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From Toxic Assets to Digital Currency: Barry Silbert's Bold Bet

On June 5, 2013, Barry Silbert, the 36-year-old founder and CEO of SecondMarket, called an all-hands meeting to announce a new direction for his brokerage firm.

Since its founding in 2005, SecondMarket had earned a reputation for trading exotic assets. The news that day would only reinforce it — and would give even some of SecondMarket's employees cause for concern.

A former investment banker, Silbert had built a successful company by making it possible for hapless investors to unload illiquid paper. Auction-rate securities were one of several asset classes for which he had almost single-handedly made a market amid the chaos of the financial crisis. (An effort to do the same for shares of privately held community banks didn’t work out.)

Though auction-rate securities had been his trading desk's most profitable asset for a while, he knew that wouldn’t last. No new ones had been issued in years, and the secondary market for them was beginning to dry up. Silbert needed to find a new asset class to trade in.

The company, Silbert told his staff, was going to open a private fund for accredited investors that would invest solely in bitcoin. The move would effectively put SecondMarket's future at the mercy of a volatile digital currency that most people thought was a passing fad, a mere tool for peddling drugs online, or a Ponzi scheme. Nobody even knew the real identity of bitcoin's creator, who used the handle Satoshi Nakamoto. "Highly unorthodox," the financial blogger Felix Salmon tut-tutted when news of Silbert's plan broke.

But Silbert had become a true believer. "Barry called bitcoin 'the biggest opportunity of my career,' " recalled Michael Moro, the director of SecondMarket's trading desk at the time.

Nearly three years later, Silbert's bet doesn't sound quite so crazy anymore. Bitcoin's market capitalization has grown nearly sevenfold over that period to $6.8 billion. Investors have poured more than a billion dollars of venture capital into startups that are experimenting with bitcoin and the technology underlying it, an innovation called the blockchain. And while naysayers still abound, big Wall Street firms are more curious than skeptical. Even national governments and central banks are taking a look.

Meanwhile, Silbert has gone all-in, and in doing so positioned himself at the heart of the bitcoin and blockchain industry. Ask anybody in the world of bitcoin today who is the best-connected member of the community, and odds are they will direct you to this boyish entrepreneur, a man who may be uniquely suited to bridge the gap between rebel entrepreneurs and mainstream financial institutions. In a fintech space that has seen more than its share of blowups, meltdowns, flameouts and criminal charges — and in which serious differences of opinion persist as to whether bitcoin itself will succeed or whether the blockchain is the truly valuable concept — Silbert has been a calming, professional presence, avoiding even the hint of scandal.

"He definitely approaches it from a much more practical, pragmatic angle" than do the hard-line cryptolibertarians, said Alan Lane, the president and CEO of Silvergate Bank in La Jolla, Calif., which provides banking services to about a dozen bitcoin startups. "He has been a really good bridge for a lot of the younger techie idea folks — trying to figure out how to fit them into the mainstream without losing what they're bringing."

The arc of Silbert's career — from a trader of distressed paper to a prolific investor in one of the most experimental corners of fintech — parallels a broader shift in the story of financial services. In the last few years, as the industry has recovered from the crisis, banks have turned their attention from cleaning up yesterday's messes to fending off tomorrow's challengers.

While working with banks and established investors is unavoidable, "the real innovation — the paradigm shift, the new way of doing things — is not going to be driven by the incumbents," Silbert said. "It's going to happen outside the existing financial system. And ultimately those ideas will be co-opted or bought by the incumbents, or [they] will completely displace the incumbents."

Among the first to recognize the interest that bitcoin and its underlying technology would hold for Wall Street, Silbert has found himself testifying before the New York State Department of Financial Services and coaching asset managers who manage tens of billions of dollars. Last year his fund, the Bitcoin Investment Trust, grew until it held 140,000 bitcoins — about 1% of all bitcoins in existence — and then Silbert took it public on the OTCQX market, making it the first publicly traded fund of its kind.

Alongside this he built a profitable bitcoin trading desk to serve institutions and high-net-worth individuals. The final piece fell into place last October, when he split off these businesses as wholly owned subsidiaries of Digital Currency Group, a new conglomerate, and sold the rest of SecondMarket to Nasdaq. What were once Silbert's personal stakes in dozens of digital-currency startups now belong to DCG's portfolio of early-stage investments. He intends for DCG to function as an index on the entire market, becoming "the Berkshire Hathaway of bitcoin."




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