I know the pizza was probably the drop more than I was.

That's cool on.

So I'm Lisa.

I graduated from the JD MBA program last May on for the past year, and change had been working at August Capital, which is Ah, San Toll Road venture capital firm, focusing on Siri's A investments in technology.

Uh, and Greg told me, you know, it'll really be a hit if you come and talk about Blockchain and crypto on.

So I've done my best to put together how we think about it from an investment perspective, and I hope that's useful to you again.

Feel free to interrupt with questions a lot more fun that way.

A little bit about me.

Eso went to Thomas Jefferson High School.

Maybe there's some TJ grads in the audience, then worked at Bain in New York for three years.

Um, did a brief stint at the White House working at the National Economic Council.

Uh, and that was the inspiration.

Thio, come back to grad school and do a JD MBA.

Uh, it was here that I first met David Hornick, who's featured in the photo gallery over there.

He was here last year, giving a talk with me on as a partner in August.

Undergraduate of law school on.

Not till I got connected Thio venture Capital and thought that that would be really fun thing to do.

It turns out it's a dream job because you get to talk to super smart people all day.

And don't I really have to make any power points or excels except for this power point?

But that's cool.

Um, so yeah, so that's that's a little bit about my journey, uh, earlier this year, One of the things that veces do is we blogged a lot.

Uh, and earlier this year I decided I would join the VC bandwagon and publish what I was looking forward to investing in in 2018 on.

So I got published in TechCrunch is pretty cool.

And these are the things that I was excited about and one of them relevant to this presentation.

I said, I'm searching for block chains.

Killer distributed application.

Um, course, the irony of that is 2018 but the concepts around Blockchain have been around since ancient times.

This is something called a rai stone.

Turns out there's a Micronesian prehistoric culture, Micronesian island of Yap, and this was their currency.

They are limestone blocks.

There are about four meters in diameter, probably weigh on the order of tons.

And obviously you can't physically transact a four time limestone block.

And so what the Islanders did was they decentralized knowledge about the ownership of the currency?

It became an oral history that was decentralized.

And when arrives Stone transferred from one person to another, everyone in the island simply moved their aural understanding of who owned the stone on.

And, uh, you know, I think that's a very beautiful analogy for exactly what Blockchain enables today.

It's a distributed understanding of who owns what who has transacted, uh, in with With who, etcetera.

So Google Rai stones are super cool.

How do I think about investing in Blockchain?

There was a log written by the team at Union Square Ventures a couple of years ago, which is where these Tarts came from.

That I think, explains this really well when you think about the Web on, think about the difference between protocols and applications.

Applications have taken the lion's share of the value, Uh, you know, protocol, Air http TCP It's a utility that shared by all of the major applications.

Why have the application's taking the lion's share of the value?

Well, it's no surprise, because there's silo data.

What's proprietary to Google and Facebook and Twitter and Amazon is the vast amount of data that they've aggregated about each of us and our browsing behavior and our friend and our networks, et cetera.

And that's where the lion's share of the value has accrued.

When you think about Blockchain, it's very different in Blockchain.

There's a lot of reasons to believe that the protocol layer is actually where the value will accrue and application layer less so.

And that's because Blockchain, by definition, is a shared data landscape.

The protocols enable any application on top of them to access all of the data that exists within the protocol.

And so there's not that same proprietary siloed data within a distributed application.

Moreover, with a protocol, there's economics of the tokens that incentivize both development and adoption of the protocol more quickly than we saw with, uh with the Web and why is that well, network effects, traditional network effects say Facebook's getting started the overall utility of Facebook when it was 10 people first using it at Harvard pretty low on the incremental value of one new person joining the network help to make it more valuable until it reached a critical density.

And then, at that point, you get good viral effects of network effects that take over and that period of time from an equal zero until an equals density is called the bootstrapping problem in network effects tokens.

Because the first users of the block chain of the Blockchain utility are compensated with tokens, and they get more token value for being early adopters than people who joined later.

You actually have this financial utility curve that's inverse to the application utility curves.

And so there's reason to believe, as you all know, that token network effects will actually be a lot stronger than the network effects we saw for the traditional way.

Uh, so that shows that the protocol layer is actually where a lot of the excitement was.

You'll remember that I had written that I was searching for black chains, killer distributed applications.

You're probably like Okay, Lisa, what's your point?

I think Realistically, I was probably wrong.

I think that really what I mean by searching for the killer application and is searching for that next great protocol.

And if you look at the distributed application landscape, it's still pretty nascent.

There's an amazing website called the State of the Gaps, where you can see in real time how many distributed applications are being developed on top of Ethereum.

As of the time I put this together, there were 1500 of them.

You can see the category is.

Most of them are in games and social.

Probably heard of Crypto Kitty's like one of the best distributed ups out there.

But even crypto kiddies, which was invested in by Union Square Ventures and others back in April, eyes still today, maybe a company worth tens of millions of dollars, whereas Bitcoin, ethereum, et cetera are worth tens of billions of dollars.

And so I think it proves the point that the protocols are where all the action is.

Applications might develop in time, but they're still pretty early.

How Riyadh August capital invested in a really cool company called Spring Labs?

Uh, and Spring Labs, uh, is trying to build a protocol layer for financial institutions today.

If you walk into a bank on want to apply for a loan, you have to submit pay stubs on a copier, your driver's license and probably a letter from one of the credit bureaus that tries to prove that you are who you say you are.

On.

The credit bureaus represent $40 billion businesses, but as we know from the equal fax hack, they're not particularly secure.

You, the consumer, have no access to your own data, no control over your own data, and they don't even really provide.

All the service is that financial institutions need.

They don't do anything with anti money laundering, anything besides just the basic know your customer analysis.

And so what Spring Labs is trying to do is take what today is a really centralized process and decentralize it and make it such that Bank of America or, well, Spargo etcetera can ping a network toe.

Find out Hey, has Lisa been verified before?

If so, I'm gonna compensate the institution who verified her, and if not, I'll do the work and then be compensated in the future.

Whenever anybody else needs to verify her identity, Ah, and so I think it's It's a really smart use of this protocol layer network effects thio, um, to create a, uh, a decentralized way of storing data that today is very simple.

And if anybody is interested in spring labs or wants toe talk about job opportunities there a shameless plug Happy to check, uh, as a law school graduate, I would be remiss if I didn't talk about how is all this being regulated, right?

Like a zoo venture investor when dealing with something like Blockchain one of the things we think about aside from, uh, you know, where is the value accruing what are interesting applications is what's the regulatory risk here?

And crypto has certainly been full of controversy in the past couple of months.

Uh, in regards to will it be regulated as a federal security or not?

And if you turn to the federal security laws, all securities have to be registered with the SEC.

That's the very basic.

Then you need to know.

Ah, and then the question becomes what the security and is a token, a security eso security 11 of the things that counts is the security is what's called an investment contract, and that was defined in a really important case called Howie as a contract transaction or scheme whereby a person invests his money in a common enterprise and has led to expect profit slowly from the efforts of the Broder.

There pretty a lot of legalese, but it's been boiled down to a four point test.

One.

Was there an investment, too?

Was there a common enterprise?

Which just means a whole bunch of people pulling together toe work jointly.

Three.

Did the people who invested expect to make money?

And for, uh, do they expect to profits only from other people's efforts rather than from contributing to the system themselves?

Uh, and so these security laws are implicated in different ways, depending on how the investment and Blockchain is structured, you've probably all heard of the I.

C E.

O.

And another phrase for an I C.

E.

O.

Is the direct token presale, and typically what happens here is the developers of the protocol put together a white paper.

That white paper is distributed pretty broadly to both accredited investors and retail investors like um, and the white paper describes the network that will be built, but it's not yet built.

Ah, and it says, you know, you can buy tokens directly in that future developed network, and then they raised a ton of money.

Some of these icy roads have raised tens of millions of dollars, and then all of that money goes towards the development of the network and compensating the developers, et cetera, et cetera.

Everything that you need to start a business.

Contrast that to the Saft, which was the brainchild of Ah law firm, called Coolly and modeled after ah, standard document developed by Y C for investments, often in the very first institutional round of a company's creation that is called the safe.

This is the Saft, the simple agreement for future tokens.

Ah, and it's very similar toe what happens with the I C E O.

But importantly, different in a couple of key ways.

Same thing.

There's a white paper that's developed before, usually before the network is existent.

But importantly here, accredited investors invest in equity in that company rather than directly in the tokens, uh, based on this staffed and then money goes to the rela bears.

They developed the network, and it's only once the network is existent, and there's actually utility to those tokens.

So in the case of Spring Labs, it would be networks created.

There's now tokens banks can transact them.

Then me Lisa, retail investor could buy one of those tokens and participate in the Took an economics that way.

So on the left hand side of the I C e o.

Uh, these tokens air probably regulated a securities.

We've already seen some action on the part of the SEC that suggest that they believe that, uh, on the right hand side, it's still a little ambiguous.

The SEC has not yet ruled, but the Saft itself that investors invest in is starting Leah security.

And then there's ambiguity as to whether those tokens the utility token, is going to be regulated a security or not.

But it certainly seems a lot more likely that because those tokens have a value, people aren't buying them because they expect that they will increase in value.

They're buying them because the network exists, and it each token represents some sliver of utility to participating in that work, so probably more likely to be regulated, not as a security and so our investment in spring labs was done via a staffed, and that's been our view.

It August there certainly tons of investors who are participating directly, not just in in crypto currencies themselves, but also in I CEOs.

And that's a super interesting thing to observe, as if you see, because it's it.

It almost poses an existential risks to what venture capital is because it's decentralizing what we do s o.

If I were you and I were thinking about, you know, are there black doing projects out there that I'm interested in joining?

Uh, you know, how do I triage this regulatory risk for myself?

There's a couple things that I would clearly avoid.

Uh, you know, no matter what picture the project you're joining is motivated to at least try to comply with regulations, right?

Like there should at least be a good faith effort to try to try to be above board.

There's a whole host of financial regulations having to do with money transmitter licenses.

You have to register with FINRA all this stuff, and then a lot of there's a ton of projects that are trying to register offshore and it attempt thio, save on taxes, Probably the case that black chain tokens are gonna be regulated as property other than as capital gains.

Uh, but from everything I've read doesn't seem like there's actually that much to be gained by registering offshore.

So it's probably more of a red flag than anything else.

And then look for companies that are raising money off of this Saft structure.

Like I said, proactively trying to comply.

It's always, always a good thing if you want to learn more.

Uh, these are a bunch of the leading lights, both in both from a technology perspective and also from a regulatory perspective.

Eso Brian Armstrong, founder of Coin Base Linda G.

Uh, it puts together some really wonderful content on medium, about about different crypto currencies and also about different events that pulled together some of the smartest people in the space.

Elizabeth Stark is creating a layer on top of the Ethereum network that slows.

The are sorry increases the transaction time.

Kathryn Hahn is a fascinating example owes of someone who's transition from the legal world.

She was, think of federal prosecutor for a while, a Supreme Court clerk and now is leading injuries and Horowitz's crypto fund on.

So she's a really deep thinker and how all of this will be regulated.

And then Matt Long, along with Fred or Cem, just launched a crypto focus fund called Paradigm.

They're both very smart.

Uh, and that's it.

Please ask questions.

Yes.

So it's great to see you.

Okay.

I don't know how you get consistent returns from, you know, super follow market.

How do you know a sellout, Especially Markie Adam Exchanges.