On bitcoin, commerce, custody, and Texas’ strategic mining interests

The Work Group on Blockchain Matters was created by Texas House Bill 1576 during the 87th Legislature and, per the Office of the Texas Governor, was tasked to “develop a master plan for the expansion of the blockchain industry in Texas and recommend policies and state investments in connection with blockchain technology.”

The following testimony was delivered to the Work Group on Friday, May 20th. It outlines: Why we started Unchained Capital, why the Work Group should prioritize the exploration of bitcoin, Texas’ leadership on bitcoin commerce, the importance of self-custody, and Texas’ inextricably linked strategic interests in energy and bitcoin mining.

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Good morning, Madam Chair and members of the Texas Blockchain Work Group. I am excited to share with you some thoughts and perspectives grown out of my six years working in the bitcoin industry.

For most of that time I have been the co-founder and CEO of Unchained Capital, a financial services company dedicated to fulfilling the needs of long-term bitcoin holders. Our firm helps thousands of clients protect billions of dollars worth of bitcoin and our headquarters are here in downtown Austin, just a few blocks away from the capitol. Just over half of our 100 employees are proud to call Texas home, and we do a lot of investment in the local community by sponsoring meetups in Austin and Houston.

Starting Unchained Capital

My journey to bitcoin and founding Unchained Capital was a result of my prior entrepreneurial experience as the co-founder of a data analytics company here in Austin. My partners and I founded that company in 2009, just as the term “Big Data” became an all-encompassing buzzword for new startups and technologies in data analytics. While our early customer set was ill-defined, we were able to leverage the market excitement around big data to raise our initial round of capital and make some headway.

Two years after we’d started the company, after our initial product set failed to gain enough clients in a vague market, we went through a painful pivot where we shifted our strategy and product to focus on a distinct set of Fortune 500 clients. This ultimately paid off as the next few years of execution led to our acquisition in 2013.

While this was a good outcome for our employees and investors, the experience gave my co-founders and I a painful lesson we did not want to repeat. We’d wasted over two years of precious time, talent, and capital and I vowed to never again start a company where we could not be crystal clear up front about who our clients were and what essential value we would provide to them. It’s a lesson that we carried with us into starting Unchained Capital.

Blockchain vs. bitcoin

When we started Unchained Capital in 2016 there was a growing trend of commentators saying that the real innovation was “blockchain, not bitcoin.” It was said that blockchain was the essential infrastructure that made bitcoin work and was applicable to more areas other than peer-to-peer electronic money. New funds, companies, and conferences were popping up left and right to piggyback on this trend and it became its own “industry,” much in the way we saw with big data in 2009.

The abundant hype, funding, and excitement around blockchain were difficult to ignore and became a siren song for entrepreneurs and conference promoters. But for my co-founder and I, our prior experience kept us fastened to the core question of “Who is the client and what is the direct, tangible benefit to them?”

This question led us to focus on bitcoin, which we’d been holders of for several years up until 2016. We saw ourselves as among a growing number of bitcoin investors who intended to hold the currency for the long term. At the time it had a market capitalization of only $8 billion, but we considered this sufficiently large enough to begin to ask questions about what forms of financial services were available to these people.

As we quickly discovered, there wasn’t much, and so we decided to answer our core question by focusing on the long term bitcoin holder and building a business that provided essential financial services such as custody, lending, and trading. Unchained Capital is now in its 5th year of operating history and our entire team is committed and excited to work on something for which they feel so much clarity and alignment with our clients.

I share this background with the Texas Blockchain Work Group with the hope of encouraging you all to consider this same core question in your research: Who is the client and what is the direct, tangible benefit to them? For all of the hype about blockchain, I consider it to be on a trajectory similar to that of big data, where the principal use case remains the same as was there in the beginning – aggregating data about users and analyzing it to better sell and market to them. Blockchain may be finding use cases in NFTs or the trading of other digital assets, but the core use case has been there since the beginning – as a new form of money.

It is therefore my belief that this Work Group should prioritize the exploration of bitcoin and money as the central use case for blockchain, otherwise it risks wasting time and effort while ignoring ways it can make a tangible difference for a body of real clients with a real use case. As Unchained Capital can attest, there is a real and vibrant community of Texans numbering into the millions who are already bitcoin users.

With a mission and focus on Texas constituents, there are then a few clear areas where it makes sense to dedicate time and resources towards research, education, and policymaking. These areas include facilitating commerce, self-custody, and energy.

Facilitating commerce with bitcoin

On the topic of facilitating commerce, Texas has already led the way by adopting HB 4474 last year, which provided for a definition of virtual currency, “take free” rights upon purchase of virtual currency, and defined control as a valid method of perfecting a security interest. These changes have already made it easier and safer for businesses like Unchained Capital and our clients to operate in Texas.

By passing this bill, Texas proved it can operate independently and with foresight for the benefit of its constituents. That said, the Uniform Law Commission has a proposed set of reforms to the Uniform Commercial Code that I believe should be incorporated and replace the changes instituted by HB 4474 in order for Texas law to benefit from the refined definitions and greater harmony with other states that will adopt the changes.

Self-custody

Importantly, HB 4474, as well as the forthcoming UCC reform, highlight control and controllability as defining elements of property such as bitcoin. The ability for an individual to hold the keys to their own bitcoin is an important hallmark of decentralization and essential to the value proposition of bitcoin.

Not only is this feature critical to how bitcoin operates, but it is also important for how the financial services industry develops around it. Most of the risk and moral hazard that creep into the financial services industry show up where someone is responsible for holding another’s assets on their behalf. As a result we have regulations in place around Money Transmission, banking, and investment management. But where self-custody is involved, it’s likely that regulators can take a lighter approach.

A financial institution like Unchained Capital is fundamentally different from anything that’s come before. While it’s true that we help protect billions of dollars of bitcoin across thousands of clients, for a great majority of those assets we do not have unilateral control. This means that we cannot move those funds without the participation of our clients, and any hack or loss of funds by one client is completely segregated from everyone else.

No bank, traditional financial institution, or common cryptocurrency exchange can say this. The promotion and adoption of self-custody-based financial services can help to create a more sound financial system, where the failure of a firm does not imperil the rest of the financial system or ordinary consumers.

On the topic of self-custody, it is my recommendation that the Texas Blockchain Work Group investigate, advise, and make recommendations that include:

• Exploring hybrid custodial models such as collaborative custody that’s in use by firms like Unchained Capital, and how such models can improve the safety and soundness of the financial system
• Educating the legislature and regulators such as the Texas Department of Banking on the topic of keys, self-custody, and the risks posed to consumers by many prominent cryptocurrency platforms who may take undisclosed risks with client assets
• Recommend that Texas lawmakers take action to enshrine self-custody as a basic right for Texans

Texas strategic interests in mining

Outside of the individuals and businesses that already today make a great answer to the question of who is the target client, there is one other group for whom a focus on bitcoin offers a direct, tangible benefit.

As I’m sure the Work Group is aware, bitcoin mining is an energy-intensive industry that has recently exploded in Texas. As the nation’s number one energy producer and home to the energy capital of the world, it’s inevitable that bitcoin mining will play an important role in the Texas energy industry.

Real-world energy is what secures bitcoin, while energy is Texas’ most strategically important industry. Therefore, an implication of bitcoin and energy being inextricably linked is that bitcoin and Texas’ strategic interests are inextricably linked.

By being more explicit about bitcoin, the Work Group can focus on key constituents for the state including the millions of Texans who hold bitcoin, its power grid, and its most strategic industry. I would not want these important clients to lose their place on your agenda.