2017 Q3: Bitmark CEO’s Observations to our Investors
To: Bitmark Investors & Advisors
From: Sean Moss-Pultz
Note: This article series is taken from Sean’s quarterly letters to Bitmark investors. We share them publicly one quarter after they are written to give everyone a deeper, transparent look at Bitmark’s perspective of the world.
Dear Investors & Advisors
There is a lot going on in the Bitcoin/blockchain space. I would like to share some observations. As I write this letter, the price of bitcoin is about $5,500. (I can remember thinking that $1,000 was amazing, and that was only back in January!) Price matters because it creates excitement and fuels other opportunities. For example, new forms of funding, such as initial coin offerings (ICOs), have been raising money at astonishing speeds — over $2B this year alone. I’m often asked “When will Bitmark do an ICO?” I have thought deeply about doing an ICO. We decided not to do one now.
Why not now? There were two main reasons. First, we were concerned a “Bitmark coin” could confuse our positioning. We are not trying to be a cryptocurrency. Money and property are fundamentally different. Money is fungible, and must not have a history. Property is always unique, and its origin and history give it value. Second, technically, we do not need a token for our property system to function. Other crypto-currencies (eg: bitcoin, litecoin) work fine for us. In short, we feel that not issuing a token clarifies the value of what we’re building and differentiates us. It also lets us partner with those who might see us in competition if we had our own cryptocurrency (e.g., China Trust Bank).
From a personal perspective, I really like the fact that ICOs are global and not concentrated in Silicon Valley. Anyone, anywhere can raise (and invest!) capital just like sending bitcoin — without requiring permission from anyone. That’s an amazing change. Yet as an entrepreneur who raised a small amount of money, the process of being “vetted” was invaluable for me. Learning how investors value a business really changed my thinking. When I see the gap between how traditional VCs value companies and how the ICO “market” is valuing companies, I get uncomfortable. This gap in expectations can permanently damage relationships.
Also, ICOs can be securities. The SEC said they would use the Howey Test as their guideline for judging whether a token is a security. Thus, a token transaction is a security if:
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
I don’t see a clear, clean cut way to translate tokens into that test. (How tokens are technically defined can even change, too!) I spoke with lawyers from three different jurisdictions to understand what’s going on here. And my conclusion is that no one really understands what’s going on here. Security violations are usually game over — for the company and often the individuals involved. It seems the tech built to stop trusting third parties can’t wish away compliance as easily as it might seem.
Another set of questions I am often asked relates to why Bitmark has chosen not to move towards “smart contracts.” A smart contract, if you’re unfamiliar with this term, is a computer program written to run on a blockchain computer. ICOs are examples of smart contracts that (usually) run on the Ethereum blockchain. (What is a blockchain computer? That’s complicated. I like to explain it as a virtual or cloud computer, shared across many traditional computers and protected using the cryptographic and consensus methods that make Bitcoin secure.) It’s important to understand that smart contracts are very different from traditional contracts written by lawyers. My favorite thinker in this space is Nick Szabo. He likes to say that law is “wet code” for the brain and programs are “dry code” for computers. Here’s a short article if you’re interested in learning more.
Bitmark has been cautious in moving into the smart contract space because we view data through the lens of traditional property rights, or wet code. Bitmark foresees smart contracts interacting with digital property, just as conventional contracts reference property rights in the physical world. But that will take time. Our immediate challenge is integrating Bitmark with existing property rights and contract law, which have already evolved to be highly decentralized and effective. (I like to think of law as code that has been debugged for 2,000 years!)
Once we have established legitimacy with existing legal frameworks, smart contracts can be a logical extension. For example, licensing or renting could be written as a program that leverages the property ownership rights for royalty payments. I think it will take some time to realize such a system, but Bitmark is already thinking through the tech needed for bitmarked digital property to be created, transferred, and authenticated from within smart contracts.
Similar to the case of Bitcoin and payments, we seek to partner with others building out smart contract infrastructure, while we focus on the property system. (This is why we joined the Hyperledger consortium.) Recording and transacting around property rights is what we do. If we can be the best in the world at that, we would contribute something valuable to the digital environment that is currently lacking. And I would feel confident that, in the process, we could build a great business.
Here are two articles and video I recommend about this space:
- A Letter to Jamie Dimon
- Money, blockchains, and social scalability
- Do our devices control more than we think?
That’s it for now. If you have any questions, please give me a call.