Matt Harris has been investing in FinTech companies since before the term was coined. He was initially drawn to the field partially due to the lack of attention it was getting 20 years ago. I recently caught up with him, and we covered the core four segments of FinTech: payments, lending, investing, and insurance. (He also argues in this this interview that real estate is worthy for consideration as a fifth segment.) The broader interview will be published shortly. Of interest in this segment of our interview was his contrarian perspective on blockchain. He is an investor in crypto-currencies, which he personally invests in, and shares the reasons why he believes blockchain is a hammer in search of nails.
(To listen to an unabridged podcast version of this interview, please click this link. This is the 30th interview in the Tech Influencers series. To listen to past interviews with the likes of former Mexican President Vicente Fox, Sal Khan, Sebastian Thrun, Steve Case, Craig Newmark, Stewart Butterfield, and Meg Whitman, please visit this link. To read future articles in this series, please follow me on on Twitter @PeterAHigh.)
Peter High: You are on the investment committee of a digital currency group, which you have referred to as a firm that provides a front-row seat to cryptocurrencies and blockchain. Cryptocurrencies, specifically Bitcoin, have been in the news quite a bit over the past few years as fortunes have been made and lost because of cryptocurrencies’ extraordinary volatility. What is your thought process on the evolution of cryptocurrencies, and how bullish are you in that space?
Matt Harris: I have been referred to as a Bitcoin maximalist because as it relates to crypto assets, I tend to be dramatically more bullish on Bitcoin than any of the other currencies or assets that have been developed. While I believe fixing prices is all inherently speculative, I get the use case for Bitcoin, and I have spent hundreds of hours speaking to owners of Bitcoin. While there are unfortunately no users of Bitcoin, the owners of Bitcoin tend to believe in it the same way people have believed in gold as a store of value for millennia. This store of value is not necessarily seen as stable on a short-term basis, but it is seen as a store of value that is divorced from the whims of governments and the inflationary tendencies of fiat currencies. It is instinct, rather than universal. Similar to many people, I have never owned gold in my life, but roughly five percent of people with means end up owning gold, and they view it as a hedge against inflation and chaos. For this new generation of mostly young people, the idea that gold has inherent value makes little sense. Frankly, other than the fact that gold has been valued that way for hundreds of years, there is no inherent logic in gold being valuable, so Bitcoin is far more appealing to this demographic.
As it stands today, there is $7 trillion of gold above ground right now, and there is about $200 billion of value in bitcoin. I view how we think about non-fiat stores of value as a market share game. We are beginning to see what percentage of people will want to own the new digital currency, as opposed to the venerable shiny metal one. To me, that is the bull case on Bitcoin. While I do not have a crystal ball on where it will go from here, I have made sure to own a good amount on my personal account and spend a great deal of time on it through DCG.
The second category where I have my conviction stems from the first. If you believe that people will want to invest in and hold Bitcoin and other crypto assets, then you will need a plethora of aspects market structure to facilitate that. If you are going to do that, you are going to need the following;
- Training venues;
- Exchanges;
- Company solutions;
- Ways to sell short and go long;
- If you are going to trade these non-fiat denominated tokens, you need something called a stable coin;
- Excellent management firms;
With DCG, there are some wholly-owned businesses and asset management trading, as well as events and media. Through DCG, we have invested in 115 different companies. Many of these are orientated towards capital market use cases that assume that there will be an emerging and evolving market for these assets, and therefore, it will need elements of market structure. While there is no evidence of success yet, I find the notion of distributed-applications extremely intriguing. I think of these as open-source protocols with an internal token.
Many of the apps that we use today as consumers, such as Facebook, Uber, and Airbnb, and those that we use for our businesses, such as Slack and Outlook, are software-driven tools that are now owned by companies or are companies themselves. I am interested in the notion that these should be open-source protocols, owned by no one and fueled by tokens that users need to buy, own, use, and earn through the utilization of the new school versions of Uber, Facebook, Outlook, and Slack. This is a massive idea, and there are thousands of highly qualified teams consisting of engineers and entrepreneurs who are building these applications on top of Ethereum. Many of them are launching these tokens before they are in use, pre-selling them, and using the funds to build the software. Most of them are going to fail, and many of them have already failed. Hundreds of millions of dollars have already been lost on a mark-to-market basis because this structure lends itself to the type of scammy promotional pump and dump schemes. However, that does not mean it is a bad idea, it just means that it is subject to abuse. While we have been cautious in the world of the distributed application and the associated token, we remain fundamentally intrigued by the idea that underpins the movement.
The last segment that we consider is enterprise blockchain. This entails the notion that the blockchain's database architecture which underpins Bitcoin and Ethereum is a radical new innovation. Some believe that there are corporate use cases within an enterprise or between and among enterprises where there are existing workflows that can be transformatively improved through the deployment of that novel database structure, with its distributive nature at the core. However, I have been relatively skeptical in this area. While there will likely be some use cases, there will be fewer than what is generally believed. Frankly, the real innovation behind Bitcoin is the trustlessness or permissionlessness. This is the idea that people can exchange Bitcoin without having to know each other and without having a central counterparty such as Visa, Mastercard, or The Depository Trust & Clearing Corporation [DTCC] stand behind and clear the transaction. This is a magical innovation as billions of dollars can freely move around without anyone being able to edit or censor the transactions.
However, this idea is not something that has utility in the context of the corporate entity. In the enterprise blockchain world, you frequently hear the phrase, "permissioned blockchain." If you believe that permissionlessness is the inherent quality of blockchain, then the idea of a permissioned blockchain is transparently ridiculous. However, this is an extremely negative view, and there are many great people who have an abundance of money desperately trying to find a nail for which blockchain is the right hammer. Because of this dedication, nails will be found, and I am certain that there will be successful projects. That said, I suspect when the final analysis is done regarding all the time, effort, and money that went into it compared to the results, I believe it will be viewed as a weak use of resources.
High: Do you surmise that the time and attention, especially among many large enterprises investing in the space, is based upon a misunderstanding of the ultimate value that the technology should have?
Harris: No. It would be ineffective to walk around Barclays and attempt to get people's attention by trying to organize resources and budgets. If you said that, "We need to upgrade all of our databases. We need to move from relational database to NoSQL databases or even distributed ledgers," people would say, "Get in line." They would tell you that everything should be upgraded, including the chairs, but spending scarce resources, time, and attention on upgrading the databases is a bad use of money because the ROI is so vague.
It is no secret that there are new database structures, and moving from flat file to relational in the early '90s was a smart move. While it took 15 years, we eventually moved off the mainframes onto the client server, we moved from flat file to relational, everything got better, and we should keep doing that. However, nobody was going to start handing out money, titles, and promotions to database upgraders. On the other hand, blockchain's rise to prominence via Bitcoin created an enormous opportunity to create what people call, "Innovation theater." You could go to Jamie Dimon and say, "I know you hate Bitcoin, you have been super public about that, and you are right because Bitcoin is for drug dealers." What is interesting is the blockchain. It was an incredibly elegant and smart saying that co-opted the momentum of bitcoin and made it safe and thrilling for corporate America. As a result, a great deal of time, resources, and budget got allocated to the database upgrade project in a way that never would have otherwise happened.
There is truly transformative potential here. With the current system, it takes two days to settle U.S. equities transactions through DTCC, but if every single stock were on a blockchain or a distributed ledger, transactions could happen instantly. The technology is not what is stopping us from doing so. Instead, it is a social issue. There are thousands of counterparties who are used to a set of standards and who would all have to agree on a new set of standards. This transition is similar to how in the U.S, NACHA has finally developed real-time payment standards allowing you to do a real-time ACH. It took them 15 years, yet no one uses it because the delay is not a problem in 99.9 percent of the use cases. In fact, having a little bit of a delay when you are moving money around is advantageous because it reduces fraud and risk. After 15 years, NACHA finally figured out how to do the real-time payments without any distributed ledgers or blockchains just by getting banks to agree on a new set of standards saying that you do not need blockchains, and nobody wants it. My skepticism is that if this service was so radically desirable, we would already have it.
Peter High is President of Metis Strategy, a business and IT advisory firm. His latest book is Implementing World Class IT Strategy. He is also the author of World Class IT: Why Businesses Succeed When IT Triumphs. Peter moderates the Forum on World Class IT podcast series. He speaks at conferences around the world. Follow him on Twitter @PeterAHigh.
