Cyberpunks & Wall Street
Bruce Fenton, a board memeber at tZero, speaks to why blockchain is the right solution for securities trading.
It is my great pleasure to introduce Bruce Fenton. Bruce Fenton, as many of you know, is an experienced economic advisor and active member of the blockchain industry. He is the CEO of Chainstone Labs, the founder of Atlantic Financial, the former executive director and board member of the Bitcoin Foundation. He's a board member at Tzero. He's a board member at Medici Ventures and he is, as many folks know, the host and founder of the Satoshi Roundtable, an exclusive invitation only retreat for leaders in the blockchain industry.
Bruce is serving as the managing director of Atlantic Financial, which in 1994 became the first full service investment firm on the internet. Prior to Atlantic Financial he was with Morgan Stanley, specialized in emerging technologies and emerging markets. Bruce has completed several significant transactions and served as a consultant to large investment funds along with ultra high net worth individuals and families. Bruce has served as an advisor to one of the worlds' largest charitable organizations for golf engagement and a top 10 global private equity firm.
He is a highly sought after speaker at conferences and has been interviewed by the Wall Street Journal, CNN, CNBC, Investors Business Daily and many others.
Please join me in welcoming Bruce Fenton.
Thanks a lot. Thanks. Hi, everybody. How you doing?
I'll tell you a little bit about ... let's see here, where are we going? I'll tell you a little bit about my background. I don't like to go into this too much but I'm sort of born to be here for this securities token thing. I've sort of done it my whole life. I'll just tell you quickly why and then we'll talk a little bit about the investment philosophy that we have at my company and how it is informed.
I first entered a brokerage firm when I was probably seven years old or so. My mom in 1977 became one of the first female stock brokers at Merrill Lynch and then she worked at PaineWebber for several years and then she ended up working at Dean Witter. I as a little kid I started hanging out in the brokerage firm. When I was nine I did my first stock trade, which was WCI, Warner Communications. I bought that because it owned Atari and I thought that Atari was going to do something cool.
I grew up in that industry. At age 14 I got my first job at Dean Witter and by 19 I had my series 7. I did that for a long time, 20 something years. We grew like many firms grew to serve larger and larger clients until we eventually served some of the largest investors in the world.
In that process I always focused on what was new, what was interesting, emerging technology and emerging markets. For emerging markets, originally that was China. When I first started at Dean Witter, which later became Morgan Stanley, China was the big rage. There was all this talk that, "Imagine if all these consumers started buying products. Imagine how big China could be as a market."
Then I started moving into the internet. That was a changing technology. I ended up living in the Middle East for a while as that market sort of boomed. But the biggest one that I've seen of all of them so far, even bigger than the internet ... We were a full service investment firm on the internet back in 1994. We were the first full service investment firm to use the World Wide Web. Really early in those internet days. I think that this boom with the whole Bitcoin and blockchain industry is the biggest of all of them.
Six years ago when I found out about this technology I really decimated this wonderful business that I'd built for 20 years that has all these clients that we worked so hard to get. The kind of clients that you'd dream your whole career of having. I didn't renew contracts with them and didn't accept the assets because we wanted to move full-time, full speed into this industry.
That was 2012. There was no industry. There was nobody who had any sort of real business behind it. There was only maybe a few employees in the entire industry that were paid and one of them was paid by our organization, the Bitcoin Foundation. It was Gavin Andresen, who at one point was probably the only full-time person in this entire industry. We paid his salary and then we paid two more salaries: Vladimir, whose now the lead maintainer of Bitcoin, and Corey Fields.
Then other companies started, or other organizations and companies started picking up the slack and then we saw a couple of small start-ups. We had BitPay and Coinbase.
I was looking for ways to merge my old world, the world I grew up in that I grew up in because of my mom, and my job from age 14 and getting my series 7 at 19 all through it. I thought it was natural to say, "How can we use this world that I came from and combine it with this new technology?" That was a long process for me to think about.
It really comes down to what is a blockchain and what's it for? At the end of the day, a blockchain is really a ledger and ledgers are really good for saying what is true. What statements are true in the world. That can be very, very useful for moving something of value from one person to another because you have a ledger that can say, "You have bitcoin. You've given it to me. Now the ledger reflects that."
With securities, that's very important. A lot of people don't really understand how the ledgers work. I'll get into that a little bit. I have a lot of stuff to cover. Typically because as the last panelists were saying this industry changes so fast, what I do is I just have some generic slides and then I go through a whole bunch of bullet points of thoughts, which I think is not as polished. But because things change so much it makes sense to cover a lot of things that I think are useful for this audience.
The title of this is "Cypherpunks and Wall Street." The reason I think this is important is this movement ... Everything that we see here, and many of you were probably at Consensus a little while ago and some of these other huge events, all of these tens of thousands of people and all of these billions and billions of dollars are in this industry, it really came from this movement. Some people may not like it or may not understand it or they may get creeped out about the politics, but that I think is a very significant strategic error because this is where it came from. If you don't like it, then you should consider not being in this space because this is really the roots of what this is. This Cypherpunk movement.
There's absolutely no question that bitcoin and therefore all of this was born of a political movement and from this Cypherpunk movement. Basically, what the Cypherpunk Manifesto is, you can't see it in the small type, but I definitely recommend reading it. It's only a page and a half. This one piece of paper written by Eric Hughes was some of the most important piece.
You could argue, there might be an argument but you'd have to talk to Satoshi to find out for sure, but I think somebody could argue that without this there might not have been any of this industry. There might not be blockchain. There might not be securities tokens. There certainly wouldn't be Bitcoin. In any event, whether it is 100% or just some percent influence, it is very, very influential and it's important.
There's a line in here, which I can't really point to, but my favorite part in there was a lot of stuff about politics and how you can use software to make the world a better place, but my favorite line just says, "Cypherpunk write code." Basically, you write code, which is a form of an idea, and you publish it. That's what the Cypherpunk Manifesto says.
Why that is important is because as we talk about all of this huge, huge potential and I believe it is incredible potential, especially with token securities of potentially tens of trillions of dollars. That simple act of publishing an idea freely and opening is very, very significant because it changes the way that incentives work. It changes the way that people participate and it's very, very different then the world that I grew up in and many of you grew up in, in this Wall Street world where you have shareholders and CEO's all on different platforms.
In open source, it is an idea that's given away. In the case of Bitcoin and really everything that has become because of that, the idea was given away and then anyone in the community can contribute. It sounds nice and it sound good if you're trying to ... Its' nice from a ... We talked a lot about regulation today. It's nice if you're trying to avoid regulation. You're just publishing an idea. If you publish code like Bitcoin, that's definitely not a security. If it's truly open source like this and it's just publishing an idea and that's something that ...
The reason I can say that so confidently, even being a non-attorney, although I've been regulated by SCC longer than I've not been. I've been regulated by the SCC for 27 years. I'm only 46 years old. I'm a non-attorney but I can say pretty confidently that when you publish an idea, if your entire act is writing down an idea and publishing it, that's not a security. And I would fight that to the ends of the earth. I'll fight that in court and I think that I'd win. I don't think you'd need me or anybody else to fight it because clearly Bitcoin, for example, is not a security.
That's kind of nice. But the really, really important thing is when you get into the incentives. What does that really mean? What that really means is that it's your project. Bitcoin belongs to me, it belongs to you. A truly open source project, something that embodies the Cypherpunk Manifesto, it belongs to all of us, which means that you don't have a leader. That completely changes the way that incentives work, the way that the governments work and all of this kind of thing.
Also, there are some things where Wall Street will need to up its game and move on to this model, which I think is the next model. There's these old sayings that say something about "medium minds talk about people, bigger picture minds talk about ideas." There's a lot of talk in Wall Street about, "Oh, we're going to talk to this person." And, "We're in with the commissioner." And, "We're meeting this so and so head of such and such bank."
That's very old school thinking. I hate to say. That's old school thinking because in the new world if you're here and talking about blockchain, you're looking at the blockchain industry, the entire thing, all of this that's going on all over the world, was created because of Bitcoin and these aligned incentives.
The best projects are the ones that embody this the most, where they don't have the leaders. There's a reason if you look at the top 10 coins, for example, on CoinMarketCap. Look at how many of them are more fair, that are not ICO's where they have at least made an effort to this Litecoin, Bitcoin, Monero. Ethereum certainly didn't meet this but has tried in some ways. And there are other ones that don't.
But aligned incentives is very, very important because it informs how things are governed and how you make decisions, how you change. There's been a lot of drama in Bitcoin with going back and one group wants to change something, one group doesn't want to change things. But at the end of the day, it's the network participants. That's very, very different than the old world.
I think that it's important to look at that and think about that and think about that kind of governance in the process. Here's some early cool people that were in the list and I talked a little bit about it.
I support a few different open source projects. Bitcoin is the number one. I served as Bitcoin Foundation director and I'm on the board still. It shouldn't be thought of as in this concept about talking about a leaderless and decentralized world, and organization like that shouldn't necessarily be thought of as important because it doesn't have any ability to effect or change the Bitcoin code. That the way you should have it in a system like this.
It's very, very important for looking at what blockchain you're going to be using. I hear a lot of people worrying about the SCC. As I mentioned I've been governed by the SCC since I was a teenager. Basically my whole life by the SCC. I take them very, very seriously. I'm a libertarian anarchist type of person, so I'm not a big fan of any government agency. But as far as government agencies go, they are much less tyrannical than some of the others.
I don't have any issue with the SCC but equal worry that you should have is the stability of the blockchain that you have. I hear a lot of people talking about how they are going to comply with regulations, we're going to use regex plus or we're going to use this or we're going to use that. You may want to ask: What block chain are you going to use? How do you know it's secure? How do you know that your contracts are secure? How do you deal with bearer assets? And these kind of issues. These are different issues that we've had to deal with.
In '79 when I was a little boy going up to visit my mom's office, there was a robbery there. There was a robbery at Merrill Lynch, a guy came in with a gun. He wanted some bearer shares. He didn't get any because they didn't have any there. But I'm betting that was probably one of the last armed robberies of a brokerage firm. Certainly didn't happen to me and I started in 1992. Got my series 7 in 1992. I never had an armed robbery and we had a key at Morgan Stanley's office. Just walked in. Right down here, when I did my training in New York here, because you didn't have bearer assets.
But it's a whole different world now. You have now people who have tens and tens of millions of dollars in bearer assets and as thieves and hackers get more sophisticated to understand who has these things, a hedge fund manager might have been very successful and never had two-factor on their phone, is going to be in a completely different world. So there are other risks that you have.
This is important. This goes back to the Cypherpunk Manifesto is because it's important in thinking about how a network works. If it's not decentralized, what's the opposite of the crazy mess and chaos that you have in Bitcoin? A lot of people talk about, "Bitcoin needs better governance. This is crazy that people are arguing and anyone can say anything." No, that's what you want. You want that because otherwise the opposite of chaos is control. You don't really want control because if there's control, guess what? That person's not always going to agree with you.
The government of Saudi Arabia, the government of Israel may not agree. The government of Taiwan, the government of China and the Dalai Lama might not agree. Somebody may not agree with you and you don't want to be in a position where your blockchain has to arbitrate those disputes or be ordered by one country to do something.
What if two different countries order you? The world's a big place. There are going to be wars. There are going to be 9/11 scale attacks, there are going to be all kinds of things that happen in this and you're going to have powerful actors that are trying to change what the truth is. What a ledger is is a statement of truth. A blockchain is a statement of what is true.
One issue I have with Ethereum is that there was a hack, or I shouldn't say a hack. It was actually an exploit. It was an attack on this project called the Dow. Somebody used the terms of the smart contract to drain $30 million or so in a way that wasn't intended. It's slightly different then a hack. They didn't actually steal money, they just sort of abused it. It's like abusing the small print or something. You check into the hotel and they say, "Hey, you know, you check the terms when you came in. We didn't tell you we get to keep your car too."
Sort of on you. You could probably sue the hotel and go back and forth but any event, hack or attack, whatever you want to call it, somebody took it and the Ethereum chain was rolled back for a measly $30 million. The fact that that can happen proves that it can happen again. If you don't have a great understanding of how it happened, and how it could be prevented happening again, then the Ethereum chain is really just a statement of what people think should be true, not really a statement of what is true.
What is true is that the Dow contract was exploited and somebody took those coins. Since the people who owned a lot of those didn't like it, they changed it and that is a drawback of having a centralized chain. Because if they can do it, then they can be ordered to do it.
I'm not bad mouthing Ethereum. On the first slide I was going to get into the investment philosophy about what we've done on this and it's important to inform the way we're thinking about this.
Anyway, when I got into this space in 2012, I started thinking: How can we take advantage of this, of what is happening in the future? And: How can we use the power of these ledgers? Or ledger at the time when there was one.
I actually invested in Ethereum. I was a crowdsale investor and invested on the first day. I was fortunate enough to know Vitalik when he was 16 and 17 years old or so. He was known as a Bitcoin person at the time. He'd go around to meetings and I'd see him at conferences.
I saw him when he gave the first presentation about Ethereum down in Miami, which is an interesting day. It was also the day that TigerDirect announced that they were going to accept Bitcoin. It was the day that Charlie Shrem didn't show up at the conference because he was arrested. And it was the day before Ben Loski's media show where he had that ill fated bit license, which has harmed New York greatly. A lot happened that week.
I invested in Ethereum and then I invested in some of these other projects that I thought would have a chance of working in this area of issuing tokens. I think that at least from an investment standpoint, we've tried to work hard to have really good long-term ideas about where we think the market is going to go, but also to be not so confident that we're 100% sure that it's going to be any one chain.
Right now Bitcoin is my favorite chain because it is a very strong chain, but it isn't really well suited for this use case of tokenised securities. Ethereum I like. I've done very well as an investor in it and because of that process and supporting Ethereum and being there from day one, we have a huge network with Ethereum. But I mentioned the issues with the Dow hack.
I invested in Ethereum classic and we got some of that for free when, if you ever owned in Ethereum you got Ethereum classic. Then I invested in some of the other projects like EOS and ADI and a couple others. Then we also made investments in individual companies like Abra who has a very cutting edge wallet, which I think is very relevant to this space and ShapeShift and other investments.
Anyway, my point of that is it's not about criticizing Ethereum but these are the kind of things that are very, very important because ... I would say even more important than the SCC. As somebody who's been registered for a long time and I pride myself on having, at least so far after 20 something years, a clean compliance record. It's very, very important to comply with these laws but it's even more important to secure that money.
They're going to be one and the same. The SCC will eventually catch up and they're going to have probably regulations, certainly guidance on how immutable is your chain? Who can decide to change things on it? What happens when there's forks?
There's going to be a lot of issues around this. It's really important to look at the roots of those things and what's backing them. To me the most important thing in that is a truly decentralized model where you have aligned interests. That would be open source.
Now, the projects that go on the open source protocol aren't decentralized. This is something that's really important to mention. Probably obvious in this group because you're mostly securities people, but when I'm talking to Bitcoin people or classic crypto people without a securities background, their biggest objection is, "Well, why don't you just have a database then? Why do you even need a tokenization security? Why don't you just put it on a database?"
My answer to that is that most people don't understand how the databases operate. I ask back, "What database? Who has the database now?" Most people don't know who runs their database now. If you own Apple shares, who do you think has a list that says you own those shares? It's not Apple. So you're trusting a central issuer. You're trusting another party. But you can't trust them with the database because Apple doesn't have the database. Apple doesn't know if you have shares. If you have an account at Morgan Stanley, they know that you have shares. But guess what? Goldman Sachs doesn't know.
There's this whole network many of you are very familiar with where all of these brokers communicate, all their ledgers communicate with each other and then ultimately they get netted out and there's clearing firms and transfer agents and brokers and administrators and registrars. Then they all end up in one name, Cdm Co. Really all the shares, because by 1996 Wall Street couldn't keep track of this big mess they said, "We can't even hope to really know who owns what. Let's just put it in Cdm Co's company's name and then we'll have DTCC figure out who kind of owns things later and we'll net it out and then at the end of a day or two or three people will kind of know what they have."
That's the model that they had. They built that model from before '96. In the '80s and even the '70s they used to just net it out at the end of the day and they'd say, "Okay, we did 60,000 trades and Goldman did this and UBS did this and we owe 5,000 shares." And they'd get on a bicycle and they'd bring those shares over. They're much more advances now. They use FTP, which is like 20 year old technology.
It's not so much that the centralized registrar, it's not a matter of bashing DTCC and the Cdm Co mess. It's not well suited to running a big complex ledger is really hard. Asked the best blockchain people. Ask the best scientist in the world. Say, "Okay, I have a ledger with 20,000 different sub ledgers and hundreds of millions of trades between those ledgers and they're held by 350 different major parties who hate each other." That's hard. It's hard.
Goldman Sachs doesn't trust Merrill Lynch with their ledger. So they have to rely on a centralized party. What blockchains are really, really good at is getting rid of centralized parties. You don't need that extra trusted third party. You already trust the issuer. But all this big mess about how things trade around, you don't need that. That's what the beauty of this technology is.
Couple other quick points. I'll go through this. I support a few of these. I invented this, it's called Spacesuit X. It's just a simple little tool. I think open source is great. If you have an idea, especially an idea like this that's not maybe a billion dollar idea, just give it away. Make it open source and give it away so it's an acronym basically. Just things that people can look at in picking a digital asset. I won't get into it too much. It's not the topic and we're running out of time.
Ravencoin is another one that I support. Ravencoin actually should be interesting because it is specifically designed for this use case. It is designed to be a platform that helps assets be issued. If you're familiar with Counterparty or Mastercoin which operate on Bitcoin, Ravencoin uses a fork of Bitcoin. Uses those things to make it so you can issue assets just like any RC20 token using the stability and strength of the Bitcoin chain but with some changes that allow you to customize those assets and be able to do dividends and voting and things like that which are very, very key.
We saw this coming a long time ago, so we've been working on this a long, long time. Securities token is a new buzz word lately but it's something we've worked on for a long time.
Also in that regard I'm on the board of Tzero, which is an exchange, an ATS. It's owned by Medici Ventures, which I'm also on the board of, which is part of Overstock. That's working to be one of the first fully licensed token securities firms.
There's a lot of cool things that's going to happen with this. I think the world is going to look very, very different. You're going to be able to carry around your stock in your pocket. Everybody will be able to issue stock. You'll have hotdog stands and pizza houses that will be publicly traded and you can trade these things peer to peer.
The whole nature of how capital works and how liquidity works in the world will be changed. I think it's really, really significant. It's a big deal. It's going to change the world and it's super exciting. Here you are early. Some of you were here in the early Bitcoin days. I know some familiar faces in the audience. Some of you weren't.
But this is just as big and it's very, very significant. You're not going to see a lot of people make these ridiculous returns on token securities but some of the businesses and enterprises and protocols backing this potentially $20, $30, $40, $50 trillion dollar industry are going to be really, really significant. It's exciting. It's a great time to be in this industry. A great time to be alive. It's going to be really interesting to see what happens. Thank you.