Episode Summary
In this episode of Signals, Nick Mazing hosts Erik Ellingson, Partner at CMT Digital. They delve into the world of blockchain, discussing its potential and the opportunities it presents.
Ellingson sheds light on CMT Digital’s focus on early-stage investments in the blockchain ecosystem. He emphasizes the importance of core infrastructure opportunities, including blockchain tools and infrastructure, payment systems, and global on-off ramps. These elements, he believes, are crucial for making blockchain technology accessible to the masses.
In addition, Ellingson highlights the potential of content generation within the blockchain ecosystem. He points to the builder economy, digital fashion, gaming, sports, and loyalty programs as key areas of focus. He also discusses the potential for AI and blockchain to come together, hinting at a future where these two technologies could revolutionize various sectors.
Tune in to Signals for a deep dive into the blockchain ecosystem and its future prospects.
Listen to this episode on Apple, Spotify, Google
Guest-at-a-Glance
💡 Name: Erik Ellingson
💡What they do: Partner
💡Company: CMT Digital
💡Noteworthy: Erik is a seasoned investor in the blockchain ecosystem, with a keen focus on early-stage investments. His insights into the potential of blockchain technology, especially in the context of core infrastructure opportunities, are noteworthy.
💡 Where to find them: LinkedIn
Key Insights
The Importance of Core Infrastructure in Blockchain
Erik Ellingson highlights the significance of core infrastructure in the blockchain ecosystem. He emphasizes the need for tools and infrastructure that simplify the user experience on blockchains, making it more accessible for non-technical teams. He also mentions the importance of payment systems and global on-off ramps, which are crucial for bringing blockchain technology to the masses. Ellingson believes that these elements are key to serving the broader community and driving the adoption of blockchain technology.
Content Generation and Blockchain
Ellingson identifies content generation as a key area of focus within the blockchain ecosystem. He points to the builder economy, digital fashion, gaming, sports, and loyalty programs tied to big brands as potential areas for blockchain application. He suggests that the integration of real-world and Metaverse technology through blockchain could drive engagement and rewards, making it a promising use case for the technology in the next five years.
The Need for Regulatory Frameworks
Ellingson discusses the need for a regulatory framework for blockchain technology, particularly in the US. He suggests that the US needs to follow suit with other countries that have established regulatory frameworks for blockchain and crypto. Ellingson believes that regulation is necessary and that the US lawmakers will eventually get it right. He also mentions the importance of partnerships with organizations like the Blockchain Association and the Chamber of Digital Commerce in developing such frameworks.
Episode Highlights
Blockchain Adoption Trends
Timestamp: [00:04:00]
In this segment, Erik Ellingson discusses the trends in blockchain adoption. He notes that the public sentiment towards blockchain and crypto can be tracked in real-time through Bitcoin’s public mark. This unique aspect of the blockchain industry allows for a real-time pulse on the venture capital industry.
“It is no secret how the blockchain and crypto ecosystem is doing at any given point in time. And what I mean by that is there are very few venture capital ecosystems in the history of global venture capital that can be tracked through a public mark on a 24/7 basis, right?”
Monetizing Digital Footprint
Timestamp: [00:10:00]
Ellingson talks about the revolutionary aspect of owning and monetizing one’s digital footprint. He mentions how this shift empowers content creators who previously relied on legacy Web2 platforms.
“This is a situation where you now have the ability to take back the ownership of that data and monetize it or give it away however you see fit. That’s really, really, really powerful.”
Global Blockchain Opportunities
Timestamp: [00:22:00]
Ellingson discusses the global opportunities in the blockchain space, particularly in Asia and Europe. He mentions the developed gaming ecosystem in Asia and the emerging trading platforms in Europe.
“It is an innately global piece of tech that’s going to facilitate cross-border transactions for decades to come.”
US Regulatory Developments
Timestamp: [00:23:00]
This part focuses on the regulatory developments in the US. Ellingson emphasizes the need for a regulatory framework similar to the European Union’s Markets in Crypto Assets Regulation (MICA).
“Ultimately US lawmakers are going to get to a point where they get it right. We’re super involved in our partnerships with the Blockchain Association and the Chamber of Digital Commerce to help the system develop a framework. Ultimately, that’s going to allow us to participate.”
Full Transcript
Nick Mazing: [00:00:00] Hello and welcome. listening to Signals by AlphaSense, and I’m your host, Nick Mazing. Our guest today is Erik Ellingson from CMT Digital, a major institutional player in blockchain and other emerging technologies. We’ll have all the links in the show notes. We’re going to discuss blockchain. Erik, can you tell us a little bit more about yourself and about CMT Digital?
Erik Ellingson: Absolutely. So happy to start with, with CMT Digital Nick. But before I do that, thank you very much for having me on. Really, really excited to be on the Signals podcast. You’ve put out great content. I’ve listened to a few over the last several months, uh, and even a year plus. So AlphaSense is is a, is a great player in, in leading the AI revolution.
And, uh, excited to talk as, as a little bit of a preview. And how I think AI and blockchain potentially come together as well. Um, but CMT Digital is a division of, of CMT Group and is a leading global blockchain and web3 proprietary trading and venture capital firm. We focus [00:01:00] across the crypto and blockchain ecosystem with a focus on some of the earlier stage investments, at least as of late.
We’re one of the earliest firms to enter the space. Started, started doing research in, in 2013, ultimately making our first investment in 2015. We have about 150 portfolio companies within the ecosystem, you know, across several different sub-sectors. And again, we’ll get into this a little bit later, uh, in the, in the discussion, but excited about several of the different use cases within blockchain tech.
We think of ourselves as really deep technologists that like to back, you know, visionary teams and truly outlier founders within the space. Um, and we’re looking for, you know, what we think of, as, you know, category defining names within the blockchain group. As we think about CMT as a whole, and why are we qualified to do so in addition to the 10 years of research we’ve been doing in this space.
You know, the, the, the CMT group was founded in [00:02:00] 1997 as a global electronic trading firm. So the development of hardware and software technology to facilitate, you know, cross border transactions, you know, specifically equity options today is really in our dna. I spend, you know, 95 plus percent, you know, of my day.
Within the venture capital ecosystem of, of CMT Digital. Um, and I’m really excited about what we’re building. Uh, a little bit of a preview into how I got there. So I did, you know, my, my master’s thesis when I was at Kellogg at Northwestern on emerging and frontier markets. And so I, I love thinking about if we were to build a new underlying infrastructure and technology today, To support our financial system, would we do it differently?
And I think the answer is a resounding yes. Both a bipartisan yes. And for practitioners within the private markets, I think we would agree yes as well. Um, and that was kind of a key area of focus for me, um, as I [00:03:00] did some of my master’s work and, and what really got me excited several years ago. Um, 20 16, 20 17, 20 18.
You know, as I really dug in, I’ve spent the last almost 12 years of my career in traditional financial institutions, both in commercial banking, investing, uh, and then on the advisory side at an investment bank as well. And one of the things I think is so cool and a differentiator at CMT here too, is. You know, it’s our multi-generational approach to investing within this space.
It’s our two co-founders, Scott Casto and Jan-Dirk Lueders, who started the business in 1997 and bring, I’ll say, you know, a little bit of an older generational approach, um, to, you know, some of the younger members in our team who bring, you know, more of a gaming aspect, you know, and, and technology forward thinking, you know, to how we’re investing in this ecosystem.
Nick Mazing: So at a high level, what is happening with the adoption of blockchain technology? Because one thing I’m seeing when [00:04:00] I looked at transcript trends, and when you look at transcripts of.
Conference calls of companies that mention blockchain. You see the first wave in 2018 and then a decline, and then the second wave 20 21 20 20 20.
Right now we are at a decline again.
Erik Ellingson: No, and that’s a great point Nick. And I know we, we talked about that a little bit before our discussion. Um, it, it is no secret right how the blockchain and crypto ecosystem is doing at any given point in time. And what I mean by that is there are very few. Venture capital ecosystems in the history of global venture capital that can be tracked through a public mark, right on a 24 7 basis, right?
That’s part of the beauty of Bitcoin. But at the same time, you can see kinda real life, real time sentiment. Going through a public mark, right? Bitcoin is, is, is marked on, right on a second by second basis across [00:05:00] exchanges. Same thing with Ethereum and some of the other larger coins. Um, and really all of the alt coins for that particular matter.
And so that, that theme, that wave, you know, has created some additional volatility within the industry as we still are. And we talk about this constantly, you know, at our firm, a very nascent industry to date. When I take a step back and I had a conversation with one of our co-founders, Jan-Dirk Lueders, about this last week.
You know, and think about kind of the history of financial tech and what that’s looked like. It’s been a buzzword that’s also been used, you know, not only for financial institutions, but how payments are accepted, you know, and across kind of the B2C market. But when you think about financial technology, it’s been just, you know, 15 years ago it was just the UX UI that people slapped onto some of the older infrastructure.
Today we’re working on changing and building that underlying infrastructure through blockchain tech and specifically within the payment space. And we can get into some other use case [00:06:00] applications, but I think really it’s, it’s the financial use case that, that, that targets what you’re talking about, um, within some of the larger Fortune 500 companies.
Nick Mazing: And how does this relate to the legacy financial system? Because we, we just went from major shock with the original bank crisis here in the United States.
Erik Ellingson: Yeah. Um, it’s, it’s really interesting to see how the crypto markets have reacted and specifically Bitcoin has reacted, you know, during some of the recent, I’ll say financial, financial banking institution turmoil. So Bitcoin rallied, you know, about 9% from March 5th to March 15th. And that was the time period in which Silicon Valley Bank, Signature Bank and Silver Gate Bank, all ceased operations.
All of which, right? It was a little bit different story with each institution. Um, but nonetheless, I think the theme was the same and people were looking for, you know, a flight to [00:07:00] safety. And a lot of folks interpreted that through the ability to exchange U S D, you know, for Bitcoin or, you know, whatever underlying fiat currency they were using throughout the globe.
You know, we believe that some of the recent SOPs to the Legacy financial system, you know, make it, make it more clear that we’re ready for a change. You know, especially within the, within the developed markets. And I think it helps prove out kind of what I mentioned on, on, on the earlier part of the call.
And that’s, if we had to do this all over again within our financial system, would we do things a little bit differently And we’re seeing, you know, emerging markets now build out some new infrastructure. To support payment flows. You know, banks have been so heavily regulated since the two thousands, you know, that that Wall Street has been hesitant to take real risk, and we’ve seen kind of the rise of the shadow banking system, which.
In fact has then added, you know, some additional risk profiles. And I won’t [00:08:00] dive, you know, deep into that here. But there’s a lot of good white papers on understanding the broader risk of the financial system today and some of the concentration that takes place with these alternative asset managers.
What I think we can right agree on is that a little bit more transparency would be helpful. And when you see, you know, some open source ecosystems like btc, right? Like you start to understand the more research you do, some of the key use cases, uh, around the globe to support that new infrastructure coming in place for payment technology.
Nick Mazing: So what about the underlying technology? How does, how this all come together?
Erik Ellingson: Yeah, so, right. We believe this, this, this blockchain tech is really facilitating now, you know, an internet of value where users can own their own data, right? They can control permission to their data, they can exchange payments, um, you know, [00:09:00] across exchanges, and not only just across exchanges, but across mediums as well.
Um, and aside from the ability to kind of monetize right, your own footprint, And do so in a way where payments flow, flow freely. Um, it’s, it’s, it’s also an opportunity to communicate with the world a little bit more differently. Right. Let me start over on that one a little bit more differently.
Makes no sense.
The underlying technology, Nick, you know, we believe we’re now at an internet of value and there is a new layer, you know, of the internet that’s gonna support. A more broad economy, and so users are gonna own and control their own data as a part of blockchains, and that’s gonna facilitate this, this whole new paradigm.
Aside from the ability to monetize your own footprint, we think the ability to own your [00:10:00] own digital footprint as an asset is revolutionary. And I’ll pause there for a second because there are so many, right? When we think about the gig economy and the content creator economy, there are so many folks that rely on Legacy Web2 names to help them write, earn a Living, whether that is with an Instagram and YouTube, Reddit, et cetera.
This is a situation where you now have the ability to take back the ownership of that data and monetize it or give it away however you see fit. That’s really, really, really powerful and we’ve seen that right through large groups. Reddit and Twitter is two examples, right? That are now right closed sourcing their data.
They’ve realized that it’s not just the communication between parties that’s super valuable with on their web2 platform, but it’s the underlying data and, and that underlying data set is becoming more and more important. We’ve seen OpenAI is an AI [00:11:00] platform. That has grown tremendously and faster than any other company in the history of the world, um, in terms of monthly active users, but how valuable that underlying data set is.
Right. What is open ai? It’s a large database with UX UI on the front end that’s ultimately generating right. It’s, it’s an l l m that’s, that’s generating real time responses for users around the world. So I think that whole piece, you know, in, in terms of monetizing your own digital asset footprint is so important.
And I think kind of the, the, second piece, and really again, back to the most interesting use case or first use case for, for, for blockchain tech, and probably the easiest to understand is the underlying payment rails, right? We know Visa, MasterCard. And other large financial institutions, JP Morgan as well, through their whole on platform, are building out new rails and infrastructure to support payments and support infrastructure to transact.
Super, super [00:12:00] important as we think about the next steps in blockchain tech and a use case and the first use case in blockchain tech.
Nick Mazing: You speak with a lot of institutional investors in your role, and how are they thinking about supporting the ecosystem currently?
Erik Ellingson: Yeah, no, that’s a, that’s a really good question and a question that I think a lot of venture capital firms are discussing right now. So I’ll talk about, I’ll take a step back and talk about the broader kind of macro venture ecosystem that I think is very applicable to us and our specific investment thesis within crypto and blockchain tech.
But Nick, I think about the ecosystem as a flywheel. And so we, we talked previously a little bit about what’s going on in the IPO market, and some groups will say, especially in the institutional community, okay, well how does the I P O market. Affect what you are doing in the, you know, some of the earliest stage investments you’re making within venture capital.
And really it’s a function of broad based macro [00:13:00] liquidity. So as our companies grow and ultimately look for liquidity events, we get into our harvest period within our venture cycle, right? So we invest, we help that company grow, flourish, and then ultimately find exit opportunities as those companies find exit opportunities that provides liquidity to us at the venture capital level.
We then distribute that out to the limited partner base. That limited partner base, right? Then reinvest back into the ecosystem, into the venture capital community and that flywheel continues. And so as capital is more readily available on the market through the I P O market, right, you see that capital get recycled and more investments getting made.
That’s, that’s kind of where we’re at right now as the I P O market has ultimately slowed down. Um, you know, we’re seeing, we’re seeing less liquidity in the market, which is giving us, you know, as venture capital firms. You know, I’d better pause as we think about investing. The, the dynamic in the industry today is a little bit [00:14:00] different because groups have raised so much money over the last 24 months and less than 50% of that capital has been deployed.
And so there’s plenty of dry powder on the sidelines to support the best founders in the community. Which, which is a great thing. You know, we’re sitting on plenty of dry powder and we’re really excited about what we’re seeing come through the door from the founder perspective as well. Okay. Completely separate from the financial ecosystem.
We have this, this founder community and I’ve heard a couple different folks both on the founder side and on the venture capital side, especially, you know, venture capitalists who have been founders at, at one point in their career. You know, talk about founding a business. It’s a very irrational thing to do.
A lot of these people are very talented people that could go into corporate AmErika and do very, very well, but they’ve chosen to take a very risky path of entrepreneurship to build a business, and that [00:15:00] has not stopped and typically does not correlate with the broader macro markets. Yeah, Dirk and I were having a conversation about this last week.
We have not seen a drop off in the quality of founders and the quality of deals that are ultimately coming to market. In, in the blockchain space. And I think that that resonates as I talk to my friends across other venture capital firms, you know, across venture capital, which is very, very exciting. Not only for us as an industry, uh, when we think about core developers, founders helping to build our business, but for the venture capital community as a whole.
You know, the US has a way, and we can talk a little bit about the regulatory environment later in this call, but the US has, you know, a way of building a venture ecosystem that’s like no other.
Nick Mazing: As a venture capital firm, uh, what types of projects are you currently excited about?
Erik Ellingson: Yeah, I think where we’re seeing the best projects, and this is a great follow up question to the question on what’s happening in the ecosystem, we’re seeing the [00:16:00] best projects right now, Nick, at the earliest stages. There’s so, so much underlying technology that needs to be built to help support this new industry that a lot of companies in that.
Kind of seed series a stage, um, are in a really, really good spot, not only from a macro perspective as I think about it as a financial investor, um, but also from an industry nascency perspective and building what’s gonna be a technology. Um, to, you know, sub technology within blockchain that’s gonna support the broader ecosystem.
So I think kind of that seed series a stage, you know, is really interesting for us. And then a lot of the larger companies that have made a big, you know, a big name for themselves and you can take a look at our portfolio on our website. We’re really excited about, you know, some of the later stage companies as well that we anticipate, you know, ultimately going to the I P O market within the next couple years.
You know, when that opens up.
Nick Mazing: Mm. The, the blockchain ecosystem is pretty broad. Uh, and if you could rank kind of your top three sub-sectors [00:17:00] where you see the most opportunity, what would, what would that be?
Erik Ellingson: Great follow up question, especially given I’ve been so vague, um, in the conversation thus far. I think what we think about is the best three areas right now would be kind of first and foremost core infrastructure opportunities, and part of that is a function. Of where our DNA is, right? Where the two entrepreneurs, Scott Casto and, and, Jan-Dirk Lueders, you know, started building the business, you know, back in 97, you know, through, through hardware and software.
It’s really, it’s really blockchain, you know, underlying tools and infrastructure to support an easier user experience to both read and write on blockchains. I think lower level account abstraction tech is super, super important to us right now. And it makes right using Blockchains much easier for non-technical teams.
And that’s ultimately the goal is to serve the masses in this community. I think [00:18:00] payments infrastructure, and we think a lot of the companies that we’ve invested in on the payment side, I’ll use, you know, strike and what Jack Mallard is doing is a great example and the ability to bring Bitcoin to, to the masses.
You know, really excited about, you know, what Jack’s doing globally, you know, what he has done in El Salvador to help build out, you know, a global ecosystem for, for blockchain. And then I think, you know, within that core infrastructure opportunity, it’s, it’s the on and off ramps as well. And it’s the on and off ramps around the globe.
Um, you know, I think we as a US have, have more options, or at least did prior to what’s going on currently in the regulatory environment for on off-ramps here. But I think on-off ramps globally and giving people access to this technology is one of the other kind of most important pieces of core infrastructure.
The next piece, you know, really a key area of focus for us is content generation. You know, content hubs and, and what do I mean by that? [00:19:00] It’s the builder economy. It’s digital fashion, it’s gaming, it’s sports, it’s loyalty programs tied to a lot of the big brands that we know today, like a Starbucks.
Or it’s Nike, right in the NFT drop that they’ve done within the Metaverse. Driving rewards, driving engagements, you know, across real world and Metaverse technology is gonna be a great use case for blockchain tech over the next five years or so. You know, I think all of us have a relationship and a person, you know, somebody who’s in the gaming environment today.
And, and as you think about, you know, people in the gaming environment, that that really is, um, You know, a, a true metaverse, it was Microsoft’s, you know, purchase of Activision, which allows them to take that next step into the metaverse type environment. And one of the things that, that, that really excites us about our investment thesis, you know, in digital content and hubs, and then I think real world experience as well.
I’ll use one example of Webstock and what Brian Stoley is trying to build through [00:20:00] a real life entertainment business and loyalty. Of, of some of your favorite artists, um, that’s going to continue to, to, to proliferate within the entertainment economy as well. And so those are, those are probably, you know, the, the, you know, top two areas that we think are not only monetizable investments, but also very, very, you know, exciting underlying ecosystems and substructure.
The third one would probably be a collaboration, you know, of blockchain and ai. And I think that whole thesis in developing the monetization of LLMs will continue to be refined over the next 12 to 18 to, to 24 months. But how do you monetize some of these large databases? And you could do so through a decentralized blockchain, right?
Where people, you know, are able to exchange tokens and, and ascribe value to the data for which they’re receiving. So, Um, and I think that thesis is gonna continue to [00:21:00] build, you know, within a lot of our, you know, ourselves and then, and then our, our partners within, you know, crypto and blockchain venture capital.
Yeah.
Nick Mazing: And there is quite a bit of variability geographically in, in the adoption of the technology. You already mentioned San Salvador obviously being a very interesting experiment, if you can call it that. Uh, how does this tie into your investment thesis?
Erik Ellingson: Yeah, no, there absolutely is. I think we think of, you know, blockchain tech as an innately global technology and we see and have invested heavily in large opportunities in both Europe and Asia in this market too. So we hired Joseph Lassen about a year ago, who’s in London, you know, covering that market for us.
And then Augie Ilag in Singapore, who’s really focused on what’s going on in the Asian market. But we’re seeing, you know, not only, you know, an uptick in in founder expertise in those [00:22:00] markets, but then the broader venture ecosystem starting to catch up with, you know, what we’re seeing in the us, which is very, very exciting.
I think as you think about underlying kind of core sub-segment investible opportunities in Asia, we’re seeing a lot within the gaming space. And the gaming ecosystem there is very developed within the European markets. DLT finance is a good example of a portfolio company that we have that’s, that’s building out, you know, a broader trading platform within crypto in Germany and Frankfurt specifically, you know, to help trade across the broader EU and onboard, you know, people into, into the crypto economy.
So I think those are, those are two examples of other markets. Um, but it is Nick. It is, it is an innately global. Piece of tech that’s gonna facilitate, you know, cross border transactions for decades to come.
Nick Mazing: Any comments about the us? We certainly had very interesting regulatory developments recently. Um,
Erik Ellingson: Yeah, no, and I know, you know, there’s, there’s constant [00:23:00] updates. So, you know, if I spoke too deeply about what’s going on in the US regulatory system, that could, uh, some of that information could be stale here very quickly. Um, I think, you know, the facts, and I’ve mentioned this already, that we have, you know, a liquid.
Digital asset market capitalization in real time. You can, you can put your finger on the pulse of what’s going on within this, you know, venture capital industry relatively quickly. And I think, you know, ultimately for us here in the us you know, we do, we do ebb and flow with announcements on the regulatory side.
And, and ultimately we’re gonna need to come up with and follow the rest of the world with a framework not that dissimilar to the markets in crypto assets regulation to the MICA documentation. That was put in place within the European Union. And so, you know, I, I think ultimately us lawmakers are gonna get to a point where, where they get it right.
You know, we’re super involved, you know, in our partnerships with the Blockchain association and, you know, [00:24:00] and the Chamber of Digital Commerce to help us, you know, develop a framework ultimately that’s gonna allow us to participate. And what I believe is the best investment opportunity, you know, of our generation.
I think as we think about the world more broadly outside of just, you know, US and Europe, you know, Japan for instance, is, is a very forward thinking country when it comes to what’s going on, you know, in, in, in crypto, you know, and then developments, you know, out east within, you know, within Hong Kong as well.
There’s been some recent announcements there that are also very exciting and so I know your question was specifically tied to what’s going on in the US and I. The answer is the US needs needs to follow suit and ultimately come up with, and it needs to be regulated. That is our opinion, right? Needs to come up with a regulatory framework that helps us take a step forward.
Nick Mazing: Erik, thank you for joining us today.
Erik Ellingson: Nick, thank you very much. Really appreciate you having me on.
Nick Mazing: [00:25:00] Today we spoke with Erik Ellingson. Partner at c Mt. Digital who gave us a phenomenal overview of what’s going on with the blockchain ecosystem globally. We have all the relevant links in the show notes. This was another episode of Signals by AlphaSense. My name is Nick Mazing and you can find us on all the major platforms.
Thank you for watching or listening.
