While most bitcoin and blockchain startups are looking for a killer app to invade the market with, CoinFox asks what enables startups to succeed and what is the role regulation plays in their future.

VC backing and the importance of regulation

While investment is one of the keys to success, it is certainly not a sufficient condition ensuring an enterprise’s long lifespan. This withstanding, 2016 has seen a significant amount of venture capital being invested in crypto and, in particular, in blockchain and bitcoin startups, such as for instance 21 Inc, a mining gadget company known as “bitcoin’s best funded startup” with its more than $121 million of venture capital raised since its launch in 2015.

VC firms such as Digital Currency Group, Blockchain Capital, Pantera Capital, Andreessen Horowitz and Draper Associates have invested a big deal of effort in adding blockchain companies to their portfolios. They have been joined by financial data service companies like Thomson Reuters, for instance, which in 2015 backed Fluent, a financial operating network for global commerce built on the blockchain.

Thomson Reuters’ strategic investment aimed generally at developing blockchain initiatives, but also at exploring potential use cases for the company itself. The so-called ‘answer company’ has recently published a series of posts dedicated to blockchain and its interaction and impact with the legal industry, thus focusing on the relationship between the development of the crypto industry space and existing or future regulations. Authored by a member of Thomson Reuters Legal Joseph Raczynski, the series of posts expressed firm belief in the future mass adoption of cryptocurrency (bitcoin or other) and has argued that “the implications on both the legal world and government legislation will be significant. …The legal industry will play a significant role in further defining cryptocurrencies and how its underlining technology, the blockchain, will be used.”

Adam Draper, the bitcoin venture capitalist at blockchain investment firm Boost VC, which backs 56 companies in the blockchain space, also emphasised the role of regulation and its importance for startups in a recent comment for Bitcoin.com podcast:

A lot of bitcoin people are still anti the system, but for mass adoption, it is going to be really really important for the system to have that regulatory approval. You’ll never go completely around the government. …I love disruption in every industry. If my own industry gets disrupted, I just hope I am on the side of it that’s winning. …But I also see the regulation as a buried entry. If you get through that regulatory approval, that’s something that a lot of startups can’t get through, so really regulation is an opportunity for a lot of people.

Are we Brave?

The role of regulation in relation to possible use cases of bitcoin has been painfully dominant in the development of an otherwise promising startup, namely Brave Software, whose founder, President and CEO is no other than the former CEO of Mozilla Brendan Eich.

Introducing Brave’s browser which features a built-in ad blocker, Eich wrote that “the Web is always in trouble for some reason or other. …I contend that the threat we face is ancient and, at bottom, human. Some call it advertising, others privacy. I view it as the Principal-Agent conflict of interest woven into the fabric of the Web. …At Brave, we’re building a solution designed to avert war and give users the fair deal they deserve for coming to the Web to browse and contribute.”

On 20 January 2016, Brave released the 0.7 developer version of their browser. Its objective is to provide browsing speed as fast as possible, user privacy protection and to integrate and enable micropayments. To achieve the latter Brave will provide every user with a wallet. This particular feature is being developed in cooperation with BitGo.

Essentially, Brave allows you to choose between three operational modes: first, you can choose to block all ads in your browser, thus experiencing the fastest browser performance and the highest degree of privacy. The ad-free mode is supported by a monthly fee paid in bitcoin and transmitted anonymously to the user’s ten preferred websites. Second, you could choose the default mode of operation in which you would see only ads selected by Brave based on browser-private user data and not on remote tracking, with the page load speed remaining unaffected. The Brave Browser blocks more ads than it replaces and substitutes the replaced ones with allegedly faster and safer ads. Finally, the user can opt to allow both ads and tracking in which case ads will not be substituted by Brave’s selection. A share of the revenue from the ads viewed will be deposited in the user’s wallet and it can be later used to support particular websites chosen by the user through micropayment. Once the micropayments have been executed, the websites will be shown as ad-free.        

On 31 March 2016, Brave announced its Brave Ledger, namely a bitcoin-based micropayments systems to be employed by both users and publishers alike. Its purpose is to transfer the share of ad revenue to those users who choose an ad-inclusive browsing experience. Should the user prefer to spend their earnings to support their favourite sites, they will preserve their anonymity. Should they decide to transfer their revenue to another bitcoin wallet, then, in compliance with existing AML and KYC regulations, their identity must be confirmed, though it will not be connected with their browsing or ad viewing history.

It took only a week after the announcement of Brave Ledger, for Brave Software to encounter resistance in the face of the Newspaper Association of America (NAA). In a press release the non-profit organisation which represents about 2,000 North American newspapers, other print publications and online products such as The New York Times Company and The Washington Post, informed about a letter sent to Brave on 7 April 2016 and signed by 17 NAA member companies in which they notified Brave that “its well-publicized plan to replace publishers' ads on the publishers' own websites and mobile applications with Brave's own advertising is blatantly illegal.”

Your plan to use our content to sell your advertising is indistinguishable from a plan to steal our content to publish on your own website,” states the NAA letter. “Your apparent plan to permit your customers to make Bitcoin “donations” to us, and for you to donate to us some unspecified percentage of revenue you receive from the sale of your ads on our sites, cannot begin to compensate us for the loss of our ability to fund our work by displaying our own advertising. We expressly decline to participate in any way in Brave’s supposed business model. We explicitly reject any compensation or consideration Brave plans to offer to us as part of its ad-blocking and ad replacing scheme, and we refuse to accept any “site wallet” that you propose to create for our supposed benefit.

In an immediate answer published on Brave’s blog, the company defended itself pointing out that it has been “fundamentally misunderstood” by the NAA publishers who would in fact gain more from third-party ads should they choose to cooperate with Brave. The company emphasised that malware has been distributed to users via ads on the New York Times and BBC websites and that this is a threat that could be averted with Brave Browser. Brave has also specified that “web content is published as HTML markup documents with the express intent of not specifying how that content is actually presented to the browser user. Browsers are free to ignore, rearrange, mash-up and otherwise make use of any content from any source.” “Make no mistake,” Brave’s blog post concluded, “this NAA letter is the first shot fired in a war on all ad-blockers, not just on Brave.”

A day after the publication of NAA’s letter Brave released its 0.9 developer version.

Most recently, however, on 26 May 2016, the NAA filed a complaint and request for “investigation of deceptive ad-blocking practices” before the Federal Trade Commission, thus fulfilling Brave’s ‘prediction’ that NAA is ‘waging a war’ on all ad-blockers.

In their complaint, the NAA argued that “adblockers undermine the ability of publishers to continue to provide free or reduced-price content on the Internet because they undercut publishers’ ability to finance enterprise journalism, and they threaten the livelihood of journalists and other content creators. These free-riding technologies are a clear and present danger to an ecosystem that has created a vibrant, content-filled Internet for the American public.”

The NAA has asked the Federal Trade Commission to investigate the two types of practices in particular, namely, the use of “paid whitelisting” by Adblock Plus and a combination of three methods, that is, the substitution of ad-blockers’ own advertising for blocked ads, false claims that subscription services prevent publisher harm and the evasion of metered subscription systems. Brave’s service has been viewed by NAA as falling under the umbrella of the second set of practices mentioned and, in particular, as a deceptive trade practice of ad substitution. In other words, NAA views Brave as an ad-blocker and not as a browser proper. NAA has argued that “ad substitution by ad-blockers implies one of two things to consumers: either (1) the advertisement originated on the publisher’s website by the publisher’s own choosing, or (2) the publishers have consented to the substitution of their placed advertising for new ads sold by Brave. Both representations are false and deceptive to consumers because publishers have not consented to the advertisements that are being used alongside their content.”

What is certainly of interest to the bitcoin community, is the fact that the NAA has paid particular attention to the micropayment option offered by Brave and others:

These services claim that publishers are not harmed by the blocking of their advertising because of these supposed payment systems. But these claims are, in fact, entirely unsubstantiated, given that these ad-blockers destroy millions of dollars in advertising value (and support for free content) and that their owners have made no showing that any payments they may offer to publishers could offset the funds lost to blocked advertising.

Brave’s case did not become central to mainstream bitcoin media. It stirred some discussion on Reddit in May, prompting users to comment on their experience with Brave so far as well as on the publishers’ move against the company. Comments were generally supportive and the feedback on the browser performance positive. User DoUBitcoin commented that “Brave browser is the killer app...it's the best onramp to Bitcoin I've ever seen. This is how Bitcoin goes mainstream! Edit: I can't believe people don't see this. Letting people acquire Bitcoin without having to register and purchase through an exchange is by far the best way to spread Bitcoin use/users.”

The Guardian has also picked the topic up, commenting:

On one level that argument [of the NAA – CoinFox] stood up to scrutiny. On another, however, Brave seemed a very curious target for the newspapers’ collective litigious outrage. Much of the news content appropriated by Brave is also shared and available on platforms such as Apple News and Instant Articles, where the share of revenue generated is a fraction of that offered by Eich’s start-up, a return that diminishes to next to nothing when allied with pervasive ad-blocking software. Eich’s response to the lawsuit reflected his surprise: “Brave is the solution,” he argued, “not the enemy.” He certainly seemed to have a point.

Whether Brave survives this crisis, remains to be seen. The question is, however, still valid: how much of a bitcoin’s startup success depends on compliance with existing (or future) regulation and abilities of its legal team, and are those more important than the potential ‘killer app’ the company is developing?

Diana Bogdan