New Kids on the Block: Vancouver Joins the Cryptocurrency Rush

May 25, 2018
Sean Clark’s latest startup is just one of the players in the city’s emerging cryptocurrency scene. Bitcoin and blockchain boosters say the technology will make investors rich and disrupt entire industries for the better, but critics call it a magnet for criminals and con artists

When I reconnect with Sean Clark in October 2017, it’s almost exactly a year since the last time I saw him—climbing a stage at the Vancouver Convention Centre to receive an Entrepreneur Of The Year award. His baby—Shoeme.ca, launched in 2012—had been bought by long-time friend and mentor Roger Hardy in 2014 for $15 million and combined with two other Hardy purchases, Shoes.com and OnlineShoes.com, in 2015 to form an e-commerce powerhouse.

Yet even then, donning tuxedos with Hardy and basking in the glow of more than 1,000 of B.C.’s business elite at a star-studded gala, Clark knew all was not well at the feted shoe empire, whose annual sales were approaching $300 million.

“We grew so fast through acquisition—jammed them together so quickly, with all these back-end platforms and warehouses and people,” says Clark, who became Shoes.com’s chief revenue officer after Hardy took control. “We were making decisions that weren’t aligned with truly great customer experience. We were making decisions to put things together quickly.”

By November 2016, Shoes.com had let hundreds of employees go and was fending off lawsuits from angry suppliers. Then on January 27, 2017, Clark’s world imploded when the company filed for bankruptcy.

“It was embarrassing. I’d been the golden child for so long,” says Clark, 38, who started as an intern at Hardy’s Clearly Contacts in 2010. “I just watched the train wreck happen.” Clark says he learned more winding down the business than growing it. “We will never speak again,” he adds of his erstwhile mentor.

Clark talks about the demise of Shoes.com, the disintegration of his relationship with Hardy and the embarrassment of front-page failure in the calm, composed manner of an entrepreneur reborn. And to hear him tell the story this past fall—from temporary offices, on loan from Frank Giustra’s Fiore Group, atop the Bentall 3 office tower in downtown Vancouver—his new venture is not unlike a religious awakening.

“I found blockchain and bitcoin—and honestly, it saved my life,” says Clark, wide-eyed, gently thumping the boardroom table for emphasis. “After the bankruptcy, I had been thinking, ‘Oh, should I be an e-commerce executive for a brand like Aritzia or Telus.’ But then I decided, ‘I’m an entrepreneur. No way.’ I thought it would take a lot of time to find the next thing. But it found me.”

‍First Block Capital co-founder Marc van der Chijs thought he was moving to B.C. to retire. Instead, he got into the blockchain game
Two for the money

To be precise, a Dutch multimillionaire by the name of Marc van der Chijs—through one of Clark’s mentoring circles—found Clark. Van der Chijs helped launch what’s described as the Chinese YouTube, Tudou, in 2005. After a billion-dollar exit seven years later, he was ready to retire—moving, at age 40, to West Vancouver with his young family.

Then in March 2013, one of van der Chijs’s bank accounts was frozen during the Cypriot financial crisis. “I wondered, ‘How is it that I can pay for a bank account and the bank decides I cannot touch my money?’” explains van der Chijs, speaking in the measured tones of the trained economist that he is, over coffee last November. He started looking at alternatives. “Then I found bitcoin for the first time. It was fairly early, and nobody was using the word blockchain.”

Bitcoin and blockchain are arguably the biggest business story of the past year—and yet one of the least understood technologies, partly because of the complex way it operates. In a nutshell, bitcoin is the first and most popular of hundreds of cryptocurrencies (see page 35), digital assets that are transferred peer-to-peer through cryptography and a distributed ledger called a blockchain; the whole system is made stable and reliable through a consensus mechanism known as mining (see page 31). The blockchain effectively cuts out the middleman—be it a bank, a law firm or a social media giant like Google—allowing consumers to transfer money, sign contracts or manage their own data without someone else taking a cut.

Some cryptocurrencies, like ethereum, are considered to have more practical applications—in the case of ethereum, the so-called smart contracts function is already transforming the world of law. But for now, bitcoin has grabbed the spotlight as the most prominent rival to gold as a store of value (if not, so far, an actual medium of exchange). Bitcoin, established in 2009, was designed by its creators to be anti-inflationary, with a maximum of 21 million coins expected to be in circulation by 2140. From January 1, 2017, to the end of last year, the price of one bitcoin had risen from just over US$1,000 to just under US$14,000.

Van der Chijs started investing in bitcoin off the side of his desk in 2014 but eventually decided he wanted to launch a bitcoin investment trust, taking initial steps to set up First Block Capital in 2016 with Thomas Kineshanko, through whom he met Clark in February 2017. “I had a gut feeling [about Clark],” van der Chijs recalls. “I did not Google him. I talked to him on the phone, and I thought, ‘Smart guy’—but he did not know a thing about crypto.”

Clark hung up and learned all he could about the technology. “He called me the next day or the day after, and said, ‘I want to meet up,’” van der Chijs says. “When we started talking again, he knew 99 percent more than most guys in the bitcoin space. He really got it.”

Soon Kineshanko was out and Clark was in as van der Chijs’s partner in First Block Capital. By September 2017, the company had received approval from the British Columbia Securities Commission to register as an investment fund manager to operate Canada’s first bitcoin investment fund; by the end of the year, it had launched and sold First Coin Capital—a vehicle for doing initial coin offerings (ICOs), a form of crowdfunding by startups looking to build cryptocurrency or other blockchain-related applications. First Block also launched Hut 8 Mining Corp., a partnership with European bitcoin miner Bitfury Group Ltd. that gives Clark and van der Chijs access to one of the world’s largest bitcoin mining operations. (For maintaining the blockchain system, miners are rewarded with bitcoins.)

First Block Capital is one of several local players to debut in the past 12 to 18 months, and part of a growing community of blockchain financiers, miners and techies putting Vancouver on the map.

HIGH SECURITY - First Block Capital’s Marc van der Chijs and Sean Clark at the alpine Swiss bunker where another firm keeps keys to clients’ bitcoins

One pioneer of the city’s crypto scene is Lisa Cheng. A poli-sci grad from UVic, Cheng was working in sales for SAP Canada Inc. in Vancouver seven years ago when a friend introduced her to the concept of the dark net: a kind of hidden Internet, shielded by encryption or the layering of networks, that was being used by everyone from online gamers to libertarians to international criminals. Then, as now, bitcoin was the currency of the dark net.

“I thought it was super fascinating, and it led me down to reading this white paper, to understand more about the technology,” Cheng remembers.

Eventually she found herself on a cryptocurrency message board and was hired by the Mastercoin Foundation, in Austin, Texas, to help build a database for its nascent digital currency and communications protocol. In 2013, the foundation hired her full-time, working remotely from Vancouver. “Mastercoin was the first company to do an ICO, and that was my first exposure into this world of how to launch cryptocurrencies and how to really get people on board with believing in cryptocurrency,” Cheng says. “But at the time it was so new that there wasn’t a proper framework.”

Within a year, Cheng had launched Vanbex Group to consult on digital currencies, blockchain protocols and decentralized technology, and in 2015 she started an ethereum smart contract business—bringing on her life partner, Kevin Hobbs (who was working in corporate foreign exchange at the time), as CEO to help scale it.

“What we do is a full-stack service based on helping startup companies in this industry mostly raise funds via token distribution events,” Hobbs explains. “And then we build the technologies: we build the tokens, we build the crowdfunding contracts, we build the watch contracts, we build the websites. I guess you’d kind of consider us like an incubator for blockchain companies.”

BUILDING BLOCKS - A pioneer in the Vancouver cryptocurrency space, Lisa Cheng runs an incubator for blockchain companies

While Hobbs welcomes all the new competition, he also casts doubt on some of the more recent arrivals. “Sean Clark, great guy, really like him—but if you’re familiar with what they do, they’re pretty much just trying to copy the model that we built, like a lot of companies are, and that’s great because we can’t handle all the demand,” he says. “But the experience in the space is kind of lacking.

“People have to do their due diligence,” Hobbs continues. “They’ve got to look at these companies that are going public and look at them really hard. Have they ever built a blockchain product before?” He compares the current situation to the dot-com bubble of the late 1990s: “A ton of companies came in really quickly, there was a lot of hype—and there’s not a lot of those companies around today. My hope is we can build something better. I mean, that’s our goal.”

Chasing crypto’s criminal element

Building a better, safer blockchain is also the goal of Vancouver lawyer Christine Duhaime. Duhaime advises startups in the fintech and blockchain world. In 2014 she founded the Digital Finance Institute, an independent research group that aims to address issues “at the nexus between financial innovation, digital finance policy and regulation.”

“I think there is no question that, like any financial instrument, there are examples of bitcoin being used for financial crime,” Duhaime acknowledges. “A big one that bothers me a lot is that bitcoin is used frequently for fentanyl; the dealers get fentanyl through China, and they pay for it with bitcoin. So that’s an example, really dear to all of our hearts here in Vancouver, where bitcoin wallets are being used by fentanyl, and it’s killing people.”

Duhaime notes that digital currency exchanges aren’t regulated by Financial Transactions and Reports Analysis of Canada (FinTRAC)—the federal agency that gathers and analyzes intelligence on suspicious financial transactions—leaving it up to the individual exchange to do its own due diligence. That’s where she steps in, in an advisory role, to help build more-transparent bitcoin wallets, with systems in place to monitor suspect behaviour. “The exchange needs to have its own methods of procedures because it doesn’t want a reputation as being a safe haven.”

Beyond the outright criminal, Duhaime also worries about some of the unethical behaviour she sees infiltrating blockchain. ICOs, for instance, have the benefit of being egalitarian, allowing people of modest resources to raise money without expensive listing, legal and accounting fees. But they also tend to attract those who are skirting regulation for other reasons, Duhaime says: “People who get into it with a good marketing plan who are scammers—who have no concern for the rule of law, who are just out to get a bunch of money and not ever develop technology with it.”

Recently, Duhaime and the Digital Finance Institute partnered with Ottawa-based MindBridge Analytics Inc. to develop an artificial intelligence–based anti-fraud services platform, CoinWatch, that will analyze digital currency coins and digital currency financial services. “We can detect things like if an ICO says, ‘We’re based in Switzerland, and this is where all our people are from,’ but yet when you go to invest, you find out they’re actually in Slovenia or in Russia,” she explains. “We’ve had some incredible interest from some government regulators already, which I can’t name, that want to partner and want to use it. And we’ve already had a global law firm sign up and a global accounting firm.”

Meet the chain gang

On a rainy day in late November, many of those hoping to launch an ICO, invest in a blockchain startup or otherwise profit from cryptocurrencies have made their way to SFU’s Morris J. Wosk Centre for Dialogue in downtown Vancouver for the third annual VanFunding conference. Would-be investors network in the atrium with tech entrepreneurs (wearing T-shirts emblazoned with their startups’ logos), while speaker after speaker in the Asia Pacific Hall extols the virtues of this new world order.

Brady Fletcher, managing director of the TSX Venture Exchange, is first to address the crowd: “It’s a really exciting time—not only for people to be able to invest in these companies that are doing disruptive things, but for us, as capital markets, to be able to adopt these technologies to really streamline what we’re doing.” As of that day, Fletcher notes, bitcoin and ethereum alone account for some US$200 billion in market capitalization.

By and large, the speakers’ tone is boosterish, but some do inject a note of caution into the proceedings. Bernd Petak, Vancouver-based partner in venture capital firm Northmark Ventures, has been a keen observer of the blockchain world for more than a decade; about half of the pitches his firm takes are blockchain-related, he tells the audience. Petak offers some tips on how to tell if a blockchain application makes sense—or whether it’s suspect.

“Does it benefit from managing trust? If it does, it gets a green check mark,” he says. “Does it benefit from information immutability—is it important to not be able to go back and change history? A classic good-use case for blockchain.” Other must-haves Petak highlights include the application having “functional persistence” (can it run after the people who built it are no longer around?), a truly decentralized model (the hallmark of blockchain) and, most important, an effective monetization strategy.

“Of the three or four blockchain-oriented pitches that we take each week,” Petak says, “at least 75 percent of them are not even aware that they won’t be able to use those monetization approaches that they’re so comfortable with. You can’t charge a fee for a transaction that doesn’t pass through your server.”

While VanFunding attendees—like many of those attracted to cryptocurrencies—look to ride blockchain to financial riches, other crypto enthusiasts are training their attention on how it might transform the modern economy.

Victoria Lemieux is one of those people. Lemieux is “cluster lead” for Blockchain@UBC, a collaborative research group with 12 core researchers, focused on blockchain technology and how it can be leveraged to benefit Canadians. An associate professor of archival studies at UBC, Lemieux has consulted for the United Nations, the Commonwealth Secretariat and the World Bank Group—all with the aim of building and maintaining trustworthy records.

“Typically, researchers will work individually in their disciplinary areas, but because the nature of blockchain really requires an interdisciplinary lens, we’ve got computer science, engineering, finance, archival science,” Lemieux says. “We’re pooling our talent so that when businesses come to us with whatever they’re doing or developments they have, we have a multidisciplinary team. We’re working directly with industry—doing problem-oriented research to stimulate B.C.’s blockchain tech sector.”

The Blockchain@UBC program is unique in Canada, with the only North American parallel being Boston’s MIT Media Lab. Lemieux saw a gap in blockchain research—and an opportunity to build a new tech ecosystem in Vancouver. Although she admits it’s a challenge to compete with countries such as Switzerland on regulation, or the Ukraine or Croatia on cheap talent, she thinks part of the solution will be attracting developers from places like Kiev to come to UBC to do a master’s or PhD there; to that end, she’s working on a master’s program with a specialization in blockchain.

“We want these people here because they are the engines of our growth. So absolutely, we’ve got work to do,” Lemieux says. “But we did it with animation and other forms of digital technology. We’ve got a really strong reputation. We can do it again.”

From dejection to Davos

If any further evidence was required that blockchain had hit the big time, GMP Securities L.P. provided it late in 2017, when the renowned Toronto investment bank launched a dedicated blockchain practice and hosted its inaugural Next in Technology conference, targeting industry players, in December.

In a year-end interview with Bloomberg News, GMP chief executive Harris Fricker predicted even brighter days ahead, forecasting that at least 50 firms tied to blockchain and cryptocurrencies would list on Canadian stock exchanges in 2018. “The level of activity in this market of quality plays, quality teams, is as high as I’ve seen since the Internet age,” he said, adding that he expected blockchain would soon represent more than 25 percent of GMP’s banking revenue.

One of the teams that Fricker has been actively supporting is Sean Clark and Marc van der Chijs. GMP helped broker the sale of First Coin to Wall Street legend Michael Novogratz last December; the firm backed Hut 8’s initial public offering on the TSX Venture Exchange in March, and First Block Capital is expected to list later in 2018.

For the average observer, the ever-changing landscape of blockchain players is hard to follow or absorb. For those on the inside, it can be equally dizzying. My last call to Clark comes in late January, to help clarify some of the changes at First Block. When I reach him, Clark is in Kiev, meeting with a group of software developers from Bitfury, the firm’s European-based partner in Hut 8. The previous week, he’d been in Davos, Switzerland, at the World Economic Forum.

“In a million years, I never would have thought that a year to the day that Shoes.com went bankrupt—the worst day of my life—I’d be having lunch at the top of a Swiss mountain with all the thought leaders of blockchain, being one of the players in this emerging space,” Clark says, the disbelief palpable in his voice. “And having not only financial success but…everything. It’s crazy. I couldn’t have imagined this. I’ve found my true calling as a tech entrepreneur.”

Coins of the Realm
‍Not all cryptocurrencies are created equal. As of March 19, there were more than 1,500, according to tracker CoinMarketCap.com. These currencies had a total market capitalization of some US$333 billion, but the vast majority are small change: bitcoin accounted for about 44 percent of 24-hour trading volume. Here are the top 10 at that time.

Digging Deep: A cryptocurrency mining primer

We take a look below the surface of this growing industry

You probably know that mining bitcoin and other cryptocurrencies doesn’t involve picks, shovels and real coins, but did you ever wonder how it works? For a firsthand account, we turned to Kunal Kumar and Joe Thomas, workshop lead and director of research, respectively, at Blockchain@UBC.Students.

In cryptocurrency parlance, mining means using computer power to secure and verify transactions to the blockchain, which Thomas describes as a giant list of interlinked blocks of data. Mining preserves the order of transactions, explains the undergraduate research assistant at the Sauder School of Business. Let’s say someone tried to use the same $100 to pay their dentist and their landlord. “Which one of those is legitimate?” Thomas asks. “Mining ensures that there’s only one true history.”

Most cryptocurrencies operate at a scheduled inflation rate, with fees for each transaction offering miners an extra incentive, Kumar says. In bitcoin’s case, people usually work together to mine a block by solving the mathematical puzzle it presents.

Each miner’s computer works at its own hash rate, a measure of calculations per second, incrementing a random number called a nonce to arrive at a hash, or numeric code, that’s less than the “target” of the block. One person gets a reward, currently 12.5 bitcoins, for completing a new block, but mining pools often split the take. “You can spend it, you can hold onto it,” says Thomas of the mined coin.

How to get started mining cryptocurrencies? Some people use a computer with a graphics card, says Kumar, an arts student who plans to major in political science. Making the task easier is software such as NiceHash, a “one-click miner” that gives your computer a preset profile. On the pricier side, there are application-specific integrated circuit (ASIC) miners dedicated to certain currencies. Used by commercial mining operations in Metro Vancouver and elsewhere, these devices are loud and power-hungry, Kumar warns.

Setup can take time, but a crypto miner is low-maintenance once it’s running, Kumar says. Tending to it won’t take more than 10 to 20 minutes a day, he estimates. That isn’t enough for him: “I spend a lot of time on it because my game plan is to look for coins that I believe will increase in value over time.”

But there’s no guarantee that mining will pay for itself, admits Kumar, who says his return on investment has fluctuated from 0.2 percent to 1 percent per day this year. Having many people mining keeps the blockchain stable, but it can also shrink individual rewards. For example, Kumar says, 10 people mining a coin worth $10 at the same rate might each get $1. “But if there’s still $10 being mined but now there’s 100 people mining that same currency, each of us is only going to get 10 cents probably.” –Nick Rockel

Originally appeared in BCBusiness.

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