RUSSIA, UKRAINE, CBDC's & BITCOIN

Blockchain Coinvestors Newsletter

Vol. 4, No. 7, March 2022

RUSSIA, UKRAINE, CBDC's & BITCOIN

It goes without saying that everyone is asking us what will the Russian invasion and the terrible loss of life in the Ukraine mean for blockchain and our investment thesis. So in this week's newsletter we will explore this question and will show that two greatly strengthened tailwinds are now driving in the direction that we have spent a decade investing into. And whichever way this goes, blockchain ends up being the beneficiary of a terrible moment in history.

Times of Crisis Bring Clarity

It is a cliché that most people are reticent to change and that it takes something substantial to flip them into action. High magnitude, low frequency events make change happen. A slap on the side of the head if you will. Awareness, consideration, trial and usage all get greatly accelerated when the world is in motion around you - whether you are an individual, a business, or a government. Not always in the moment - that can create paralysis. But certainly, once the dust begins to settle.

That is what is happening right now

The COVID Example

Before turning to Russia and the Ukraine, let's just take a moment to reflect on the last two years. COVID has been a human crisis of almost unprecedented magnitude. Not so much in terms of lives lost, but certainly in terms of lives impacted. It is hard to emphasize the positives when so much human grief and loss has been going on. But as investors we need to look closely because as stated above, times of crisis do bring change, clarity and even new investment dynamics.

After three decades working on the digitalization of everything, we had come to expect that the move to the digital economy that we call The Fifth Era would be a long term undertaking. However, COVID just accelerated humankind towards that future much faster than anyone had expected.

The table below shows evidence from a McKinsey project that shows that not only did industries and organizations change, but they found it much quicker and easier to do so than they expected without the impetus of a global pandemic that would 'brook no opposition'.

There was no choice.

Russian Invasion A Sharp Shock Too

Russia is now marching across the Ukraine and for all of us it is another terrible crisis which is bringing human suffering on a massive scale. Another slap to the head of humanity. And once again, it is greatly accelerating shifts towards the digitalization of every money, commodity, and asset.

The Need for Sharp Tools in the Global Monetary System

We have written in the past about the blunt tools of today's monetary system. How, as an example, the US Government sending out millions of paper based COVID checks in the middle of a pandemic that might have been spread on inanimate objects, was ludicrous to consider. But the US does not have digital wallets or digital dollars to send value in real time and at no cost to its 300 million people. So paper has to suffice. A very blunt tool.

Well now almost every government wants to sanction Russia and block, seize, and/or freeze every Russian pool of value owned by Putin and his Oligarchs. However, the tools are blunt and the ability to act is limited. Just one example. The US wants to stop certain Russians using their money right now. Mastercard and Visa announced this week that they would block cards issued by Russian banks from being used outside Russia. Not inside Russian because the Russian payment processor that Mastercard and Visa work with would presumably not agree (or would be quickly nationalized by the Russian government). So for now, Russian issued bank cards just used abroad.

A blunt tool? Actually a shotgun backfiring in the faces of the most needy. Who needs to use their Russian bank issued cards right now? All the refugees who are fleeing Russia and arriving in Poland, Hungary, Romania, and Bulgaria. As well as all the Ukrainians who have them too. Who does not care? All the Russians using the Russian bank issued cards in Russia as well as all the Oligarchs for whom their debit and credit cards are easily replaced (they all have ways to secure money and make their payments if needed. Furthermore, they are not struggling to find the money for their Maslovian essentials. They will be just fine, even if their ego's are a little bit bruised).

What Western governments have suddenly come to appreciate are the characteristics of digital money that they have been saying are the underlying rationale for the Chinese digital yuan. China has a sharp tool with which to censor its own citizens if they stray from the path of the long walk. Now Western governments suddenly wish they had the same sharp tools to enable selective turning off of the money and value held by Russians - or at least those Russians the West wishes to censor.

The US Finally Gets Moving

So now all of a sudden, the President of the US issues an executive order asking for the US to greatly accelerate its consideration of the uses of digital monies, commodities and assets. In Newsletter Vol. 4, No. 3 we shared the whitepaper of the Governors of the US Federal Reserve which lay out the rationale and benefits of a US central bank issued digital dollar (CBDC). Now the President is calling for 14 accelerated studies to report back this summer.

Suddenly, from resistance, to consideration to rapid calls for implementation now. Another crisis demanding a rapid acceleration of innovation and change.



You can read the President's executive order by clicking here.

The Risk of Big Brother and Orwell's Nightmare World

Now to be clear, we have concerns about central bank issued digital currencies being used by politicians to censor specific groups of people. One person's terrorist is another person's freedom fighter. And if we have learned anything in our lives so far, it is that politicians will use sharp tools when they align with their policy objectives. This could be Pandora's box opening to the world of Big Brother just like George Orwell warned us about. Not least because so many see China going down that path. A prisoner's dilemma perhaps? We hope not.

Implication - Scenario One

In summary, the first implication of the Russian invasion of the Ukraine for blockchain is that we are moving rapidly towards Scenario One. A world of central bank digital currencies that will provide sharp tools for our government officials as they manage the global monetary system.

The Reality of 2 Million Refugees (and Growing Daily)

However, that is not the only way in which this terrible crisis is accelerating change and accelerating blockchain. Consider the impact on the average Ukrainian refugee.

Eight years ago, Russia invaded the Crimea, and since then we have watched as Syria was destabilized and millions of refugees left their homes and headed to Europe for asylum and safety. What happened then is happening now. In fact it always happens when countries go to war. Suddenly, people realize that they need to move now. They grab the children, pack what they can carry, and before you know it long lines of refugees are on the march. In the case of Ukraine, it is believed that 2 million people are already on the move, and that another 2 to 4 million will be soon too. All of them have left home with a few items of value - including their gold and jewelry which are easy to carry, but also easy to take away. As the Syrians learned, the man at the border with the gun will strip you of all the gold you have on you, and even if he does not get it all, the 'helpers' along the way will take what you have left.

The message right now in the Ukraine and in Russia too is that you need to have some of your value offshore, and you need it in censor resistant accounts and better yet, digital monies and assets. Of course, not in wallets and custody solutions on Ukrainian platforms. Russia can turn off the electricity and Ukrainian access to the Internet. So that does not work.

Of course it is too late now for most Ukrainians with wealth to open an account, and move their value out of their Ukrainian or Russian bank accounts. They missed that opportunity although we hear many are still trying.

The world is watching this all play out - again.

The Message to 8 Billion People

Take a look at the map of the world's most populous countries in 2050 based upon current population dynamics. In the Western countries we mostly don't see that for at least 4 billion people, their own state issued fiat currencies are not the place to hold their store of value. We have (mostly) trustworthy governments who issue (mostly) trustworthy fiat. They may print too much of it, but at least we don't think it will go to zero, or be expropriated by our own government right out of our bank account.

However, for at least 4 billion of the world's 8 billion people, they are watching the images of the Ukraine and are saying 'but for the grace of god there go I'.

And the consequent takeaway is just behind that realization as they come to it.

'I need to move some of my family's value into a better store as soon as possible'.




Distributed, Sovereignless Stores of Value

The chart below from Glassnode begins to help one see the inevitable consequence, or the greatly strengthened tailwind to use our own vocabulary.

Individuals are going to keep on opening decentralized, distributed wallets and will accelerate the portion of their store of value that they allocate to them. Especially if they are in the countries that might go the way of the Ukraine - or in which their own government may take actions to take away their value.

Implication - Scenario Two

The second implication of the Russian invasion of the Ukraine for blockchain is that we are moving rapidly towards a Scenario Two. A world of decentralized, distributed digital wallets and stores of value that the average person will use to protect themselves from the risk (and reality) that their own country may become destabilized from without or from within.

Real World Reality - Hybrid Future

So which will it be? Scenario One and a world of central bank digital currencies, or Scenario Two and a world of cryptoassets? The answer of course is both. The future is being accelerated by Russia's invasion of the Ukraine and both Scenarios are now inevitable. Digital monies, commodities and assets are being accelerated in just the same way that COVID accelerated digital communications and content.

Implications for Blockchain Coinvestors Investment Thesis

So what does this mean for Blockchain Coinvestors and our investment thesis? Well for us it is no change in the direction of change that we have invested into for a decade. This is just an acceleration that we were not expecting. And since we have mostly been investing into the blockchain infrastructure, we know it is needed for either Scenario One or Two and of course for both. We are completely straddled on this one.

Our funds are having closings if you want to learn more just email ir@blockchaincoinvestors.com as soon as possible.

Thank you for reading.

Alison Davis
Matthew C. Le Merle

Digital Assets Week is coming to California: March 22nd and 23rd in San Francisco, and March 25th in Palo Alto. The focus over the 3 days is on digital security, digital assets, and institutional crypto. We invite you to join Matthew Le Merle at the event to learn from the sector's most experienced leaders. Along with Matthew, other speakers include:

  • Chris Larsen, Executive Chairman, Co-Founder, Ripple

  • Scott Lucas, Managing Director, Head of Digital Assets, JP Morgan

  • Matthew McDermott, Managing Director, Global Head of Digital Assets, Goldman Sachs

  • Andrew Peel, Head of Digital Asset Markets, Morgan Stanley

  • Mike Belshe, Cofounder and CEO, BitGo

  • Chris Rice, Head of Digital Assets, Credit Suisse

  • Ryan Marsh, Global Head, DLT & Digital Innovation, Securities Services, Citi

  • Andy Tang, Partner, Draper Associates

  • Greg Brogger, Founder, SharesPost Inc

  • Michael Ashe, Head of Investment Banking, Galaxy Digital

  • Justin Chapman, Head Market Advocacy & Innovation, Northern Trust Corporation

  • T Prasanth Mathew, Managing Director, Cash Management – Head of Global Fintech & Platform Sales and US Tech Sales, Deutsche Bank

  • Jamie Finn, Co-founder and President, Securitize

  • Dave Hendricks, CEO & Cofounder Vertalo

We look forward to seeing you later this month. Registration is available here for those interested in attending. 

ABOUT BLOCKCHAIN COINVESTORS

Launched in 2014, our goal is to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and crypto projects. The strategy is now in its 9th year and has to date invested in more than 30 pure play blockchain venture funds in the Americas, Asia and Europe; and in a combined portfolio of 300+ blockchain and crypto projects including 30+ blockchain unicorns. Our funds rank in the top decile amongst all funds in their respective categories on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in Grand Cayman, London, New York, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.

FUND PERFORMANCE

Blockchain Coinvestors Funds are continuing to generate strong returns. As of Q2 2021 our funds rank in the top decile amongst all funds in their respective categories on both Pitchbook and Preqin with Net IRR exceeding 60% for Funds I and II. This remarkable performance results from powerful tailwinds driving the world towards a future in which digital monies and digital assets are ubiquitous and the businesses and projects providing blockchain and crypto products, services, and infrastructure benefit disproportionately.

BLOCKCHAIN COINVESTORS FUNDS

Blockchain Coinvestors’ goals are to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and to capture superior returns from investing in the leading blockchain venture partnerships:

  • Fund III is open only to investors who meet the Qualified Purchaser definition with a minimum subscription of $250,000.

    • A “qualified purchaser” is an individual or a family-owned business that owns $5 million or more in investments. The term “investments” shouldn't include a primary residence or any property used for business.

  • Fund III Parallel is open to investors who meet the Qualified Client definition with a minimum subscription level of $250,000 at the discretion of the Manager. Please contact ir@blockchaincoinvestors.com if the minimum is of concern.

    • Currently, an individual or entity is a qualified client if he, she, or it: (i) has a net worth of $2,200,000 prior to investment in the fund (excluding the value of his or her primary residence).

While the two funds are substantially the same, there may be some funds and investments that are only available in the Qualified Purchaser vehicle. Blockchain Coinvestors funds can take investments via IRAs. We support several providers, including AlgoIRA, Kingdom Trust, Millennium Trust Company and Pacific Premier Trust Company (Pensco).

Blockchain Coinvestors has launched an Early Stage Token Fund that is open to investors who meet the Qualified Client definition with a minimum subscription level of $250,000 at the discretion of the Manager. This Fund expects to have access to early stage tokenized projects that few others can access through its relationships with other leading blockchain investors. The Fund will target 20 to 30 SAFTs as well as positions in traded tokens when excess capital is on hand. This is a continuation of the direct token investing strategy of the Fund Manager that has included private stage investments in Acala, Filecoin, NEAR, Polkadot, Structure, and others.

Please visit the Blockchain Coinvestors website to learn more about our offerings. You can also reach our Investor Relations team directly at ir@blockchaincoinvestors.com.

BLOCKCHAIN COINVESTORS SWISS

We are excited to announce that Blockchain Coinvestors Funds are now available through Swiss certificates for those of our non-US investors who prefer this approach. The underlying fund is the same, however, our Zurich based team at Blockchain Coinvestors Swiss, who will introduce in future weeks, can provide detailed information regarding this investment option. Email us at mlemerle@fifthera.com to learn more.

BLOCKCHAIN COINVESTORS ANGELLIST SYNDICATE

Continuing the theme of the democratization of investing, we have a rapidly growing Blockchain Coinvestors syndicate on AngelList providing access to selected coinvestments. Please join us and our partner Lou Kerner on AngelList.

Click here to receive the insightful weekly crypto newsletter and webinar invitations from our Blockchain Coinvestors partner Lou Kerner.

REGISTER NOW FOR UPCOMING WEBINARS AND CALLS

Our investment team hosts bi-monthly webinars and calls to help educate our community about the Fifth Era, fintech, blockchain and crypto. We discuss important trends, tailwinds and investment themes including what we have learned and how we are using our knowledge to inform our own investment thesis and actions. Below is a list of upcoming webinars for which you can register by clicking the links:

Options for Investing in Blockchain and Crypto

- March 21st, 7:00am PST

- March 21st, 12:00pm PST

What are SPACS and State of the Current Market?

- March 28th, 7:00am PST

- March 28th, 11:00am PST

Institutional Investors - Making the Case for Blockchain

- April 4th, 7:00am PST

- April 4th, 12:00pm PST

Recordings of past webinars and calls can be found at www.blockchaincoinvestors.com/webinars.

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