Bitcoin has slowly been challenging PayPal. Recently, CCN reported that bitcoin topped PayPal’s market cap after breaking $4,000 for the first time, and soaring past a $70 billion market cap. Back in 2016, PayPal announced it appointed the founder and CEO of Xapo, Wences Casares, to its board of directors.
As bitcoin surpasses PayPal, CNBC’s Eric Jackson caught up with former PayPal COO David Sacks, known in Silicon Valley as an entrepreneur and an early investor in various companies such as Facebook, SpaceX, Uber, and Airbnb.
Bitcoin is Creating “The New World Currency”
The conversation started off with a question regarding Sacks’ take on the rise of digital currencies. The entrepreneur stated that after PayPal he never thought payments would interest him again, but notably stated that bitcoin is fulfilling PayPal’s original vision. According to David Sacks, in PayPal’s early days the team believed that if enough people got involved, money would never had to leave its systems, but revealed that the vision ended when eBay acquired the company.
“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.”
Furthermore, Sacks revealed that to him, it feels like we’re witnessing the birth of a new kind of web, the decentralized web, or the internet of money. In it, blockchain technology is being used to create decentralized apps, and to fund new startups through Initial Coin Offerings (ICOs). This means the all the ingredients needed for a new wave of innovation are there, but it also “feels reminiscent” to the dot-com era, as it is revolutionary that money is being made programmable, but there is “speculative excess and random enrichment.”
The conversation went on to focus on recent remarks made by billionaire investor and founder of Oaktree Capital Management Howard Marks, that stated digital currencies such as bitcoin “aren’t real.” Sacks stated that raising the alarm on speculation isn’t wrong, but added that Howard Marks is wrong in saying that digital currencies aren’t real. He stated:
“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.”
His explanation for skepticism in the U.S. is that those inserted in its financial system have felt relative political and financial stability for some time and, as such, tend to underestimate bitcoin. People in other parts of the world, in which the systems aren’t as trustworthy, got it sooner because they understand that their life work can one day collapse or be confiscated.
Nevertheless, David Sacks questions the value digital currencies currently have. According to his comparison between cryptocurrencies and the dot-com bubble, the technology is in 1995, but the pricing is “either 1999 or getting close.” This means that the bubble will eventually burst, but the early PayPal executive hopes that it won’t be as bad as it was when the dot-com bubble burst. He stated:
“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.”
He believes that the big correction will be regulatory, rather than technical, as various ICOs are raising a lot of money without being properly structured.
Digital Assets Are a Long-Term Threat to Venture Capital
Regarding future SEC regulations and ICOs, David Sacks revealed that he hopes the SEC will distinguish coins that have actual use in an ecosystem and shouldn’t be viewed as securities, from “asset coins”, which should be viewed as securities.
When asked if digital assets and tokenization represent a long-term threat to venture capital, Sacks confirmed the suspicion. In one way, startups can now raise money through an ICO instead of seeking venture capital. Moreover, LP interests and most illiquid assets might be tokenized, and soon enough illiquidity will be a disadvantage that only top firms will be able to justify.
2/ With over 1500 ICOs launched or announced, it's becoming clear that any startup that can ICO will ICO.
— David Sacks (@DavidSacks) August 12, 2017
“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.”
Challenges That Lie Ahead for Cryptocurrencies
At the end of the conversation, Sacks laid out three big areas that cryptocurrencies still need to improve upon: scalability, slideware, and regulatory. Both bitcoin and ethereum can handle less transactions than PayPal or Visa, which means risky improvements still lie ahead, for example.
Then, he added that most ICOs are still just whitepapers raising funds, and that the execution of their ideas may not go as expected. Fortunately, however, the cryptocurrency boom attracted a lot of talent to the space.
Finally, regarding regulations, he stated that these will have a major impact on adoption and innovation:
“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.”
At the end of the piece, David Sacks warned potential investors that ICOs are whitepapers for technology that doesn’t belong on the blockchain, and that some could simply be pump and dump schemes.
Featured image from Disrupt/TechCrunch.