Bart Stephens | Blockchain Capital
The forthcoming explosion of security tokens
Bart Stephens is the Co-Founder & Managing Partner at Blockchain Capital, the most established VC firm in the Blockchain sector, the first VC firm to raise a venture fund through an ICO and the most active VC investor in the sector, with 75 portfolio companies across four funds. We recently spoke with Bart, who will be speaking at our Digital Asset Strategies Summit (Oct. 16 – 17 – Dallas), as he shared with us his thoughts regarding the strong intellectual interest in blockchain and crypto assets by financial institutions.
Digital Asset Strategies Summit: Your VC firm issued the first digital tradeable blockchain-based financial product to investors as well as the first SEC compliant ICO. Is this the future of venture capital and private equity investing?
Bart Stephens: One of the unexpected innovations blockchain technology has enabled has been an explosion in global crowd-sourcing for tech projects. This has primarily been done on the Ethereum blockchain in a transaction called an ICO. These ICOs have primarily funded blockchain technology projects by issuing utility tokens and other crypto assets. However, we foresee that there will be an explosion of a new category of tokens that represent more traditional securities called security tokens. Blockchain Capital invented the world’s first security token called the BCAP which is essentially a blockchain-based and tradeable venture fund with each token representing a limited partnership interest in the fund. These tokens are liquid and trade on the secondary market similar to the way a closed end fund trades on the New York Stock Exchange. Our BCAP ICO was also done in a regulatory compliant manner via a Reg D 506(c) and Reg S offering that complied with AML/KYC rules in addition to investor suitability. Though the BCAP was the first security offering and first compliant ICO, we expect many more to follow in the coming years.
Digital Asset Strategies Summit: Do you see all future ICOs being issued in compliance with the SEC?
Bart Stephens: The SEC has been surprisingly thoughtful and balanced in its approach to both blockchain technology and crypto assets. For example, the SEC has explicitly stated that neither Bitcoin or Ethereum are considered securities due to the decentralization of their current network. The SEC has also given the industry preliminary guidance on whether an ICO will be considered a security based on a settled supreme court case law known as the Howie Test. The SEC is looking at these token offerings on a case-by-case basis. The challenge the SEC faces is to support innovation here in the US but also protect investors and financial incumbents.
Digital Asset Strategies Summit: Your colleague at Blockchain Capital recently stated that “Every major bank is trying to do something in the space.” What specifically have institutions been doing to penetrate the cryptocurrency space?
Bart Stephens: Banks and financial incumbents are caught in a classic “innovators dilemma” with respect to blockchain technology and crypto assets. Financial institutions, generally speaking, are highly regulated and risk-averse. The emerging blockchain technology industry is fast-moving, controversial and often clouded in regulatory uncertainty. It makes for a challenging operating environment for financial institutions to address this global phenomenon. It’s part of why it’s so exciting to finance start-ups in this ecosystem. There are massive opportunities for small and nimble companies to address large global markets that financial incumbents are ill-equipped to address. With all that being said, the growth of these markets is now too fast to ignore if you are a Fidelity, Goldman Sachs, or even Jamie Dimon’s JP Morgan. There’s also a generational issue at play here, where millennials are inherently more comfortable with mobile and digital platforms and crypto assets. So, if you’re a large financial institution looking to meet the needs of your millennial customers who are asking for these products and services, your choice is to enter the market or lose those customers to your competitors. Expect more financial incumbents to launch services such as trading, custody and lending of crypto assets this year and next year.
Digital Asset Strategies Summit: Have you witnessed an increase in the number of crypto companies looking to raise venture capital specifically to build platforms and tools for institutional clientele?
Bart Stephens: In the last several years, I have spoken with dozens of hedge funds, family offices and traditional institutional investors. I can tell you first hand that there is a strong intellectual interest in blockchain and crypto assets. However, a lot of the infrastructure and “form factors” that institutional investors are used to with more traditional assets is still being built – namely custody and prime brokerage services. The lack of these services has kept institutional capital from entering the crypto asset market – but this is rapidly changing. Companies such as Coinbase, Bitgo, itBit, Circle and others are all entering the institutional market which we believe will increase adoption and fund flows into the crypto asset market in 2019.
Digital Asset Strategies Summit: A recent rumor had been circulating that Facebook is interested in acquiring Coinbase, one of your portfolio companies. What kind of an impact would a Facebook/Coinbase marriage have on the crypto industry and financial services industry at large?
Bart Stephens: I can’t comment specifically on Coinbase acquisition rumors – as an investor in the company, it would be inappropriate. I can say that two years ago, I could have foreseen a company like Charles Schwab or E-Trade acquiring Coinbase. Now I think it is more likely that Coinbase could acquire either Charles Schwab or E-Trade, or more likely add stock brokerage services to compete with those financial incumbents head-to-head. As a fun fact, Charles Schwab is a world-class company based in San Francisco that is 47 years old. Coinbase added more accounts in the last two years than Charles Schwab has in its 47-year history. The growth rate we are seeing in the operating companies in the crypto ecosystem are faster than Internet 1.0, social media companies and sharing economy companies.
Digital Asset Strategies Summit: Thanks Bart. We look forward to hearing more of your thoughts at the Digital Asset Strategies Summit October 16 – 17 in Dallas.