N.C. companies bet on blockchain
By Mark Tosczak
For those just hearing about the “blockchain” technology that underlies bitcoin and other so-called cryptocurrencies, you’re about five years behind Chapel Hill hedge-fund manager Mark Yusko. That’s when a friend told him of plans to start a bitcoin fund. “He’d been successful, and he was basically shutting down a multibillion-dollar hedge fund to go into a new business, so I had to at least pay attention,” says Yusko, founder of Morgan Creek Capital Management LLC, which oversees more than $1 billion (“CapTrust parent tops list of state’s biggest money managers”).
Now, Yusko incorporates cryptocurrency technology into his investing business, extols its potential at conferences and is raising $25 million for a fund to invest in blockchain-technology ventures. In March, Morgan Creek bought Raleigh-based Full Tilt Capital LLC, an early- stage investment firm, as part of a plan to raise up to $500 million to buy blockchain security tokens that represent ownership of assets.
He’s not alone in envisioning a virtual currency that could replace dollars, Euros, yen and other government-issued currencies. Walmart Inc. is using the technology to track produce as it travels from farms in Mexico to U.S. stores. Law firm Ward and Smith PA, with five offices in the state, started accepting bitcoin as payment in June.
Bank of America Corp. holds 45 blockchain-related patents, more than anyone else, Fortune magazine reported. CEO Brian Moynihan and his peer at JPMorgan Chase & Co., Jamie Dimon, are bullish on the technology, though less so on bitcoin. JPMorgan has launched a blockchain-powered payment processing network with banks in Canada and Australia.
Wilmington-based Reeds Jewelers started accepting bitcoin for payment four years ago. “In 2014, it was probably a lot more of somebody who was an investor in something a little more speculative,” says Mitch Cahn, vice president of marketing for the jeweler, which sells online and at 58 stores in 13 states. “It’s gotten a lot more mainstream.”
Blockchain evangelists imagine a day when the technology will proliferate, though few will understand how it works, much like how smartphones befuddle their users. Here’s a brief explainer: Blockchain is the technology that undergirds bitcoin and other cryptocurrencies, as well as new applications. A blockchain is a series of digital files linked together in sequence, with older files toward the beginning of the chain and newer files toward the end. Each block contains transactions similar to an accounting ledger.
What makes blockchain so potentially powerful is how the blocks are hooked together using algorithms. Once a block is added to the chain, it can’t be changed without invalidating each block that comes after it — creating an immutable data file that no single entity controls.
The process of adding blocks requires computer processors to perform large numbers of complex calculations. Because of the computing power involved, this process is often distributed across a network of computers in a process called “mining.” Owners of those computers earn tokens for participating in mining. In the bitcoin blockchain, those tokens are a new virtual currency. Other blockchain networks are set up to issue tokens used for running software and other purposes.
To turn all that into a business, veteran entrepreneurs Flip Filipowski and Brian Platz are developing blockchain-based software applications. Their audacious goal at Winston-Salem-based Fluree is to compete with Oracle, Microsoft and other tech giants.
“The role of Fluree is to become everyone’s blockchain,” says Filipowski, who started or co-founded several businesses including Winston-Salem-based propane company Blue Rhino. Platz and Filipowski say their technology is better suited to handle the massive amounts of data now generated than older database systems constrained by computer memory, network speed and other limitations.
“No [single] entity ever controls the data and every entity has instant transparent visibility,” Platz says. The goal is to enable companies to share billing, inventory and other information without relying on auditors to ensure the data is correct. Blockchain helps users “codify these contracts in a way where you don’t need auditors anymore, because nobody controls it and everybody can validate it,” he adds. “I wouldn’t want to be an auditor.”
Started about three years ago, Fluree’s beta-software version has attracted more than 500 companies. A production version of its software was expected to launch in late July.
Fluree employs about 10 people and has burned through about $2 million from “friends and family.” It plans to make money by licensing its software and providing technical support services, Platz says.
Morgan Creek Capital expects its larger fund will focus on security tokens, which are registered securities and distinct from cryptocurrencies such as bitcoin or the utility tokens such as those that might power a Fluree application, Yusko says. He foresees the digitization of loans; real assets such as hotels or apartments; mineral rights; or intellectual property. “With about $14 trillion of goods and services now changing hands, anything of value that is exchanged in an analog world will now be moved to digital and tokenized.”
Blockchain-based security tokens could speed up transactions and reduce costs associated with brokers and other middlemen. “The thing that I love is that if I want to transfer value to you today, we need a trusted third party,” Yusko says. “If we have a blockchain transaction, you know, we hit the chain, it gets validated by the nodes and ‘Boom!,’ it’s a permanent immutable record that can’t be hacked, can’t be changed or altered, and we don’t need a trusted third party.”
Of course, not everyone involved in the emerging technology can be trusted. The N.C. Secretary of State’s Office issued seven orders in the first five months this year against firms and individuals offering cryptocurrencies that regulators view as securities offerings. “We’re really focused on the fraudulent investing programs and schemes that involve cryptocurrencies,” , director of the secretary’s securities division, told a Raleigh business group in April.
Blockchain promoters believe the technology now is at the same stage as the internet in the early 1990s — a tidal wave capable of reshaping the economy. Filipowski conjures visions of autonomous organizations that involve virtually no human intervention: Imagine driverless cars operating on a “distributed Uber.”
Cryptocurrencies such as bitcoin, Yusko says, could replace currencies issued by governments. If that happens, the ability of governments to manage economies by manipulating interest rates could be vastly diminished, he predicts.
Who in 1995 predicted the rise of Facebook or Uber? “99.9% of all the applications that we’ll be using in five years haven’t been conceptualized yet,” Filipowski says. “I think most of those will be manifested in blockchain.”