NEW YORK, NY – Steeped in anti-government, anti-bank sentiments, Bitcoin’s early history expressed a cyberpunk sort of message. Famously the first block (record of transactions) in the blockchain contains the message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. Speakers at these nascent bitcoin gatherings highlighted the fraud that the traditional financial system imposed and offered an entirely novel alternative to fiat monetary systems.
No longer a protestation of the fraudulent global financial system centered in the United States, Bitcoin’s remaining narrative, supported by wall street and digital industry, circles around the concept of ‘digital gold’. As the Federal Reserve continues the money printing spree, adding hundreds of billions worth of asset purchases per month, financiers worry about potential dollar devaluation.
Long-time Bitcoin supporters and converts from the traditional financial space hammer this viewpoint, accompanied with new believers like Michael Saylor, CEO of Micro Strategies. Saylor pioneered the concept of data mining in the early 1990s when the newly formed Micro Strategies made their name known by winning a 10 million-dollar contract with McDonald’s to analyze the efficiency of their promotions. Fast forwarding to August 2020, Micro Strategies began fervently utilizing cash reserves to buy Bitcoin. Over a year, the company now holds more than 5 billion dollars worth of the digital asset. Saylor views Bitcoin as an institutional grade asset and the primary contender for digital money.
Blackrock, the world’s largest asset manager, owns 13% of Micro Strategies. The Chief Investment Officer of Blackrock recently stated on CNBC that bitcoin is “here to stay” and it will “take the place of gold to a large extent”. Larry Fink, Blackrock’s CEO reportedly spoke about Bitcoin with governor of the Bank of England at a meeting with the Council of Foreign Relations:
Bitcoin has caught the attention and the imagination of many people. Still untested, pretty small relative to other markets…Can it evolve into a global market? Possibly.
Larry Fink
Not especially invigorating words, yet engagement from the head of such a high powered organization and individual merits attention. Gold traditionally serves as a premier store of value in tumultuous times, and historically central banks hoard gold in preparation for tough times. However, in the digital age, the electric properties of a digital asset, enabling easy transportation, quick transfers, difficult confiscability, and software defined scarcity, continues to convince a slew of high profile buyers from Silicon Valley to Wall Street to depart from traditional financial wisdom.
A shift to internet based digital assets also gives even more momentum to the global digital infrastructure oligopolies. Google actively invests in various blockchain companies and Facebook caused waves with an announcement of their attempted cryptocurrency Libra, which was shot down by United States regulators. Pantera Capital and other news agencies report that PayPal and Jack Dorsey’s company Square recently have been purchasing 100% of the approximately 900 BTC minted per day.
Getting Incumbents on Board
One company born in the heart of the Wall Street and banking industry has been preparing for this scenario for years. Digital Currency Group’s (DCG) existence stems from one individual, Barry Silbert.
As a former banker at Houlihan Lokey, Silbert worked on headline bankruptcies such as Enron and Worldcom. Afterwards he formed his own investment company which specializes in dealing illiquid, troubled, assets such as restricted stock, mortgage backed securities, and collateralized loan obligations. This company, named Second Market, positioned itself quite well for the 2008 financial crisis when billions of assets were becoming illiquid (troubled). Second Market also provided liquidity for tech companies, such as Facebook and Zynga, whose impatient employees used Second Market to sell stock options before the companies’ IPO.
Since 2012, Silbert had personally been buying Bitcoin (~200,000 USD around $5-10 USD per BTC) and eventually started using Second Market to buy BTC as well. By infusing his own capital, Silbert started a Bitcoin investment fund (named Grayscale in its current form) and an Over the Counter trading desk (genesis OTC) through Second Market, setting the stage for the eventual Digital Currency Group. Silbert sold Second Market to NASDAQ, and the formal launch of DCG followed shortly after in 2015.
DCG operates as a holding company, owns several subsidiaries, maintains a portfolio of digital assets, and owns equity in hundreds of crypto companies. Some of the bigger names they invested in early on include Coinbase, Ripple Labs (creator of XRP, third largest cryptocurrency by market cap), Blockstream (major contributor to the bitcoin codebase and scaling solutions), Bitpay, and Bitgo (payment processors). They also own Coindesk, the largest media company dedicated to cryptocurrencies. A report from the business analytics company CBinsights places DCG as the single most active investor in the entire blockchain industry. DCG outpaces traditionally mammoth tech investors such as Andreessen Horowitz or Google.
Another analytics company Messari suggests that DCG could easily expect a 4 billion dollar IPO. They also operate the largest digital asset management fund in the world through their subsidiary Grayscale Investments. The Grayscale Bitcoin Trust (GBTC) alone manages US$30 billion worth of BTC as of November 27, 2020, and was the first of its kind to become an SEC reporting company.
Like a miniature Kochtopus, referring to the Koch Brothers sprawling empire, one can find DCG’s tentacles all over the cryptocurrency industry, including core aspects of the bitcoin protocol itself and lobbying groups.
The company’s formation, initial investors, and board members inform the context for one of the lords of the industry. Between the founder’s Wall Street perspective, the initial investors, and the company’s origins, DCG clearly focuses on serving the next evolution of the monetary empire.
The published participants in DCG’s initial undisclosed fundraising round comprises: Bain Capital Ventures, Canadian Imperial Bank of Commerce (one of the ‘big five’ banks in Canada), CME Ventures, FirstMark Capital, Master Card, New York Life, Novel TMT, Oak HC/FT, RRE Ventures, Solon Mack Capital and Transamerica Ventures.
Digital Currency Group’s board consists of three individuals, Barry Silbert, Glen Hutchins and Lawrence Lenihan. Larry Summers is also the only listed advisor to the board. Hutchins and Summers, in particular, have held prestigious positions in government, Summers as treasury secretary and Hutchins as a special advisor on economics and healthcare, both to the Clinton administration.
Quite the catch for a nascent crypto industry, Larry Summers, perhaps has most diligently served the entrenched global financial system powered by the United States capital markets. Summers served in several US administrations and as president of the World Bank. Between working in the Clinton and Obama administrations he amassed millions in speaking fees for companies he used to regulate, and worked cozy jobs in private finance. His personal net worth between the administrations increased from around 400K to 10-30M. Summers also maintained a significant relationship to Jeffery Epstein. They held seats on the Trilateral commission and Council of Foreign affairs together. Epstein also donated millions to Harvard University while Summers was president.
Glenn Hutchins, a giant in the financial space, founded the private equity firm Silver Lake Capital (which currently manages around 60 billion USD). Other past work includes a director position at TD Ameritrade and senior management at Blackstone. Currently he sits on AT&T’s board, as a Director at NASDAQ (for over 15 years), a class B director at the New York Federal Reserve, Director at Center for American Progress, Council of Foreign Relations, and Vice president of the Brookings institute.
Hutchins also has donated hundreds of thousands to the democratic cause over the years, generally between the DNC, individual candidates and political action committees; including, $60,000 to former NY governor Elliot Spitzer (who resigned after a prostitution scandal), $34,000 to John Kerry, $50,000 to the Schemer Committee of the Majority and most recently $50,000 to the Hilary Action Fund.
Hutchins, Summers, and Larry Fink sit together on the advisory council of the Hutchins Center on Fiscal and Monetary Policy at the Brookings institute.
To reiterate, these individuals oversee the single largest investing company in the entire blockchain industry. The role of a corporate board revolves around protecting shareholder interests and managing executives for that end. Considering the shareholders above, the goals of DCG sit in plain view.
Influences in Bitcoin
In 2017, during the height of Bitcoin’s market rise, transaction fees reached approximately $50, showcasing the inability of the network to serve everyday people and businesses. However, network fees do not inhibit the wealthiest to use the technology. Even a $100 transaction fee is attractive for individuals transferring millions or billions of dollars-worth of value, but as a medium of exchange for the less endowed, this obviously represents a prohibitive cost.
One of DCGs holdings, Blockstream works on the two touted solutions to Bitcoins scaling problems, the Lightning and Liquid network. While employing different designs, both of these solutions aim to increase the ability for people to transact bitcoin without congesting the main network. However, due to the nature of the cryptographic mechanisms which make Bitcoin what it is (the energy intensive mining which you may have heard of), both of these solutions introduce significant third party dependencies and more emulate global banks rather than distributed cryptographic systems. Blockstream also employs the most developers out of any company which works on Bitcoin’s core codebase or the lightning network.
The technical nature of mining makes concise simple explanations difficult, but basically ‘mining’ consists of specialized computers computing an algorithm as fast as possible in order to receive a reward from the network. This process creates the ‘blocks’ in ‘blockchain’, when Miners win this race they write the history of the blockchain, by processing transactions into the block, which is linked to all previous blocks. The rules for this procedure exist in the software released by the Bitcoin developers.
The overall security of the network depends on the robustness of the mining ecosystem. if one entity controls over 50% of the computing power of the blockchain then they can control the history of the network.
‘Mining’ for Bitcoin in any consequential capacity these days requires a secure building, wide array of computer infrastructure, knowledge/skills for maintenance/optimizations and access to energy. Just like with any industrial enterprise, Bitcoin mining operations must balance costs of infrastructure and energy with production capacity.
One of DCG’s newer subsidiaries, Foundry, specifically focuses on the mining industry in North America. The CEO maintains three main areas of focus: miner operation financing, and consulting services. They claim to have procured over half of the mining equipment imported into North America. DCG committed around $100 million USD to Foundry through 2021. A recent partnership with Bitmain, a Chinese company and the world’s largest miner manufacturer, was announced in September 2020. Foundry will help Bitmain’s North American customers secure financing. Increasing the ties between the two major power centers in the industry, the United States who provides the deepest capital markets, and China who wields influence in the mining ecosystem.
Before the recent mining ban by the CCP, the majority of miners resided in China. Research from the University of Cambridge estimated that over 60% of the computing power behind the Bitcoin network came from China. The sudden ban sent shockwaves through the industry as miners liquidated their equipment. Due to this saturated secondary market, Bitmain temporarily suspended the global sale of miners from late June to August. However, the market recovered and Bitmain sold out several models of its flagship antminer in September. Remaining the global powerhouse, Bitmain recently held a conference in Miami, Florida, opened by the mayor Francis X. Suarez.
Taking a broad look at Digital Currency Group, we see that their tentacles reach into multiple critical aspects of the industry, mining and developer focus; they who control the capital determine what ideas receive funding and operational support. When that capital is ultimately directed by the institutions with entrenched power, such as the banking, national security and financial industry, energy towards change empowering marginalized people seems unlikely. The industry’s deepening relationship with China simply follows the trend set by American business and financial incumbents for decades.
As is often the case with novel and potentially useful technology, industrial titans vie for a share of the empire while displacing societal functions at an ever increasing rate. Despite historically sympathetic ideals, the Bitcoin community failed to knock down the global power structures, and merely offers a system upgrade.
Great article. Its hard to find investigative pieces leaning on the elite centered agenda of Bitcoin. Many traders can already see how manipulated its price action is, but still in the dark about its true goals, which to me after reading your work – illuminates its pied piper nature, luring the masses into the token economy.