This VC Is Sure Venture Capital Is About To Be Disrupted

Blockchain Capital’s recent BCAP token offering is a harbinger of things to come in venture capital and private equity, says the firm’s managing director Brock Pierce. And Stan Misohnik, the CEO and cofounder of a new investment bank focused on cryptocurrency called The Argon Group, seconds that. Pierce talks about how his career in cryptocurrency started with video games, how Blockchain Capital’s three funds have evolved over time, why he is taking the step to disrupt himself, and why his phone number is being handled by the office of T-Mobile’s president. And Miroshnik explains how his background in capital markets helped him see the business opportunity and why the BCAP token issuer was based in Singapore.

Show notes

Transcript

Laura Shin:

Hi, everyone. Welcome to Unchained, a podcast engineered by Fractal Recording and produced by me, your host, Laura Shin, a Forbes contributor covering cryptocurrencies and blockchain. Thanks for tuning in. Last episode I asked you all to fill out a survey I’m conducting so I can improve Unchained.

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Today I have two guests, Brock Pierce, cofounder and managing partner of venture firm Blockchain Capital and Stan Miroshnik, CEO of the Argon Group, an investment bank for the emerging cryptocurrency and token-based capital markets. The two collaborated on a recent crowd sale of Blockchain Capitals BCAP tokens, which represent shares in the firm’s third fund, which is called the Blockchain Capital III Digital Liquid Venture Fund.

The crowd sale or initial coin offering as they’re often called raised $10,000,000 for that fund and the BCAP tokens resolve a long-standing headache of venture capital, the fact that the investors usually called limited partners or LPs typically have to lock up their capital for 5 to 10 years before they see any returns.

In contrast, BCAP token investors will be able to sell their shares on the secondary market after 40 days for international investors and after 1 year for US investors. It looks like people were eager to participate in this new form of venture capital as the BCAP tokens sold out within 6 hours. Welcome, Brock and Stan.

Male Speaker:

Thank you for having me.

Male Speaker:

Laura, thank you for having us.

Laura Shin:

Before we dive into the meat of the discussion I thought our listeners would be interested in hearing that one of the most exciting interviews I’ve ever had in cryptocurrency was when I walked into Blockchain Capital’s offices right as Brock’s phone number was being hijacked and for those of you who don’t know about this, this was kind of a big trend.

It’s still going on. Trend is actually the wrong word. It’s a phenomenon where people’s phone numbers are being stolen by hackers to the hackers’ own devices which and then they’re using those phone numbers to get access to cryptocurrency. Brock, have you ever had such a dramatic interview with a journalist?

Brock Pierce:

Yeah. I mean, the timing was interesting and I have to thank you. I had a good resolution, far better than almost everybody else thanks to you. Yeah, so my phone was not working well and sometimes the reception in my office is a little less than perfect and so right as you’re coming into the office, I asked my partner Brad, I’m like, call my cell phone and it rings and I hear it go straight to a voicemail for a magicJack.

And I go well, that’s not my carrier and I’m obviously  very familiar with this issue and I’ve been warning people in a lot of my public speeches, you know, the importance of 2-factor authentication and that we’re really going to need something like 3-factor authentication.

You need a separate device because it’s so easy to steal people’s phone numbers but my phone number wasn’t in my name, so I felt I was pretty secure from you know this phone sort of porting social engineering, you know hack, but when my phone was taken, yeah, you happened to be popping into the office right then and there.

Fortunately, things worked out well for me. I was able to contact the exchanges and have my you know accounts frozen across the board. The hackers got absolutely nothing from me. I was able to remove my phone number from more or less all of my important accounts in a matter of minutes. I caught it quickly, but normally it takes at least at that point months before you get your phone number back.

I was actually very fortunate to have you in the office. You reached out to T-Mobile for a quote, which got my situation escalated to the office of the CEO and president and T-Mobile bent over backwards to get me my phone number. They worked with Sprint and things were resolved and my phone number is now held by the president and CEO’s office so if you walk into a T-Mobile store and you ask about my phone number, I don’t even show up. The regular customer service people can’t see me so thanks to you I’ve got like this incredible service and I got some gifts from T-Mobile.

Laura Shin:

Well, we have a lot to cover today, especially around the BCAP token news so Brock, can you begin by telling us how you heard about Bitcoin and ended up cofounding Blockchain Capital?

Brock Pierce:

Yeah. Well, I’ve been call it in the digital currency or virtual currency space since the late ‘90s. It started out with video games, a game called Sanctum, which was like Magic the Gathering or Pokemon meets chess and they sold virtual packs of cards and we would trade these cards with other players in the same way that you would in a baseball card shop or a comic book store and you know it was very clear in that instance to see that this intangible object had value and the inside being that the intangibility of the object didn’t make it any less valuable.

Its utility was just as much as it had been if it were physical and in some ways arguably better because you could play with people all over the world versus just those in your you know local town, and so I contacted the game company and said I’d like to buy your virtual packs of cards in bulk and I’d like to basically run a single store, you know, I want to replicate what exists in the analog world digitally, and they’re like yeah, that makes sense.

And so I started that business up in the late ‘90s and then with things like Ultima Online and EverQuest and World of Warcraft and Second Life, I jumped into that business and I was kind of the world’s largest market maker for all of these virtual economies.

I built up a supply chain of 400,000 people in China that were playing video games professionally to mine digital currency again in games like World of Warcraft or Second Life and I’ve done tens of billions of dollars of business in that category and so it was only natural that Bitcoin was on my radar from you know more or less the beginning but it wasn’t until 2012 where I saw sort of critical mass forming, momentum building and I finally actually fully appreciated the novelty of the technology in a way that I didn’t in the earlier years, but that’s when I said okay, you know. I was asked by people what do you think of Bitcoin?

And I said well, that or something like it is the future. I just don’t know if the future is now or 25 years from now and so it was in 2012 where I said okay, clearly the future is now, I have to drop what I’m doing and I’ve been working full time in this space since, started a bunch of companies, done a lot of stuff in my name, done things kind of all over the place but yeah, the principal thing that I do is we’ve been…we build a fund, a leading fund in this space and we’ve been having a lot of fun with it.

Laura Shin:

So actually I wanted to go back to what you were saying about these gaming tokens, you said that you also had people mining those, like in China, what does that mean? Because of course I know what mining means in Bitcoin but I don’t know what it means when it comes to a video game currency.

Brock Pierce:

Well, yeah. I mean, we’re the original miners. When we talk about proof of work in video games, it’s…it has a whole new meaning or an original meaning and that is that the virtual currency, the swords, the shields, the horses, the castles, you know, these sorts of things inside of these gaming environments had value and essentially I was making a market for time.

There were people that had too much inventory on our hands and they wanted to pay rent or buy beer, right, and then you had people that lack discretionary time but had expendable income and in essence I was a market maker between you know those two groups of people and so the people…well, the problem is I had more buyers than I had sellers and so eventually I had to look at the world and say okay, where is the biggest population of people that have a high propensity to game?

And it was pretty obvious to me that it was China and so I just jumped on a plane and moved to China not having any contacts. I opened up the you know Yellow Pages and got an office and hired a recruiter and actually built up a few thousand employees there between Hong Kong and Shanghai.

Laura Shin:

You were paying people to play video games to collect these shields and horses and swords and etcetera and then you were selling them to people who didn’t have time to play the game to collect them so that way they could purchase them to employ in the game, is that what I’m understanding?

Brock Pierce:

Yes. I employed hundreds of thousands of people, hundreds of thousands of individual people to play these games to do that to meet tens of billions of dollars of global market demand. You know, I managed what looked like an altcoin market of hundreds of currencies across hundreds of servers and different games. My main investor was Goldman Sachs Principal Strategy that propped us. I think I was their first private investment because they looked at their currency trading desk and they said wow, I’m managing more markets than they do.

Laura Shin:

That’s really interesting and I find that…

Brock Pierce:

This is when I was like 20, 21, 22, I was a very young guy back then.

Laura Shin:

Yeah. I really like that story and I like kind of so the parallels to the way the market is I guess burgeoning or evolving now in cryptocurrency and I actually then, one thing that you sort of alluded to, but I think in that story that you were telling about how you decided in 2012 to get more serious about it, is that when you founded Blockchain Capital and if so I know also…well, I think also Brad and Bart are your cofounders, Brad and Bart Stephens, how did you hook up with them?

Brock Pierce:

Well, so Bart and Brad, yeah, so I didn’t start with Blockchain Capital. The first thing I was doing was mining because I was very concerned about you know regulatory risks and you know is the government going to try and shut this down and I know Orange Is the New Black and all but I just never thought that was my color.

I was afraid that jumpsuits don’t work on me either and so the first stuff I was doing is a lot of things around my name, you know, I had I think 10 percent of the batch 1 Avalons and you know most of what I was doing was pretty stealthy in the beginning until I got kind of comfortable with the idea that you know let’s say the US government disliked Bitcoin, the world’s a big place, and it’s actual…its market opportunity is really in the developing world so you know if you’re smart and you’re careful and you’re well advised in terms of legal counsel, you can do really innovative things in this space and you can sleep at night and in part that’s what our ICO is attempting to do is hopefully provide some better guidance for people in the future, but the first thing I did is I’m an entrepreneur by background so I built a lot of companies, I’ve run a lot of companies, you know, kind of call it early stage CEO, kind of founder type role, and when I was looking at this industry, I couldn’t figure out what company to build.

You know, I could build one of the me too basic infrastructure plays or something different and I saw so many interesting opportunities I didn’t know what to do with myself, so I decided to start incubating  companies and I was building a new company every two months.

I started Tether and Go Coin and Blade and buying Mt. Gox and a bunch of different sort of businesses that I was kicking off and I was starting a company every 6 to 8 weeks, and then I got up to running you know 8-10 companies simultaneously in a I kind of call it executive chairman type capacity, and I realized this isn’t going to scale either and that there was still more things that I wanted to participate in, more exposure that I wanted and I could’ve evolved into more of an accelerator that looks like Boost or I decided that the best way to get exposure to the overall ecosystem was as a fund and so Bart, Brad, and myself started this.

And I got to know them going back to my video game days so Bart and Brad were running a $700,000,000 hedge fund when we started Blockchain Capital. They shut that down to do this full time with me, but they were also you know for the last decade prior to that, the biggest industrialists in the video game industry you know in terms of public companies.

They were the main investor in Tencent when they went public and you know all sorts of interesting gaming companies around the world and so they were playing World of Warcraft and you know I’m going to try and tell the story the way they do, but they were playing World of Warcraft and they were like wow, we’re paying Blizzard $15 a month each for accounts but we’re paying this company IGE and these other businesses hundreds of dollars a month to buy virtual gold and things.

They’re like this is kind of an interesting business, and I think you know this company might be bigger than Blizzard. They’re like let’s go figure out what this industry is, who does it and they went and found the 5 or 10 biggest most popular websites to buy World of Warcraft Gold and then they started making a research project of it and looking up who owns these companies, looking at domain registrations and things and what they figured out is I owned all of them and I’d already rolled up the entire industry and so they actually cold-called me you know like 14 years ago and they’re like all right, we think what you’re doing is awesome, we want to meet you, and they came down and they offered me you know like a $20,000,000 investment in my company. I’m like, thanks, that’s a sweet offer but no, thank you. I can do a lot better. And they’re like what?

And then I closed an $80,000,000 financing a few months later led by Goldman Sachs under substantially better terms, but they ended up investing in that round and my partner Brad Stephens was on my board and so in 2012 I went to my board of directors for what was one of the remaining businesses.

I sold my media business to Tencent. I’ve had a number of exits in that space but we had our main Korean business left where we were doing a little over a billion dollars a year at about 700 employees in that remaining business, which is one of the last assets left of that kind of era of my life and Brad was on the board along with Goldman Sachs and Oak Investment Partners and I said hey, guys, we’re in Korea, we’ve got 90% market share, the industry is flattening out and there’s not really a lot of room left for growth, so we got to either expand into other territories and start making that kind of expansion move or we have to start getting into other product verticals. I said I want to get us into Bitcoin and Goldman Sachs and my whole board like including my partners in the case of Brad, everybody laughed at me, like Bitcoin are you kidding?

I’m like, no, I’m actually very serious that I think that there’s a big thing happening here and we need growth and I think Bitcoin is potentially that big market for us. I said I want to buy Mt. Gox and they’re like why? I go well, Mark Karpeles and the management team is maybe the worst there is and their technology is horrible but they have all the market share.

We have the management team and we’ve got the technology so let’s go buy this thing and they’re like okay, this is a joke, and basically didn’t entertain the conversation. I made an argument and said hey, I’m going to send you guys some research about what’s going on in the Bitcoin market and why I think that there’s potentially a big future here and in our next board meeting I want us to reevaluate because you know I want to have an informed conversation.

You clearly are…you’re taking this as a bit of a joke and it’s a very serious conversation so three months later we come back, you know, board meeting starts and I’m like okay, I want to buy Mt. Gox and they still laugh at me again. I’m like did anyone read the research that I sent you? Did anyone read any of the…and the response essentially was no.

Well, the person from Oak then went on and led the circle investment and _____ 16:00  a lot of interesting things come to Goldman but I got a hold of my partners Bart and Brad, I’m like you run hedge funds, you invest in you know virtual currency video game companies, you’re you know kind of Silicon Valley royalty, how is it that and you’re young that you didn’t review any of the stuff I sent you and you’re still you know dismissing this idea.

I go it’s okay to disagree with me and think that Bitcoin is stupid and that buying Mt. Gox is a bad idea, but it’s not okay to dismiss my idea when you’ve done no work to actually understand the market opportunity I’m presenting to you, I’m really disappointed, guys.

You know, I can understand Goldman Sach’s response but you guys know better, you should know better. I’m disappointed and they actually were so affected by this conversation they dropped what they were doing and they started contacting every economist, cryptographer, computer scientist and they went into a deep dive because I basically said what’s wrong with you? And their deep dive into Bitcoin came back with Brock, we want to shut down our hedge fund and come build a venture fund with you full time and that’s actually _____ 17:07.

Laura Shin:

Vindication for you.

Brock Pierce:

I don’t tell that story very often but that is the origins of how the firm got started and then I went to Bobby Lee and Charlie Lee and Matt Roszak and a bunch of friends of mine in this space, this is in 2013, I said hey, I’m going to pass the hat around and let’s just start throwing money into all of the cool deals and let’s see what you know happens from there and now here we are 5 years later.

Laura Shin:

Nice. Yeah. Well, I’m glad that you mentioned Bobby and Matt because they are both people who were previously on the podcast and my next question actually was about these companies that you guys have invested in, I’m sure as you kind of mention in the beginning, you know, there were a lot of companies that maybe were a little bit less legitimate or just you know not really good investments, but several of your portfolio companies have now become some of the top firms in this space like Coinbase, Chain, Xapo, Ripple, Bitfury, BTCC, BitGo. I mean, there’s just a long list. So how did you guys discern what would be good investments when it came to vetting the different start-ups in this industry?

Brock Pierce:

Well, the main thing you know I think as a venture capitalist for you know from our perspective at least I can speak for myself and I think my partners, the most important thing that we look for is ultimately the founders, it’s the management team, you know.

You’re investing in people first and foremost, ideas and everything else are secondary, and in the list of companies that you’ve named, the founders of every one of those companies are you know extraordinary you know people doing amazing things and the sort of person that you look at, you talk to, and you say I think you might change the world, and those are the people that you’re trying to support back and you know I think we’ve done a pretty good job of picking the best possible people in the industry and you know there’s a few deals I’d like that we would be in that we’re not in but I think in terms of overall portfolio we back the best people in the business.

Laura Shin:

Okay. So I also want to hear a little bit more about what it was like investing in these start-ups during this period up until you had this idea for the BCAP token. So what kinds of trends did you start to notice in terms of what entrepreneurs or developers were doing and also how that might affect the venture capital industry?

Brock Pierce:

Yeah. Between each fund or period you essentially have a vintage and you know the 2013 and 2014 and 2015, each of these years you know had a different trend and so Blockchain Capital was the first venture fund in the world set up to invest in this area exclusively and in the beginning it was a lot of Bitcoin companies because that’s all there was, right, in 2013. There weren’t…I mean, the term blockchain wasn’t even used very often other than in the case of the blockchain wallet, blockchain.info.

It was mostly early on Bitcoin companies, the basic infrastructure in the same way the internet wasn’t very useful until you had you know an internet browser and an email client and a search engine and content and things to read and e-commerce and things to buy.

You know, you needed all that…they call it the bridges, the roads, the tunnels, the basic infrastructure for it to be useful and so most of the you know early investments were in these kind of now you know iconic Bitcoin companies. I’d say that was the sort of first phase and then it became how do we use Bitcoin technology, you know, sort of the blockchain, the enabling technology to re-architect the financial world and you know the chains and you know those types of companies that emerged and then the sort of next wave is well, what else can you do with this technology outside of financial services and starting to look at media and all of the things that we’re doing today and we still invest across all of them.

I mean, Bitcoin and cryptocurrency, the digital currency side of the business was in a bear market for a couple of years and so we stopped investing in new companies in that area because I didn’t know how long the market would be bear. Obviously we’re in a phenomenal bull market right now, but in that bear market as a VC it was you know we had a lot of companies and those could all end up being starving babies and you know you just stop trying to take on new companies that may need money because between you know DCG and Pantera and Fenbushi and all of us that invest in this area, you know collectively we don’t have that a big pool of capital. We do not have enough money to support these portfolio companies.

We rely in a large part historically on the later stage generalist VCs and you know the VC market you know said hey, okay, I’ve got a bitcoin or a blockchain bet, I’ve got 1 or 2, I haven’t seen any exits.

I’m not seeing massive revenues being generated in some cases, market’s a little bit flat, you know, we were in a tough time, and so we were focusing on you know kind of the most emerging of things and you know we invest across all of it now and then obviously with ICOs, you know, I was a founding board member of the first ICO, Mastercoin, which was the sort of the project that architected with…has become ICOs and I’ve been a major investor in you know a lot of the most important ICOs.

I think we owned like 10% of MaidSafe when it went live. We put 500 Bitcoin into Ethereum’s crowd sale and own almost you know I’d call it a million Ether at day 1 and you know I’ve been doing the ICOs, but in our first two funds we had some large LPs, you know, kind of big family office types that said we got Bitcoin exposure, so I don’t want you know the fund buying things like Bitcoin and Ethereum and I said that’s fine, I would never actually buy those types of things…well, at the time Bitcoin with my fund and I don’t need to charge you a fee to buy Bitcoin.

I’ll show you how. Let’s start by taking you to Coinbase and do you want to buy more or do you want to secure more? I’ll show you how to use BitGo and I don’t need to make money off your buying a Bitcoin that you can do on your own. I don’t feel justified in charging you for that but unfortunately in fund 2 we were prohibited in our docs from buying crypto.

I remember like just pulling my hair out when Ethereum was at a dollar and I’m like I’d like to make the largest bet our firm’s ever made in Ethereum at a buck, I want us to go buy you know…I said I want us to buy a million dollars’ worth and we couldn’t get the legal approval to do it and couldn’t you know…I probably should’ve gone and got waivers from everybody but that would’ve been you know a 40 or a 50X return in a pretty short period of time and fully liquid.

The IRRs on this venture fund would start to look like Chris Sacca’s. Unfortunately, I mean, we did just fine and I made that money myself, but I’m really excited by our new fund’s ability to invest in ICOs and I’m kind of bummed out that I wasn’t able to do this on behalf of my limited partners. My job as a fiduciary is to get up every day and make money for people and it’s really disappointing when I’m prohibited from doing so because of a term that was intended to prevent me from buying Bitcoin, not other things like Ethereum, but we fixed that with the third fund.

Laura Shin:

This takes us up to this time of the BCAP token. So let’s actually turn to Stan now. Stan, can you tell us your background and how you learned about and became interested in cryptocurrency?

Stan Miroshnik:

Yeah. Absolutely. So most of my background is in investment banking and capital markets and so I spent most of my career I started at Morgan Stanley and then worked across New York and London and Moscow and saw the emerging markets develop and become very active overnight and so I followed Bitcoin sort of on and off since about 2012 and even played around with miners at home and kind of the nerd in me likes to tinker with that stuff, but never really seriously considered it because I saw how quickly complexity was growing, how quickly miners were evolving, and always thought it was something that’s sort of a world away.

But then early last year I started paying attention to you know what’s become known as the ICO market, but I saw early-stage companies engage in really interesting capital markets activity that you normally you know…you normally don’t see and I saw all those dynamics playing out and to me what was really…

Laura Shin:

What are some examples?

Stan Miroshnik:

Well, like watching Ethereum earlier, then watching the Dow and watching how much interest it garnered and how unique of an instrument it was and the depth of the market for a compelling asset like that so an ability to raise 150,000,000 in a market that at that time was less than 15,000,000,000 in terms of both Bitcoin and everything else, that was pretty meaningful and the willingness of the community to invest from the grassroots and support a project like that, not only through kind of open source participation and participation in the development but also with their dollars, that’s pretty compelling and so as we saw more and more products coming to market, more and more ICOs happening, what was clear to me is that you kind of needed an institutional player to bridge this market, right, you had very deep technical teams taking effectively a break from their product road map for 3, 4, 5 months to dig into securities law, to try to understand what jurisdictions can I do this in, can I not, do I need to set up a foundation, do I do this in Switzerland, can I…I’m sitting in the US, can I do this in the US and does the ICC have jurisdiction and each one of these companies was doing this over and over in addition to each of them individually trying to find investors, each individually trying to find and build a platform for the distribution of the ICO each individually writing their own smart contracts.

And it was obvious to me just from the traditional capital markets that what you need is an institutional grade service provider that helps these companies bridge the gap between issuers and investors, helps them run a clean process that starts with diligence, starts with a clear story for the coin, how investors benefit, how the company benefits, how the community gets to participate, how you think about the governance going forward, what are the implications for the company, you know, 18, 24 months from now when they go to look for new financing and then engage directly with investors both those that are small token investors but also kind of the bleeding edge family offices, high net worth individuals, folks that are already holding some Bitcoin and are thinking about this asset class.

And so last year so at around this time we started the Argon Group, which is you know, which is our vision for a digital investment bank focused on this new tokenized cryptocurrency capital market, and I had the fortune of meeting Brock in the fall of last year as we were kind of experimenting with various legal structures and how to create a clean, clear, compliant, and legal path for an ICO for a company that wants to do it as a true equity security or a true security versus doing it as a use coin or a more traditional structure and so we were based in LA and Brock spends a lot of time in LA and so as you talk to the lay community and you know talk to folks in San Francisco and the valley when the conversation turns to cryptocurrency and Bitcoin, it’s always…it always goes back to Brock so he is kind of the epicenter of this ecosystem and so I met him through a friend.

He came over to the office and we had you know I think we spent a couple of hours together and like his insight and vision for this space was so compelling that I thought we kind of have to work together and so a little bit…you know, sometime later he asked me to come up and meet Bart and Brad and we had a really interesting conversation about doing you know a first tokenized venture fund. Part of that thesis is about the capital market in general. Look, there’s…you know, the market is large.

A lot of people are holding core positions in Bitcoin and Ethereum and some of these other coins, but it’s really a market that’s starved for product and a lot of those…the holders don’t actually want to exit crypto in any way. They don’t want to go back to fiat. They want a product offered inside the crypto market and that’s a compelling idea on one side.

On the other side, the fund is purely focused on blockchain and cryptocurrency and so it makes perfect sense for them to lead innovation in this space, disrupt themselves and offer a product to their constituency because if you are a part of the broader cryptocurrency community or just in general, if you’re trying to make a bet on blockchain now, there’s almost no way to do it, right.

There’s no public companies. There’s no comparables. You can’t get access to the elite venture funds that typically invest in this stuff and so there’s really not a mechanism for someone even in the community to really participate in a traditional sense and so creating this product as we talked about it made you know lots and lots of sense.

Laura Shin:

And so what is your business model?

Stan Miroshnik:

So our business model is kind of a very traditional investment bank and so as we build it we help issuers issue shares, we help investors invest in tokens. We’re building a platform for distribution of tokens very much like you know sort of a traditional online brokerage type platform. We have investors like that come in. Yeah.

Laura Shin:

But what I mean is do you take fees from both the group that’s doing the crowd sale as well as the investors in the crowd sale or are you charging only on one side or?

Stan Miroshnik:

We’re charging only on one side and it’s on the issuer’s side.

Laura Shin:

Which is? Okay.

Stan Miroshnik:

But the vision for the businesses is much broader. It’s about building products that help you invest in this space. So what we did with B Capital and we’ll talk about that in a little bit is it’s offered as a security and so to purchase a security especially if you’re in the US you need to be…to go through an AML and KYC process and you need to be accredited and so you need to have a pathway and a platform for people to do that and so creating these other tools and products to help this investment ecosystem is part of sort of the broader vision.

Laura Shin:

Okay. Yeah. And I just want to clarify for people who may not know these terms, AML, KYC, it’s anti-money laundering and know your customer rules and regulations. So let’s take this moment to have a short break for an important word from our sponsor, Onramp and afterward we will discuss the BCAP token.

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You can learn more and see examples of its work at thinkonramp.com. I’m speaking with Brock Pierce of Blockchain Capital and Stan Miroshnik of the Argon Group. Brock, so tell me how Blockchain Capital came up with the idea for the BCAP token.

Brock Pierce:

Well, again I was a founding board member of Mastercoin, which was the first ICO so I’ve been very much in the ICO market since call it day 0 and watching it closely and you know through 2013, 2014, 2015 it wasn’t you know that exciting. I mean, it was interesting but it wasn’t like a trend.

The model and the idea was out there for everybody to imitate, but you know venture capital was still the main model and what happened is the money plateaued in terms of generalist venture capital coming into the sector in like 2015, 2016, but the number of entrepreneurs coming into the market continued to accelerate and so there was this dynamic of a lack of capital, you know, to support all of the you know incredible entrepreneurs and things that were happening but you know where there’s a problem you know and where there’s a will there’s a way and so last year we had 64 ICOs raising over $100,000,000 and that happened I think more out of necessity.

You know, in retrospect it’s easy to look at why this happened and how the trend emerged. It was out of a need. There was a void that needed to be filled and the quality of the ICOs and you know my desire to invest in them was such that it was very important that our next fund was going to be investing in tokens and I was also concerned about the structure.

A lot of the ICOs, some of them you know I felt were using very convoluted structures for the purposes of you know creating use coins to circumvent securities law and I wasn’t comfortable with it.

My view is that this can be done a better way and so I had already been selling my partners and you know toying with the idea for quite a while to do something like this and when I met Stan and saw that this was a team of you know Wall Street you know deep bench sort of bankers that had the right securities and legal backgrounds and I said okay, this is a group of people that I can get comfortable with doing something you know that’s you know pushing the boundaries of what can be done and so it was already on my plan to do it and I said Stan, well, I’d like to be your first deal. I said I want to do this.

It’s something I’ve been thinking about doing and you seem like the right people to do it with so let’s go, you know. It required obviously a lot of time on our part and obviously a tremendous amount of you know legal resources to get comfortable that we’ve architected a model that you know hopefully we’ve standardized and that you know now others can copy.

Laura Shin:

And will the fund invest both insertives and in coins or…

Brock Pierce:

Yes.

Laura Shin:

And if so then what’s the break…and what’s the breakdown?

Brock Pierce:

The answer is yes. Right now I still…I’m not a fan of most of the ICOs. I think we’re in a bit of an ICO bubble and I think that the deals are raising capital at too early a stage. I don’t think a white paper in most cases is sufficient and I think there’s still a role for you know VCs and firms like ours for the near term to basically provide for seed funding…preseed, seed, maybe even in some cases series A but what’s really happening is blockchain technology is making it much more efficient for companies to essentially go public and instead of going out and raising later stage venture capital for a series B and series C and a series D, it’s my view that you know now companies will be going public at a series A and series B level using this technology and it’s of course going to start with our endemic community, but I think as investors you want to see at least a minimally viable product get past proof of concept, demonstrate that the management team can execute before I think you know giving it to call it the crowd.

Laura Shin:

So let’s talk about this language that you’re using about them going public at an earlier stage. This is exactly the kind of language that I hear a lot of the entrepreneurs in this space are trying to shy away from. You know, they’re trying to deemphasize this idea that what they’re offering is a security.

So let’s both talk about that as well as you mentioned earlier that there were all these different things that you needed to do in terms of legal and regulatory issues that you needed to resolve so can you describe what things you did in order to get past those hurdles to…in setting up the BCAP token and make sure that you weren’t running afoul of any SEC rules or anything like that?

Brock Pierce:

Well, I mean the main thing is just looking at the world differently instead of trying to avoid being a security, instead of you know trying to avoid you know characterizing yourself that way, you have to ask yourself the question…it’s called can I do it differently?

You know, can we look at the regulatory framework and you know there’s the Jobs Act and all these wonderful innovations that have been happening to lower the bar for people to be compliant in the sale of securities so this is you know a trend that’s been under way.

It’s very easy to imitate what’s been done before so you know with Mastercoin we created a foundation and the ICO capital went into the foundation, the foundation that was responsible for financing the development in Ethereum and everybody else more or less copied our model and most people didn’t spend the time, do the work, didn’t hire the lawyers to spend serious money.

Ethereum did and they were very late in launching and Vitalik was very smart to do it the way…along with the rest of the team the way that they did. They said we’re not going to rush this. We’re going to make sure that we’ve got proper attorneys and we’ve been well advised that we’re going to do it right, not fast. You know, the infrastructure would be…

Laura Shin:

So Brock, can you just describe for me like about launching this foundation and then having the ICO money going to the foundation? Describe for me why those seemed like the right choices to make from a regulatory perspective.

Brock Pierce:

Back then?

Laura Shin:

Yeah.

Brock Pierce:

As the you know sort of founding board and whatnot, we didn’t even get compensated. No one got $1. We all had to invest under the same terms as everybody else so that we were probably the most conservative of anyone and I still felt very uncomfortable after the fact. You know, I’m…the structure is definitely you know bleeding edge and we won’t know you know and if I look at an ICO on an individual basis, some of them I would be very nervous if I were involved as a principal in any of those projects and so the view is…

Laura Shin:

Because they look too much like securities? Like is that what you’re nervous about?

Brock Pierce:

Yes. Yes. _____ 39:42.

Laura Shin:

Okay. But then if you, if you structure it where you’re a foundation then why is it that is deemed to be safer?

Brock Pierce:

I’m not sure that that makes it any safer. The foundation structure is just saying that the money is going into an entity to support the development of the open source software so I mean that doesn’t provide for I think a regulatory sort of comfort. That doesn’t provide for that.

You have the Howey test, which is you know the main thing that people try to analyze. Is it a security or is it an app coin or a use coin and you’re looking at those sorts of things and in some cases you have to look at each of them individually but the main thing that we did differently is we said instead of trying to circumvent securities law, is it possible to acknowledge that you’re a security? Can you do this differently? Can you…instead of trying to dance around it, what if you just walked through that door and the answer is you can.

The Jobs Act and the things that have been going on here in the United States to lower the bar for these types of things to occur has happened and that’s what crowd funding is. Crowd funding is the first major step in the democratization of venture capital, things like AngelList. What we’re doing and what the blockchain is able to provide here in this overall just ecosystem of participants is an environment where we can take it 10 times further and in our case we used regulation, you know, S&D exemptions.

Laura Shin:

What are those?

Brock Pierce:

Well, these are two exemptions under the SEC. Regulation S allows you to do things internationally and allows for us to raise money from international investor. Regulation D allows for us to raise money from US investors, but we’re limited to accredited only and we’re capped at 99, but those…so the big limitations what we found out is we can do this but the downside is you have to do KYC, you know.

No one had done an ICO where you KYC’d every investor. You know, we had thousands of people sign up to participate in our crowd sale and clearly the evidence is in. The precedent’s been set. You can do KYC and I would advise everyone doing an ICO at this point, everyone to do that. Most of your legal…most of the mistakes that I think are being made is you know taking money from the wrong places or the wrong people and running afoul of rules in that area and KYCing your users gives you an ability to basically not take money from people you shouldn’t.

Laura Shin:

And how many investors did you have total?

Brock Pierce:

I think the in the ICO, Stan can correct me, we had roughly 1,000 investors in the deal and I think _____ 42:19 probably 5,000 but unfortunately you know the…we did a very small raise and we kept a cap in place because we were breaking you know I think a lot of new ground and the idea was not to maximize. I think if the Dow had said we’re going to cap this at 10,000,000, you know the Ethereum ecosystem would be better for it just because you can raise more money doesn’t mean you should.

Laura Shin:

Right.

Brock Pierce:

And so we said…we know this is an experiment. We know we’re trying to pioneer a bunch of new things and the idea was to do something modest.

Laura Shin:

Okay. Yeah and you covered these things so long ago but just for listeners who aren’t familiar with them, I wanted to flag the Howey test, which Brock mentioned was covered extensively in a podcast I did with Jerry Brito and Peter Van Valkenburgh of Coin Center.

I will refer to that in the show notes, but essentially it’s a case the Howey something versus I don’t remember the full name of this case, but essentially it is used often to determine whether or not an offering is a security and there’s four prongs to this and then sort of a fifth I guess.

This wasn’t a part of the case as far as I understand but it’s just a fifth test for whether something’s a security which Brock has referred to a few times and that’s whether or not something has utility, so for instance if you purchase a membership in a golf club before the golf club launches, that’s not considered a security because presumably you’re purchasing it not because you think the membership’s value will rise after it opens but because you want to use the golf course.

So anyway, there’s a number of these different prongs for the Howey test, which Peter and Jerry went over in depth in that podcast and the other thing that he mentioned was the Jobs Act, which some of you many know. It’s what is enabling regular investors, regular everyday investors to participate in crowd sales and not have to be what’s called accredited investors where they make a certain level of income, which is 200,000 and above or have a net worth of $1,000,000 or above.

All right. So there’s so much background that people need to understand to know all the reasons for these different regulations and how that affects the way that these tokens will play out, but anyway so I want to talk more about the BCAP token. I know that you registered the token issuing entity in Singapore. Can you guys describe for me what benefit Singapore offers?

Male Speaker:

Yeah. Absolutely. Singapore’s one of the few places in the world where there’s been a ruling that said that tokens are not securities. They’re specifically assets and so by registering the issuing company in Singapore it allows us to sort of achieve local compliance in a very token-friendly jurisdiction.

Laura Shin:

And what is that distinction between securities versus assets?

Stan Miroshnik:

It essentially allows you to avoid all the regulation where…not avoid but the regulation isn’t applicable to you in the context of selling securities so everything that’s typically in place in terms of disclosure and registration and filings, etcetera, all of that applies to securities, but it doesn’t apply to essentially assets and assets is essentially you know things like real estate or hard goods and so by explicitly saying this is not a security, Singapore has removed a lot of legal overhang and legal complexity and executional complexity from executing a token in that jurisdiction.

Laura Shin:

I’m just a little confused because during this conversation I thought that you and Brock were saying that why don’t we be upfront about the fact that these are securities and then now you’re telling me that actually they’re not securities?

Stan Miroshnik:

Well, so it’s a complicated legal structure and so the nuance of doing it in Singapore is it’s the one place that’s so far ahead of other places in the world. It’s done the work. It’s now experimenting with these new tools and so what we then do is we because the fund is in the US and we’re in the US and a lot of their investments are going to be in the US and investors were addressing…are partly in the US too, we then take that security and offer it in the US as Brock mentioned using the two existing exemptions under the Securities Act and so he mentioned Regulation D that’s been changed by the Jobs Act over the last 5 years and that allows now things like general solicitation where you can advertise and talk about the security that you were selling in a public forum and so that’s been a big change and that’s a path of offering it to US investors.

Laura Shin:

Are you saying that the BCAP token in a sense is defined different legally depending on the jurisdiction? So in the US according to Reg D you’ve offered it as a security but then in Singapore with the way the regulations are there, it’s defined as an asset, is that what you mean?

Stan Miroshnik:

That’s exactly right. Yes.

Laura Shin:

Okay. Interesting. So I actually also wanted to go back to ask about the investors. I know you guys were limited to 99 investors and they had to be accredited investors in the US. First of all, can you explain why that was and then tell me about who the overseas investors were because if you had and it sounds like 901, I’m curious to know kind of like where they came from?

Stan Miroshnik:

Yeah. Absolutely. So the 99 rule is actually specific to offering a fund, right. So there’s another layer to BCAP specifically unlike a traditional company because it’s a fund and so it needs to exist on an exemption to the Investment Companies Act of 1940 and so to be compliant with that framework you have to offer it to less than 100 people in the US to not have to register as an investment company or a mutual fund or something along those lines and so that’s…that’s the exemption framework that most of the professional investment firms use, you know, like private equity or venture capital or hedge funds and so the 99 limitation came from that piece of the law and then the accredited piece that you described so well earlier came from the Regulation D 506 C provisions of the law and so the interplay of those two is what created the US dynamic.

And so now shifting to the second part of your question in terms of where the investors are coming from, we had a really broad participation so it’s equally spread through Europe, through Asia, Latin America. We had some African investors and so it was really kind of fascinating how global this market is.

Laura Shin:

Were there any particular countries that were…where it was more popular and maybe even that surprised you?

Stan Miroshnik:

So there’s actually native interest from Singapore. There was some interest from the UK. There was a lot of interest from China and we kind of knew this going in because we saw where the traffic was coming from to a lot of our materials and landing pages. Broader Asia and interest from Korea so I think how interesting this is to an Asian audience was really compelling.

Laura Shin:

That is interesting. So Brock, I’ve often heard you refer to this step that you’re taking with the BCAP tokens as blockchain capital eating its own dog food and I want to hear you kind of explain what you mean by that and also give me your thoughts on what changes you think this BCAP token could unleash in the industry?

Brock Pierce:

Well, I mean we’re going to be investing in ICOs. We believe in sort of the ICO market and so I might as well walk the walk, right, and do something…you know, the goal of a lot of what this industry from my perspective the goal is to democratize you know the financial system is you know one aspect of what we’re doing and to you know enable equal access for everyone, you know, complete and total financial inclusion across all of its areas and it’s part of the reason I was an early adopter of crowd funding. I think I still have I think the largest personal syndicate in Southern California on AngelList. We’ve syndicated a lot of deals.

I believe philosophically crowd funding and blockchain and Bitcoin are you know all you know working toward call it the same macro outcome so this is just the next sort of big leap in it and then you know venture capital as a whole I mean VCs invest in innovation and disruption but how often do they innovate themselves?

I mean, the venture capital industry has benefitted greatly from technology and the internet but their model hasn’t changed at all so I see how the venture capital industry is going to get disintermediated, decentralized, disrupted, and so I can sit around and wait for some…I can wait for someone to come along and disrupt us or you know we can choose to disrupt ourselves and cannibalize ourselves so my partner Bart Stephens after graduating from Princeton was at E-Trade back in the mid ‘90s and running Corp Dev and Biz Dev reporting to the CEO and you know the E-Trade, Scottrade sort of story of you know how the brokerage business in the ‘90s changed is always a very interesting one to me because you had a dominant big brokerage firm called Charles Schwab and you know they saw these new emerging firms that were going to you know lower the fees in a big way and they very smartly decided to cannibalize their entire business.

They put themselves out of business but as a result of having done that, the way that they you know danced through the innovator’s dilemma is they still exist today as a result of that. And so I think I see how the venture capital industry is going to be disrupted by this technology and you know I’d rather do it to myself.

Laura Shin:

And didn’t you say a lot of VCs have been calling you asking how they can do the same thing?

Brock Pierce:

Yeah. Yeah. No. My phone’s pretty much been ringing off the hook by private equity people, real estate funds, anyone with a general lack of liquidity. I mean, I have so many people coming to me now saying can I do this in my industry? And I think the answer is it’s going to happen to…this is not a Bitcoin or blockchain specific trend.

This is going to affect everyone, the whole fund business, anything where there’s an illiquid asset and so it’s starting naturally you know with the endemic sort of industry and it’s going to be a fund like ours but you know in a matter of I think 6 to 12 months you’ll start to see other things where on a Venn diagram you have overlap amongst these communities video game-related stuff, you know, really advanced technologies, intentional communities, you’ll start to see these waves but we’re the beginning of what will be a trend that I think is going to disrupt all venture, all private equity. I think this is the beginning of a long story but ultimately one that you know ends in this business never look…you know, forever being changed.

Laura Shin:

And so both of you are pretty familiar now with the different regulations in terms of growth, crowd funding and then you know I’m not wanting to run afoul of the different securities laws and things like that, so are there any particular ways in which you would like to see US regulations evolve so that they’re clearer for entrepreneurs and developers and also then on the other side the investors in these different crypto assets?

Brock Pierce:

You know, I think more regulatory…I mean, the Jobs Act obviously was a good step in the right direction and all of the crowd funding companies are you know helping to make progress here. You know, unfortunately, I mean most ICOs today, the advice I would give is to follow basically the model that we did, which is unfortunate because it basically excludes most Americans.

You know, we’re limited to 99 and they have to be accredited so the reality is the American investor base is the one that is disadvantaged because of regulations that can probably be improved. I mean, always they can be improved and hopefully they do. You know, these are in most cases we’re talking about like the 1940 Act. Most of the laws we’re referring to were things designed you know nearly 100 years ago. So yes, I think we could probably benefit from you know improved and more modern regulation and you know this is a process.

Laura Shin:

I’m pretty sure from the side of the regulator they think that they’re protecting the investors because we certainly know that there are a few coins that had been launched that have been outright scams that the SEC has gone after and then there are others that fall kind of into more of a gray area so whether or not US investors are at a disadvantage probably depends on where you stand on this. Well, so where can people learn more about you and your work and get in touch with you both?

Brock Pierce:

Well, go to blockchain.capital or blockchaincapital.com. Both of them will get you there and you can learn more about the firm and get in touch with us. I’m pretty accessible everywhere.

I’m around the world pretty much constantly, so I’m all over the world and always happy to meet you know anyone in this space that’s you know part of this movement of you know changing the world, and I think for the better but you can find me on Twitter @BrockPierce. I’m on most social media, I use every sort of messaging app. I try to be as accessible as I possibly can be and we want to invest in every great company so I mean if you’re an entrepreneur out there and you’re looking to build something and you want help, I’m…I try to be as accessible as possible and I try to help everyone.

Laura Shin:

Stan?

Stan Miroshnik:

Yeah. So we’re at argongroup.com. Lots of information on the site, case studies and our view on Bitcoin as a true emerging alternative asset class, lots of information about the ICO space, some statistics. We put out a weekly market update on what’s going on with the various things in the market and developments, pricing, statistics. We have a great monthly newsletter.

We’re on Twitter, on Facebook, in Telegram and all the major ICO-related channels and if you’ve got a compelling business that’s a part of this ecosystem and you’re thinking about how to fund it, finance it, how to work with other partners or you’re thinking about M&A opportunities, come and talk to us and we…I think we have a lot of interesting expertise. We have strong partners that have spent you know a lifetime around this space and we’re happy to help and have a conversation.

Laura Shin:

Thank you both so much for coming on this show. There was just so much to unpack. It’s such an interesting thing that you guys are doing so I really appreciate you taking out this time this week. Okay. Well, thanks listeners for joining us today. Before you switch off this podcast, don’t forget go to surveymonkey.com/r/unchained. Let me know who you are and what you want to see in this show.

If you’re interested in learning more about Brock and Stan, check out the show notes which are available on my Forbes page, Forbes.com/sites/LauraShin. Thanks so much for tuning in to Unchained, which comes out every other Tuesday. Please share the podcast with friends and on social media and remember to review, rate, and subscribe to it in iTunes or your preferred platform. Thanks again for listening.