(This article was originally published in the May 2015 edition of the New Jersey Tech Council's TechNews)
New Jersey has made important investments in its innovation ecosystem over the last decade. However, further establishing the state at the forefront of the nation’s innovative economies requires thinking out along the development curve in order to identify and provide infrastructure for future disruptive technologies. In addition to providing resources for existing entrepreneurs, public and private groups should look to proactively fund the future tech that will push New Jersey forward. A good way to gauge the future of software innovation is to look at where the big investors are putting their money.
If you read what venture capitalists like Fred Wilson, Marc Andreesen, and Sam Altman have to say, there are a handful of important technologies that will be maturing in the next five years and that promise to have a major impact. Among these are "cryptocurrencies," most notably Bitcoin.
What is Bitcoin
Bitcoin has increasingly been in the news since first released in 2009. The core technology of Bitcoin, the "blockchain," is essentially a communications and coordination medium, a ledger system on which the anonymous transactions of the entire network are stored and verified. When someone engages in a Bitcoin transaction, that transaction is checked for authenticity, and is then published to the network. Subsequently, knowledge of the anonymous transaction is available worldwide and becomes part of the public ledger. The key takeaway from this technology is “anonymous distributed trust.”
Bitcoin - and any system relying on blockchain technology - provides an almost totally anonymous method of conducting business. Cash provides a good analogy for Bitcoin. In just the same way that a cash transaction is anonymous because there is no personally identifying information attached to the money you exchange, a Bitcoin transaction allows you to exchange funds between anonymous alphanumeric addresses. If one takes care not to generally reveal their address, there is no easy way for personal information to be associated with a transaction.
Bitcoin is distributed because there is no central authority. Software running on nodes connected to the network verifies the authenticity of each transaction. Further, each transaction is peer-to-peer in exactly the same way that cash is peer-to-peer. A buyer transfers a certain quantity of the currency to a seller without an intermediary involved.
In contrast to the distributed and anonymous nature of Bitcoin, consider the fragile nature of our traditional payment systems. When you slide your card at a retailer, your information passes through a number of intermediaries. This includes personal information like your name and zip code. Thus, a large amount of personally identifying information is stored in an ever widening circle of systems - each of which you need to trust. Bitcoin has no intermediaries, and requires no personally identifying information in order to work.
Finally, because of the technical implementation of the system, the ledger is essentially not forgeable. This means that every transaction that occurs using Bitcoin is verifiable and trustable because, given the foreseeable state of computing technology, the blockchain’s advanced cryptographic techniques are nearly impossible to crack.
Why you should care about it
Bitcoin has been steadily gaining credibility with large organizations. Recently Tmobile announced a major initiative in Poland that will accept Bitcoin for mobile minutes. Similarly, Microsoft now accepts Bitcoin as payment for its software and videos. Last summer, Dell joined other majors retailers, like Newegg.com and Overstock.com, in accepting online Bitcoin payments.
Cryptocurrencies are also making strides in the institutional setting. You can now invest in Bitcoin through a publicly offered fund. The Winkelvoss twins have also waded into the Bitcoin world, claiming that their new project will one day be the "Nasdaq of Bitcoin." In Spain, three companies have teamed up to begin offering Bitcoin withdrawals from 10,000 ATMs. Perhaps most interesting, IBM recently announced that it is working with the Federal Reserve to develop a digital currency based on the technology.
Not only has Bitcoin made strides with existing institutions, but also companies that develop with cutting edge implementations of blockchain technology have been raising a lot of money. Andreessen Horowitz recently became a major investor in 21, Inc., a bit coin start up. 21 Inc. has reportedly raised $116M to date, the most ever for a cryptocurrency startup. Coinbase, a major “virtual wallet” provider received the attention of Union Square Ventures. Starting from an initial A series of $5M, Coinbase went on to raise $100M in series B and C funding. All told, cryptocurrency startups received over $347M in funding in 2014 – more than triple from a year previous. And the pace continues to accelerate.
The Applications of Bitcoin
Bitcoin’s first and most obvious implementation is as a digital currency. Last year, Bitcoin transactions surpassed 100,000 per day. One merchant solution alone, reportedly processes over $1M in transactions each day. The financial applications of Bitcoin are manifold as it enables individuals to make anonymous transactions online. Of course there has been buzz around the potential facilitation of illicit purchases, however the legal opportunities are more compelling. Using Bitcoin, individuals could contribute to politicians and causes without fear of political repression or backlash for undesirable speech. More basically, individuals could also retain a sphere of privacy in their purchasing habits and spending preference – much as cash currently provides.
Bitcoin also opens up the opportunity to finally make the world of true micropayments a reality. Typically the overhead in fees associated with using third-party processors have made micropayments impracticable. However, as a peer-to-peer system, the overhead for an individual Bitcoin transaction is nearly nonexistent.
As a software system that is not dependent on central banks, Bitcoin also affords the opportunity for frictionless cross-boundary transactions. Individuals in countries that previously had trouble accessing capital for lack of financial infrastructure, now only need a smart phone with an Internet connection.
However, as compelling as the financial applications of Bitcoin are, blockchain technology promises a host of interesting nonfinancial uses. Simply for the sake of efficiency, the so-called “Internet of Things” will depend upon a decentralized, trustable transaction ledger of the vast quantities of information that connected devices will continuously generate. Blockchain poses one potential solution to this IOT dilemma, and also offers compelling applications in many more areas.
For instance some startups have begun using blockchain technology to enable alternatives to traditional contracting. Relying on publicly verifiable information, a blockchain-based contract can provide for absolutely known conditions, who agreed to them, and when they should be enforced. Taking it a step further, such contracts can also be made to self-execute, thereby reducing the transaction costs of the legal system that frequently disincentivize parties from fully vindicating their rights.
The fully secure audit-trail provided by blockchain technology would empower a whole host of applications for trust-based instruments. Blockchain technology could be used to create financial instruments, property registers, and any other ownership-dependent asset that can be absolutely verified for authenticity. Using such a system, the costs of enforcing owners’ rights would plummet.
There have been suggestions that small Bitcoin payments may have a place in SPAM prevention and also in unlocking the untapped bandwidth on home WiFi routers. There have also been experiments in using the blockchain to create tamper-proof voting systems. This activity isn’t constrained to simple online-polls either – in 2014 a political party in Denmark began using the blockchain as part of its own internal voting. As an absolutely trustable, publicly reviewable system, the blockchain can provide a whole new range of methods for transmitting information that is fraud-proof.
New Jersey: The Next Silicon Valley
Merely knowing that Bitcoin is a “next big thing” is insufficient – New Jersey need to be, if not the place, at least a major place where hot software startups want to be. With proper foresight, the New Jersey ecosystem can become a home to cutting edge tech like Bitcoin. New Jersey already leads in a number of areas, most-notably biotech, but the value proposition of software-based tech should be seriously considered. First, the overhead to get started, and the cycles of product development require much lower capital resources. A dollar given to a software startup stretches much farther - a $50K investment to a software tech startup can represent a serious infusion of capital that makes the difference between having a prototype and never getting off the ground. If you can seed enough software startups with relatively low amounts of capital, it becomes a numbers game - the investments nurture the entrepreneurial community and it becomes only a matter of time before you have a game changer emerge.
There are two important things that New Jersey can do to cultivate the kind of tech development that will differentiate the state. First, we need to ensure that angel and seed funders see New Jersey as a viable investment environment. The state has already made some strides in this area. For instance the 2013 Angel Investor tax program was used to support 181 investments in 2014. And public-private partnerships, such as that between the EDA and Edison Partners VIII, have allowed more than $40M to flow to innovative companies in the garden state.
The state should continue these efforts, and build on them by specifically identifying and attracting angels to form as a leadership network in the state. Coupled with this, the EDA should actively collect and disseminate metrics that help us understand the strengths of our investment community, and also to work on our weaknesses. Further work should continue to research the possibility of providing financial partnership with angels, including matching grants and conditional loans.
The second major thing to do to encourage software tech startups to take root in New Jersey is to actively focus on developing a close-knit culture of entrepreneurship in the state. Groups like LaunchNJ have begun this work, and the state should look for opportunities to consolidate this culture. To date, much of the EDA’s focus has been distributed throughout the state. This makes political sense as a general policy, but has some subtle problems.
Often the preferred destination for startups is Silicon Valley and a handful of other locales. One advantage that Silicon Valley, NYC, and Philadelphia have over New Jersey is geographic constraint. New Jersey is every bit as convenient as Silicon Valley in terms of access to workforce, transportation, and physical infrastructure. What New Jersey needs is a directed focus on a smaller geographic area in which to cultivate our software tech sector. We need a "scene" where the innovators go to collaborate and socialize. Although not a large state, having our innovation hubs spread out across a number of cities and suburbs is less than ideal. Newark and Jersey City have been making great strides toward revitalization in recent years. Trenton is also an obvious candidate for both a renaissance and a corresponding software tech boom. Since his election, Mayor Jackson has made a number of moves that suggest that economic development is on the forefront of his mind.
The state government also needs to scale up the scope of its economic policies to incentivize a much larger range of startups. Although undeniably positive, programs like the Grow NJ tax credits and the Technology Business Tax Certificate Transfer Program are designed to assist relatively large companies when compared to the kind of startups that operate in the software tech space. In short, our law makers need to design economic policies that make it much more attractive for founders to start work on their ideas in New Jersey.
Software is eating the world – what can be digital will be digital. In the next five years we will witness a host of new technologies that transform important parts of our economy and daily lives. Bitcoin and the blockchain will certainly be a part of that transformation, and now is the time for the right investment to happen. New Jersey, already a leader in many ways, has an opportunity right now to expand its influence.
 The Bitcoin Investment Trust - http://www.bitcointrust.co/#About
 https://blog.coinbase.com/2013/12/12/coinbase-raises-25-million-from-andreessen/ ; https://blog.coinbase.com/2015/01/20/coinbase-raises-75m-from-dfj-growth-usaa-nyse/