Security, Venture Capitalism, and Macro Trends in Crypto: A Conversation with Arianna Simpson
If you haven’t heard of Arianna Simpson, then most likely you’re just joining the crypto world. The BitGo PM turned venture capitalist has had skin in the game since 2012, which in crypto years, is more than enough to solidify one’s credibility. Simpson has developed a keen eye since reading Satoshi’s white paper six years ago, working with Jameson Lopp thereafter, experiencing both bear and bull markets, and now formally investing in the space. So, if you’re just joining the conversation, there’s only a few better places to start.
On April 23, 2018, BTCManager caught up with Simpson to talk a little bit more about her start with Bitcoin and her work with the above mentioned crypto security firm. Now she helps manage an open-play technology-focused investing fund, Crystal Towers Capital, as well as her very own Autonomous Partners, a crypto-specific fund that invests directly in both virtual currencies and blockchain projects in the space. Much happened in between, of which earned Simpson a place in the top female voices in the space, but perhaps it’s best if she explains the rest.
Arianna Simpson: Not exactly, the real kind of genesis in my interest in this space was a trip that I took to Zimbabwe in 2013. I spent some time traveFling around Southern Africa and was in Zimbabwe after the worst of their hyperinflation. They had switched over to the U.S. Dollar to restabilize the economy, but they were still having a lot of economic struggles from that. When I came back to the U.S.
I was thinking a lot about the alternative financial systems and what might be possible in a world in which a corrupt central government wasn’t controlling all of the monetary policy and means of exchange. When a friend of mine introduced me to the Bitcoin white paper, everything kind of clicked in my head.
At that point, I was working at Facebook, but I think the company was actually pretty slow to start to adopt anything related to cryptocurrencies or bitcoin. Eventually, it made sense for me to move into the industry full-time because I started blogging and doing a decent amount of speaking on the subject. It ended up that I was thinking a lot more about cryptocurrencies than my actual job.
From there you began working with BitGo. Did you have a connection with someone there already?
Well, not really. Ben Davenport, one of the co-founders [of BitGo] had also worked at Facebook, but we didn’t really know each other because he was in the Menlow Park office and I was working in New York.
What actually happened was I wrote a blog post about multi-sig and BitGo was kind of the first company that had really commercialized multi-sig wallets and I mentioned them in the blog post. I sent it to them thinking it might be interesting if they wanted to publish it on their blog or check it out. Then they told me, ‘Hey this is great, why don’t you come have a chat,’ and so one thing led to another, and they made me an offer to join.
Source: Penn State
Since you aren’t working with BitGo anymore, have you noticed a change in focus in what the company is up to?
BitGo was always in the business of providing very secure solutions for enterprise tech customers. I think one thing that has changed is really just the market. Back when I was at BitGo, the company was running on an AUN model, which obviously was a difficult pricing model to sustain at a point in time when bitcoin was worth $200 or $300.
Since prices have appreciated so dramatically, the business model is now a lot more viable, and I understand the company is doing very well. So, that’s one change, but that it doesn’t really have anything to do with what the company has done, just more a shift in terms of the market.
Basically, just the price of holding cryptocurrencies has made security a higher priority, thus benefitting Bitgo.
Yes, that’s right. Even just the same number of customers are a lot more profitable for the company. There’s a growing interest on behalf of exchanges, funds, soon institutional investors, and the beginning of holding coins directly [rather than investing in companies or ETFs].
This is becoming quite a theme in 2018 and the end of 2017, but do you see a more formal entrance from institutional investors coming soon or do you think this is just hot air? People like Tim Draper, for instance, are eager to say things like ‘bitcoin is going to be $250,00 in a couple of years,’ and I was wondering if you think the arrival of institutional investors is legitimate and will happen very soon?
No, I think it’s actually going to happen. I don’t like to make specific price predictions because I think that’s a very difficult thing to get right. I would say that the level of interest from institutional investors, even governments, is only growing over time.
If you just consider the fact that bitcoin has a finite supply and an increasing demand generally, obviously that bodes well for price appreciation, but it’s hard to predict a specific price point especially in a limited amount of time. We’re still dealing with something very volatile, but I do still think the general trend is ‘up’ otherwise I wouldn’t be spending all of my time doing this.
Going off that, Coinbase recently deflected Wikileaks and a few others for custodial services and the like, and I was wondering if you think Coinbase will continue to be the most reliable user-friendly for institutional investors? Or do you think another company will emerge and does things a bit better and is a bit more open?
Coinbase has announced their institutional custody product, and I think they’ll probably do well with that just because they have such a strong brand in the space. I think, though, we need more than one provider, and I don’t necessarily think it’s a bad thing, and these are all market expanding, and because overall the total number of institutions, even individuals, who own cryptocurrency is very low, I think all of these things are net positives for the space. I think Coinbase will do well, but I think there is room for others to grow.
Going back from your move from BitGo to a venture capitalist, did you find that that shift also came with a shift in perspective of how you saw cryptocurrencies overall?
I think as an investor now, it has definitely been very helpful for me to work in the space on a number of different fronts. Number one, I understand some of the challenges that companies face in a different way than if I’d only ever been an investor, which I think is very helpful. It also gives me a degree of credibility that I wouldn’t have if I were only an investor; as much as 2017 was a fantastic year, the years preceding that were pretty tough.
2014 to 2015 made up this long bear market, and it was a rough time to be working in the industry. So having been in the space and having felt that pain personally has given me a degree of ‘street cred’ if you will, which might have been difficult if I had come waltzing in during the bull run of 2017. So that’s definitely been helpful to me as well. Lastly, it enabled me to meet a lot of people in the industry and really get to know folks before all the hype, and that has paid off in a lot of different ways.
In terms of security, where do you think the industry needs to focus? What are the next steps? People are quite interested in multi-sig wallets and decentralized exchanges [DEXs], but are there any other topics flying under the radar that people need to be aware of?
Broadly speaking the issue of key management is still an obvious one, but it’s still very much not a solved problem, in the sense that even if you are using multi-sig wallets there are certain degrees of risk and for most people, frankly, usability is not yet at an acceptable level.
There’s this tradeoff between security and usability, and I don’t think the industry has figured out the right happy medium. Sure you can buy an air-gapped machine and you can transfer an offline wallet software over with a USB, and then store that offline computer in a vault, but all of these things are major hindrances to usability and just beyond the ability and/or interest of most users. What happens is they’ll leave their coins on exchanges and things like that, which then become honeypots and end up getting hacked.
Ultimately, the real issue is that we don’t yet have good key management solutions that are both easy to use and secure. Now, I think that this is a problem that will be solved, but we’re still probably a few years away from seeing that happen. To be honest, I don’t think we’ve made great strides in that category in the last five years because I still personally see a lot of the same struggles now as I did in 2012 and 2013 when I was first getting into the space.
Do you think that comes down to general education about what this is all about or do you think it has more to do with the fact that there don’t exist easy-to-use products for users to store their keys?
It’s a product problem. It’s not realistic nor desirable to expect most people to understand key management to the degree that it’s currently necessary. What happens, in most major technology waves, is that a lot of that complexity ends up being abstracted away and eventually things that would’ve seemed impossible or like magic, end up becoming commonplace. So, that’ll be the case here as well, but it’s just moving along at a fairly slow pace in some ways.
Do you know of any firms that are working on this specific problem at current?
BitGo, of course. They have both an enterprise product and a wallet available to others such as consumers. There is Casa, which has a scheme which involves a lot of different people, something like five different digital keys [to store each customer’s cryptocurrencies].
There’s another few companies that are kind of working on splitting keys using multi-party computation in order to make key management more secure and eliminate a single-point of failure that’s similar, but not exactly the same on a technical level, as multi-sig. So, yes, there are companies working on solutions to these problems, but I’ve yet to see a solution where I’m like, ‘ok, wow, that’s really it.’
Another problem, is that the financial incentives aren’t aligned, in the sense that consumers have shown time and time again that they are not particularly desirous in paying for software security products. Of course, Ledger had a pretty impressive year in terms of sales for their hardware device, but I think hardware devices are a little bit different in terms of consumer purchasing psychology. Even still, we hear of people constantly getting hacked and we’re definitely not in a phase where this problem is solved.
What do you mean by ‘consumer purchasing psychology?’
Consumers have become accustomed to not paying for software products. There’s very little incentive to pay for a security software product and the problem is, despite it being a very rational decision to spend, let’s say ten dollars a month to protect $100,000 worth of cryptocurrency, most people just won’t do that.
It’s kind of the type of thing where you don’t expect you’ll get hacked, until you do. It’s a challenging sale to make because you’re not helping people make more money, you’re protecting them from a downside which might happen or might never happen. That’s part of the challenge in getting people to pay for this on an individual basis.
Do you think hardware wallets like Ledger fall short of software products?
No, they’re probably the best solution at the moment. Even better, perhaps, would be a combination of hardware and software. For example, BitGo’s multi-sig wallets allow you to use their software product in combination with their Ledger device, which is interesting because then you have this key that’s generated and kept offline, but you still have a multi-sig approach.
It would be difficult for an attacker to steal your coins. Something like that is probably the best combination of user-friendly and secure. Of course, everyone’s needs are different. Based on how frequently they need to trade, for example, but there all kinds of other considerations.
Do you miss working with a team like BitGo, trying to develop a product, compared to having an investor role?
No, not at all. That doesn’t reflect poorly on BitGo or any other companies I worked for, but I just discovered that I’m very much an investor at heart. A lot of entrepreneurs end up becoming investors at a certain point in their careers, just because after a certain degree of success as an entrepreneur it seems to be a natural path that a lot of people follow. But to be honest, I’m very glad that I got started in investing fairly young because it’s absolutely what I want to spend the rest of my life doing.
For better or for worse, I spend a bizarre amount of my time thinking about allocating capital, markets, teams, and things like that, so for me this is one hundred percent what I want to be doing. I feel lucky to have figured that out fairly early on. Investing, for me, is both a lone wolf and a very social activity.
On the one hand, you can actually manage a really large amount of capital with a very small team in a way that you could never run, at least not to date, a $50 billion company with a small team, but you could very much run a $50 billion fund with a small team. It’s a different dynamic than what you would see in a company. So, I’m constantly meeting with entrepreneurs and developers and other investors in the industry, but on other hand it also means a lot of time spent by myself reading and researching. Ultimately, that’s kind of the perfect combination for me personally.
Is your role at Crystal Towers Capital different than your role at Autonomous Partners?
Yes. Crystal Towers is one that my partner Tikhon Bernstam and I started in 2015. That fund was early-stage generalist fund; we invested in about 35 businesses mostly early-stage tech companies based in San Francisco, New York, and LA, in a number of fields. We did some autonomous vehicles, healthcare, and a few different things. My second fund, my most recent fund Autonomous, which I started in 2017, is one hundred percent crypto-focused. So I’m investing in currencies, but also in companies that are in the space.
Source: Angel List
Do you have a preference to investing directly in coins than you do in companies or projects?
They’re definitely very different. I obviously believe there is a lot of potential in this space in a number of different ways, so I structured things in order to be able to have a certain degree of flexibility in terms of the form factor. Some teams were raising equity rounds, other teams were raising SAFTs, other teams were launching a coin without any ICO. There are a lot of different models being used and are still being used. I just wanted to be able to participate in as many of those as possible because there are great teams that are kind of using many different structures at this particular point in time.
In your role as investor now, you’ve probably developed a much broader perspective of the macro trends in the market, and as such, do you expect anything in particular in 2018 or the coming years that people may have overlooked?
I’m very bullish on infrastructure. Where we are in the cycle right now, there’s still a lot of infrastructure foundations that need to be laid. Things like security, as we discussed, but also scalability. So, what are going to be the really dominant scalable smart contract platforms, as well as exchange infrastructure, both centralized and decentralized exchanges. Basically, all of the foundational pieces that I think the ecosystem needs to have functioning before it can really go mainstream. That’s what I spend a lot of my time looking at.
As you’re based in the U.S., do you think that the country is becoming a pariah in the cryptosphere? Do you feel like your work is in any way hampered or if you have less access to the projects that you want to have access to simply from a regulatory perspective?
Yes, some teams are certainly deciding to base their companies or launch their ICOs elsewhere and perhaps only allow non-U.S. investors. But it’s not really a problem that has become very significant for me, in the sense that, so far I’ve been able to invest in everything that I’ve wanted to invest in. In the event that that starts to become an issue, I may choose to open up an offshore entity. Right now, though, that’s still not a primary concern of mine. It may also change and if the United States becomes even more closed off, in terms of the types of things that it’s allowing, then that could potentially be a real challenge.
I hope that isn’t the case because I think this is also a great opportunity for the U.S. to help move things forward and maintain a dominant position in the development of technology. What I am seeing, however, is that great teams are coming out of different places, you see Berlin, Singapore, or Hong Kong. It will be really interesting to see how the regulatory landscape evolves and how much of an impact that ends up having.
As you find yourself not actually restricted by regulations in the United States, but you also note that a lot of other places are turning into these ‘havens.’ Is that simply due to their crypto-friendly nature, or is there another factor?
A lot of it definitely has to do with regulations, but certainly not all of it. Switzerland is another place that has become very friendly to crypto projects and you start to see a hub crop up in Zug and a lot of teams deciding to be based out of there. So, yah, regulations definitely have a real effect of where projects migrate. That’s another reason why ultimately it’s a very bad idea any country to decide to outright ban or make it very difficult for projects to domicile in their jurisdiction.
In the end, there will always be a region that is more friendly and they will reap the benefits of this next major wave of technology. If you look at a state like New York, for example, with the BitLicense, which I think is really quite a bad idea, projects are not based here. They’re moving to New Jersey, to Delaware, to California, they’re moving to other states just because of those challenges. It ends up hurting the geography more so than the projects.
Source: Brave New Coin
You’ve also done quite a bit of writing and general reporting on crypto, how best do you think media coverage can improve?
A lot of it comes down to not sensationalizing things. I unfortunately see CNBC and some others who basically pump a particular coin, which I think is frankly irresponsible just because while we would like to think that everybody is going to do their own research and spend hours upon hours reading developer docs before making a purchase, that’s just not realistic. So, blatant encouragement of consumers to purchase a particular coin is just a really bad idea.
There’s no guarantees that prices are going to go up and if retail investors get burned that ends up bringing down the regulatory hammer with more violence and potentially setups the setting back of the space overall. In the end, it’s important not to dramatize the price activity and more real work on the fundamentals would be great. Obviously, clicks are important and price drama drives more of that, ultimately I don’t think that’s where we should be trying to get the space to go.
Do you think cryptocurrencies have a tribalism problem?
I think certain projects do, but I don’t think it’s a major issue for the entire space. Some general debate is healthy and we already see quite a bit of that. But certain people are really hellbent on shilling their own projects or projects that they’re heavily invested in (and perhaps not disclosing it), which, again, starts to become problematic. In general though, I wouldn’t say that’s too much of a problem outside of a relatively small number of projects.
And where do you think the media has done a good job?
I think some of the media has done a great job. For example, Laura Shin’s podcasts are terrific. There’s a number of other folks who’ve done really good work which is good for them, of course, but also for the space. More things like deep dives into certain projects and what the developers are working on is what deserves to be celebrated.
Another popular point is that many institutions are a lot more interested in blockchain technology rather than cryptocurrencies, but many of these institutions are offering private or permissioned blockchains. Do you think this is problematic and, more importantly, will this non-public rendition of the blockchain become an industry-wide trend?
In general, I’m fairly skeptical of private chains. In many cases, that I’ve seen, is that they really just need a database that works. So, too much focus on private chains gives corporations or banks them the impression that they’re being innovative and progressive, but not actually have to do that. I think there are exceptions, however.
For example, Kadena, in which I am an investor, and I think they have an interesting model where they have both a private chain and a public chain. One use case for the private chain, involves an instance in which you have multiple stakeholders who are seperate companies and who don’t necessarily trust each other, but who need to collaborate on a particular subject.
A private chain could be interesting in this example because there’s a sort of consortium responsible for maintaining the ledger and everybody can see that it’s been maintained appropriately and things are happening as everybody is saying they are. They still need to have some control over their data and a little bit more ability to give and remove access to participants, just in there potential in dealing with very sensitive information. In this particular case, a permissioned chain could make sense, but in other cases I think it’s a little bit more hype-driven and hopping on that bandwagon because it sounds good more so than they actually need the technology.
Finally, are there any plugs or articles that you think people should be aware of?
One thing that I read quite recently that I thought was quite interesting was the most recent post that 0x put out.
As I’ve been spending a lot of time thinking about exchange infrastructure and one issue that I’ve heard come up repeatedly from folks who are institutional traders from the traditional hedge fund world, who are trading crypto, is that they cannot be trading on [DEXs]. In part because of performance issues, but also because of KYC and AML requirements and needing to know who your trading counterparty is. So the blog post is basically an explanation of what would be effectively a permissioned pool whereby in order to trade in a particular pool, you would have to meet certain KYC/AML requirements and then have access to that pool and everyone in it would have been pre-approved in the same way.
That’s a pretty interesting concept which is helping to bridge the gap between regulation and actual technical feasibility. I also think it’s indicative of where we’re headed and maybe some larger trends.
For more information regarding Simpson’s next moves in the space, you can find her on Twitter and AngelList, as well as on her site. On June 11 to June 12, 2018, she will also be presenting her work at the inaugural BCI Summit in New York along with a host of other speakers from the crypto sphere.