Running with Unicorns, a Crypto Podcast by Gem
Running with Unicorns, a Crypto Podcast by Gem

Running with Unicorns Ep. 3

Crypto News Roundup: A Time for Reckoning / John Marchesini, Blockchain Beach

December 20, 2018

A conversation with Blockchain Beach co-founder John Marchesini about the topsy-turvy year of uncertainty for the crypto markets and industry. John sums up the biggest events of 2018 that roiled the markets and looks ahead to 2019 with some pithy predictions for where all this is headed.

“At Blockchain Beach we definitely try to focus on the decentralized culture. That’s our term for this emerging culture that people who are crypto enthusiasts, blockchain enthusiasts. There’s a sense of community that binds us all together.”

– John Marchesini, Co-founder, Blockchain Beach

In This Episode
Blockchain Beach co-founder John Marchesini joins us today to talk about this long hard year of uncertainty for crypto investors and the industry as a whole. John describes the biggest events of 2018 that roiled the markets, sent investors fleeing, and sent shockwaves through the industry. We discuss the key enforcement actions by the SEC relating to ICOs and other SEC announcements or lack thereof that had market impact and how it’s just the tip of the iceberg. We talk about the growing sensitivity of the cryptomarkets to global news events and forces. And we analyze the impact of the market downturn on the industry as a whole, with layoffs and buyouts already at play and more on the horizon. John looks back at the 2018 predictions that came true and the ones that didn’t. And he has some informed projections for 2019.

Topics Covered

  • Describe 2018 core crypto market and industry as a whole
  • Onset of crypto winter
  • Crypto markets aligning with global equity markets
  • Crypto markets sensitive to global news events
  • Concept of digital gold as alternative to stock markets
  • SEC putting a damper on the markets with ICO rulings
  • Significance of SEC Chairman Jay Clayton speaking at Consensus Invest
  • SEC rulings tip of the iceberg
  • Potential impact of 2019 anticipated SEC ruling on Bitcoin ETFs
  • Impact of market downturn on industry with consolidations/job losses
  • Consensus 13% layoffs as an example of industry impact
  • Looking at the rest of the industry
  • Importance of treasury management during market downturns
  • 2018 predictions that came true
  • 2019 predictions — SEC’s ETF decision, possible Ethereum fork
  • Whither institutional money? Will they remain on sidelines?
  • How institutional money is impacted by SEC regulations
  • Alternative Trading Systems (ATS) for tokenized securities
  • Potential 2019 Coinbase IPO
  • Crypto in culture and pop culture
  • Advice for new investors: Vet your information
  • Finding credible reporting on crypto news
  • Top takeaways

Guest Contact Information
John Marchesini
Blockchain Beach
Twitter | LinkedIn

Questions and Comments
podcast@gem.co

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Full Interview Transcript

Chitra: Hello, and welcome to Chasing Unicorns, your portal to all things crypto. I’m Chitra Ragavan, Chief Strategy Officer at Gem. Let there be no doubt, we are in the grip of a crypto bear market. Crypto winter isn’t just coming, it’s here. Well, what better time for a crypto news roundup and a look ahead to 2019? Joining me now is John Marchesini, co-founder of Blockchain Beach, an LA-based blockchain and cryptocurrency media company.

Chitra: John, welcome to the show.

John: Thanks for having me.

Chitra: How would you describe 2018 in terms of the crypto market and the industry as a whole?

John: Well, 2018 as you know started off pretty well, started off with a bang, you know Bitcoin ended the year last year around $15k, moving into Jan. And then we saw some momentum in the markets up until Sept. The SEC had been issuing some statements throughout the year, and by the time September rolled around, there was more clarity in terms of the market and ultimately there was a bit of the winter was coming, and we saw the winter coming very early on in the spring. The winter kind of started in Sept, now we’re kind of – we could be mid-winter. Moving into next year, I would say that winter is expected to continue in the terms of the crypto asset market.

Chitra: Its seems as of this year that one of the things we have noticed is the markets have become very sensitive to any kind of news pronouncements either from the SEC or even global events – there seems to be much more sensitivity. Is there a reason for that?

John: We started to see the crypto asset markets align to the global equity markets around the second half of this year. You know I can’t necessarily speak to one individual event and why that happened, but I think that with the creation of bitcoin futures at the end of last year you have the parent company – NYSE – they have announced that they’re gonna be creating back futures. Those are gonna be daily settled futures. So I think as you start to see more of these institutional vehicles come into market, you’re going to start having more professional investors involved, and I think overall a maturation of the space as these crypto assets become more professional friendly in terms of investors.

Chitra: I think also for investors what it probably means is that they have to be more attuned to the news because you can start to see that correlation, and you can start to educate yourself better as to how that market might move based on events in China or Japan or in the U.S. for that matter.

John: Yeah, I think traditionally commodities like gold have been viewed as safe haven assets so as there has been uncertainty in terms of equity markets people will retreat into gold. I think you could see that happen with crypto assets as well. You have a lot of people pushing the digital gold initiative in terms of how we should think about bitcoin. It’s very possible that crypto assets could fall into that safe haven status for professional investors.

Chitra: I think one thing that might be important for us to say right now is that we’re not financial investors, we’re not offering any investment advice – we’re merely doing an analysis of some of the biggest events and news flashes this year. I think it’s really important to say that.

John: Yeah, thank you. What we’re providing here isn’t financial advice and we’re not financial investors, but it’s certainly fun to speculate and discuss current events.

Chitra: So, if you were to look at one or two events that really pushed the markets this year, what would you say they were?

John: Well, I think the SEC probably has had the biggest hammer in terms of putting a damper on the markets. It wasn’t one event in particular, the sec has been issuing its statements throughout the year, kind of with a progression moving towards enforcement and making an example of some of those bad actors in the market. Not only did we see rampant fraud and unregulated crowd equity fundraising, some of the ICOs, which were unregulated securities, the SEC continued its pattern of enforcement with things like the Floyd Mayweather and DJ Khaled example that they made.

Chitra: Essentially saying that you can’t tout or promote an event – an ICO for which you’ve been accepting payments without disclosing that you have been accepting payments.

John: Correct – it’s not only people who didn’t disclose that they were paid for promotions but the actual fact that ICOs ultimately – Jay Clayton said that most of the ICOs that he has seen have been for unregulated securities.

Chitra: And Jay Clayton is…

John: Jay Clayton is the chairman of the SEC. He recently spoke at the Consensus Invest conference in NY last month and what we saw throughout the year was a lead up to having the chairman of the SEC actually address crypto investors, which you know…

Chitra: Pretty significant.

John: A year ago it would almost be unheard of. Here in LA we also had former chairman Cox of the SEC who kind of set the table and tone at the Start Engine Summit that we would be hearing something similar from Jay Clayton officially in NY.

Chitra: So essentially the SEC in a series of cases relating to both fraudulent ICOs but also non fraudulent but unregistered securities essentially was saying that hey if you’re going to raise funding for crypto projects you’re going to have to register them as securities.

John: Yeah, Jay Clayton actually said that ICO’s were a pretty compelling investment vehicle in terms of raising capital. What he also said though was that most of the ICOs are unregulated, security offerings – little to almost none, there are some exceptions in terms of companies that were leveraging the ICO process for regulated securities, there are some good actors that were in there. We could touch on some of those if you’re interested, but I think that there was – the overall approach was hey, the SEC is going to be looking, going to be further involved in terms of these crowd equity fundraising processes, and they want to make sure that there’s FINRA-compliant investment – sorry – there needs to make sure that there are technology offering that allow crowd based equity funding. In a regulatory way. And that would be FINRA-compliant as well.

Chitra: And the SEC said also I think Commissioner Dan Greenberg said this is just the tip of the iceberg the enforcement actions of 2018. So as we look ahead to 2019, it seems that they still have all of these unresolved cases from 2018 and now they’ve opened the door for non fraudulent examples of ICOs that have not registered, so now there are the civil penalties that they are now imposing on other ICOs too – so it seems like there’s a lot left to be shaken down in the world of ICOs and regulations in the coming year.

John: Yeah, I think whenever Jay Clayton spoke, that was the end of phase one. And I think it’s gonna allow the SEC to kind of catch its breath. It’s a lot more difficult right now in terms of the offering platforms that are available to facilitate FINRA-compliant crowd-based equity fundraising projects. And that’s a good thing. So I think we’re going to start to see those funding platforms that are FINRA compliant emerge hopefully by the end of q1 next year – there’s no guarantee. Therefore in the meantime without that additional capital coming into market, the sec has a chance to look back and go hey what happened in the past year to three years.

Chitra: The sec delayed not once but twice it’s decision on Bitcoin ETFs. Can you talk a little about what those exchange traded funds are and why they have been viewed with such anticipation in the community?

John: I think the sec had the chance to kick the can down the road and they did it every time they had a chance to do it. So there’s not going to be a decision made until Feb 2019 at the earliest, and that will be a required thumbs up or thumbs down for the ETF that’s on the docket that has the highest priority. A lot of people were expecting to have an ETF available for trading something in 2018. Now we know that’s not gonna happen. Jay Clayton said that the investor investment protection around ETF is just not there, there’s too many pump and dump schemes that continue to be in market and then also there’s too many unregulated exchanged which facilitate pump and dump. Until there’s a regulatory aspect for those mechanisms in terms of the market, there’s just too much risk in bringing a professional asset like an ETF to market.

Chitra: And that’s something that’s widely anticipated that decision is going to have an impact in the industry

John: Yeah. In my opinion aside from the backfutures, which we’re going to see launch hopefully in January, it’s the next piece of potentially positive news that could move the market, and ultimately would allow an investment of capital from institutional investors.

With such a busy news year and all of these decisions coming down in regular increments, you started to see an impact on the industry as a whole. And particularly with companies starting to think about consolidating and job losses and it just seems like the tip of the iceberg.

John: Yeah, just in the past two weeks we’ve seen a number of layoffs of well capitalized crypto companies. Steem laid off 70% of their workforce, SpankChain laid off half their workforce, and then ConsenSys – which my understanding is 1200 people – laid off between 13-15% of their workforce. We had broken the news in Q3 confirming that ConsenSys had around 1000 employees, which was pretty remarkable considering the age of the company. It’s a relatively new venture back software and enterprise company and at the top there’s Joe Lubin. He was one of the first early investors in terms of the Ethereum crowdsale. He got in really early, it’s my understanding that he’s spending a lot of his own money in terms of funding. There are 55 companies at least that are part of the ConsenSys portfolio, many of those projects haven’t seen any return on investment in terms of revenue, in terms of the value they’re driving. There was an article in Forbes last week about how ConsenSys was going to shift more toward ConsenSys 2.0 where they’re gonna focus more on the companies in their portfolio where they are driving the most value so that Joe Lubin doesn’t have to spend 100 mil a year carrying the weight of all these portfolio companies that – while they may be good projects, they’re not going to provide any return any time soon.

Chitra: And essentially ConsenSys is a crypto VC.

John: Yeah crypto VC is kinda the best way to describe it. However, it is a decentralized company and there’s been a ton written about how that works from an organizational standpoint. I’d say it’s a big experiment and it’s an expensive experiment and I have a lot of respect for someone like Joe Lubin who is funding something like this with his own capital. Because you’re not necessarily seeing this in other parts of the market.

Chitra: Is what’s surprising about this is that someone like Joe Lubin who has a lot of resources is feeling the brunt of the market, and all of these events this year, what’s gonna happen to the smaller companies that have a lot fewer resources?

John: Right you know one of the things that we don’t know is how well consensus managed their treasury and whether or not the price of Ethereum is impacting their ability to make good decisions in regards to those smaller companies.

Chitra: And treasury management is…

John: Treasury management is when during the ICO boom, many of these companies were accepting capital through crowdfunding in the form of Ethereum. So once companies would receive the Ethereum, in order to have good treasury management, that Ethereum would need to be converted into fiat at some point in order to minimize the price fluctuations in market for Ethereum.

Chitra: Which is super important given how volatile the market is.

John: Yeah. If you’re an early stage company you don’t want to have your developers looking at the markets and worried about their jobs, there needs to be that layer of insulation there and that could be something that could be regulatory as well – there needs to be a certain level of treasury management to help insulate companies so that in a volatile market they’re not necessarily tearing their hair out when a particular currency dips.

Chitra: So as this market if it deteriorates, companies that have better treasury management practices are going to survive better than companies that haven’t?

John: I think in terms of the ones that are accepting capital from the crowd in terms of crypto it’s absolutely essential to their financial well being and their ability to devote resources into parts of the company that are going to drive value and drive the company forward.

Chitra: I think 2019 is going to be a very busy news year for you as you cover all of these events

John: Yeah I mean we’re – many of the predictions that we had at the end of last year, we thought this year would be ‘Coinchella’ and we created a Coachella-themed posted with all of the crypto assets on it and we thought that it would be Coinchella all year. The reality is – it was Coinchella for about half the year. And many of the predictions we had for last year will still remain true for 2019, so out of 10 of our predictions, only 2 of them have happened.

Chitra: Which ones?

John: Financial regulation-

Chitra: No surprise.

John: And the fact that we would see the bitcoin futures, actually which happened in December of last year.

Chitra: And the ones that you thought would really happen this year that didn’t happen?

John: We thought we would see an etf, which we have touched on. Ethereum has a hard fork that has been in the discussions in the development community. There’s Constantinople and Casper – we thought we would see either Casper or Constantinople, now Constantinople is scheduled for January, but as of this morning I think a key member of the community issued a dissent on the particular whitepaper for that upgrade. And the institutional money in terms of our prediction for institutional money to kind of flow in there really hasn’t been those professional investment vehicles for crypto assets that have emerged or matured in a way that is going to really allow for that influx. So in terms of kicking the can down the road, there’s been a number of instances of that and I think the institutional money is still on the sidelines.

Chitra: Why do you think that is? They’re waiting to see how the markets move or mature?

John: There needed to be the regulatory aspect. We should touch on two things here – in terms of commodities like Bitcoin and Ethereum, there’s a way for them to go out and purchase those directly if they need to. However when it comes to the securities conversation, if most of the ICO projects were unregulated security offerings, there’s really no way for that institutional money to come in without having the regulatory processes in place. Not just processes but the technology to facilitate, whether that’s trading or crowd equity funding, everything needs to be compliant in an entire ecosystem. What we have right now is an entirely non compliant ecosystem when it comes to securities offerings.

Chitra: And so as these – many people said that 2018 represented the death of ICOs as we saw them this year – what’s going to replace ICOs?

John: There’s the death of ICOs using the current process we have now. As I was saying earlier in our conversation Jay Clayton said that ICOs are an effective method for fundraising. So the SEC is mostly concerned for how do they fit the ICO process into a regulated process. And one of the things that’s missing is what we call an ATS – an alternative trading system. There really is no alternative trading system that would facilitate the trading of tokenized securities. So that’s going to be a missing component. Hopefully that will hit the market early next year – you know, tZERO which is overstocks – and disclaimer, I own overstock stock – they have an ATS that they are looking to bring to market and there’s also, Coinbase has acquired a company that has a FINRA compliant ATS that they’re working on, and we could see that hit the market next year. It wouldn’t surprise me to see Coinbase move into potentially facilitating the trading of regulated tokenized securities as early as next year.

Chitra: So that’s one of your predictions for 2019, any others?

John: A Coinbase IPO is certainly in the cards for 2019 – you saw earlier this year they took on some additional capital to raise their valuation to I think it was between 3 and 5 billion dollars. Coinbase you know, is not a new company. It’s not quite as old as Uber, but it’s almost as old as Uber. We saw both uber and Lyft file for IPO with the intention of going into 2019. It’s possible that you’ll see Coinbase file for an IPO depending on market conditions sometime next year.

Chitra: One of the interesting things that happened this year was – cryptocurrency began to penetrate pop culture. You saw John Oliver do an unprecedented 20-minute riff on cryptocurrency which was really funny. You saw Bitcoin became an official word in Scrabble for 11 points, and there were a lot of other things like that.

John: Yeah, at Blockchain Beach we definitely try to focus on the decentralized culture. That’s our term for this emerging culture that people who are crypto enthusiasts, blockchain enthusiasts, there’s a sense of community that binds us all together. And for us to have shared cultural experiences is something that’s gonna be fun, and not only are we seeing it in board games and tv game show games such as jeopardy which had a cryptocurrency category about two weeks ago, there’s also music conferences. There’s a DJ named 3LAU that created a crypto music conference in san francisco. I didn’t get a chance to go so I didn’t get to hear how the experience was but I think that people – much like the cannabis industry – I see the crypto movement and decentralized culture, we’re going to be looking for increased opportunities to build a sense of community and to really experience what is a changing economy and a change in terms of the way we view the world together.

Chitra: And you also saw that when Floyd Mayweather and DJ Khaled had their settlement with the sec, that was big news so you’re going to see that as a lot of these big figures in pop culture and music and art get involved in the cryptocurrency space, you’re going to see much more sensitivity in the community I think to that

John: Yeah, like we said earlier, we’re not financial advisors, and neither are Floyd Mayweather or DJ Khaled. One of the themes we have for our readers is to do your own research. And that’s going to continue to be a theme and I think that by doing your own research, I think it’s important to depend on the community to learn together. This is a very difficult space to learn about, and people feel comfortable learning about this space together with their colleagues and their friends. So whenever you see a celebrity endorsement such as Mayweather and Khaled, you should look at that just like you would any other commercial in terms of skepticism. They’re going to be required to play by the rules moving forward to say hey I was paid to say this. There needs to be a clear label in terms of sponsorship when it comes to Twitter or Facebook or whatever means they’re using to get the word out. There’s sec compliance and there’s FTC compliance anytime there’s a celebrity endorsement but the good news is from an agency perspective and a brand perspective, there are tons of agencies that specialize in helping brands partner with celebrities and I think we’re going to continue to see high profile celebrities partner with crypto currency and crypto asset companies as the space mature.s

Chitra: I think that’s a really important point because as you pointed out cryptocurrency is very much a self taught culture, you really have to pretty much learn it on your own at least initially. I think that the sources of information that you use, they become very very important. Because as you know there’s a tremendous amount of pay to play journalism in the space so for people who are just entering the space, do you have any advice on how they find credible sources of information so they understand that the decisions they are making are based on sound, unbiased information.

John: Yeah, one of the reasons why we created blockchain beach was to become an authoritative source of news and information when it came to news and I think where we could start that conversation is – a lot of americans don’t necessarily know the difference between what’s earned media and what’s paid endorsement. And I think as you have seen some of these new media companies arise out there as we are covering the space, I couldn’t tell you how many have earned media as opposed to paid media, so I will say we can start from the top knowing that CoinDesk has done a pretty good job carving themselves out in the space, they have been around for quite some time. They have reputable journalists that are on the team. You’re starting to see some of the mainstream media companies like Bloomberg and Forbes add crypto verticals to the space. The wall street journal has been a bit behind but they’re trying, which is good, and you know you’ve seen some other – I’ll give a shout out to a buddy of mine in New York, the Block Crypto, they’ve done a good job really defining themselves in market as a smaller niche publication. We share the same goal of making crypto simplified so that we can eventually bring in a larger consumer audience.

Chitra: So are there some takeaways that people should walk away from this show with – the main points of things that are going to happen, lessons learned from 2018?

John: I think that a lot of people still want to get exposure into this market from a speculative standpoint. There are numerous opportunities out there in order to do that. However there’s inherent risk in getting involved with any of the ICO’s we have seen over the past several years. And it’s impossible to predict which of those are good actors vs bad actors, so the SEC has its work cut out for them in the near term. But I think we’ll reach some sort of inflection point in 2019 where we can put the regulatory aspect of crowdfunding behind us. We’re not going to see crowd equity funding vehicles for retail investors for security offerings immediately. Most likely we’re going to see accredited investors given access to these platforms first and foremost, and then once this model has been proven for accredited investors, we might see platforms emerge that will take advantage of retail demand, however I think we could easily be a year away from that. So in the near term, it may be smarter for consumers to stick to commodities.

Chitra: Awesome, John. It’s been great having you on the show, some great perspectives. Where can people learn more about you and about blockchain beach and about all the writing you’re doing?

John: People can go to blockchainbeach.com or attend any of our events that we have around Southern California or potentially global community and it’d be great to meet people. Come out and say hello.

Chitra: Thank you very much.

John: Thank you.

Chitra: John Marchesini is a cofounder of Blockchain Beach, an LA-based blockchain and cryptocurrency media company. Check out some of the resources and links for this episode on the gem blog. Join us again for another episode of Chasing Unicorns. Until then, enjoy your crypto journey unicorns.

Running with Unicorns, a Crypto Podcast by Gem

Running with Unicorns is a crypto podcast and video interview series hosted by Chitra Ragavan, Chief Strategy Officer of Gem. A veteran former journalist with National Public Radio (NPR) and U.S. News & World Report (U.S. News), Chitra interviews crypto thought leaders, regulators, and experts to offer a lens into the rapidly evolving world of digital assets. Designed to appeal to both beginner and seasoned investors, Running with Unicorns is produced at Gem’s headquarters in Venice, California. Our mission is to offer unbiased and independent analysis of the news and events shaping the cryptocurrency movement, industry, and markets and to explore the role that digital currency will play in the future of money.