There is a specter haunting the world, the specter of the Internet of Tokens.
There are about 7.5 billion humans who live in 2017. Those who own one or more Bitcoin are estimated at only 600,000, fewer than 1 in 10,000, or 0.000008%.
Out of 18.5 million developers, only about 5,000 are skilled in Blockchain development, or 0.00027%. There are over 100 million corporations, and only a few thousand Blockchain companies. All cryptocurrencies together are worth about $150 billion.
We normally wouldn’t expect such tiny numbers of owners, developers and companies, in a world with a $75 trillion a year in Gross Global Product, and over $350 trillion worth of assets, to be so impactful, as everything crypto should be almost invisible at this early point in the growth of the field.
And yet we do notice all the impact of Bitcoin and the other 1,000 to 2,000 cryptocurrencies and tokens. We can’t help it: the news is loud, and its everywhere.
We see stories about Bitcoin’s price rising (to over $5,000) and falling. We hear that if we put $100 into Bitcoin in 2010 that it would be worth over $10 million today, and we see that Bitcoin was the best performing currency of the year most years since 2009, when Satoshi Nakamoto published his famous white paper.
We hear Jamie Dimon, the CEO of J. P. Morgan Chase, the largest commercial bank in the United States, claiming that Bitcoin is a fraud, and that if any of his employees are trading it, they will be fired, even as social media responds by showing J. P. Morgan trading Bitcoin and other financial instruments that track Bitcoin. BlackRock’s Larry Fink says that the rise of Bitcoin, “identifies how much money laundering there is being done in the world”, an attempt to get regulators to attack Bitcoin.
We see the government of the Peoples Republic of China engaged in frantic activity with one hand, subsidizing electricity for Bitcoin miners so that they pay less than the equivalent of 2 cents a kilowatt-hour (vs. 16 cents a kWh on average in the US), and on the other hand, crazily, demanding all but two exchanges shut down, and banning initial coin offerings (ICOs). We see the Republic of Korea (South Korea) ban all ICOs.
But also hear stories from wise people away from the headlines – that the powerful people in China have been told cryptocurrency will create over a trillion dollars in wealth, and we learn that the Communist Party will reopen the exchanges…after making sure that Party members are in control of the new exchanges. Can’t have a trillion dollars wind up in the hands of non-Party members – that would be destabilizing! At least, that will be the story told and retold by government.
We also see small nimble innovative governments, like that of Estonia (population 1.5 million), seeking leadership in electronic identity using the Blockchain. We see Gibraltar and Malta, proud of their ability to generate government revenue from gaming, seeing to become regulatory leaders in token sales.
And we see the US Securities and Exchange Commission taking the middle path – not banning ICOs, but from time to time seizing exchanges (and currency worth over $1 billion) and selling far below market (an average of $320 per Bitcoin from federal sales) and issuing warnings about the DAO, and sometimes calling entrepreneurs and telling them to give back the proceeds from their coin and token sales, and issuing press releases that only 820 people paid their taxes on Bitcoin wealth a few years ago.
Meanwhile, every day there are three to seven new ICOs or token sales. Some question the quality. Brock Pierce, one of the most successful Blockchain investors and the Chairman of the Bitcoin Foundation, has repeatedly said in public presentations, “19 out of 20 ICOs are crap” and warned token entrepreneurs to be extremely careful of the securities laws “to avoid wearing orange”, a reference to prison garb color made popular by the prison TV show Orange is the New Black.
Universities are starting to offer classes in the Blockchain and cryptocurrencies to belatedly try to fill a fraction of the demand for developers that sees 13 out of 14 jobs unfilled in a timely fashion.
What can we conclude from all this?
That governments, universities, corporations, mass media, investors, and the general public all expect that cryptocurrencies will change the world. That’s a little general, so let’s be more specific. The people paying attention expect this to be bigger than the dot com boom.
The wisdom of the smart crowd seems to have reached the consensus that the technology, economics, finance, and political implications of the Blockchain world, will be the most transformative of any industry since the dot com explosion of the mid-1990s, a once in 25 year opportunity to make vast fortunes and change the world, for better or worse.
It’s worth looking at the dot com explosion for context of how big the Internet of Tokens could become.
The Internet has been around since the days of Dr. Larry Roberts at DARPA, who required universities that received grants for integrated circuit research to share their computational resources, in 1968. In 1973, Vint Cerf and Dr. Robert Kahn announced the specs for Internet Protocol version 4. But it wasn’t until Prof. Larry Smarr, at the National Center for Supercomputing Applications, asked Mark Andreeson (for the princely sum of $12 an hour) to create something called Collage, later Mosaic, and still later Netscape Navigator and then Internet Explorer, that the web browser created an “interface breakthrough”, allowing the average non-technical person to access nearly the full power of the Internet.
The market cap explosion of the dot com era was impressive. In aggregate, the dot com companies were valued at over $7.2 trillion, about $6 trillion of that in the US alone. While many companies failed, we know from Thomas Jefferson’s favorite economist, Jean-Baptiste Say, who coined the term, “entrepreneur”, that “quantity creates its own quality”. In other words, if you want to find a prince, you have to kiss a lot of frogs. If you want to create massively valued companies, you have to create a lot of companies, and be willing to let most of them fail.
Out of the “dot com bust” that got so much bad publicity, we got FANG, Facebook Amazon.com, Netflix and Google, which are worth something like $3 trillion in the future. Amazon.com alone might be valued by the market at over $1 trillion, and is changing retailing; with apparel now the no. 1 category online, and historic highs of retail store closing in the US occurring in 2017.
Governments in the world’s 215 nations look with envy at what happened in the US as a result of the dot com explosion, at least, while times were good.
The US government had invested $50 million in the Internet, mainly via DARPA and the US Dept. of Commerce. And what a windfall return it received. In the year 1990, US federal tax revenues were $1.1 trillion. Just ten years later, in the year 2000, federal tax revenues were $2.1 trillion! An extra trillion in revenue. MIT professors who studied GDP growth concluded that roughly half the GDP growth of the US in the 1990s was directly or indirectly related to the Internet. So $50 million investment by Washington, DC returns over $500 billion each and every year. A million percent return…every year. That’s the greatest ROI in history.
The early spending on the Internet had a few interesting results. Roughly half the entire world’s Internet Protocol (IP) traffic went through the US, and roughly half the US traffic went through the Washington, DC area (mainly because of Metropolitan Area Ethernet – East or MAE-East), handing the US government the ability to do electronic surveillance on a silver platter, and boosting the area wealth so that the richest counties in the US are the ones in Northern Virginia near Washington, DC, with a disproportionate number of telecom and Internet companies. But the seeds of failure were planted by making the agency responsible for electronic surveillance, the NSA, also responsible for cybersecurity, and creating a perverse incentive to fill the world exclusively with broken locks. Thus the opportunity to reinvent cybersecurity via the Blockchain.
What governments learned from the dot com era was
1. There is massive revenue to be made from being ahead of the curve and creating a safe reliable environment for entrepreneurs to be able to conduct legitimate businesses, without unreasonable fear that capricious, arbitrary and (as in China) self-serving government officials would change the rules retroactively and put entrepreneurs in jail or steal their franchises in the broader sense.
2. To get big successful companies, government must allow and even encourage massive experimentation, and be ready for investors to experience widespread losses. This sober realization is driving the US to try to limit participants in ICOs and token sales to accredited investors, those with net worth of $1 million or person annual income of $200,000 or joint spousal income of $300,000 a year – a tiny fraction of the total number of people who would like to participate in cryptocurrency offerings, defeating the original vision of cryptocurrency as a great equalizer that allows people to send money to each other without banks in the middle.
3. The small companies can get big quickly, and start to make political demands, and to throw their weight around, and it’s important (for governments) to show the CEOs and boards who is boss while they are still small.
From all of this, we can conclude that there will be a tsunami wave of regulation in 2018 as national governments (and in a few cases, municipal governments, such as New York, London, Singapore, and Tokyo) rush to put together policy frameworks that are “Goldilocks” – not too hard (or Blockchain entrepreneurs will decamp to other countries) and not too easy (or scammers will flood the market, and create a stench in the air from failed ICOs, causing the market to seem tainted), but “just right”.
Gibraltar is very well positioned, as it has the best of both worlds – tiny size that lets it tailor its regulations almost to individual companies, but direct access to the world’s financial capital, London, even as London enters into a phase of great interest and receptivity to new policies as the City of London gets ready to adapt to life post-Brexit, when it cannot count on being the biggest financial market in the European Union, but will need to survive based on responsiveness to new market opportunities.
Where does all this lead us?
To the Internet of Tokens, in which any person or suitably advanced bot, sim, agent , daemon, or artificial intelligence can buy, sell, borrow, loan, or swap in any of thousands of parallel currencies or tokens with any other.
Tokens in the near term are eye-candy, but they have a deeper greater value that will only become apparent after sufficient infrastructure is in place. Here are the top ten changes we can expect will lead us to the Internet of Tokens. Every one of these is a big financial opportunity for thousands of people.
1. Better wallets – Coinbase has mixed reviews, but it only handles Bitcoin, Ethereum, and Litecoin. Jason King has estimated that he has over 200 cryptowallets. We need wallets that will handle any tokens, securely and simply. This is a gating factor to the growth of the Internet of Tokens like no other.
- Better security – an estimated 10% of all coins and tokens issued in 2017 have been stolen by hacker and malefactors, an outrageous statistic. Imagine if Elon Musk announced that 10% of all 80,000 Teslas were stolen between the factory and delivery. The company stock price would collapse. In theory, the Blockchain has the math to handle this, as it incorporates an elegant solution to the Byzantine General’s problem – how do you determine who is lying or providing false or faulty information? If we can figure out who the bad actors are, and banish them from the network, that’s worth quite a lot.
3. Better exchanges and more exchanges – Exchanges are necessary for liquidity and clarity about the value of crypto assets. Exchanges will need to be set up to replace the ones shut down in China, possibly by the army of exiles Beijing is creating by telling exchange creators to get out, or beg for a job with the party-connected officials who are permitted to replace them.
4. Better education for Blockchain developers – Moe Levine and Jason King are doing an ICO to raise $80 million for the Academy for Blockchain Technology, using the statistic that only 1 in 14 corporate approved and funded projects for Blockchain are able to attract adequate Blockchain developers to meet the timeline and budget. It will take months to ramp up, but if this project succeeds, it will remove the biggest bottleneck.
5. Better policies for ICOs and token sales. Still in process in many nations, but 2018 will be the year we see polished policy packages. The Republic of Korea was showing great promise with its policy programs published in 2017, until it panicked and just banned all ICOs. Most urgent for regulators: a uniform approach to AML (anti-money laundering) and KYC (know your customer) that works for holders of cryptocurrency comparable to the way that banks know people who have accounts with them. There’s just no way around this, though many people with cryptowallets are used to being able to imagine they are and always will be anonymous…which is not a reasonable expectation. Science is offering the first incubator ICO and went the extra mile to make it a security in compliance with SEC regulations, and it’s possible this will be the norm for the future.
6. Better due diligence – Tom Peters, author of many business books, says it’s useful to “fail fast” and learn to do better. If Brock Pierce is correct and 19 out of 20 ICOs are crap, then let’s hope the bad ones fail fast, so we can all know what characteristics, what “corporate DNA” separates the winners, the survivors, from the losers that go out of business.
- Better trading platforms – currently there are projects to make it more simple, secure, and straightforward for traders of currencies, commodities, and securities to be able to trade cryptocurrencies. Initially this will be about better interfaces, but eventually this will need to include well-integrated wallets, exchanges, bank accounts, all compliant with CYA/AML.
- Tokenized real estate – Real estate is worth over $217 trillion and will be utterly transformed by the Blockchain because chain of title is so crucial, and distributed ledgers are tailor made for title. In late September 2017, the Wall Street Journal reported that Propy (which concluded a successful ICO that raised $14 million) assisted Tech Crunch founder Michael Arrington in the first transfer of a non-virtual asset using the Blockchain, the purchase of real estate in Kiev, Ukraine (the emerging center for low cost Blockchain software development). The big weakness of real estate as an investment class is its illiquidity. If Propy (and Altanti and Hip and others) succeeds, buying and selling real estate anywhere on earth and being able to transfer title securely via the Blockchain will enable massive liquidity to come to real estate, creating vast fortunes both from property and the supporting technology.8. Tokenized financial assets. At the World Blockchain Forum in London, late September 2017, several speakers talked about tokenizing the $100 trillion in equity and debt instruments. Liquidity (say, a private valuation vs. a publicly traded valuation) can generate a 30 to 300% premium, so the Internet of Tokens, if it makes it easier for anyone to buy, sell, borrow, loan and swap, will give holders of financial assets a significant bump up in value.9. Tokenized commodities and energy. One of the more interesting innovations deriving from the Blockchain are the solar providers, such as Sun Exchange, which is doing a fall token sale that promises to “use the sun to stream cryptocurrency to your wallet” from individual solar panels that you “own”. Given that Stanford’s Tony Seba says that there is a $100 trillion opportunity to transition from this world of 81% fossil fuels to one that is 100% powered to solar, wind, hydro, and other clean green energy, and that at least $50 trillion of this will be for solar, it’s possible that one of the killer apps for Blockchain is to enable massive investment in solar from individuals, making it unnecessary to have public utilities, and coal and nuclear power plants.
- Tokenized business models for machine-to-machine and DAOs 2.0. The Internet of Tokens will enable business models that charge small amounts for utility computing and cloud-based storage. Google, Intel, Microsoft, Amazon and others have invested vast sums for storage. Storj (pronounced “storage”) had a successful ICO for its storage business plan, and Block.One has announced it will be using EOS tokens to pay for storage in its cloud offering. The Internet of Tokens is a way to give an allowance to all the emerging intelligent software, so that it can buy its way into well-run secure parts of the Internet, leaving spammers and scammers out of the walled gardens and future developments. Bad actors need not apply: their money will be no good here, where “here” is the Internet of Tokens, and good citizenship is a prerequisite to being able to interoperate. The DAO is the Digital Autonomous Organization. Hopefully we’ve learned how to do DAO right this time, after the hack in 2016 derailed this promising 21st century advance.
If you add up all these possibilities, I think it’s reasonable to expect that the cryptocurrency/Blockchain boom will result in the creation of over $10 trillion in wealth. We are only 1.5% of the way there (with aggregate market cap of about $150 billion, of which about 47% is Bitcoin and Bitcoin Cash), so there is plenty of growth.
The path to growth for the Internet of Tokens is clear. May you participate and help to build a new world.
Alex Lightman is an MIT graduate (’83), attended graduate school at Harvard, and is the winner/recipient of four global technology awards, including the Economist magazine Reader’s Award for the “innovation that will most radically change the world” for this decade 2010-2020. He is a co-founder of Token Communities Plc., a Gibraltar corporation that invests in tokens; the CEO of a publicly traded energy company; and advisor to seven ICO/token sales, including Propy, Science, and Academy for Blockchain Technology mentioned in this article. He is the author of the first book on 4G wireless, Brave New Unwired World and the co-author, with Brett King, of the Amazon.com bestseller, Augmented: Life In The Smart Lane, which was no. 1 in seven different categories in 2016.