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David Sacks is one of the best-known entrepreneurs and investors in Silicon Valley. He was the COO of PayPal more than 15 years ago, which made him a charter member of the so-called PayPal Mafia, a group of influential Silicon Valley investors and execs that also includes LinkedIn founder Reid Hoffman and early Facebook investor Peter Thiel.
Sacks started Yammer in 2008 and later sold it to Microsoft for $1.2 billion, and he was an early investor in Facebook, Palantir, Uber, SpaceX and Airbnb. Most recently, he served as CEO of HR software start-up Zenefits, and steered that company through some legal and financial pitfalls after replacing founding CEO Parker Conrad.
With bitcoin prices hitting new highs, I wanted to talk to him about how he views the rise of cryptocurrencies this year and what he thought of Howard Marks' recent comments in his investor letter that these digital assets "aren't real."
Here's an edited version of our conversation from last week:
Eric Jackson: As someone involved with PayPal at the beginning, what intrigues you most about the rise of these digital assets?
David Sacks: After PayPal I never thought I would get interested in payments again. But bitcoin is fulfilling PayPal's original vision to create "the new world currency." We actually had T-shirts printed in 1999 with that mission statement.
A payment is just a credit to one account and a debit to another. That's a database entry. We believed that, if we could get enough people to participate, money would never need to leave the system. PayPal could become the database of money.
We added features like interest and debit cards so you'd never have to withdraw funds to the legacy banking system. When we got acquired by eBay, that project kind of stopped.
But cryptocurrencies like bitcoin are now fulfilling that original vision. They are doing it in a decentralized way (with a decentralized database called the blockchain) whereas PayPal tried to do it in a centralized way.
Jackson: You recently tweeted that you thought cryptocurrencies have the chance to be Web 3.0. What did you mean by that?
Sacks: It feels like we are witnessing the birth of a new kind of web. Some people have called it the decentralized web or the internet of money.
The big development since the emergence of bitcoin itself is that the underlying enabling technology, the blockchain, has been turned into a developer platform. The leading platform is called ethereum. It's a platform for creating new kinds of decentralized apps and cryptocurrencies (or "tokens" or "coins"). It's also created a new funding source for this innovation in the form of Initial Coin Offerings (ICOs). So we have all the ingredients necessary for a whole new wave of innovation.
For those of us who lived through the dot-com era, this feels reminiscent. You have some of the same speculative excess and random enrichment. But you can also feel that something revolutionary is happening. Money is being made programmable. That's a fundamental change with implications we can still barely see.
Jackson: That brings to mind the recent investor letter which Oaktree's Howard Marks sent out in which he said that Bitcoin and other digital assets aren't real. What do you say to that?
Sacks: Marks isn't wrong to raise an alarm bell about speculation, but he's wrong in saying it's not "real." That's like saying software isn't real. Of course it's real.
Did the U.S. dollar become less real when it stopped being backed by gold? Cryptocurrency is the next step in that same evolution — to make currency more virtual.
In its purest form, currency is confidence. It's a network effect around an agreed-upon medium of exchange that has some promise of scarcity. Bitcoin enforces its scarcity through a combination of cryptography and economic incentives ( "cryptoeconomics"). A lot of people find that more comforting than relying on the good faith of a government. In math we trust.
People in the U.S. — and especially longtime participants in the U.S. financial system — have tended to underestimate bitcoin because we have long enjoyed relatively stable political and financial systems. People in parts of the world with less trusted systems have gotten it sooner because almost anything would be preferable to having their life's work trapped in a fiat currency that could collapse or be confiscated at any moment.
Jackson: If the current moment with cryptocurrencies is like the dot-com era, does that make it a bubble, and if so are we in 1995 or 1999?
Sacks: The technology is probably 1995 and the pricing is either 1999 or getting close. It's a combination of something real with a lot of speculation.
What I've been trying to figure out is: Who are the good teams and interesting projects in the space? Also I've been trying to understand the future regulatory environment and invest only in companies that have structured correctly and are likely to survive the inevitable crackdown.
I think the trigger for a big correction is more likely to be regulatory than technical. The SEC provided some important guidance in its DAO report a couple of weeks ago, but we will learn a lot more if there's an enforcement action. That's going to be much more important to the future of this movement than the dreaded bitcoin fork that occurred a couple weeks ago and turned out to be a Y2K-like non-event.
Jackson: So is there going to be a similar three-year nuclear winter when the bubble bursts like what happened after the dot-com boom?
Sacks: Hopefully it will be a soft landing rather than a nuclear winter. It could be a positive thing if all the scammers and pumpers get washed out of the space.
There's going to be a correction though. Many of these ICOs are still just slideware but are getting a Series D type of valuation. They don't deserve that type of valuation at this stage of development. That will rationalize at some point.
Jackson: How are ICOs and future SEC regulation going to mesh?
Sacks: Hopefully the SEC distinguishes between "protocol coins" (which have an actual use in a software ecosystem and should not be viewed as securities) and "asset coins" (which are securities). The public policy think tank CoinCenter has done some excellent work in laying out the legal frameworks and policy rationales for this.
Until now, most of the action in ICOs has been in protocol coins. The better projects have worked hard to structure their tokens so they are not securities.
However, I believe we will soon see the emergence of asset coins (aka traditional asset tokens). These will be securities. It must be done correctly, but it's going to be an exciting area.
Jackson: What securities could tokenize?
Sacks: Almost any illiquid asset today lends itself well to moving onto the blockchain and becoming tokenized. It will create a deeper market with improved price discovery and should increase the value of those assets.
In the long run, even liquid assets like stocks could move onto a blockchain because of the benefits of this platform.
Ultimately this is a technology for maximizing the efficiency of every asset, means of ownership, fluidity of markets, and mechanism of payments. The goal is the optimization and maximization of the world economy. That may make it the biggest revolution of all.
Jackson: Are digital assets and tokenization a long-term threat to traditional venture capital?
Sacks: Yes — in two ways.
First, a lot of start-ups that would have sought venture capital can now raise money through an ICO. I've called this "crypto capitalism" in contradistinction to venture capitalism.
The terms of crypto capital are more favorable to entrepreneurs than venture capital. So any start-up that can ICO will ICO. Whether a start-up can ICO will depend on technical and regulatory suitability, but it could ultimately be a very large category of start-ups.
If so, that will certainly challenge VC. Larger VCs who would typically invest after the ICO will have to compete with hedge funds, which is not a great place to be. VCs who want to invest before the ICO will have to compete with angels to offer a real value-add.
Second, at the level of the VC's own investors, I think LP interests are likely to be tokenized, along with most other illiquid assets. The prestige VC firms will resist this, but there are already a few new VC firms at the margins that are tokenizing. Soon, a few more will do it. Then a few more. Eventually, illiquidity will be a competitive disadvantage in fundraising that only the top firms will be able to justify.
All of this being said, the SEC's rulings in this area will have a huge impact on how this plays out. If those rulings support innovation, that will lead to a more competitive world for VCs, whose world is already quite competitive. But that world will also be more frictionless and efficient.
Sacks posted a tweet storm about this idea:
Jackson: What are the biggest challenges that still lie ahead for cryptocurrencies?
Sacks: I see three big areas for concern: scalability, slideware and regulatory.
First, the number of transactions per second that either bitcoin or ethereum can handle is still orders of magnitude less than what PayPal or the Visa network can do. It's been estimated that ethereum, which is the main developer platform for decentralized apps, would need a 250x improvement to run a 10 million user app and 25,000x improvement to run a billion-user app like Facebook. That improvement requires real work and involves some risk. There's a product roadmap, but it's going to take years.
Second, most of the ideas out there today for ICOs are still just white papers, or what we used to call "slideware." There is a lot of execution risk in turning these ideas into usable software that actually gets adopted. One fortunate effect of the crypto boom is that it has been helpful in attracting talent to the space. We will need that migration of talent to continue in order to realize the potential.
Third, as we've discussed, will be the extent and nature of regulatory acceptance. The eventual rules governing the application of securities laws to tokens will have a major impact on adoption and innovation in the space, at least in the United States. There is some risk that if the wrong regulatory regime gets adopted in the U.S., then the center of innovation could move to other countries. If blockchains are the next internet, that would be a very unfortunate development for the U.S.
Jackson: We have bitcoin and ethereum plus a number of smaller, lesser-known currencies out there — including the new Filecoin ICO. What lesser-known currencies intrigue you most?
That said, one admonition I would make to your readers is that most probably shouldn't be investing in ICOs directly. We are seeing white papers for technology that doesn't truly belong on the blockchain or, worse, could be pump-and-dump schemes. Many of the scams originate outside of the United States, so they will be harder to regulate. Just like a lot of retail investors lost money in the dot-com era, the ICO era has the potential to do the same unless people really take the time to understand what they are investing in. A number of professionally managed crypto funds, with real technical expertise to evaluate ICOs, are starting to emerge and may be a safer way to participate than investing directly.
So I would just urge everyone to temper their excitement with sound business judgment. Or does that sound too much like Howard Marks?