make sure that the capital markets are protected and investors are protected and so forth. So, we‚Äôre pursuing things there.
Jeremy Allaire: And then, on a sort of incentive coin or Polocoin, we‚Äôre looking at a lot of things to do with the platform in terms of incentivizing usage and referral models and other things and certainly nothing specific to announce there, but we‚Äôre looking closely at some of the options and look at what some of the other exchanges have done as well.
Jessica Lessin: Great, thank you Jeremy. Next question.
Male speaker 3: I have a question.
Jessica Lessin: Just buy your way guys. I‚Äôll tell you to stop if you‚Äôre talking over each other.
Male speaker 3: Cool. So on the USDC front, what do you guys see as the rollout timeline for that? It seems like there‚Äôs a couple of other projects coming out right now and I‚Äôm curious how you think you stack up against some of the other ones, like Tether obviously being the collateralized incumbent but then also new projects like TrueUSD and then also algorithmic stable coins? And then do you also see USDC being listed on exchanges like Finance, Bitrex, etc?
Sean Neville: Yeah, I can take a part of that. And then Jeremy, I‚Äôm sure, also can jump in. So, USDC is launching imminently just in the next few weeks from Circle. However, Circle isn‚Äôt expected to be the only issuer of USDC, though the way it‚Äôs being set up is that there‚Äôs a network and a framework for issuing stable coins and Cricle will just be one of these issuing members, so there can be other members issuing USDC. There will also be other members issuing other stable coins. They need to follow the framework and follow the network rules including proof of solvency and alike that are required as part of this framework. So, it‚Äôs a little different than some of the existing auctions other there. It is a full Fiat asset backed approach. It‚Äôs not the common algorithmic approach or crypto asset backed approach or hybrid, it is full.
Fiat asset backed approach, which does mean that the issuing members need to be licensed, have the requisite reserve, account access including banking partnerships or [inaudible] and alike. So, this separate network that manages members like Circle [inaudible] these is what we refer to as Center, of which we released some information about late last year, it was just updated and refreshed last week, along with the news that Bitmain has also joined the Central network along with Circle.
Jeremy Allaire: And just to add to that. So, yes, obviously some really critical differences as Sean noted, is this is an open standard framework, an open source technology and a scheme that really any crypto company, anything, any company or any bank can implement. And it‚Äôs really designed for that openness and interoperability and so we‚Äôd be thrilled to see that Square supports USD coin, we‚Äôd be thrilled to see‚Ää‚Äî‚Ääa company like Line in Japan have a JPY coin‚Ää‚Äî‚Ääwe‚Äôd be thrilled to see a lot of different players in the space issuing on this model and we expect to see things like that happen.
In terms of other differences, the key is with Circle as a regulated financial institution in the US and a Bit licenced a company with global banking partners and public auditors, we‚Äôll be launching the first gateway to use this coin, as Sean noted, in the near future and the really critical thing there is that it‚Äôs high quality liquidity. So, customers around the world will be able to access that through traditional bank connectivity and wire fund access USD coin and use that as an ERC 20 token globally, whether that‚Äôs in a smart contract or on an exchange trade or in a decentralized exchange and lots of different scenarios where any ERC 20 token could be used, including in a personal wallet. So that‚Äôs what really the key is. Actually having real liquidity and connectivity that‚Äôs high quality with both public auditors and global banks sitting underneath that is really key for this to work well.
And into the last question there, we‚Äôve had a lot of really strong interest from exchanges globally in supporting USD coin and when we do make this generally available to the public, we‚Äôll announce a really broad range of exchanges that are listing it. And so we do expect it to be a token that is getting fairly broad support.
Male speaker 4: How do you expect -
Jessica Lessin: Thanks!
Male speaker 4: Sorry. Can I go ahead?
Jessica Lessin: By your away.
Male speaker 4: Okay. How do you expect to control the price of USD coin, because apparently it‚Äôs going to mimic the price of the US dollar also, just like the other stable coins? How is that going to happen if nobody is going to control the quantity, I wonder?
Jeremy Allaire: Sean, do you want to take that?
Sean Neville: Yeah, this model is full Fiat asset backed, so just in terms of a flaw, it goes something like I could be a trader who is interested in acquiring USD coins, I come to something like a web application that are on board providing KYC and so ultimately at the end of that, I‚Äôm going to be transferring dollars from my US dollar bank account into this web application‚Äôs settlement account.
So, if I‚Äôm using something like a Square web app or Circle web app, I would have some bank account information that allows me to transfer funds into it. It‚Äôs going to have to be held in for reserve. So, there‚Äôs a validation verification process that occurs between the making institution, whoever is running that web app, like Square in that example or Circle or others, but didn‚Äôt interact with the contract that handled the minting of the USDC coins.
And assuming all goes well during that validation and nothing is rejected, there are no air cases and then there are coins that are minted, ERC 20 tokens that I transfer anywhere.
The reserves can‚Äôt be used in any other way. They can‚Äôt be reinvested. They have to be held for reserves and backed one to one in the reserve accounts that are holding the dollars.
Male speaker 4: So nothing different from the way Tether is managed?
Sean Neville: Sorry, I couldn‚Äôt hear the question.
Jeremy Allaire: Nothing different than the way Tether is managed?
Sean Neville: Yeah, so the differences that you could do something like mint a USDC from Circle and then it can be used globally, Center will be the network that is ensuring that Circle is fully solvent, audited, licensed, etc.. If someone were to acquire those USDC and wish to redeem them, they would just need to go back to any other member of the networks. They could go to another USDC minting member of the network, which doesn‚Äôt need to be the originator, it just needs to be another member of the network.
So, in these examples, if Square and Circle were both members, it‚Äôs possible to get USDC from Square, use it globally and someone who wants to redeem them, meaning burn the USDC tokens and have the underlying reserves transport the documents to another account, they go to the other member of the network, including potentially crossing currencies that [inaudible] such a thing as, say, a yen coin and a euro coin that you can addition to a USD coin. So, it doesn‚Äôt need to be the equivalent of a single exchange or a single mint or the [inaudible] the minting and the burning or the deposits and withdrawals.
Jeremy Allaire: The other piece here is that there is specific auditing requirements and compliance requirements. Issuers have to actually be licensed to operate as either banks or money transmitters in the relevant jurisdictions.
Jessica Lessin: Great. Keep going with the questions and also we can definitely keep talking about Circle‚Äôs announcements but I want to make sure that we‚Äôre also thinking broadly about the landscape and have some questions for Alex as well. So let‚Äôs prioritize those.
Male speaker 5: How real is the risk of a 51% attack on a currency and can that be guarded against? Because there are some sovereign entities or sovereign sponsored entities that have developed A6, in China for example. Do you see that as a real risk in the crypto space?
Alex Sunnarborg: Yeah, I mean that‚Äôs generally somewhat surprising today how much centralization is on most coins just within just a couple of mining pools. Some large sovereign or state actor developing A6 under the hood and presenting a real risk is a definite possibility and something I think, generally, the community would look to potentially fork against, but to to keep it short and sweet, mining is already heavily centralized. It would be a very expensive attack and pretty risky because the network could fork away from something like that but it‚Äôs definitely a very real risk.
Male speaker 5: Is there any way to guard against it?
Alex Sunnarborg: Essentially, trying to fork to render their specialized hardware useless. In general, I mean, the hope is that these networks acquire so much hash power that it makes any one player more or less impossible to garner that much power. But given the fact that these networks are still in their relative infancy, it‚Äôd be a very expensive and costly attack depending what network you attacked, but definitely possible. Could you guard against it? It would probably be a more or less reactionary type event or trying to create some generally ASIC resistant protocol in the first place. But I guess in short, it is an attack, it could probably be dealt with after the fact. But nonetheless, it‚Äôs a pretty real risk today.
Male speaker 6: I have a question that builds off of that. I think that more and more, you‚Äôre seeing tokens and networks start to move to some type of masternode system or a staking system in which you are rewarding essentially holders of collateral bond. And I just want to get your insights on that, if you think that more tokens will be moving that way in the future and if you think that masternodes will become kind of an investment vehicle for people to hold their crypto asset?
Alex Sunnarborg: Yeah, I think more and more I hear about sort of like a masternode focused investment strategy come about. So in general, yeah, I think it‚Äôs attractive from a few perspectives. Obviously, most of these crypto currencies are not like cash flow or income producing assets. There‚Äôs a couple of examples that have something like that that don‚Äôt utilize a masternode system, but kind of all these protocols moving towards [inaudible] with some elements of a masternode system like what Ethereum could be, what Decred or Dash or Pivx already has is attractive for generating that income, especially if you‚Äôre just trying to accumulate more raw crypto currency or add some element of cash to your position to sort of hedge it out.
I also think it‚Äôs pretty attractive because it generally locks up some supply that then is going to be left off the market and sort of reduce the available supply relative to the demand. So, high level and sort of just anecdotally what I hear people talking about, I think these coins with some element of a masternode system, or at least the ability to produce some passive income, will kind of grow in popularity and be more of a thing people talk about going forward.
Male speaker 7: I have a question.
Jessica Lessin: Thanks, Alex.
Male speaker 7: So, I think, regarding security tokens, I have two full big questions. So, I mean, there‚Äôs a lot of talk about security tokens in general. How do you see the regulation playing out in the security token space? And the second question is, for example, real estate has been often thought of as a prime target for security tokens, how do you foresee this actual real asset being brought into the blockchain, more of the Oracle system, to actually play out for a lot of these physical assets if they were to compare it to security tokens?
Alex Sunnarborg: Yeah. So, in general, I would say I kind of agree and think the whole narrative around securities tokens is is definitely growing. One question I‚Äôve been asking most of these projects is just generally what‚Äôs the sort of tie between the real legal system and the blocchain actual token is. So, with projects like Polymath for example, this securities issuance are actual creation platform, there‚Äôs more or less, and the UI like a drag and drop system of various facts about the actual security token that you‚Äôre creating and on the backend there‚Äôs sort of a general legal template that‚Äôs been created by Perkins Coie to sort of mix them together. So, I guess from a pure new securities issuance perspective, it makes sense.
On some of these existing real world assets that are going to go through this process of tokenization, again, I‚Äôd want to understand more about the actual legal tie at ownership to these cash flows versus what rights this actual blockchain token give me.
But I guess from a high level, I think a lot of these assets make a lot of sense to be tokenized. We‚Äôre just not really at the point yet where we‚Äôve seen live securities tokens, we haven‚Äôt seen new securities tokens really be created, we haven‚Äôt seen traditional securities be transferred to blockchain tokens and we really haven‚Äôt seen a venue where accredited investors can only come and trade these things. So, in general, I like the high level idea. I think your thinking is probably pretty inline with mine and we‚Äôre just not at the point where we‚Äôve really seen all the logistics of these things be rolled out yet.
Jessica Lessin: Alex, can I ask? What is motivating this urgent interest around them? Is it just securities? Yeah, what is motivating it and why now? Is it seen as a safer regulatory path because it‚Äôs a little more defined?
Alex Sunnarborg: Yeah, I mean, there‚Äôs absolutely a safer sort of regulatory regime. You have much more regulatory clarity if you raise with the general securities framework that the FCC already understands. So, it‚Äôs generally a way to make money. I think a lot of these more traditional issuers have thought it‚Äôs an easy way to sort of raise new money from this crowd that‚Äôs generally interested in crypto currencies. I think the use case of tokenizing traditional assets has just been talked about for quite some time and it‚Äôs just sort of a culmination of all of those. But really, it seems like it‚Äôs just a more straightforward regulatory framework and an easy way to get some capital and a vehicle that looks more transferable and traceable at a very high level.
Jessica Lessin: Got it. Great. Another question please.
Do we have any questions? I can go get a list.
Male speaker 8: I got a question.
Female speaker: Can you hear me?
Jessica Lessin: We can.
Male speaker 8: Okay, ladies first.
Female speaker: Sorry.
Jessica Lessin: Ladies first.
Female speaker: Thank you. Are you going to see more due diligence in this space, because I hear about white papers getting millions with showing nothing and there‚Äôs so much scam. You can‚Äôt tell the difference between a project that you should invest in versus one you shouldn‚Äôt. So, I think I‚Äôd be interested in seeing what‚Äôs the differential factor, what should we keep our heads up on? And then just, is regulation, or hopefully whatever it is, government involvement or public private partnership, whatever that‚Äôs going to help people to do more due diligence before jumping into these things?
Alex Sunnarborg: Yeah, peerpoint. I mean, right now, the ICO Space is really just a total wild west. I mean, you see these projects marketing towards the general public, which you can‚Äôt do in the real world, that‚Äôs blatantly illegal to market like that. So, hopefully, a lot of things will kind of help shake out these bad projects. One being this hopeful fear of regulation that eventually a hammer