Wall Street is increasingly expressing an enthusiasm for applications of bitcoin and blockchain technology, but according to venture capitalist Barry Silbert, the attention of the traditional financial community has so far fallen on its more problematic implementations.
Most of his investments, Silbert explained, have been on what he considers the two most prominent of its three use cases: as a store of value and a payments rail.
"I didn't expect the ledger would be embraced first," he said in a new interview.
Silbert told CoinDesk:
"I'm surprised they honed in on that first. A private federated blockchain doesn't solve any major problems and ultimately I don't have a high level of optimism it's going to succeed. I'm surprised they haven't figured that out yet and I'm surprised they are doing that first."
The founder of Digital Currency Group (DCG), Silbert has so far invested in 56 companies in the bitcoin and blockchain space, with the full list of names spanning 19 of the 26 letters of the alphabet. One of the industry's earliest investors, Silbert has also been one of technology's most vocal evangelists, launching an over-the-counter (OTC) trading desk (Genesis Trading) and a private investment vehicle Bitcoin Investment Trust (managed by Grayscale Investments).
The new comments come amid a spike in interest in use cases for the blockchain, the distributed ledger system underpinning the bitcoin network. However, this has coincided with increasing attention to private blockchains and distributed ledger systems such as those being offered by startups such as Digital Asset Holdings, Eris Ltd and R3CEV.
Such blockchain products are primarily aimed at helping banks better facilitate information flows through shared databases and as a way to settle and clear transactions. Still, Silbert doesn't believe it's any weakness in the technology that will hold back such attempts. Rather, he believes the open-source nature of bitcoin makes it a superior solution.
"The rail is working today ... whereas these ideas around federated blockchain, any time you put two banks in a room, let alone nine, it's a setup for a disaster or a long process," Silbert said, hinting at the recent partnership between R3CEV and nine major banks.
Federated blockchain projects, as described in the book Digital Gold by New York Times journalist Nathaniel Popper, attempt to replace bitcoin's distributed network with a system of proprietary computers that process transactions.
"What will likely happen is there will be a lot of interest, a lot of discussion, and I think you'll see some money get deployed, but they will capitulate and shift their attention back to the bitcoin blockchain or some decentralized blockchain solution," he continued.
The remarks come as part of the first wide-ranging interview between the investor and CoinDesk in which he spoke at length of the changing dynamics of the bitcoin ecosystem.
One of the most notable of Silbert's remarks was his characterization of the bitcoin network as one that, while struggling to come to consensus on issues such as the size of transaction blocks, is more reliable in its governance than any alternatives.
Despite the diversity of opinions in the bitcoin community, most recently on display at the Scaling Bitcoin conference in Montreal, he said the open-source community has shown it is capable of solving hard problems and advancing the network.
"The reason they're looking to do these private blockchains is because they have concerns about bitcoin's security or reliability," Silbert said. "Those will all get addressed by time, as these groups come up with a solution."
When asked whether DCG intended to increase its support financially for developers in the face of these concerns, Silbert cited his ongoing support of industry think tank Coin Center while expressing an overall optimism about the robustness of the development community.
"We invest in and we build companies," Silbert said. "We don't have on-staff developers at the DCG level to commit or test code. It's not the role we play, but I think it's very important."
He suggested that he would consider ways to support development that fall within the scope of its role in the industry, adding: "I think the pressure should create some opportunity to financially support core development."
Speculation and greed
Silbert further addressed comments made at the American Banker Digital Currencies + the Blockchain Conference this July, in which he appealed to the audience that one of bitcoin's central strengths was that it provided holders with a financial incentive to support the network.
Rather than characterizing the statements as part of a wider branding pitch for the industry, he suggested that greed and speculation are simply a reality of how the system works, one that has historically served the network well by increasing adoption and promoting evangelization.
“All of the great things that bitcoin can be, all of that is not possible unless the money supply, the amount of bitcoin in circulation is much higher.”
"Many people involved in bitcoin today got their first exposure to it through the expectation and the hope that they would buy it and that the price would go up," he continued. "What I have seen is the people who do that tend to become avid readers and followers of the space, they tend to start to understand the opportunity that exists for bitcoin as a rail and ledger system."
He framed bitcoin's increase to a peak above $1,000 as a positive instigator of change, suggesting that there are now "five times" the bitcoin owners because of the market activity, and that this event bolstered the ability of firms such as Coinbase and Circle to obtain investment.
However, Silbert suggested that he believes another similar price increase would likely be needed for wider adoption in the future. Greed and speculation, he said, could be viewed as positives provided they result in more liquidity in the market.
"All of the great things that bitcoin can be, all of that is not possible unless the money supply, the amount of bitcoin in circulation is much higher and the trading in and out of currencies is more common," he said, adding:
"You can create real issues for Western Union but it's not possible with [the price of] bitcoin at $230."
Over time, he said, the market will need to create incentivizes for users to join that go beyond "the wealth effect". These included having merchants offer reduced prices for bitcoin.
In 10 years, however, Silbert doesn't believe bitcoin's low value relative to fiat currencies will continue to be an issue.
"What I do know is that with Wall Street's awareness in blockchain as a first step and the amount of money that is being deployed in trading strategies, it will not take a lot of that money moving into bitcoin to create positive price momentum," he continued.
As for how consumers will interact with bitcoin, and whether they will know that their use of certain products would create demand in the digital currency's markets, Silbert was less clear.
"On the currency store of value side of things you know you have bitcoin exposure, on the rail you may or may not know, on the ledger you won't know," he said.
Silbert suggested he believes more companies using bitcoin as a means to send money would begin moving the currency to the background of the user interface. The statement follows public decisions by bitcoin services provider Circle and social tipping network ChangeTip to follow such a strategy.
He expects bitcoin would likely be front-and-center for investors using the technology as a scarce commodity akin to gold, a use case he still feels is among the more compelling.
"We will get to a point in time where ... you'll hold some portion of their wealth in bitcoin similarly to gold. For people in emerging markets, in my opinion, it's better than gold because it has utility," he continued.
Silbert also spoke about how he believes recent trends in VC funding don't speak to any larger conclusions about the technology. Just because use cases for bitcoin as a currency or payments rail may not be getting investment attention today, he said, that doesn't mean investors aren't watching.
However, he did suggest that investors are taking their time, allowing winners who can prove they can navigate the current challenging market to emerge.
"I wouldn't take that and believe there's not a significant amount of interest in the space, just because there haven't been announcements recently," he said. "There's a lot of interest in things other than blockchain for Wall Street."
Silbert also indicated that much of this attention is now focused on areas where market leaders haven't emerged. For example, he cited BitPay's processing service and Coinbase's wallet offering as products with enough traction to ensure that the companies behind them were unlikely to be displaced.
"The areas most interesting to VCs are going to be the 2.0 apps, the Abras of the world, and teams like Blythe Masters' team [at Digital Asset Holdings], entrepreneurs with big markets looking to solve big problems," he continued.
In regards for the health of its startups, DCG suggested that it has amassed data on how to determine whether its companies' strategies are working, and that this is guiding strategy.
This includes assessing positive growth rates, how much money firms should expect to earn off customers, the onboarding cost for these customers and the places it feels represent the biggest global opportunities for the technology.
Elsewhere, he said DCG is looking at use cases of the bitcoin blockchain for settlement, attempting to "understand who the players are and what they're looking to achieve".
Still, he said that he feels like creative products that leverage the strength of the bitcoin network are first and foremost on the radar.
"We are spending more time looking at businesses like Abra that are building products on top of what's been built that wouldn't have been possible before," he continued. "Then we're also looking at unique use cases of the bitcoin blockchain, Filament, non-financial applications of the bitcoin ledger system."
Citing DCG's investment in Ripple Labs, he also suggested investments in companies providing alternative ledgers wasn't "out of the question".
"I've never been more confident about bitcoin's leadership position, but we're interested and excited about up-and-coming technologies and approaches. We're not a fund, we're a company."
Disclaimer: Digital Currency Group is an investor in CoinDesk.