JP Morgan veteran Daniel Masters explains how blockchain will end up commercial banks

As much as bitcoiners and cryptocurrency enthusiasts try to deny this, bringing converts from traditional finance is the best way to legitimize and advertise the industry in the eyes of many investors.

One of the first executives to make the leap was CoinShares Executive Chairman Daniel Masters. After a long and illustrious career as a commodity trader with JP Morgan and elsewhere, he stumbled upon bitcoin after the end of the commodities super cycle following the global financial crisis. Masters immediately saw the potential of bitcoin and blockchain and realized that his background as a technologist and commodity trader was tailored to make him an ambassador of this new sector for a net set of individual and institutional investors.

At the same time, through the creation of his own cryptocurrency investment management company, he was able to look to the future of this sector and see what developments lie ahead, as well as the upcoming clashes between crypto-rebels and established financial operators. Forbes sat down with Masters to get his thoughts on the future of this industry.

Excerpt from Forbes CryptoAsset and Blockchain Advisor.

Forbes: Let’s talk about your proverbial bitcoin conversion moment. How did you first hear about bitcoin? What was your reaction?

Daniel Masters: Before finding bitcoin, I was finishing a very high profile and successful career in commodities. I started at Shell Oil, spent time at Salomon Brothers, moved to JPMorgan, and in 1999 went out on my own to manage two large hedge funds (one discretionary and the other thesis-driven). Our basic thesis was that China was going to consume large quantities of goods and we wanted to be opportunists. At the time, the price of oil was $ 10 per barrel, copper was $ 2 per pound, gold was around $ 1,300 an ounce, and all of them have risen in subsequent years as we rode the wave of the material super cycle. prime. However, in 2012 I found myself scratching my head and wondering what to do next. The commodity boom had unfolded: Oil would not rise another 1,000% to $ 1,000, volatility began to decline, and the qualitative easing put a safety net between 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, like a doctor looks at an MRI, and I thought to myself that this is a very energetic chart. The price had gone from a fraction of a cent to something like $ 15. For a commodity trader that kind of movement sets off alarm bells and money signs flash before your eyes.

I started looking as much as possible, bought $ 10,000 worth of bitcoin with my money by funneling it through a Chinese agricultural bank at Mt. Gox and I even locked myself in a room for two days to solve a block on the bitcoin blockchain. In doing so, I realized that bitcoin was essentially a version of the internet without a copy / paste function. This is really important.

Forbes: What was your first bitcoin trading venture?

Masters: I am not a computer scientist and I will not 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 would have been much more difficult than commodities. Secondly, there were a lot of scams in the industry around this time, which created further skepticism.

With these challenges, I didn’t want clients to have doubts about the trust structure they were investing in. Therefore, I opted for a fully regulated structure which took two years to build. I have worked with a regulated custodian, administrator, bank, legal advisor 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: Additionally, you have a holding company, CoinShares International Limited. It has three things: our interest in CoinShares Holdings, the operating company; Komainu, our regulated custody business in partnership with Nomura and Ledger; and holds our venture capital investment portfolio which comes from our equity. Step down one level and you are now in CoinShares Holdings Limited, which has two main strands, starting with our trading business CoinShares Holdings Capital Markets, which made $ 4.5 billion in revenue this year. The second business is CoinShares Jersey Limited, where we hold the same corporate investment and financing services licenses we had when it all started. Finally, we have a Stockholm-based company called XBT Provider, which is the issuer of our exchange-traded notes that track euro and krona-denominated bitcoin, ether, litecoin and XRP.

Forbes: It’s interesting to see how your business has expanded to support a wide variety of trading infrastructure and 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 think the industry will go in the next few years?

Masters: I think you are betting here. I work trying to think about where the world will be in three years and re-adapt my business to fit that point in the future. Consider central bank digital currencies (CBDCs). There are some very compelling reasons why central banks issue their own digital currencies. For example, you don’t have to physically touch or move it, you can deal with black markets and corruption, and provide real-time accounting. More importantly, if you take physical money out of the system, negative interest rates can be applied. There are eight central bank currencies on the way, including two that are almost alive in China and the Bahamas, with one obviously more important than the other.

Forbes: Do you think CBDCs will heat up the battle to determine the world’s future reserve currency?

Masters: There is an interesting dynamic going on in the world of CBDC. China’s digital currency will be formidable and the US will be forced to react. It could be in the form of a digital dollar or a 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 large number of commercial banks such as Chase and Bank of America. These banks do two things: they create products and services like mortgages and deal with end users. I think we are entering a new paradigm where central banks issue CBDCs, commercial banks cease to exist and the service level is filled with crazy new emerging companies like Compound Finance, Uniswap, SushiSwap and people who are really doing decentralized finance. and released today. So the last interesting layer is who is actually in front of the consumer. You can already see that there are more choices. Coinbase would like to reach all users, as well as Binance, although probably not in America. You have wallet infrastructures like Blockchain.com which already have 50 million outstanding wallets.

That said, you might get the incumbents too. Samsung is putting chips into phones now, essentially making them hardware wallets. Amazon may come out with a digital wallet. Whoever has that level is ultimately 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 this thinking?

Masters: I think the old world is patchy in the sense that the fractionalization of resources is much more cumbersome than the digital world. Sometimes it’s getting better with stocks, but gold and real estate aren’t really divisible. Hence, it is lumpy and too in-between. You buy an ETF; I can give you 12 service providers between you and your resource that are not really needed. The old world is also highly centralized, which stifles innovation because you can’t just walk into that wall and change something.

There is a migration to the new world of capital, talent and even the normative mindset. For example, people need to stop worrying that every single bitcoin transaction is promoting some kind of terrorist activity, which it isn’t. This migration started slowly, but is now happening faster. The place we get to is the tokenization of everything and it will be catalyzed when central banks find out. In her inaugural address, Christine Lagard (president of the European Central Bank) spent 15 minutes talking about stablecoins. If everyone has a digital wallet and CBDCs, which aren’t backed up by anything anyway, are de rigueur, suddenly bitcoin looks great. It will take over the role that gold has played with regards to legacy money and all other digital assets will fall into place. The middle layer, the service layer, will become much more automated, technological and democratic, and the endpoint layer will become a real struggle.

Forbes: Do you think what you are doing is in direct competition with commercial banks in general?

Masters: I think at this point I’ll flatter myself to say so. But really, when I see things on a regular basis, like the decentralized peer-to-peer lender Compound Finance with a billion dollars worth of assets under management, you have to pay attention. There is so much brilliant innovation taking place. Today, lending and lending can be done transparently, remotely and self-governing on a chain. It is much better than doing it with Citigroup. It means something. This is Blockbuster’s Netflix, it’s just that Blockbuster hasn’t figured out what Netflix does yet.

Forbes: Thanks for your time.