The Dread Pirate Roberts was never going to persuade Wall Street to love bitcoin. Maybe John Mack can.
Roberts was the swashbuckler alter ego of Ross Ulbricht, founder of the multimillion-dollar Silk Road online bazaar who’s serving a life sentence for allowing customers to use bitcoin to buy drugs, hacking tools and fake identification. Ulbricht’s was the early, ominous face of the cryptocurrency and no one on Wall Street wanted to touch it. What investors can no longer ignore is the incredible price gains almost 150% alone this year for bitcoin. Yet the problem of how to buy and sell digital assets while keeping compliance departments happy remains.
Enter Mack, the former chief executive officer of Morgan Stanley.
He’s taken an interest in Omega One, a startup that plans to act as an agency brokerage for asset managers and institutional investors who want to own cryptoassets like bitcoin and ether but don’t want to run afoul of know-your-customer and anti-money laundering regulations. Mack is one of a few private backers of Venture One, Omega One’s sole investor at this point.
“I have been watching and investing in the cryptocurrency market over the last several years, and as a Venture One portfolio company, I find Omega One to be an important next step in the emergence of this new economy,” Mack said in an e-mailed statement. “We think Omega One is going to be transformative because it benefits the entire ecosystem – making crypto assets cheaper and easier to access.”
The need for a trusted firm to act as a middleman between the worlds of Wall Street and digital currencies is an indication of the growing pains these new markets face. Bitcoin has always been extremely volatile – it has dropped about 20% since rising to a record last month a trait shared by ether and other digital coins. More than half of the computers that make up the bitcoin network are located in China, giving one nation outsized sway over the global market and leaving reputable investors cautious. And a history of alleged thefts and hacks in the last few years have shaken confidence in security measures employed by some digital asset exchanges.
The uncertainty among conservative investors toward cryptocurrencies is playing right into Omega One’s strategy, according to Alex Gordon-Brander, the company’s chief technology officer. “We’re the bridge between the traditional capital markets and the crypto markets,” he said in an interview. “We will provide everything from balance sheet intermediation to a trusted counter party.”
Wall Street has been captivated for the last two years by the prospect of applying blockchain technology to save banks billions of dollars a year in back office operations and slashing settlement times. A type of software that combines distributed computing and cryptography to make bitcoin and ether possible, blockchain is in a basic sense a shared database that has no central authority overseeing it. Rather than blockchain, however, Gordon-Brander said Omega One is focused on convincing the financial world that cryptocurrencies should be viewed as a new asset class.
There are a few signs of this already. Both Fidelity Investments and USAA allow customers to access their bitcoin or ether balances through their accounts if they are linked to the digital exchange Coinbase. Gordon-Brander said this is the year that attitudes will change.
“We’re seeing the very first signs of institutional adoption of crypto markets,” he said.
Investing in bitcoin has never been for the faint of heart. Within two months in late 2013 it shot up from about US$125 (RM535) in October to US$1,150 (RM4,940) in December, an 820% appreciation. Within two weeks, bitcoin fell to US$520 (RM2,230) on Dec. 18, 2013, according to price data from Coindesk. Earlier this year it dropped to US$775 (RM3,325) from US$1,129 (RM4,845) between Jan 4 and Jan 11, a 31% loss. And then in four months it went from US$964 (RM4,135) in March to a record above US$3,000 (RM12,875) in June to a current price of US$2,233 (RM9,585), according to Coindesk.
Ether spent much of the second half of 2016 in a range between US$10 (RM43) and US$12 (RM52), then shot up to US$396 (RM1,700) over three months between March and June, an astounding 3,500 gain. It has since fallen 53% to a current price of about US$187 (RM1,800), according to Coindesk.
The unregulated nature of bitcoin and ether may also bias traditional investors from getting involved. Bitcoin transactions are verified by so-called miners, who use powerful computers to ensure transactions are valid and the bitcoin belongs to the user who wants to transact with it. For verifying transactions, miners are rewarded an amount of free bitcoin.
Chinese miners account for over 50% of this network, and the country also produces a large share of the computer hardware used to mine, according to Brian Forde, director of digital currency at the Massachusetts Institute of Technology’s Digital Currency Iniative.
That concentration risk may spur other countries to become involved in bitcoin mining to blunt China’s effect on the global market, he said earlier this year.
There have been high profile losses of bitcoin and ether as well. The former head of Mt. Gox, the bankrupt Japan-based bitcoin exchange that imploded in 2014 after losing hundreds of millions of dollars’ worth of the cryptocurrency, began his trial earlier this week. Chief executive officer Mark Karpeles pleaded not guilty in Tokyo on Tuesday to charges of embezzlement and inflating corporate financial accounts.
Last month, Korean Bitcoin exchange Bithumb was hacked and users’ personal information was stolen, according to the exchange. Last year, about US$55mil (RM235mil) worth of ether was stolen from the DAO, a smart contract meant to crowd-fund development projects on the ethereum blockchain. The money was later recovered.
Omega One is also pitching itself to current cryptocurrency investors who want to limit transaction costs, Gordon-Brander said. He should know about that, as he previously was instrumental in building the algorithmic trading system for Bridgewater Associates, the world’s largest hedge fund. The system helped break up large currency orders for Bridgewater’s customers, a system known as smart order routing, to save Bridgewater’s clients money in foreign-exchange trades, he said.
The same issue arises in cryptocurrency transactions, as difficulty in filling orders can cost users hundreds of dollars in transaction costs, he said. The system will be a dark pool, meaning orders are hidden, unlike a public exchange with an open order book. If Omega One can’t fill a trade from resting orders in the dark pool, it will be shipped off to other exchanges around the world for completion, Gordon-Brander said.
Users of Omega One will have to possess a digital coin native to the system, what will be known as an Omega Token. The company plans to offer an initial coin offering in either mid-August or mid-September, Gordon-Brander said. He declined to say how much the ICO would raise, but put the range within hundreds of millions of dollars. That money will become the firm’s balance sheet that it will use to buy and sell bitcoin or ether on behalf of its customers, he said.
“We can do a lot more with a US$1bil (RM4.29bil) balance sheet than a US$100mil (RM429mil) balance sheet,” Gordon-Brander said. “The balance sheet is the grease that makes the liquidity work.”
John Mack serves on boards including the Bloomberg Family Foundation, founded by Michael Bloomberg, the owner of Bloomberg LP, parent of Bloomberg News. — Bloomberg