Banks Are 'Grabbing in the Dark': Blockchain/Bitcoin VC Draper

Adam Draper thinks people will stop talking about the blockchain in the next few years.

No, the chief executive of Boost VC, which backs 56 bitcoin and blockchain companies, does not think the platform that promises to revolutionize financial institutions with rapid settlement and transparency is a fad. Rather, he thinks in a few years the technology will be so prevalent that it will fade into the background.

"In three years, no one is going to be saying blockchain, but everyone is going to be using the blockchain," Draper said in a recent interview with American Banker. "I don't say I'm going to TCP/IP you — I say I'm going to text you."

Boost began four years ago as a venture firm with a tech-business development center. As it plotted its second year, it decided to narrow its focus. It considered 3-D printing, but that is too capital intensive, Draper says. It considered drones, but at the time Draper couldn't see many uses besides taco delivery. Draper had already personally invested in Coinbase, a bitcoin exchange, so it decided to focus on the cryptocurrency. The company is now on its seventh "tribe" of companies put through its development program. It invests $25,000 for a 6% stake in the companies.

"We slowly became known as the bitcoin accelerator," Draper said. "Our added value is that we've established the strongest network in the space, and so financial institutions come to talk to us about what they should do with blockchain. It's fun."

In the interview, Draper talked about the rise of blockchain technology, the future of bitcoin, the challenges of private blockchains and which sector is now catching his firm's attention. The following is an edited transcript of that conversation.

Are you surprised that the technology has pulled ahead of the currency?

I look at it as a tree architecture. Blockchain is the industry and bitcoin is an opportunity in that industry. Underneath bitcoin, there are cross-border transactions, store of value for emerging markets and microtransactions. But blockchain itself has other opportunities; things like settlements and smart contracts.

I'm not surprised that blockchain has been noticed. Also, there is a lot of emotional baggage of bitcoin. Everyone realized it was valuable, but they couldn't quite recognize that this thing associated with drugs and guns was going to be revolutionary to the financial markets. When people realized you could parse the two and didn't need to be doing only currency-related transactions with the blockchain, its revolutionary power was noticed.

This is the year of blockchain experimentation. Every large financial institution is participating; they are all searching for the way it is going to disrupt financial markets. They are all experimenting with startups, experimenting internally. 2017 is implementation.

Are bitcoin companies finding it easier to find institutions that will offer them banking services?

It has gotten better. For our first bitcoin companies, banks had just begun hearing about bitcoin and thought it was bad, so all of them kept getting kicked out of banks. It is happening less and less now. A lot of banks have become more comfortable, but there is also a regulatory road map. Banks needed guidelines, and they have them now. They are treated like a money transmitter if they are transmitting money, for instance.

There was a period of time when all of the banks had an innovation department that was tasked with getting to the bottom of the technology, but they were also given no decision-making power to say if they could accept bitcoin accounts. All the banks were a "no" for about a year and a half. Our companies weren't doing anything wrong and were going through [anti-money-laundering] and [know-your-customer] processes, but were kicked out of bank after bank after bank. But if bitcoin companies survived that period, they ended up having a bunch of great relationships with banks.

Banks are so gung ho about blockchain that it has led to more acceptance.

What's your take on the plan to change the size of blocks in the bitcoin blockchain? Do you think there will be a hard fork (a change to the software that would require widespread adoption, or else possibly result in two competing networks)?

Let's start from the beginning. There is Bitcoin Core, which is a group of five developers, and then there are a separate 20 bitcoin developers. They all discuss what the updates will be to the system. Mike Hearn [a prominent software developer in the bitcoin community] wrote this blog post that bitcoin is over, essentially. I wrote a response. The block-size debate is all about figuring out how to up the number of transactions that can happen every 10 minutes that clear in the bitcoin blockchain. I believe the biggest risk to the bitcoin blockchain is the Core. They need to be aligned. Additionally, there is this problem that 60% of the miners are in China and are behind the great firewall [which delays data transmission across the border], so that also makes transactions slower than they should be. Those are the biggest problems of the block-size debate. Mike Hearn tried to facilitate something called BitcoinXT to happen. It was an attempt to change the block size and a few other things, but he needed it to be voted on by the miners. But because so many are in China, he can't get the vote he needs. He worked a lot and it didn't get voted through. So, I think he is upset and believes bitcoin is over. I do not. I'm in full belief that it is alive and kicking.

They are thinking about a hard fork right now. That means duplication and change of an open-source product. There is no right answer here because it is a future-based question. It is unknown if a hard fork would be bad. We know that the Core has been slower to develop innovation as of recently. They are talented and I like them. But to update it, you need all the votes. But at least a fork would be pushing in a direction. Right now, I just want the boat to move. Right now we are stopped and waiting. If you're looking at this as a startup technology, Hearn is saying that there are too many people trying to transaction via bitcoin and we can't handle the volume. Too many people around the world are competing for computing power. Those are dream scenarios for a new technology. My guess is that we will do a hard fork. It will end up being good; it will make the Bitcoin Core make decisions. This is how I see it playing out: there is a hard fork and now you'll have these two going up against each other. When you have two groups, they compete. Innovation happens. Right now everything is going through one chamber.

I think it is interesting that while this technology is potentially revolutionary, there are still people behind it, and they are the biggest threat to it.

The democratic nature of the system probably adds some challenges to it, too.

It is still a global experiment to see if pure democracy works. Think about Ethereum [a separate cryptocurrency and blockchain platform]: it has created great developer tools for smart contracts through a separate blockchain that syncs with the bitcoin blockchain. But that group has a leader, Vitalik Buterin. Having the drive and focus of someone pushing it forward — it is interesting. It came out of nowhere and has started creating a lot of value for developers. A lot of our companies are beginning to enable Ethereum-based smart contracts or support.

What's your take on banks using permissioned, private blockchains versus the bitcoin blockchain?

They are all experimenting with private ones, but that doesn't mean they couldn't eventually use the bitcoin blockchain. But my take on permissioned ledgers is this: you have to add enough value that it is worth doing with a blockchain rather than just using a database. What are the true value-adds of this technology? Some of things you can do with a private blockchain can be achieved with a database.

But to me, the bigger picture for the financial world is this: finally everyone is looking at their technology problems. The fear of the unknown disruptor is launching them into action. They don't want to be "Napstered."

Nonetheless, I think blockchain can add value to some of the things they are doing.

With bitcoin, we knew the problem we were solving. With blockchain, we know what the technology is, but we don't yet know what problem it is solving. All of these financial institutions are saying, "We want to do something with that." But they are all experimenting with the problem they are solving. It is the reverse way of most technology development. They will find something that it will disrupt, but right now they are grabbing in the dark.

What are the things that can uniquely be solved by a blockchain rather than a database?

We are replacing trust in a third party with proof. The things it does really well are certification of assets. Think of a deed for a house. If the house burns down, there is no proof. This is a way to prove I own it. Besides currency, there are settlement, digital assets and smart contracts. Think about the startup world. I invest in a startup. Then after a few more investment rounds they are sold. Right now, there are a lot of middlemen settling that transaction so we end up with our money. I could see a day when that transaction could just send straight to my account. It would be preprogrammed.

But those aren't the only opportunities of the blockchain, but underneath that it is a change-out of the entire financial system. Getting everyone on one system is what blockchain is going to do. Each of these financial institutions is working to identify something that works. They are going to be separate opportunities, but they will slowly raise to just being on the blockchain.

But the biggest deal is that banks have thousands of ledgers that need to be synced. That is capital intensive. With blockchain, it can just happen if it is implemented slowly and well.

The way blockchain in banking is evolving now, with so many companies, partnerships and banks all exploring it in a web of ways, are you concerned that it will end up creating the same kind of silos it promises to break down?

Definitely. Financial institutions have created a wall with the R3 CEV consortium. But let's say blockchain gets fully adopted. What is the end result? Banks have to figure out what their value-add is. Storing data is not as big of a deal because it is now digitally stored. Transacting is done on an open-source platform. What they will find, their core value-add is distribution and lending. Where do you make your money? Banks have higher and higher regulatory fees, but are making less on payments. You'd rather have someone else take that payments system out of your hands, but you need a payments system if you want to be a bank.

There are going to be multiple blockchains. There are going to be blockchains for real estate, for instance. But off of that, there is going to be the bank blockchain that syncs with the real estate blockchain. There will be a way for them all to talk to each other, and that will give it the openness and transparency that I believe the system needs.

What's the next thing Boost is focused on?

We just added Ethereum-based companies to our focus. They are going to play a big role in the smart-contract part of the blockchain world. We plan to continue to support the blockchain ecosystem. We've been there for three years. It has become a huge space, and it is really exciting, and we are about to hit financial-institution adoption. From when we first looked at it to now, it has come such a long way.

Has it come to where you thought it would be?

I thought it would go a different route. I thought bitcoin was going to be adopted as a meta-currency layer. That was going to be the first opportunity. Banks would use to send money cross-border by transacting in and out of bitcoin, similar to what Ripple is doing. That's how I thought it would play out initially, and then it would go to the blockchain. For banks, it was like, "Well, bitcoin is nice, but it is not reliable enough for the amount of money we handle." But what it can change is all of our ledgers and data.