IVCA Feature: Questions Were Answered at Event, "Unraveling Crytocurrencies and Blockchain"

IVCA Feature: Questions Were Answered at Event, “Unraveling Crytocurrencies and Blockchain”

February 28, 2018

It’s the second month of the year and already the Illinois Venture Capital Association has had their second Event, “Unraveling Crytocurrencies and Blockchain.” The lively luncheon on February 14th, 2018, featured information on one of the hottest financial topics of the moment, currencies and money systems that develop on the internet marketplace. The event was sponsored by Greenberg Traurig LLP – an international law firm, the largest in the country, with 38 locations including Chicago – and featured Saurabh Sharma of Jump Capital as moderator. The expert panel included... 

  • Barbara A. Jones, Shareholder of Greenberg Taurig LLP
  • Uri Klarman, Founder/CEO of bloXroute Labs
  • Omkar Naik, Lead of Microsoft’s Enterprise Blockchain and Data Platforms


Crytopcurrencies has been a hot financial topic in the last couple years, led by agencies like Bitcoin, which was founded in 2009. Blockchains are part of the system that allows these currencies to function, which was explained through the Q&A format between the moderator Mr. Sharma and the panel. 

Q: What is Blockchain? What does it really do and how does it really work? 

Uri Klarman took on this question. Essentially crytocurrencies are an exchange of money-for-services that doesn’t rely on banks or credit cards. It is an exchange that is directly between the transaction parties – peer-to-peer – which ends up being cheaper and more efficient. In Bitcoin, there is an online “wallet” which contains your funds, in which is “unlocked” with a private key. Thus in a transaction, funds can be sent to another wallet through the private key system. 

The second part of these transactions involve “miners.” These miners take into consideration all the transactions going on, and put them together into a “block.” There is a fee for successfully putting those blocks together, with percentages of all transactions within it. Currently, these blocks are being created online every ten minutes, and consequently is the “Blockchain.” These Blockchains are the history of every transaction made within them.

Q: Why have they’ve become so destructive? 

Again, Mr. Klarman answered. Basically, he put it in terms of banks. To function, customers must trust banks with their funds. But within those institutions, it has become complicated between businesses, especially internationally, to effectively transfer funds. With the Blockchain, the entity-to-entity (peer-to-peer) transaction is direct and finished in minutes. And in another important point, if someone wanted to change the transaction in any point in its history, you can go back to the relevant Blockchain to do it. That is a huge difference in the facilitation of business transactions.

Q: How is Microsoft thinking about this new way of transactions? 

Omkar Naik of Microsoft weighed in. At Microsoft, they have a platform to bring in Blockchains. Where they are seeing the applications besides financials, is in shipping. There are Blockchains that are smoothing out the customs situations of shipping between borders in real time, which includes trucking, so sensitive or perishable items don’t sit and wait to clear customs. This had also led to re-thinking data and documentation between lawyers, doctors and medical resources. For example in a crisis, blood donations can be cross referenced much faster.

Microsoft treasury is also running a Blockchain internally where they are reducing the current time of six months to open a Microsoft bank account to ten minutes. In another example, Microsoft has also been working with the United Nations refugee situation, creating a smoother transition for these refugees to rejoin the economy. 

Q: In terms of the Private Equity industry, will the cost be prohibitive in starting over with these kinds of transactional methods? 

Again, Mr. Naik of Microsoft. This is in the crawl-before-we-walk stage, as far as using a technology that removes the trusted entity (banks). To trust each other in a direct method will require education, which is the stage that we’re at.

Q: We are all familiar with legal contracts. What is coming out of this new transaction space is the “Smart Contract.” What is a Smart Contract? 

Barbara Jones of Greenburg Traurig handled this inquiry. Essentially, the Smart Contract is an “if, then” scenario. As was said earlier in the peer-to-peer scenario, if money is transferred from my account to your account, that is basic way a smart contract works. It is evolving into a variety of uses across the broad chain and industries as Blockchains are being defined, and being used for legal contracts.

Mr. Naik spoke of these contracts as “alerting the system.” If there are specific needs that a transaction must have, these become part of the transaction. It alerts the exchange, and then puts it in place. Ms. Jones concurred, calling it an exciting feature because you can build whatever elements necessary within the contract, in a real-life scenario. 

Q: Who owns the Blockchain? How do you think enforcements and accountability will be handled? 

Ms. Jones was concise... “it’s a brave new world, no one owns the Blockchain.” She went on to summarize the recent press, with announcements by SEC, FTC, State Regulators and the IRS, everybody is jumping aboard, and it is going through a regulatory evolution... especially in the last year. About nine months ago is when the hard looks at cryto-trading and coin offerings started happening – how it was being offered, what constitutes them, what rights are associated with them and who they were being offered to – and actions are being taken. 

For example, a company offering crytocurrency in Germany was hacked, and the SEC used the situation as a roadmap for companies going forward, and basically were saying that they are awoken to this marketplace. There are securities laws already in place, and the players in this new market are expected to follow those laws. The expectation from federal and state regulatory agencies is that the gatekeepers need to keep the market sound, and there will be enforcement actions. 

The general view right now is that if you want to do a coin offering, it either has to be registered with the SEC or fall into an exemption. If it does fall into an exemption, you’ll have a one year holding period on trading, so that has to be built into a smart contract. All of this must be thought out in advance, especially if the offering is characterized as a utility or securities token. What are the rights assigned to each? 

If your company is raising funds through a coin offering, close attention must be paid at to what stage the company is in... because if your company’s product or service is not completely commercialized and available for use today, in the eyes of the SEC you will be a security... and you’ll have to justify to the SEC that you’re not. That’s the stance at the moment. The utility token is one used within a business ecosystem, for example accessing the good or service with that token, and paying for it.

Q: Can you state that as an example? 

Mr. Klarman offered an example of a UBER coin, as in what if you paid for the ride service with such a coin. You would have to buy the coin from UBER, and within that system would pay the driver. That is a utility token. 

Ms. Jones emphasized that most companies are not at that stage. She said she was working with companies that want to do a utility coin offering, and her firm is working with the SEC to convince them that these offerings are a utility. The companies don’t want to be the next poster child for enforcement, considering that is the mode the SEC is in at the present. 

And then there is the Commodities Futures Trading Commission, who viewed these coins as commodities, and want to regulate it accordingly. The IRS is looking at it as property, as when you buy or sell its a gain or loss. That must be reported on income tax. On the state level, there are requirements as a money service organization. There are a whole rack of regulatory circumstances, a “real hornet’s nest,” and it is evolving. Mr. Sharma added that the legislative hearings on these scenarios are ongoing, and the SEC is receptive in these hearings.

Q: What if you are looking at crytocurrencies as investments? 

Ms. Jones warned that there are many different structures for pre-sales and Initial Coin Offerings (ICOs), for public and private situations. So keep in mind these are securities, and if an ICO or pre-sale doesn’t agree with that, you should be asking more questions before investment. Also she noted that offshore structuring might not work in the United States, especially in this current regulatory environment. Always use best diligence, and ask a lot of questions. 

Q: With Blockchains and crytocurrencies changing everyday, how can an investor or user trust what the system will do?

Uri Klarman explained that Bitcoin, for example, is called a ‘permissionless Blockchain,’ in the sense that anyone can join. And in this case, you can have half the folks in it making decisions one way, and the other half doing something else. Today, there are many ideas happening at once, and Klarman sees the system stepping back and slowing down. The Blockchain exists as ‘trustless communication,’ and this drives value. The useful Blockchains will emerge, from a situation where many are being developed right now. 

Ms. Jones added this... that the crytocurrency market has the same “bubble” characteristics as the dotcom bubble of the early 2000s. In the dotcom bubble, there were stricter gatekeepers, in the crytocurrencies it is more of a Wild West atmosphere. 

AUDIENCE Q: Does each token or coin have its own Blockchain, or in essence is there just one Blockchain, like there is one internet?

Mr. Klarman answered that originally each currency had their own Blockchain, and then people started using existing Blockchains to trade the currencies, so now not all of them have their own.

AUDIENCE Q: In your opinions, which of these coins will survive? 

Mr. Klarman said it’s still unpredictable, and it has two parts. One is a strong networking effect... for example, if a lot of people are using Bitcoin then is has more utility. The other part is the question, ‘does it have value?’ The time reduction of peer-to-peer payment has value, and the older networked currencies are the key. 

Ms. Jones expounded on the two types of currencies, one networked and the other ‘utility tokens’ that, for example, a business issues to pay for its services. The advantages of the networked currencies is that they can be used across platforms, or to purchase utility tokens. 

Q: How will this infrastructure scale up without driving up the expense of implementation?

Omkar Naik of Microsoft took on the question. As the system evolves, it will take innovations to make it more viable. For example, the most efficient way is to look at these as applications, which plug and play into the protocol that you choose.

Q: How can crytocurrencies work on an Limited Partner basis? 

Ms. Jones pointed out that most funds currently do not allow crytocurrency investments. There are ‘side pockets’ in some investments for cryto, or forming new funds which invest in Blockchain companies. It’s a different LP universe at that level, because traditional LPs are not yet interested in this space, so there is a lot of discussion going on in the formation side. 

AUDIENCE Q: Do companies that accept Bitcoin, for example, hold onto it or generally convert it? 

They generally convert it, according to Ms. Jones, because it’s hard to open a commercial bank account using crytocurrencies as a deposit, except in very limited cases... usually if there is a long-standing relationship between the company and the bank. Mr. Klarman added that if one country will start to use it, as in Japan recently passing a law to accept crytocurrencies, then a domino effect will take over. Ms. Jones mentioned smaller countries like Estonia and Dubai jumping on board, as well as Florida real estate deals being made with crytocurrency. 

AUDIENCE Q: Do you foresee a day when different currencies will be able to trade on one Blockchain, and how is hacking being protected? Mr. Klarman spoke of scaleability... the number of transactions that can be handled in a certain amount of time, as the key to trading. The single Blockchain is still not feasible because of currency politics, and the number of coins. The hacking had to do with access to a person’s private key, and it didn’t affect the rest of the Blockchain.

The next IVCA Event will be Tuesday, March 13th, 2018... “Uncovering Cyber Risks During Diligence.” Click here for more details and to register.