If you want to know what is the Next Big Thing, the saying goes, follow the money. Hundreds of millions of dollars of venture capital are pouring into disruptive young companies building businesses around Bitcoin and the block chain, a technology underpinning the cryptocurrency that allows for the exchange of anything of value.
Union Square Ventures’ Fred Wilson, who foresaw the rise of social media, investing early in companies like Tumblr, Twitter and Kickstarter, made his first investment in a Bitcoin company in May, backing Bitcoin wallet Coinbase.
Silicon Valley venture capitalist Tim Draper outbid rivals to win a recent U.S. Marshals Service’s auction of nearly 30,000 Bitcoins that were seized by authorities from Silk Road, the black market website that was shut down by the FBI, and has started actively investing in a number of Bitcoin companies, including Vaurum, BitPagos and Korbit.
His son Adam Draper, who is also a VC, has pledged to fund 100 start-ups focused on the Bitcoin industry over the next three years.
Marc Andreessen, co-founder of the $4 billion venture capital firm Andreessen Horowitz, says he is bullish about Bitcoin and is in it for the long run. Peter Thiel is backing Vitalik Butakin’s Ethereum, a project known as the Lego for Bitcoin.
And Barry Silber, a scheduled speaker in the Innotribe track at Sibos, has resigned from an operational role at SecondMarket, the online market exchange for illiquid assets he founded, to concentrate full time on investing in Bitcoin.
All of these investors have said publicly that they see the introduction of the block chain as having the same disruptive impact on financial services that the Internet had on communications.
Close The Gap Between The Bitcoin World And The World Of Finance
Some cryptocurrency upstarts argue that they don’t need the banks or governments to make this vision a reality. But to create scalable, mainstream services and reduce friction and risk, some of the disruptors are finding they first have to close the gap between the Bitcoin world and the traditional world of finance.
To that end, a number of them are painting themselves as companies that can build trusted relationships with government regulators and traditional players in the financial sector.
For example, to inspire mainstream take-up of services Bitcoin exchanges will have to be built to more closely mirror traditional exchanges, argues Scott Millar, CEO of Cryex, a European start-up that plans to do just that.
“We want to bridge the gap between cloud-based asset ledgers and existing rails out there,” says Millar, a scheduled speaker in the Innotribe track during Sibos, an annual banking conference.
“What we are trying to do is provide an exchange that has the engineering and legal structure that will allow it to become reference priced.”
For its part, Circle Internet Financial, which has so far raised $26 million in venture capital from a range of investors, including Valley firm Accel Partners, is focusing on making online tools to allow consumers to transact easily and safely, reducing much of the friction and risk that is currently associated with Bitcoin, says Circle CEO and Chairman Jeremy Allaire, also a scheduled speaker in the Innotribe track at Sibos.
In order to allow its customers to convert smoothly from local currencies into digital currencies it plans to mimic features of some existing Bitcoin wallet and payment services as well as some of the deposit-providing and custodial features of traditional banks.
Working To Build Consumer Confidence In Bitcoin
“We are trying to take the friction out of participating in the digital economy,” says Allaire. “Our goal is to have you on-boarded on our system, which includes ID verification and fraud and risk scoring, and enable you to link into an existing financial account, instantly make a deposit and instantly have your fiat converted, and do all of that in five minutes.”
Circle is also working to build consumer confidence in Bitcoin, after the high-profile collapse of the Mt. Gox exchange. “We have underwriting insurance for theft and bankruptcy, which is a big deal for consumers, and if our physical vaults are compromised their insurance will cover that,” says Allaire.
The company has also invested in military-grade hardware, a sophisticated multiple-signature architecture for authorizing transactions, and cold-storage wallets.
In order to provide a consumer product, “we need to have accounts in the markets we are in,” says Allaire, “and we need to have connectivity to ACH [the automated clearinghouse system, a nationwide network in the U.S. through which depository institutions send each other batches of electronic credit and debit transfers], SWIFT [a global organization that each day handles financial transactions such as wire transfers for more than 9,000 banks] and the card networks.”
Circle is in talks with banks and with regulars, he says, but argues start-ups should not have to apply for a banking license. “If you are a financial intermediary you should be subject to a less rigorous set of requirements,” says Allaire. “This is a key consideration that is really important for the start-up system to thrive.”
Ripple Labs, which has raised venture funding from Andreessen Horowitz and other investors to build a new global payments system, is working with banks to make it easier and more efficient to move money between institutions and to switch between fiat and digital currencies. Today, users on the Ripple network can instantly trade between gold and digital and fiat currencies. Germany’s Fidor Bank is a client and Ripple Labs says U.S. banks are coming on board. Its global payment system is an alternative to the correspondent banking system and promises to offer real cost savings to the banks.
It Is Not A Zero-Sum Game
To leverage the power of the block chain and create an ‘Internet for value exchange,’ existing financial institutions need to be linked to market makers, says Ripple CEO Chris Larsen, a scheduled speaker in the Innotribe track at Sibos.
Another project called Stellar, which is being backed by payment processor Stripe, promises a bridge between the virtual and traditional currency worlds. It will use a decentralized network of computers run by so-called “gateway” institutions — banks and other financial firms — to manage and authenticate a public record of transactions. The gateways provide the exchange services that allow customers to send money to others anywhere in the world.
South Africa’s BitX (formerly known as Switchless), which owns and operates an emerging market Bitcoin wallet and exchange provider, is now developing enterprise cryptocurrency software for global banks, private wealth managers and brokerage firms that want to get into the game.
It is not a zero-sum game in which disruptors win and banks lose, says BitX CEO Marcus Swanepoel, who previously worked for Standard Chartered Bank in Singapore. “For me the real innovation will come when the Bitcoin disrupters, regulators and banks intersect,” he says.