Notable venture capital company Andreessen Horowitz has bankrolled several blockbuster startups over the years. But the firm’s latest bet on cryptocurrencies is going awry due to regulatory bottlenecks. Now it is taking matters into its own hands.
According to a recent WSJ report, the Menlo Park-based firm hosted a Crypto-Regulatory Summit in San Francisco in May earlier this year. The summit, which boasted top policymakers and crypto entrepreneurs in conversation, was a bid to “bridge” the growing rift between regulators and startups in the sector.
A Regulatory Chasm
New of the summit, by itself, is not remarkable. What is striking, however, is the commingling of entrepreneurs, VC firms (who have substantial monetary stakes) and regulators in one room to discuss legal matters.
For the most part, Silicon Valley has tended to shun Washington D.C., preferring to criticize or look on in disdain at the machinations of power in the nation’s capital. Where necessary, entrepreneurs mobilized public opinion and broke laws in their quest for customers and profits. Ridesharing startup Uber is the most famous example of this approach.
But the tables have turned in the crypto ecosystem. Even as they have gained mainstream attention, crypto growth is hamstrung due to regulatory uncertainty. The status of tokens issued by startups during initial coin offerings (ICOs) has become a point of debate between regulators, who claim that they are securities, and entrepreneurs, who maintain that the tokens are utilities necessary to conduct transactions on the platform.
Complicating the issue further are the number of scams that proliferate the cryptocurrency ecosystem. In the last year, the SEC has become increasingly aggressive in pursuing criminals within crypto. Its actions have resulted in a pall on the once-thriving ICO ecosystem. Developers are also reported to have deserted prominent cryptocurrencies.
For Andreessen-Horowitz, the stakes are high. The venture capital firm boasted a war chest of $10 billion in April this year. It also announced a $350 million fund dedicated to crypto startups this past May.
On its website, Andreessen-Horowitz refers to “trust” as the new software primitive from which other components can be constructed. Blockchain, the underlying technology for cryptocurrencies, decentralizes trust by distributing the mechanism of consensus between different nodes or systems in its chain. Co-founder Marc Andreessen also played up blockchain’s potential and compared it to the Internet during the May summit. “The evolution of the Internet over time has so many echoes with what I am seeing with cryptocurrencies and blockchain, it’s quite remarkable,” he said. The firm has also registered with the SEC as a registered investment advisor (RIA) to further increase the amount it can invest in crypto startups.
In an industry whose contours are still being defined, Andreessen-Horowitz’s list of investments includes a roster of some of the most well-known names in crypto. Coinbase, North America’s biggest and most well-known cryptocurrency exchange, is part of its portfolio. Filecoin, a decentralized online storage company that is among the biggest ICOs of its day, is also in the list.
Andreessen-Horowitz is also a member of Facebook’s Libra association and one of its companies, Anchorage, is tasked with custody of the cryptocurrency.
A Stumbling Block
But regulation has become a stumbling block for its startups. Facebook’s Libra is already under intense legal scrutiny around the world. Basis, an Andreessen Horowitz startup that sought to use algorithms as a proxy for central bank functions, folded earlier this year after talks with the SEC. Even Coinbase has had to face off against the IRS to protect the identity of its customers. Kim Milosevich, a spokeswoman for Andreessen Horowitz, told the Journal that regulation itself was not a problem for their company. “…it’s the lack of clarity around crypto regulation that our companies and the crypto space overall grapple with,” she said.
But it might be awhile before regulatory clarity comes to cryptocurrencies. The SEC Chair Jay Clayton is unimpressed with potential applications for cryptocurrencies. In interviews, he has maintained primacy of the Howey Test, a test formulated by the Supreme Court in 1933 to determine whether a token is a security, for evaluating coin offering tokens. Under his leadership, the agency has repeatedly used the rule to crack down on startups that have fun afoul of the rule.
“I think a lot of people got excited that somehow we would change the rules to accommodate the technology and they invested their time and effort thinking that would happen,” he told Bloomberg in a recent interview. “I have been pretty clear from the start, that ain’t happening.” His colleagues have mostly agreed with him. “Some of the things you learned from your older VCs, that won’t transfer,” J. Christopher Giancarlo, a former SEC commissioner is reported to have told Marc Andreessen.
But indications are that Andreessen Horowitz may be prepared to wait it out. This was the inaugural edition of the regulatory summit, meaning more are planned in the future.