JP Morgan’s former global head of energy trading, Daniel Masters, was among the first traditional investors to get into bitcoin, helping craft the value proposition that many institutional investors now embrace.
As much as bitcoiners and crypto enthusiasts try to deny it, bringing in converts from traditional finance is the best way to legitimize and publicize the industry in the eyes of many investors.
One of the earliest executives to take the leap was CoinShares executive chairman Daniel Masters. After a long and distinguished career as a commodities trader with JP Morgan and elsewhere, he serendipitously stumbled upon bitcoin after the commodities supercycle ended following the global financial crisis. Masters immediately saw the potential of bitcoin and blockchain, and he realized that his background as a technologist and commodities trader was tailor-made to make him an ambassador for this new industry to a net set of individual and institutional investors.
At the same time, through building his crypto investment management company, he was able to look into the future of this industry and see what developments lie ahead, as well as upcoming clashes between crypto insurgents and entrenched financial incumbents. Forbes sat down with Masters to get his thoughts on the future of this industry.
Excerpted from Forbes CryptoAsset & Blockchain Advisor.
Forbes: Let’s discuss your proverbial bitcoin conversion moment. How did you first hear about bitcoin? What was your reaction?
Daniel Masters: Before I found bitcoin, I was finishing a very high profile and successful career in commodities. I started at Shell Oil, spent time at Salomon Brothers, transitioned to JPMorgan, and in 1999 went out on my own to manage two big hedge funds (one discretionary and the other thesis driven). Our basic thesis was that China was about to consume vast amounts of commodities and we wanted to be opportunistic. At the time the price of oil was $10 a barrel, copper was $2 per pound, gold was about $1,300 an ounce and they all rose in subsequent years as we rode the wave of a commodity supercycle. However, by 2012 I found myself scratching my head and wondering what to do next. The commodities boom had played out—oil was not going to go up another 1,000% to $1,000, volatility started to ebb, and qualitative easing put a safety net under risk assets.
Then one day I was sitting at my desk, watching CNBC, when I saw a price chart for bitcoin on the screen. I studied it closely, kind of how a doctor looks at an MRI, and thought to myself that this is a very energetic chart. The price had gone from a fraction of a penny to something like $15. For a commodities trader that type of movement sets off alarm bells and money signs flash in front of your eyes.
I started to research as much as I could, purchased $10,000 worth of bitcoin with my own money by funneling it through a Chinese agricultural bank to Mt. Gox and even locked myself in a room for two days to solve a block on the bitcoin blockchain. In doing so, I figured out that bitcoin was essentially a version of the internet without a copy/paste function. That is really important.
Forbes: What was your first business venture in bitcoin?
Masters: I’m not a computer scientist, and I’m not going to create my own cryptocurrency, but I wanted to have an adventure. That said, it wasn’t going to be easy. First, articulating the investment thesis for bitcoin was going to be much harder than commodities. Second, there were a lot of scams in the industry around this time, which created additional skepticism.
With these challenges, I didn’t want clients to have any doubt about the fiduciary framework in which they were investing. Therefore, I opted for a fully regulated structure that took two years to build out. I partnered with a regulated custodian, administrator, bank, legal counsel and auditors. All this work took away all the question marks around us, and investors only had to worry about price risk.
Forbes: How is CoinShares organized?
Masters: On top, you have a holding company, CoinShares International Limited. It holds three things: our interest in CoinShares Holdings, the operating company; Komainu, our regulated custody business in partnership with Nomura and Ledger; and it holds our venture investing portfolio that is sourced from our own capital. Go down a level, and you’re now at CoinShares Holdings Limited, which has two main strands, starting with our trading business CoinShares Holdings Capital Markets, which has done $4.5 billion in turnover this year. The second business is CoinShares Jersey Limited, which is where we hold the same investment and fund service business licenses that we had when everything started. Finally, we have a Stockholm-domiciled company called XBT Provider, which is the issuer of our exchange-traded notes that track bitcoin, ether, litecoin, and XRP denominated in the euro and krona.
Forbes: It’s interesting to see how your business has expanded to support a wide variety of infrastructure and trading services in the industry. Forbes is very interested in the future of the digital asset class, which includes but is not exclusive to cryptocurrencies. Where do you see the industry going in the next few years?
Masters: I think you’re on the money here. I work by trying to think about where the world will be in three-years-time and retrofit my business to accommodate that point in the future. Consider central bank digital currencies (CBDCs). There are some very compelling reasons for central banks to issue their own digital currencies. For instance, you don’t have to physically touch or move it around, you can deal with black markets and corruption, and provide real-time accounting. Most importantly, if you take physical cash out of the system, you can enforce negative interest rates. There are eight central bank currencies on the way, including two that are almost live in China and the Bahamas, with one obviously being more important than the other.
Forbes: Do you think that CBDCs are going to heat up the battle for determining the future world reserve currency?
Masters: There is an interesting dynamic playing out in the world of CBDCs. The Chinese digital currency is going to be formidable, and the U.S. is going to be forced to react. It could be in the form of a digital dollar or trade war.
Forbes: How do you think this evolution towards CBDCs will impact traditional financial infrastructure?
Masters: The most interesting aspect of CBDCs is the impact they will have on commercial banks and the financial system as a whole. Today, central banks issue currency to a slew of commercial banks like Chase and Bank of America. These banks do two things—create products and services such as mortgages, and deal with the end users. I think we are going into a new paradigm where central banks issue CBDCs, commercial banks cease to exist and the service layer is filled by crazy new emerging companies like Compound Finance, Uniswap, SushiSwap, and people that are really getting distributed, decentralized finance done today. Then the final interesting layer is who actually faces the consumer. You can already see that there are multiple choices. Coinbase would like to get to all the users, as would Binance though probably not in America. You’ve got wallet infrastructures like Blockchain.com that already have 50 million outstanding wallets.
That said, you could get incumbents as well. Samsung is putting chips into phones now, making them essentially hardware wallets. Amazon could come out with a digital wallet. Whoever owns that level at the bottom is critical.
Forbes: I don’t have to tell you that discussing or predicting the demise of commercial banks is a strong statement. Can you expand on that thought?
Masters: I think the old world is lumpy in the sense that the fractionalization of assets is much more cumbersome than in the digital world. It is getting better with shares sometimes, but gold and real estate aren’t really fractionable. So, it’s lumpy and over intermediated. You buy an ETF; I can give you 12 service providers between you and your asset that aren’t really necessary. The old world is also heavily centralized, which stifles innovation because you can’t just get inside that wall and change anything.
There is a migration taking place to the new world of capital, talent and even regulatory mindset. For example, people need to stop worrying that every single bitcoin transaction is fostering some kind of terrorist activity, which it isn’t. This migration started slowly, but it is happening faster now. The place we are getting to will be the tokenization of everything, and it will be catalyzed when central banks figure this out. In her maiden speech, Christine Lagard (president of the European Central Bank), spent 15 minutes talking about stablecoins. If everyone’s got a digital wallet and CBDCs, which aren’t backed by anything anyway, are de rigueur, then all of a sudden bitcoin looks great. It will assume the role that gold served with regards to legacy money, and all the other digital assets will fall into place. The middle layer—the services layer—will become much more automated, technological and democratic, and the endpoint layer will become a real fight.
Forbes: Do you think what you are doing is in direct competition with commercial banks at large?
Masters: I think I’d be flattering myself at this point to say that. But truly, when I see things on a regular basis, like decentralized peer-to-peer lender Compound Finance having a billion dollars in assets under management, you have to pay attention. There’s just so much brilliant innovation taking place. Today, the borrowing and lending can be done transparently, remotely and in a self-governed manner on chain. That’s a hell of a lot better than doing it with Citigroup. It means something. That is the Netflix to Blockbuster, it’s just that Blockbuster hasn’t figured out what Netflix does yet.
Forbes: Thank you for your time.