Blockchain, Cryptocurrencies and Web War 1 [Interview with Brad Rotter]
The growth of blockchain and cryptocurrencies has created new questions, opportunities, and problems the likes of which our world has never seen. Yet like any challenge, looking to history for lessons learned is a sure way to find solutions.
I recently spoke with Bradley Rotter, vice chairman of Rivetz and co-founder of the Entanglement Research Institute, who has an entirely unique tenure in both finance and blockchain. During our conversation, he shared fascinating lessons and anecdotes about utility and security tokens, barriers to mainstream adoption, and “Web War I,” and what we can learn from the finance industry of the 1980s. The interview was edited and condensed for clarity.
One of the first things we talked about is that we’re now at a point where crypto tokens have become the most valuable type of data that exists today, but that this has yet to be realized by the mainstream.
The most valuable data in the world used to be in the Pentagon. That's no longer the case for two reasons basically. One, all the data has been stolen from the Pentagon. It's amazing how much data we've lost. Not just in the Pentagon and DOD and NSA but basically every entity, every corporation. And the second reason is if you stole the plans for the next generation F39 joint strike force fighter jet, good for you, there's only a couple of buyers. I maintain the most valuable data in the world at this juncture is the Bitcoin private key because it's money. And so the cybersecurity aspects of protecting those keys, protecting that money...it's a significant challenge but an absolutely critical net structure if digital currency shall become ubiquitous.
The storage and security of currency have been a top priority and challenge for thousands of years, and counterfeiting has been an issue for just as long. Blockchain has changed this in that while there hasn’t been much counterfeiting in digital currencies, one could argue that the prevalence of fraudulent ICOs is a different form of counterfeiting. Mr. Rotter underscored the gravity of the challenge at hand.
I've talked a lot about what I call Web War 1. It's the first war in history that cannot end. There's no one to surrender. There's no flag, there's no capital, there's no general command staff, there's no one to surrender. Moreover, what's worse is it's the first war in history that we're facing thousands of armies from nation states, criminal gangs, terrorist organizations, down to pimply ass teenagers in their dorm room and last but not least, it's the first war in history that we're all on the battlefield for.
In addition to the security of tokens and transactions being a barrier to mainstream adoption, Mr. Rotter had strong feelings that Bitcoin, despite getting crypto to where it is today, is hampering the next phase of growth for the industry.
It’s likely that Bitcoin is the next Netscape. As brilliant as it is, the construct of Bitcoin mining and expending copious amounts of computational resources and electricity resources is pretty damn inefficient. And nature abhors inefficiency. It's also a nightmare from an accounting perspective to use Bitcoin or any digital currency in routine transactions.
Rotter’s last point about it being a nightmare for routine transactions was only lightly touched on but cannot be underappreciated. I’m reminded of Geoffrey Moore’s bestselling book Crossing the Chasm, which explains that while successful tech companies attract early adopters with disruptive products, achieving mainstream adoption is done by positioning them as incremental improvements to people’s existing processes. There is still a lot of progress to be made to make cryptocurrency more accessible to the mainstream.
Bearish and Bullish on Utility and Security Tokens
Utility tokens exist to guarantee future access to a product or service and not as a currency itself, and yet the market in some cases treats them as an investment vehicle. Mr. Rotter shared a fascinating analogy between the current status of the utility tokens market with IRUs in the 1980s.
There was a very similar construct to utility tokens back in the 80s and they were called IRUs. An IRU stood for the indefeasible right to use a strand of fiber, and there were futures and options, and firms being set up to create IRUs. These companies laid so much cable on the ocean floor to create the IRUs that they flooded the market. Most went bankrupt.
Well, it's a very interesting analogy to what we've experienced last winter with these utility tokens. In order to produce a new utility token, you don't have to rent a boat or lay cable on the ocean floor, to produce a new utility token, takes a few minutes. And as a result of that, many of these utility tokens were printed and shoved out the door. That's my view of what's caused this tremendous price collapse in the entire space. Those new utility tokens took money that otherwise would have been deployed in Bitcoin and Etherium, and as a result, caused the outward price pressure for Bitcoin and Etherium and basically the entire universe.
Unlike utility tokens, security tokens are subject to regulation by the SEC because it’s value is tied to a tradeable asset. And unlike utility tokens, Mr. Rotter sees a brighter and more tangible future for them.
I'm very bullish on security tokens. As my friend David Johnston has said for a number of years, everything that can be decentralized will be decentralized.
It will be interesting to see how global markets and regulators react to the fact that it’s just one global market unrestricted by borders. In the same way that birds don’t see different colored countries as they fly across them, people will seek out the regulations they want regardless of country. Mr. Rotter shared what he’s heard from government officials and their outlook on the blockchain.
The government people, the regulators that I've spoken to are enthralled with the concept of the blockchain and what it can do for regulation. This is a regulator's dream to have an immutable ledger like the blockchain to track beneficial ownership, to track taxes, to ensure against malfeasance like making short selling and so forth. Again, there are always two sides to the coin. The downside of this new paradigm is cyber security that we've talked about before.
Ultimately, a great promise of blockchain in government and public expenditure is that we can collapse government bureaucracy and let programs run on their own while giving the public more trust and transparency into how the system functions.