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Using blockchain in business, an industry joke goes, is a bit like teenage sex. While everyone talks about it, few are actually doing it.
On day one of the two-day Beyond Blocks conference, held at Seoul’s Shilla Hotel this week, the joke was certainly apt.
While blockchain technology has been talked up and is widely recognized as promising, mainstream investors have shied away from crypto-currencies, blockchain’s most significant application to date, because of the perception that they are a bursting bubble filled with get-rich-quick fraudsters, money launderers and North Korean hackers. Meanwhile, among the general public, the technology has essentially remained niche.
A star figure in the sector, Michael Novogratz, founder and CEO of US-based Galaxy Digital Capital Management, a crypto investment firm that is currently opening offices in Hong Kong and Tokyo, took the stage at Beyond Blocks to deliver some thoughts on these issues to a packed audience.
When Novogratz founded Galaxy “the mission was to convert institutional investors to crypto,” he said. While the big boys have not yet bitten, claimed Novogratz, the word is at last getting out.
“Now, when I meet a CEO or CIO, I am surprised at how much they know. Most have not taken the first step in participating but they are doing a lot of work.”
A youthful technology and a lack of precedent
When Galaxy first discussed the idea of a crypto index with Bloomberg – it now exists – the financial information giant listened politely but refused the bait, Novogratz said. It took a call to Michael Bloomberg himself to persuade him the idea had legs. “We convinced him, we opened his eyes and said it is not about North Korea and money laundering and drugs, it is about change,” Novogratz said. “It is a millennial-led revolution.”
Although the senior management from traditional finance houses are moving cautiously, younger executives in the companies are making the case for both cryptos and blockchain. “There is a push from the bottom of organizations saying, ‘We want to participate,’” Novogratz added.
Still, he cautioned against the exuberance the sector has become engulfed by. Star staffers, for example, are demanding the earth in salaries.
“Engineers are getting more expensive,” Novogratz, a 53-year old former Goldman Sachs executive and Forbes-list billionaire joked. “Now, on the West Coast, a 23-year-old engineer demands more than I get paid.”
And some investors have equally stratospheric expectations. “If you bought crypto three months ago, now it [has dropped] 50% and you look like a joke but in venture capital, nobody expects profits for years,” Novogratz said. While many investments promise returns of 7% a year, “in crypto, not many people want to buy at 10-12%.”
One thing holding institutional investors back is that few major financial services brand have yet jumped in so there is, as yet, no precedent set.
“Think about how institutional investors operate. It’s hard to tell your boss ‘I have money in places you have never heard of,’ ” Novogratz said. “You need a trusted, name custodian – a Japanese bank or HSBC or ICE or Goldman Sachs – to allow institutional investors to feel comfortable.”
Despite the beginnings of institutional forays into the sector, little formal involvement from Wall Street has yet occurred. Novogratz, however, is bullish that more concrete moves are afoot. “I think that is going to be announced in three to six months,” he said.
Beyond investors, large-scale market pick up requires transparency and understanding among users though Novogratz says it is not necessary to comprehend the technology in-depth. “Crypto is going to be the back of the TV. You don’t think about it,” he said. “You won’t see mass adoption until the user experience does not feel like something new and that is still five to six years away.”
Getting regulations right
In addition to institutional investor support and mass market adoption, Novogratz feels the sector needs a solid regulatory framework.
“It really needs clarity in the US first,” Novogratz said. But with most regulators cutting their professional teeth at institutions like JP Morgans and Goldman Sachs, early signs were overlooked. “Crypto is 98 percent retail, it is the peoples’ revolution,” he said. Sector innovators were “not Black Rock or the State of Wisconsin or Hermes Pension.”
As a result, cryptos were under the regulatory radar when the sector really ignited at the end of 2017. “Last fall, there was a frenzy when prices went up and [regulators] said, ‘Oh, shit!’ and did something fast,” Novogratz said.
It was not just the United States. Similar knee-jerk reactions took place in Japan and South Korea. “In lots of places they just said ‘stop’ to give themselves time to understand what was happening.”
“Regulators are supposed to protect the little guy and [initially] they did a crummy job,” he said. But now Novogratz is “wonderfully happy with the posture of US regulators,” after they started chasing the fraud and market manipulation that has hammered the sector’s reputation. In recognition of this, Novogratz anticipates greater legal clarity as regulatory bodies familiarize themselves with the issues of the sector.
Revolutionary tech vs traditional norms
However, concerns remain. Will the semi-revolutionary, decentralizing nature of blockchain and cryptos – which appeared partly in response to disgust at the 2008 financial crisis – not be negatively impacted by investment from global investment houses?
Not according to Novogratz. “You won’t change the world on half a billion dollars in market cap,” he said. “We need more liquidity in the system.”
Novogratz cautioned blockchain firms and initial coin offering issuers from appearing too cutting edge and suggests that traditional investment metrics be used to sort the sector’s winners from its losers.
“The ones I bet on have unbelievable science or have big money. ‘Too much of a good thing is a great thing,’ as Mae West used to say,” he advises. “You need a world class CEO and the ability to create a community. Each token is a social community.”
The good news is that “the air of craziness” has subsided from the sector. “I think we have bottomed out,” Novogratz said.
Senior, traditional finance executives, from New York stock exchange operator ICE to the Canadian Pension Fund are well informed about sector trends, he said, and “conferences are packed.” (Indeed. Seoul’s Beyond Blocks sold out; the Samsung-run Shilla Hotel’s conference hall was standing room only.)
“The bet I am making is that sometime in the next two to three years, a herd of institutions will come running into this space,” Novogratz said. “Without that, we will be running in circles.”
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