(MarketsMuse fintech and blocktech curators extend our thanks to Prospectus.com LLC for the following contribution)-Bloomberg Intelligence reporter Jonathan Tyce wins the Valentine’s Day Award for Very Good Framing courtesy of his latest piece “Blockchain is Coming Everywhere, Ready or Not” –one of a series of articles by Tyce that puts the blockchain value proposition into proper perspective. Without suggesting there is any IP underlying the thesis advanced by Tyce, the opening sentence speaks volumes to those who are crypto challenged and have the misinformed view that blockchain = bitcoin=all kinds of bad things, including but not limited to ‘investment bubble”, Ponzi scheme, “pump and dump” ICOs where the Issuer is now hiding in the ‘dark web’ or sun-tanning in Belize, and lastly, ‘one of the things that lets people create crazy currency that isn’t even fungible’. Bid repeats: Its all about the blockchain, blockhead. Not bitcoin. Welcome to BlockTech.
Without intending to invite the BloombergLP copyright cops to castigate this blog for infringement violations, this blog has posted a series of original articles themed with the same title of this post. With that disclaimer, we’ve responsibly stayed within the goal posts and merely excerpted select portions of Tyce’s piece to advance smart thinking and give credit where due…
The applications of blockchain technology will spread in 2018 far beyond bitcoin and, perhaps more surprisingly, way beyond financial services. Significant disruption and new business opportunities are on the menu. Four of the most-critical benefits from distributed-ledger technology can be encapsulated within trust, transparency, cost and speed. Where will the disruption occur?
Blockchain is now a familiar term to many, though in most cases, its meaning will be inextricably linked to bitcoin after a 10-fold price surge in 2017 valued the cryptocurrency at more than $180 billion.
This is only one strand of the story for Europe and globally. The applications of blockchain technology will spread in 2018 far beyond bitcoin and, perhaps more surprisingly, way beyond financial services.
For starters, huge improvements in efficiency and transaction speeds, cost savings and enhanced security are on the menu, with significant disruption and new business opportunities likely to follow.
Putting the semantics to bed early, blockchain is the name designated to a string or chain of transaction records (blocks), cryptographically signed with “hashes,” or digital signatures. Though undoubtedly the most high-profile application of blockchain, the bitcoin network is just one example of how cryptocurrencies and other transactions can use this technology.
Blockchain is effectively the means to create tamper-proof records of data and transactions — whether that is a money transfer, vote cast, medical record or change of property ownership. It is just one of a variety of decentralized database technologies that exist across multiple locations. These are known as distributed ledgers, and it is within these so-called DLT technologies that great opportunity exists.
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Blythe Masters, once considered the “Babe of Investment Banking” in view of her long tenure and celebrity senior role at JPMorgan—which included her being credited for helping to create those snarkly financial derivative products known as credit default swaps (CDS), has since aspired to become known as either the “Blockchain Batgirl” or the “Babe of Blockchain” through her latest career role as CEO of the bitcoin-buttressed fintech startup Digital Asset Holdings. But, now that Blythe is no longer flying with the superpowers that came with her JPMorgan superhero costume, she is rapidly discovering that startup land has more sharp elbows than JPM’s bond trading floor.
Despite the fact Ms. Masters is undeniably a bona fide member of any Masters of the Universe Club (sic Tom Wolfe/Bonfire of the Vanities)—and however much “blockchain technology” has inspired a cadre of brokerdealers and banks to get on board a train that could evolutionize the financial industry at large, and even despite a potential “death-knell magazine cover” courtesy of October’s Bloomberg Markets Magazine, Masters’ foray into the world of fintech startup funding is proving to be bumpy at best. The “blue ocean” this famously-fetching, blue-eyed blonde banker is now swimming in is populated not only with sharks, but with migrant bankers’ bodies floating ashore and otherwise left beside the yellow-brick road to billion dollar Unicorn valuations.
Notes NY Times business news journalist Nathaniel Popper—one of the 4th estate’s leading bitcoin industry experts (and a MarketsMuse in his own right), Digital Asset Holdings is running into the types of startup funding challenges that mostly all mortals encounter when pitching ideas scrapped from a whiteboard: questionable valuation, untested technology value proposition, a highly-fragmented and often dysfunctional target audience, and last but not least, an investment structure that is being increasingly challenged across the institutional investing world for giving preferential ownership treatment to a select group of early investors. In this case, Digital Asset Holdings is providing a very sweet deal and a very exclusive suite of follow-on round financing options to its anchor investor, which happens to be her former employer, JPMorgan.
Here’s an excerpt from Popper’s piece—“Cash Call For a New Technology” which appeared on the front page of the 29 December edition of the New York Times business section.
The newest venture from Blythe Masters, until recently a star banker at JPMorgan Chase, appeared to be an overnight success story in the making.
Her start-up, Digital Asset Holdings, is working in one of the hottest areas of growth on Wall Street today: the blockchain technology that underlies the virtual currency Bitcoin. And Ms. Masters has already received a promise from JPMorgan, her former employer, to be the lead investor on the new project, pitching in around $7.5 million.
But Ms. Masters’s company has been struggling for months to close the deal with other investors. Most recently, large banks including Goldman Sachs and Citigroup have balked at putting money into Digital Asset Holdings after learning that JPMorgan was being given better terms than other investors, according to several people briefed on the deal.
The banks and financial firms looking into investing, the people said, have also expressed doubts about the actual software solutions Ms. Masters’s start-up is working on, much of which has been put together through purchases of smaller start-ups.
“The deal would need to improve materially for us to get involved,” said one executive at a financial firm, who has been looking at putting money into Ms. Masters’s company, speaking on the condition of anonymity because negotiations were continuing. “It’s not supercompelling.”
Digital Asset Holdings’ chief marketing officer, Beth Shah, said assertions that the company was facing challenges in raising funds were inaccurate but she declined to provide further details. All of the potential investors declined to comment.
The challenges that Ms. Masters is facing reflect in part the increasingly difficult environment facing start-ups of all sorts as investors have begun to worry that the tech industry has been overhyped and overvalued, pushing down values for companies both public and private.
She is also contending with the difficulty of building a viable business around the virtual currency Bitcoin and the various technological concepts it has introduced to the financial industry, most of all the blockchain.
Digital Asset Holdings is proposing to build something similar to the blockchain database, in order to provide a cheaper and faster way to trade other sorts of financial assets, such as loans and foreign currencies.
The problem for Ms. Masters is that several other start-ups are trying to do something similar, and there is no guarantee that any of the start-ups will ultimately succeed. Many industry experts think that it could take years to get to the point where the blockchain technology can be used effectively by banks — if it works at all.
The New York-based start-up ItBit, which is building its own blockchain-like technology, had been out trying to raise $100 million based on the assumption that the company was worth $250 million. More recently, it has scaled that back and is now hoping to get $50 million from investors, with a valuation of $135 million.
Ms. Masters hopes to raise from $35 million to $45 million, valuing the company at $100 million.
In recent months, the software that Ms. Masters has shown to potential investors allows for the issuance and trading of so-called syndicated loans — large loans broken into pieces and sold to different investors. It can take weeks for trades in this market to go through, a time span that D.A. is trying to shorten.
Investors who have looked at the software, though, say they are not convinced that Ms. Masters’s technology will fix the problems in the loan market, which are attributed as much to human cooperation as to bad software.
There are also indications that Digital Asset Holdings has not had an easy time integrating all the outside technology start-ups it bought. For example, two of the three employees who worked at Blockstack, which the company acquired in October, have already negotiated to leave D.A., people briefed on the situation said.
“All employees who were offered permanent positions at the time of the acquisitions of Bits of Proof, Hyperledger and Blockstack are still with the company,” said Ms. Shah, D.A.’s chief marketing officer.
One of Ms. Masters’s competitors, known as R3, has approached the problem from a different angle and is trying to determine how the banks want to use the blockchain before building specific software. With that strategy, R3 has signed on over 40 banks as partners in recent months, including all of the big banks that Ms. Masters is trying to persuade to invest in her company.
None of this has scared off JPMorgan, which has agreed to lead the Series A investment round in Digital Asset Holdings, people briefed on the negotiations said. To reward JPMorgan, the people said, D.A. plans to grant it warrants to buy a bigger share of the start-up in the future at the same price it is getting now. JPMorgan is said to have committed to helping Ms. Masters’s company improve and secure adoption of its technology.
Some of the other banks looking into investing in D.A. raised concerns about the JPMorgan deal in a meeting this month at the Sandler O’Neill offices that included Citi, Goldman and Bank of America representatives. Smaller financial companies, like Nasdaq and Markit, have also remained on the fence, the people briefed on the negotiations said.
For the full story from the NY Times, please click here
It doesn’t take a “markets muse” who speaks in tech talk to know that Fintech is not only fashionable, its now mainstream. And, whilst the early “jibber jabber” surrounding Bitcoin was fodder for Wall Street naysayers, including JPM’s Jamie Dimon, “the worm has turned” according to NYT columnist Nathaniel Popper, a bitcoin expert and the author of “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money.”
For earlier MarketsMuse coverage of the bitcoin and blockchain movement, click here
In Popper’s most recent NYT column profiling the cadre of banks, along with assortment of startups founded by banking expats, the fintech fascination is less about bitcoins as a currency, and all about the blockchain technology that powers the virtual currency.
MarketsMuse Editor Note: Though some of skeptics sitting on the MarketsMuse editorial stools suggest that these fintech applications should be targeting industries that actually embrace innovation, such as online gambling and adult entertainment, we won’t diss anyone by selling near-term straddles.
“…Nowhere, though, are more money and resources being spent on the technology than on Wall Street — the very industry that Bitcoin was created to circumvent.
“There is so much pull and interest on this right now,” said Derek White, the chief digital officer at Barclays, the British global bank, which has a team of employees working on about 20 experiments that explore how the technology underlying Bitcoin might change finance. “That comes from a recognition that, ‘Wow, we can use this to change the fundamental model of how we operate to create our future.’”
For people like Mr. White, Bitcoin isn’t just a digital token to use for online purchases. Instead, many of the top minds in finance have come to believe that the software that brought the virtual currency into existence also enables a fundamentally new way of transacting and maintaining records online — allowing people and banks to directly exchange money and assets like stocks and bonds without having to rely on a long chain of expensive middlemen…”
A few banks have gone public with their work, but most of the activity has been happening behind the scenes. At one private meeting, held in April at one of the Manhattan offices of Bank of America, executives from more than a dozen large banks gathered to confidentially discuss how the technology underlying Bitcoin could be used to change foreign currency trading, the largest financial market in the world, according to people who attended the meeting.
Central banks like the Federal Reserve and the Bank of England have their own teams looking at the technology.
“A year ago, it was more of an idea,” said Max Neukirchen, the head of corporate strategy at JPMorgan Chase. “Now, it is a real opportunity. You test it and realize that this can play a big role in our thinking about how our own infrastructure will evolve.”
Who are the players to watch? Aside from the secretive projects inside of each of the 6-pack shops (including JPM!), major exchanges including NASDAQ and NYSE owner ICE are actively throwing resources at blockchain technology applications. On the startup scene, Dave Rutter, a former inter-dealer broker who was a head capo at Prebon Yamane, and then CEO OF ICAP before starting electronic broker LiqudityEdge is now wearing two hats via his role at blockchain wannabe R3CEV LLC. Not to be outsmarted is Mark Smith’s “Smart Securities” product, created by his startup Symbiont. Smith is the former co-founder and COO of Lava Trading and a certified tech wonk with a keen FX markets expertise. His company, with help from fintech merchant bank SenaHill Partners has so far outfoxed R3CEV by having already set the stage to facilitate the first corporate bond issuance using the blockchain technology.
For Nathaniel Popper’s latest commentary “Bitcoin Technology Piques Interest on Wall St”., please click here
MarketsMuse.com Tech Talk update profiles the latest development regarding Overstock.com’s CEO Patrick Byrne plan for a cryptosecurity trading system “for brokerdealers” only and akin to the array of ECNs and ATS platforms that Fintech aficionados and broker-dealers are already accustomed to.
Overstock looks to issue Bitcoin-style stocks via new trading system; may issue up to $500 million in stock through blockchain-style technology
Overstock, the online retailer building a crypto-securities exchange, has revealed that it may issue up to $500 million in stock through blockchain-style technology.
Last year Overstock CEO Patrick Byrne hired developers and lawyers in an effort to create a platform – dubbed ‘Medici’ – that could use the core blockchain technology to create a cryptosecurity trading system, in which computer algorithms are used to trade virtual stocks issued by public companies.
The firm has now filed a prospectus related to the sale of securities with the Securities and Exchange Commission, adding: “We may decide to offer any of the securities described in this prospectus as digital securities, meaning the securities will be uncertificated securities, the ownership and transfer of which are recorded on a cryptographically-secured distributed ledger system using technology similar to (or the same as) the distributed ledger technology used for trading digital currencies.”
The prospectus says that these digital securities would not be traded on any existing exchange but on a specific system registered with the SEC as an ATS open only to subscribers that agree to trade exclusively through vetted broker dealers.
For the full story from Finextra.com, please click here