Even though bitcoiners and crypto enthusiasts alike try to deny it, bringing in converts from traditional finance is the best way to legitimize and publicize the industry in the eyes of many investors.
One of the first executives to take the plunge was CoinShares executive chairman Daniel Masters. After a long and distinguished career as a commodities trader at JP Morgan and elsewhere, he stumbled across bitcoin after the end of the commodities supercycle following the global financial crisis. Masters immediately saw the potential in bitcoin and blockchain, and he realized that his background as a technologist and commodity trader was tailor-made to make him an ambassador for this new industry to a new set of individual and institutional investors.
At the same time, through the creation of his crypto investment management company, he was able to look into the future of this industry and see the developments to come, as well as the upcoming clashes between crypto insurgents and established financial operators. Forbes sat down with Masters to get his thoughts on the future of this industry.
Excerpt from Forbes CryptoAsset & Blockchain Advisor.
Forbes: Let’s discuss your proverbial bitcoin conversion moment. How did you first hear about bitcoin? What was your reaction ?
Daniel Masters: Before discovering bitcoin, I was finishing a highly publicized and successful career in commodities. I started at Shell Oil, spent time at Salomon Brothers, transitioned to JPMorgan, and in 1999 went on my own to manage two large hedge funds (one discretionary and one another focused on the thesis). Our basic thesis was that China was about to consume large amounts of raw materials and we wanted to be opportunistic. Back then the price of oil was $10 a barrel, copper $2 a pound, gold around $1,300 an ounce and they all went up over the next few years as we surfed on the wave of a commodity supercycle. However, in 2012, I found myself scratching my head and wondering what to do next? The commodity boom had played out – oil was not going to rise 1000% to $1000, volatility was starting to ebb and qualitative easing put a safety net under risky assets.
Then one day I was sitting at my desk watching CNBC when I saw a bitcoin price chart on the screen. I studied it closely, much like a doctor looks at an MRI, and I thought it was a very energetic picture. The price had gone from a fraction of a penny to something like $15. For a commodity trader, this type of movement sets off alarm bells and silver signs flash before your eyes.
I started researching as much as I could, bought $10,000 worth of bitcoin with my own money funneling it through a Chinese farm bank to Mt. Gox and even locked myself in a coin for two days to resolve a blockage on the bitcoin blockchain. In doing so, I realized that bitcoin was essentially a version of the internet with no copy/paste functionality. It’s really important.
Forbes: What was your first bitcoin business venture?
Mastery: I’m not a computer scientist, and I’m not going to create my own cryptocurrency, but I wanted to have an adventure. That said, it wasn’t going to be easy. First, articulating the investment thesis for bitcoin was going to be much more difficult than commodities. Second, there were a lot of scams in the industry at that time, which created additional skepticism.
With these challenges, I did not want clients to have any doubts about the fiduciary framework in which they were investing. So I opted for a fully regulated structure that took two years to build. I worked in partnership with a regulated custodian, administrator, bank, legal advisor and auditors. All this work removed all the question marks around us, and investors only had to worry about price risk.
Forbes: How is CoinShares organized?
Mastery: Additionally, you have a holding company, CoinShares International Limited. It owns three things: our stake in CoinShares Holdings, the operating company; Komainu, our regulated custody business in partnership with Nomura and Ledger; and it holds our venture capital investment portfolio which comes from our own capital. Go down one level and you are now at CoinShares Holdings Limited, which has two main strands, starting with our CoinShares Holdings Capital Markets trading business, which had $4.5 billion in revenue this year. The second company is CoinShares Jersey Limited, where we hold the same investment and fund services business licenses that we had when it all started. Finally, we have a Stockholm-based company called XBT Provider, which is the issuer of our exchange-traded notes that track bitcoin, ether, litecoin, and XRP denominated in euros and kroner.
Forbes: It’s interesting to see how your company has grown to support a wide variety of business infrastructure and services in the industry. Forbes is very interested in the future of the digital asset class, which includes but is not exclusive to cryptocurrencies. Where do you see the industry going in the next few years?
Mastery: I think you are on the money here. I work trying to think about what the world will be like three years from now and modernize my business to fit that in the future. Consider central bank digital currencies (CBDCs). Central banks have very compelling reasons to issue their own digital currencies. For example, you don’t need to physically touch or move it, you can deal with the black market and corruption, and provide real-time accounting. More importantly, if you withdraw physical money from the system, you can charge negative interest rates. There are eight central bank currencies on the way, two of which are almost alive in China and the Bahamas, one obviously more important than the other.
Forbes: Do you think the CBDCs will step up the battle to determine the future global reserve currency?
Mastery: There is an interesting dynamic playing out in the world of CBDCs. The Chinese digital currency is going to be formidable and the United States is going to be forced to react. This could take the form of a digital dollar or a trade war.
Forbes: How do you think this move towards CBDCs will impact traditional financial infrastructure?
Mastery: The most interesting aspect of CBDCs is the impact they will have on commercial banks and the financial system as a whole. Today, central banks issue currencies to a large number of commercial banks like Chase and Bank of America. These banks do two things: create products and services such as mortgages and deal with end users. I think we’re entering a new paradigm where central banks issue CBDCs, commercial banks cease to exist, and the service layer is filled with crazy new emerging companies like Compound Finance, Uniswap, SushiSwap, and people who are truly distributed, decentralized finance does today. Then the last interesting layer is who actually faces the consumer. You can already see that there are several choices. Coinbase would like to reach all users, just like Binance but probably not in America. You have wallet infrastructures like Blockchain.com that already have 50 million wallets in circulation.
That said, you could also get incumbents. Samsung is now putting chips in phones, essentially making them hardware wallets. Amazon could offer a digital wallet. Whoever has this level at the bottom is critical.
Forbes: I don’t need to tell you that discussing or predicting the demise of commercial banks is a strong statement. Can you develop this idea?
Mastery: I think the old world is lumpy in the sense that asset splitting is much heavier than in the digital world. It sometimes gets better with stocks, but gold and real estate aren’t really divisible. So it’s lumpy and more intermediate. You buy an ETF; I can give you 12 service providers between you and your asset that are not really needed. The old world is also heavily centralized, which stifles innovation because you can’t just get inside that wall and change anything.
There is an ongoing migration to the new world of capital, talent and even regulatory mindset. For example, people need to stop worrying that every bitcoin transaction is promoting some kind of terrorist activity, which is not the case. This migration started slowly, but it is happening faster now. Where we come to will be the tokenization of everything, and that will be catalyzed when central banks get the hang of it. In her first speech, Christine Lagard (President of the European Central Bank), spent 15 minutes talking about stablecoins. If everyone has a digital wallet and CBDCs, which aren’t backed by anything anyway, are de rigueur, then all of a sudden bitcoin looks great. It will assume the role gold served in relation to legacy money, and all other digital assets will fall into place. The middle layer, the service layer, will become much more automated, technological and democratic, and the terminal layer will become a real fight.
Forbes: Do you think what you’re doing is in direct competition with commercial banks as a whole?
Mastery: I think I would flatter myself at this point to say that. But really, when I see things on a regular basis, like decentralized peer-to-peer lender Compound Finance having $1 billion in assets under management, you have to be careful. There are so many brilliant innovations going on. Today, borrowing and lending can be done seamlessly, remotely and autonomously on-chain. It’s much better than doing it with Citigroup. It means something. It’s Netflix to Blockbuster, it’s just that Blockbuster hasn’t figured out what Netflix does yet.
Forbes: Thank you for your time.