There’s a new venture fund in town, focused on the hypiest of hyped sectors right now: blockchain systems and cryptocurrencies. It’s a small fund, but what’s interesting about Castle Island Ventures is the pedigree of the Boston firm’s founders and the careful approach they’re taking.
In an exclusive interview, co-founder and partner Matt Walsh says Castle Island Ventures has raised $30 million for its first venture capital fund. Walsh and Nic Carter, Castle Island’s other partner, quietly formed the firm earlier this year after leaving their jobs at Fidelity Investments. Today they’re officially stepping out of the shadows with their new venture, which is part of an emerging group of crypto/blockchain funds located around the world (see table near bottom of story).
Castle Island will back early-stage startups developing products and services to spur increased adoption of blockchain technologies—the online, distributed ledger systems that underpin digital currencies such as Bitcoin. There are lots of hurdles to overcome, but if advocates are right, blockchains might one day transform finance, cybersecurity, business supply chain management, and other aspects of industry and society.
Walsh spent the past four years at Fidelity, where he was a vice president and one of the leaders of the wealth management behemoth’s exploration of the nascent crypto/blockchain world. That work included helping assess and develop potential blockchain products and directing blockchain investments by Devonshire Investors, Fidelity’s private investment arm, Walsh says. Carter, meanwhile, was a Fidelity investment research analyst focused on cryptocurrencies and blockchain, Walsh says. Carter also created Coin Metrics, an open-source software project that provides data analytics used by crypto investors. After the pair quit their Fidelity jobs, they headed across the Charles River, trading their offices near Boston’s financial district for space in Kendall Square in Cambridge, MA.
Castle Island is notable, in part, for what it won’t invest in: digital “token” sales. Young blockchain ventures are increasingly raising money via online “initial coin offerings” (ICOs), through which they sell digital assets that can be used to pay for services, such as cloud-based data storage, powered by the companies’ software. But such token sales are less regulated than traditional fundraising mechanisms; many of these crypto crowdfunding campaigns are turning out to be scams, and regulators have deemed some of them illegal securities offerings.
While some equity investment firms are also putting money into token offerings, Walsh says Castle Island is steering clear. “We are definitely not a crypto hedge fund,” he adds.
Castle Island’s agreements with its investors do give it the ability to buy crypto assets, such as Bitcoin and Ethereum, Walsh says. But it’s not a big focus for the firm, he adds, and those purchases will be made on a “buy and hold basis.”
Instead, Castle Island will primarily make equity investments in businesses building the infrastructure that could enable the industry to grow—think user interfaces, software for managing custody of digital assets, and other products that serve as “picks and shovels” for the sector, Walsh says.
“It’s not always going to be the sexiest type of company,” Walsh says of his firm’s investments. Castle Island is taking “a sober view of the market. And I think it’s informed by a view of what it’s actually going to take to get institutional adoption for this technology. We’re kind of like the anti-cowboys of this market.”
Banks and other large financial institutions have mostly taken a wary stance toward cryptocurrencies and blockchain systems. Fidelity is one of the large financial services firms that has been open about its interest in the sector, and it went so far as to set up a Bitcoin and Ethereum mining operation that became profitable, CEO Abigail Johnson reportedly said at an industry conference last year. Goldman Sachs is considering expanding its cryptocurrency-related services, but is proceeding “cautiously,” a top executive told Bloomberg TV in June. And JPMorgan reportedly has been exploring blockchains for the past couple of years and recently appointed an executive to oversee its cryptocurrency strategy, according to Financial News and Fortune.
Some blockchain advocates believe it’s a matter of when, not if, the financial sector and other types of businesses will truly embrace such technologies. But industry research suggests the gap between hype and reality remains wide: a recent Gartner survey found that few companies are currently investing in and deploying blockchain technologies, and a Forrester report from last November predicted that some businesses’ blockchain projects would be scaled back or even halted this year.
One of the barriers to widespread adoption is that the technology isn’t very easy to use. Walsh makes a comparison with the development of the Internet, saying that the blockchain sector is waiting for its Web browser moment.
“Right now, the user experience is just terrible,” Walsh says. “These blockchain networks will only be successful if the majority of consumers that are using them don’t even know that it is powered by blockchain.”
Castle Island’s first investment is in
