The interview was conducted and written by Pat Larsen, CEO at ZenLedger.io a Crypto tax service.
What will cryptocurrency mean for banking, IPOs and more?
We talked with Michelle Tsng whose incredibly diverse background—with deep experience in law, tech, entrepreneurship and community building—gives her a unique perspective. She’s done stints at Cisco, eBay and PayPal and then left the corporate world for the start-up life, where she became interested In virtual currency, helping a non-profit, VLAB, and co-founding a blockchain payments company. Blockchain has been fascinating to her as a convergence of all her areas of expertise. We talked to her about IPOs and ICOs and payment methods from PayPal to banks to cryptocurrency.
We thought that 2017 was the year of the ICO with 876 ICOs raising $6.2 billion, but 2018 has been even bigger—with 1224 ICOs raising more than $7.5 billion. Tsng shared some insights on why even with this volume, these startups aren’t yet making an outsize mark on the payments world.
It is still difficult to acquire and transact in crypto; unlike with PayPal, I can't just buy a donut seamlessly. Crypto necessitates several steps—going through several exchanges, taking care with addresses and understanding conversion rates so you need a Crypto tax service. With PayPal, all you need is an email. And of course, there is no recourse if you make a mistake or someone steals from you, unlike in traditional banking and PayPal.
That’s such an interesting point on Crypto Taxes and Accounting. As a new payment form, crypto and blockchain are going to be disrupting traditional finance companies, and we’re seeing some of those stalwarts, like MasterCard and Bank of America filing a lot of patents. And yet today, if I hand you a check, it has a routing number and account number, and I have full confidence that you can't steal my money, and if you do, it's insured. But cryptocurrency doesn’t have these assurances.
Tsng shared her view on the relationship between crypto and banking companies and what must be done to embed a sense of security:
You can see where the disruption will come; if we have the blockchain, where do banks fit in? People wonder why we have to wait three days to settle and pay fees. A lot of the credit card companies feel threatened by the technology because they have these large legacy systems in place and that technology basically makes some of these institutions obsolete.T
he U.S. banks have been shockingly slow with technology; for example, I think the latest thing was YOYO wallet which means I can pay you with an e-mail address. PayPal did that years ago, by the way. They don't have sophisticated systems to protect the consumer, so if I sent something to you, there's a lot of scams, and there's no recourse even though it's provided by a well-known bank. Compare that to PayPal which has buyer protection to protect consumers.I think we still have a ways to go, in terms of influence and security for cryptocurrency, because everybody talks about how the blockchain is encrypted, but it is still vulnerable to being hacked. Why aren't the exchanges using secured blockchain to keep track of all the money and the things, or multiple cross blockchain and having both cull it?
Having worked at PayPal, I'm used to having a wallet and sending money with an e-mail—the money is in my wallet and not a bank. In the future, I would hope I can just send instantly send my coins to you for work you do for me, and you can buy goods, digitally or physically.However I think there has to be standards within the peer-to-peer blockchain communities to make sure that the blockchain is secured, rather than just assuming that it's protected by cryptography and nobody can break it. Once we have some kind of standards it will be better for the community and for consumers.
We hear a lot about how blockchain can disrupt angel and VC investing and get rid of the gatekeepers. I was curious what Tsng thought about what happens when a large amount of institutional capital comes in and whether that will professionalize the space.
I see it as just a reinvention of investment banking: It's coverage; it's distribution; and it's access to capital. However, the barrier to entry is a little bit higher because you have all the regulations that startups have to go through. And I see that they need quite a bit of seed money since the space is becoming commercialized with consulting services popping up.
Now that bigger firms have come into this space, a lot of the ICOs are doing private sales, or pre-sales, that target a lot of these bigger, traditional VCs, which are now starting to conceal funds. The problem is that unlike equity—where you're basically saying you believe in the project—these investors are seeking liquidity. But if you have one big investor buying lots of your tokens, what would happen if they sell all of it at the same time? They can get out very easily. So you have to wonder if they are doing the same amount of due diligence on the token, or are they just selling it for the high. If they come out and make their money, then the coin will go down.There’s so much riding on the possibility of an ICO, and there’s not yet as much historical background that will help investors make good decisions. I talked to Tsng about some of the capacities she would look for in an ICO consulting company.
Right now I think we are seeing a re-creation of traditional investment banking where banks provide an IPO with marketing, share distribution and legal services. The banks are also selling access to capital providers and a stamp of legitimacy.
But with an ICO it’s a little difference because they’re basically giving away virtual coins that they have created, so people are just signing up because of that. But do you know whether they really believe in the project or which protocol will survive? Since it’s based on supply and demand, and it's new money, the VCs can liquidate any time, and then they've got basically no buying chairs and no buying member who's going to buy their coin.
Their customer base will really be their partners and the other companies that they partner with, and so it depends on those relationships, but once you've paid money to work with these protocols, are they investors? I think there's a distinction between partners and investors, and that will affect the price of the coin in five years.That speculation piece is what makes some investors wary. I asked Tsng to share some heuristics she uses to evaluate the quality of an ICO.
It starts with a team of very smart people; they have to have business judgment, but they also have to have character. To me grit is really important—they are not going to give up because they believe in this project and will continue, even during bad times. And it’s hard to find in the startup space; people tend to come and go, because they want coins or title, or the next big trend comes along and they’re off to do something else. So to me it’s about filtering people, and knowing who to do business with.
The product has to be great but even if the developer really knows how to make stuff, often they don’t have the sales knowledge or business knowledge, so advisors are really important. But they have to care; I see a lot of advisors who actually don't really spend a lot of time with the company, so you need to make sure the advisors are really giving smart feedback to help move the company forward.
And of course, having customers is pretty cool—you have to know how are you going to make money with this company…are you going to grow something first? Then you need a lot of investment beforehand.
Everyone is still wondering how blockchain will shake out. I talked with Tsng about whether she thinks it will find its biggest applications in finance, or whether other capabilities will ultimately gain more traction. For example, it's not shocking to think that virtual reality is going to lead to huge digital asset economies, as well.
A lot depends on the barriers to entry. Games are always going to gain traction because they’re fun. CryptoKitties—people love cats. And then there’s the whole space of digital goods. A couple of years ago I was talking to a friend about how crazy it was that people were paying for digital hearts. And maybe they were only a dollar, but if a million people buy them, then that’s a million dollars. It’s similar to the early days of Facebook and people would “poke” you or give you gifts; you’d end up with a dim sum dumpling or a shoe.
Or consider the digital gaming companies, like FarmVille; at some point, I think they were PayPal's biggest customer. My nephew would say, "Michelle, I really need to feed my fish or tend my garden, or my farm is going to die.” It was a case of the digital affecting the physical, and you get addicted to it.
At the end of the day, crypto still also has an air of speculation. It’s what my startup ZenLedger is trying to counteract by helping people on their Crypto Taxes and Accounting with good governance: We help individuals and CPAs pay their Cryptocurrency taxes, so from my vantage point, I’m really only dealing with the white hats. But I wondered whether Tsng would agree that highly speculative investments can result in an atmosphere where it’s difficult to trust what you see.
Yes, at the beginning everyone is excited and wants to be a part of it. But at the end of the day, it will depend on the integrity of the person. And governance is also very important. Without the threat of defamation, how do we regulate ourselves, and how do we make sure that everyone complies? It goes beyond taxes to laws and regulation, and eventually to integrity. I see a lot of OGs [originals] coming to the space, people with money. Are they ethical? Are they going to be keeping the ecosystem safe for newcomers? There’s a lot of scams and frauds in Crypto tax service.
When you create a startup, people come and go, because it's hard. From an investor perspective, you have to understand those dynamics, and from a founder perspective, you have to filter out the people who are there for the experience or the money.There is so much exciting possibility in crypto, but Tsng shared what we all know: that the blockchain community needs to self-regulate better.
There are tons of scams, but we don’t seem to be keeping them out. Perhaps the high failure rate of ICOs will cool the market and make it less attractive for outright frauds to jump in and that will create a benefit for everyone.Author: Pat Larsen is an alum of the US Air Force Academy and Chicago Booth. He is a co-founder of ZenLedger.io, a Bitcoin tax calculator for individuals and CPAs. @patlarsen on Twitter.