Bitcoin Ventures: When regulations matter

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Bitcoin Ventures is a series of columns that we’ll be publishing leading up to the next Pitch Day as part of the CoinGeek.com London conference in February 2020.

Our goal is to share information with Bitcoin entrepreneurs and developers who have a product or business idea, and they want to bring their idea to the market. I’m often the first point of contact for many people looking to find investment from Ayre Ventures; I’ve been privileged to see some incredible ideas come through my inbox. However, there are plenty of ideas that are still at the “back of the napkin” phase, and I hope that over the course of this series, we can help people take their back of the napkin scribbles to profitability.

We’ll discuss a variety of topics, such as writing business plans, asking for the right amount of money, how to give a standout pitch to a room full of investors, securing Bitcoin venture financing, and a lot of other topics along the way.

Regulatory considerations for your Bitcoin venture

With so many topics to cover, choosing a first was difficult until I recalled an excellent product pitch that was derailed by a regulatory concern.

I won’t share the details as the group is making some adjustments before pitching again. The crux of the issue was a gambling component that would limit the jurisdictions the product could legally launch.

Regulation seems like a dirty word for many people in the Bitcoin industry. The Wild West days attracted a plethora of scammers with horrible ICOs that promised riches but left people with broken bank accounts; Bitcoin investors are casting a far more critical eye towards potential opportunities.

I reached out (via email) to Alex Fauvel and Jan Smit of TwoHop Ventures to get some insights into what investors consider in terms of regulations before they invest in a bitcoin business and what entrepreneurs should prepare before pitching their plans. Smit recently shared with CoinGeek some tips on what makes a good pitch.

TwoHop Ventures themselves took significant steps to ensure their company’s regulatory compliance before starting their fund by creating a cooperative in the Netherlands, which is a respected jurisdiction that has a wide range of tax treaties with other countries. The group only accepts fiat currency for their investments. It’s a “tried and tested” legal structure as the group wants to offer its limited partners an investment opportunity in the Bitcoin SV ecosystem with as little regulatory risk as possible.

Companies looking for investment, the unregulated ICO market is a no-go, Fauvel and Smit said, noting, “As long as the regulation on ICOs remains unclear in some major jurisdictions, we strongly advise our portfolio companies not to raise funds through tokens. We will only invest in equity or convertible notes.”

TwoHop Ventures are big proponents of the BSV ethos that all activities need to comply with local regulations.

We like companies such as Centbee who turn compliance into an advantage. Since everything you do with the blockchain involves money transfers of some kind, the team must have a good understanding of KYC, AML and data handling regulations.

Do your homework

If you’re looking for investment from a fund, it’s essential that you do your Bitcoin regulatory homework. If you’re putting your time, effort and money into a project, you want to make sure it’s legal or have a good sense that it won’t be deemed illegal in the future.

TwoHop Ventures offers this advice when it comes to doing your Bitcoin regulations research: “Read up on regulations in the early stages as they tend to impact the design of blockchain-based products and businesses.”

“Securities, AML and Privacy are usually the areas to start. For us, the entrepreneurs must show that they take compliance seriously and have made an effort to map out the relevant regulations and their impact as they (as non-lawyers) understand it.

“We understand that more detailed outside expert advice is likely to be required in later stages after we have invested. When the team reaches a size of 10, most startups in the blockchain space should also consider appointing a person (part-time) specifically responsible for regulation/compliance.”

Depending on your jurisdictions and business type, local regulators will require your executive team to take yearly exams to ensure you understand the rules for your business must follow.
Knowledge of licenses for compliance is of crucial importance. These licenses will cover your business operations and the technical architecture of your system.

Exams and licenses are something you need to know, how much and how long each will take is important when approaching an investor. This knowledge shows a level of professionalism and preparedness.

If this isn’t your expertise, “you need to be able to identify key hires in the legal, regulatory, and computer systems positions. What specialties or qualifications should they have? If they do not have this, they should be looking to outsource these responsibilities to another company and know which suppliers would be able to fulfil this role.”

Bitcoin is still relatively new, and jurisdictions haven’t caught up in terms of Bitcoin regulations. I wanted to find out how investment funds consider situations where an idea is so unique, such as Uber or AirBnB, that no rules exist. They explained:

“Typically, Silicon Valley has an ethos of move fast and ask for forgiveness. We don’t necessarily think that it is a bad idea to press ahead to ideas that are in grey areas. It’s a balance of risk vs reward.

“However, the entrepreneurs must know these sections of the law well and put forward a logical legal argument as to why their strategy does not put the long-term viability of the company at risk. A ‘decentralized’ AirBnB still needs to give governments access to see the data on-chain. It does make things more efficient potentially, but that is another matter.”

Pixel’s selling point

Arguably the highlight of the CoinGeek Seoul conference was Alex Fauvel’s presentation for Pixel, a company TwoHop have invested in, which not only accepts regulation but welcomes it. How much did their regulation-friendly product factor in TwoHop’s decision to invest?

“Being compliant in the identity field is paramount to success, an identity that is not compliant with the law is worthless.”

But there were two big reasons that Pixel was interesting.

“The technology is relatively simple. It does not rely on new poorly understood technology but uses existing technology in a new way to create a general solution to a considerable problem. A problem that few people realize is an issue, and fewer people even trying to solve it.

“A legally compliant on-chain identity will be used somewhere in almost every chain of transactions in the future. If you legally own your data and want to add to or alter it, one must authorize themselves with a form of identity.”

Interested in making your pitch? Learn from sCrypt founder Xiaohui Liu, who pitched his project to a panel of investors in Seoul for the first ever Bitcoin Association Pitch Day.

Watch this space for more information concerning the next Pitch Day as part of CoinGeek Conference London this February or if you feel your business is ready for investment, feel free to send your business plan and pitch deck to [email protected].