Investing in Web3 with Alex Tapscott, Part 1

Michael Hainsworth:
The next leap in Internet technology is underway. And like how Web 2.0 was a massive evolution from the static pages of Web 1.0, Web 3 will address some of the issues of its predecessor. If data is the new oil, Web 3 will fundamentally change the way we view the ownership and value of our data. Alex Tapscott knows this. The author of Blockchain Revolution and the managing director of the Digital Asset Group at Ninepoint Partners sees tremendous opportunity in what’s coming next for financial services and investors. We began our conversation by defining Web 3.

Alex Tapscott:
In order to understand Web 3, it's helpful to understand what came before it. So Web 1, what we call now, the read web, and what I think most people would remember as the .com era was really a one way static medium. It was a way to consume information digitally. And although, it was primitive by today's standards that nevertheless revolutionized things by basically making information readily available, at least to anyone with access to an internet connection.

In the early 2000s, technology evolved and our behavior online evolved ushering in a new era of the web that we now know as Web 2. And Web 2, the common term is the read write web, and basically all that means is the web is not just a way to consume information but also to collaborate online, to communicate. And the defining business model of Web 2 was social media built on the back of user generated content.

But what ended up happening in Web 2 was all of the value that was created online, all of our data, our interactions, the impressions, the attention that we provided was captured asymmetrically by powerful forces, big social media companies, large tech conglomerates, financial intermediaries, and others. So what Web 3 basically offers is a rethink.

Web 3 is the read, write, own web. So not only is the web a way to consume information, not only is it a way to post information and to create content online, but it's also a way for us to actually own the things that matter online. And that means owning our own identities, owning our own data, and being able to transact in any kind of asset, whether it's a piece of art or security or money peer-to-peer without the need for powerful platforms and intermediaries. It represents a wholesale shift in how we think about the role of the internet user, from being an internet user to an internet owner.

And that's a very important transformation that I think is going to impact basically every industry from financial services to creative industries to civil society, and even government.

Michael Hainsworth:
So Web 3 is designed to address some of the shortcomings of Web 2.0 where the data on the content are housed and controlled by what we now refer to as big tech using technologies like decentralization, blockchain, token based economics. Those are the foundational technologies of Web 3?

Alex Tapscott:
Yeah, that's right. So the most important thing that's been invented in Web 3 is the token. Now, it's a funny thing. The word token sounds lighthearted, maybe almost trivial, but it turns out to be both appropriate in a necessary term. You can think of tokens basically as containers for value in the same way that you can think of a website as a container for information. And that's a very important starting point because I think a lot of people when they hear the words blockchain or Web 3 immediately go to cryptocurrency like Bitcoin. To be sure, Bitcoin is an important asset. It's worth hundreds of billions of dollars, but it represents the beginning and not the end of this story.

So in the same way that a website can be programmed to basically display anything of information, whether it's the classifieds or the weather or sports scores, or a search engine, or content, media, and so forth, a token can be programmed to represent anything of value.

And so, in a way, it's like this container, right? This blank slate that we can fill with anything of value and represent as an asset online. So that can be money, but it can also be financial assets like stocks and bonds, titles and deeds. It can be art, collectibles, anything that requires scarcity to have value can be represented by a token.

Now, tokens only exist and are only possible because of the foundational technology, which is known as a blockchain. And a blockchain is basically just a way to program value in digital scarcity into assets. It's a way to represent value online without needing a trusted third party like a bank or a big social media company, or a big tech company to say so. And that's an important innovation that is going to decentralized ownership and power in the economy and also online in a way that I think is going to upend a lot of those old business models.

Michael Hainsworth:
When I talk to audiences at conferences and trade shows about the metaverse, I explained that there are actually three metaverses, there's the industrial metaverse, the enterprise metaverse, and the consumer metaverse. And there's a lot of talk that the metaverse is dead. The consumer metaverse. Mark Zuckerberg legging off thousands of workers as seen as proof, but his problem is that he was trying to create a centralized metaverse, like how AOL tried to create a centralized web location for everything. It seems though we'll see many consumer metaverses, and Web 3 is expected to be one of those underlying technologies.

Alex Tapscott:
Well, I couldn't agree more with that sentiment, and I think that it's worth defining what the metaverse actually is. It's a much hyped concept, but most thoughtful people still agree that it's going to be important culturally and economically quite significant. The investment bank, Citibank, and Morgan Stanley estimate the value that's going to be created to be in the trillions of dollars over the next decade.

But I think when a lot of people see the word metaverse, they think of virtual worlds or video game, and that is only partially true. I think that virtual reality and augmented reality is going to be more important in how we interact with the internet. And that's not just my idea, that's something that we've seen play out over the decades. If you think about Web 1, the primary way we interacted with Web 1 was via desktop computers and the web browser, right? That's why it's known as the .com era because that's the identifier for a website.

The second area of the web, Web 2, really was more accessed via smartphones and via mobile applications. And so the defining businesses like social media are things that we now primarily access on our mobile devices. So it does make sense that at some point, the physical way or the hardware interface for the web is going to change. So we had computers, then we had smartphones, what comes next? And it is very likely that at some point, augmented reality or virtual reality will be part of that story. And we've even seen companies like Apple announce that they're soon to unveil their own augmented reality headsets.

However, just because you're accessing the web via virtual reality or augmented reality doesn't, in my opinion, mean that you're accessing the metaverse and the true sense of the word. What you're really accessing are closed, controlled virtual environments that are governed by corporations. And that's okay, by the way, there's nothing wrong with that. There's nothing wrong with going to Disney World, another closed environment that's controlled by a corporation. But when you enter Disney World, you turn over any sense of meaning or any rights that you would have in the real world.

Michael Hainsworth:
And if you're the father of a six-year-old, your sanity.

Alex Tapscott:
Yeah, you definitely check your sanity at the door. And also, I've heard $5,000 to $10,000 just to have a decent family trip to this world. But that's an aside. So what we really need to do for this new virtual plane of existence, however you want to define it, is basically just bring some of the things that matter in the real world online and into this virtual world. So that means rights, right? Rights to privacy, property rights, the ability to own assets, the ability to freely transact peer-to-peer without having to pay massive taxes to platforms.

Right now, Facebook and Apple, and others are looking at the metaverse as just another way to basically propagate the same model that existed in Web 2, where if you're Apple, you're charging 30% every time an application is downloaded, anytime a subscription is paid, anytime an in-game asset is purchased through the app store, that is a massive levy that weighs on the economic activity online.

So any metaverse that we do create needs to be one where users are empowered, where they control their own assets and where they can transact peer-to-peer. That is all only possible with Web 3 tools like tokens and with blockchains as the foundation. Otherwise, we're not creating a metaverse, we're not creating a new reality, a new shared experience. We're just creating Disneyland online.

Michael Hainsworth:
So with all of that in mind, I want to talk about present day because metaverse is a thing that's coming. It's not quite here yet. It's going to be a little while. We've got this new Apple headset that's coming out quite shortly, but that is only going to be the beginning of that aspect of Web 3.

Let's talk about more practical applications of Web 3 and what it means for your world at Ninepoint Partners. I mentioned decentralization blockchain in these token based economics have a huge role to play in the evolution of the financial services sector.

Alex Tapscott:
Yeah, that's right. One of the areas, perhaps unsurprisingly, where this technology is having the most immediate impact is in financial services. And it makes sense in a way. Web 1 and Web 2 were different from each other, but were both mediums for information. They were ways to access, to share, and to propagate information. What's different about Web 3 is that it is a medium for value or for assets. So what industry do we think of when we think of value in assets financial services?
Now, there's been lots of digital innovation in financial services over the past half century, starting first with the Diners Club card and leading all the way up now to today, what we know as FinTech or financial technology, but most financial technology or FinTech innovation that we have seen isn't trying to get to the root of what the industry does. It's basically creating a new sleek user interface to access the old institutions and the old ways of doing things.

So in a way, it's like digital wallpaper on the old edifice of financial services. It's a fresh coat of paint that's concealing some of the more antiquated parts of that industry. What Web 3 and its financial sector known as Defi or decentralized finance is trying to achieve is a wholesale rethink of the core purpose of financial services.

So the industry is kind of bewildering to some people. The leaders of it are known as the masters of the universe, and it is the lifeblood of our global economy. But fundamentally, it does several basic things, right? It gives people a way and people and businesses a way to move money, a way to store money, a way to access credit, a way to ensure against risk, a way to transact and trade financial assets, and other things like commodities. A way to connect investors with entrepreneurs, with sources of risk capital, a way to organize financial information, a way to establish identity and so forth.

And this is a taxonomy that we've developed and appears in my new book and informs our investing decision making here at Ninepoint quite closely. And so, if you look at Defi, there are digitally native companies and organizations that are basically recreating a lot of these functions of financial services. So take payments as an example. In the past several years, we've seen an explosion in a new kind of asset known as a stablecoin. Now, not all stablecoins are created equal, but as a whole, the industry has grown to over a hundred billion in value.

And basically, all a stablecoin is a digital asset that is backed by some other kind of asset. And this, in most cases a US dollar. And it creates easy ways for individuals and businesses to move money peer-to-peer instantly around the world. Now, today, you might think that's, that doesn't sound like a big innovation, but today most businesses and individuals rely on organizations like SWIFT and the Correspondent Banking Network to move money around the world. And it can take days, sometimes weeks to settle transactions. And cost quite high fees.

Stablecoin transactions by contrast are instantaneous or near instantaneous, and nearly free. And that kind of innovation, subtle, as it might seem, is going to basically completely disrupt a huge part of the business model of banks and other financial intermediaries. Oh, and by the way, it's going to create ways for people all around the world, whether they have a bank account or not, to move in store and perhaps even earn interest on US dollars. And that's something that is going to be a huge boon to many people around the world, especially those living in the global south.

Michael Hainsworth:
That segues into what I want to talk about next because that's financial services. What about the financial markets themselves? How do you think Web 3 is going to disrupt the markets?

Alex Tapscott:
Yeah, absolutely. Well, there's a couple ways to think about that. The thing that most interests me is how Web 3 enables new business models and new kinds of markets that weren't really possible before. So, we think about the corporation, the company as being this defining feature of modern capitalism. And in a way, it's like the killer app for capitalism, the corporation. It's a way to pool capital to conduct large capital intensive exercises. So the first companies were launched to send ships across the ocean or to build railroads, or to dig mines and so forth, big capital intensive industrial era type activities.

Now, we have these new kinds of organizations known as DAOs or decentralized autonomous organizations that instead of having shareholders have token holders, and those token holders can be anywhere around the world, they can buy into those organizations or they can earn a share in them by being a user or a customer of a company or of a project.

And to me, that is a new novel framework that I think is much more suited to our digital age because most organizations, most software applications for example, don't begin as local companies, right? They're not trying to tackle the Toronto market first before moving somewhere else. They're trying to build something that is ubiquitous and that can be used by anyone. And now, we have a new toolkit to allow people who are early users of these platforms to actually become owners of those platforms. And to me, that is a incredibly powerful paradigm shift that is going to, I think, help to fuel the growth of a lot of these new kinds of organizations.

So that's not to say, by the way, that tomorrow Enbridge or an Apple, or Royal Bank is about to become a DAO. It took decades, if not centuries, to migrate from agrarian based economies to industrial economies. And so, it'll take a very long time to migrate from this industrial area concept of a company to something that's digitally native. But I do think that many of the new kinds of organizations that will launch in this industry and in others are going to use this. And in fact, we've already seen that. Almost every single startup in Web 3 today begins as one of these digitally native organizations that doesn't have a cap table with shareholders, but rather has a token holder base that is global in nature. So I think that's one thing that's very interesting.
In terms of financial markets as a whole. I think that as with any other technology revolution, there are going to be big winners and big losers, and that's true for publicly traded companies as well. On the one hand, you can make the case that this technology stands to disrupt a lot of legacy business models. As I've explained, this new primitive known as tokens can replace or disrupt a lot of traditional models. But at the same time, I also think that as with other technologies, there's a huge opportunity to harness these tools to improve your business in pretty profound ways.

So in the public markets, maybe financial intermediaries and banks see their impact and their influence decline over time as more peer-to-peer models supplement the existing centralized models of traditional finance. But for a lot of technology companies, perhaps harnessing these tools creates new ways to target new users, to build new markets, to connect with customers in more profound ways. And that's why we're seeing this huge explosion of enterprise adoption of Web 3.
And I think that's something that surprises a lot of people when they find out that companies like Starbucks or Mastercard, or Pepsi, or PayPal, or Microsoft for that matter, are embracing these tools wholeheartedly because they see as with other eras of the web that this new era of the Web 3 is going to have as great, if not a greater impact than previous eras of the web. And if they position themselves accordingly for this next era of growth, they stand to benefit significantly.

Michael Hainsworth:
So you give investors an opportunity to participate in the next generation internet with the Web 3 Innovators Fund. How's it managed?

Alex Tapscott:
Thank you for asking that question. Great segue. I'd love to talk about the big ideas, but it's important also to talk about what we're trying to do here at Ninepoint. So the Web 3 Innovators Fund, in our view, gives investors broad exposure to all of the transformations that are happening in Web 3 today. So a lot of transformations in Web 3 are happening at the digital asset or the token level. And the fund and its strategy will get exposure to digital assets and to the growth of that asset class directly and also indirectly through businesses that are fully leveraged to that industry.

But we also want to make sure that we are capturing some of these other companies that are embracing this toolkit to transform their business. And so, we will be casting a wide net. We'll be remaining very focused on Web 3 and the kinds of transformations that I've described, but we'll be casting a fairly wide net so that we don't miss out on any kinds of opportunities that arise.
So the fund itself in the strategy as we see it gives investors a simple low fee way to get exposure to Web 3, both Web 3 and digital assets and Web 3 for business across a range of public securities in a format, an ETF that anybody can own. And that's something that, in my view, no other other strategy or fund that I've seen does everything that we do or does it in my view as well as we do. And so, we're really excited to bring this to market as a way for investors to participate in this transformation.

You can think about Web 3 today as being on the same stage as Web 1 was in the mid 1990s. In the mid 1990s, there were a couple of companies that had already distinguished themselves. You'd mentioned America OnLine for example. And so, it would have made sense logically to say, "Well, if I want exposure to the internet, I should buy shares of America OnLine." Sure, that made sense. But what made more sense was actually to take a portfolio approach because one single asset is not representative of an entire transformation that is going on.

And that's why I think owning just Bitcoin, for example, while useful in the context of a portfolio, is a little limiting because you're going to miss out on all the other kinds of innovation that's happening in this industry today. So it would've been smart to take a portfolio approach then, and it makes sense to do so today as well.

And also, another thing I'll add, which is that in the 1990s, the leading companies in the world were not technology companies. They weren't even technology hardware manufacturers necessarily. And they certainly weren't internet companies. They were large industrial organizations and financial services firms, GE, JP Morgan, companies like that. And today, the biggest companies in the world are all pretty much Web 2 platforms, right? They are Apple, Amazon, Google, Facebook and others.
And so, at the time in the 1990s, now, you would've put a couple of percent into the internet stocks, and at that time they were speculative because it was early stage. But over time, they came to capture a huge share of the total value of all publicly traded equities because the internet itself was consuming so much of the economy, right? And I think the same thing is true today. So the Web 3 fund today represents a relatively small part, I think, of a total portfolio approach. But over time, if we're right, it's going to consume a big part of the economy just as prior eras of the web did. And so, I think that's a useful framework to use when thinking about it.

Michael Hainsworth:
So much to dig into here, what do you say, we make this a two part series, have you back, talk about the top Web 3 firms, dig deeper into what it means for investors. Work for you?

Alex Tapscott:
Sounds great.

Michael Hainsworth:
So then what would you say the key takeaway for this conversation should be for the listener?

Alex Tapscott:
Well, the key takeaway is that the web and with it the internet are entering a new era. And this transformation comes at a pretty important time because we are on the brink of a new epoch where technology is reimagining everything that is possible. And there's a lot of promise in this future, and there's a lot of peril for people that don't understand or embrace the potential.
And so, what we want to do and what we've always done at the Ninepoint Digital Asset Group is to lead first with education, to help, to guide investors, clients, and others who are curious about this subject along in their journey so that they can understand this potential and they can position themselves for that future. And we hope that this new strategy gives them easy and simple way to do that, and we look forward to continuing on in that vein.