Just six months ago, the cryptocurrency industry was riding high. Celebrity endorsers from Matt Damon to Tom Brady to Reese Witherspoon were hawking all manner of crypto vehicles to millions of eager retail investors. As crypto soared, the message was clear: The future has arrived. Get in now to enjoy the ride. You’re a sucker if you wait. Since then, prices have crashed in a seasonal cataclysm widely dubbed “crypto winter.” Billions in value have been wiped out, both by the market’s performance and in a series of high-profile hacks. As for the celebrity endorsers? They have all fled the scene. From the ashes of this boom-and-bust cycle, the crypto industry hopes to gear up for a new era, undaunted, if a bit more mindful of its mistakes. And San Francisco — never one to miss out on a gold rush — wants to play a central role in the evolution.
A wave of new crypto companies are striving to not only strike it rich, but succeed in building out Web3, a wholly new iteration of the internet in line with their values, a spectacular gamble already costing billions in investment. But whether San Francisco will continue to play a leading role is — like the future of crypto itself — clouded by uncertainty.
As the city struggles to regain its vitality after the pandemic and struggles with homelessness, perceptions of rampant crime and high costs, some crypto innovators feel its time has come and gone.
CRYPTO CITY
Last year San Francisco lost the nation’s largest crypto company, the digital asset exchange Coinbase. The company closed its downtown office and declared its headquarters as “global” to ensure that no area of the company’s operations could be considered its HQ, a move emblematic of crypto’s decentralizing mission. Perhaps not coincidentally, the move also put Coinbase beyond the reach of San Francisco’s administrative office tax on large corporate headquarters, levied on companies with 1,000 worldwide employees, $1 billion in revenue and half their San Francisco payroll tied to headquarters functions.
A year later, another large crypto exchange, Kraken, left the city on more contentious terms, with its CEO Jesse Powell citing crime, homelessness and the leniency of the city’s former DA Chesa Boudin as reasons for the departure.
Other companies are moving to emerging crypto hubs like Austin and Miami.
“We used to be in California, like three years ago, but over the last year, we all pretty much ended up moving to Miami,” said Varun Kumar, founder and CEO of Hashflow, a decentralized finance company offering complex financial products to crypto traders. He spoke with me from the airport, hopping between Berlin, Singapore and Colombia.
“I think all the crypto scene is slowly migrating. We like to say that the internet is the new Silicon Valley. And that especially applies to the crypto scene, where Web3 is very decentralizing and pretty much everyone from anywhere can contribute to the system.”
Miami has heavily courted crypto companies, with its Mayor Francis Suarez putting city money into MiamiCoin, which has since lost most of its value. In New York, Mayor Eric Adams vowed to convert his early paychecks to Bitcoin, a symbolic move to appeal to the industry. Mayor London Breed, on the other hand, has stayed rather mum on the subject of cryptocurrency. San Francisco also lacks high-profile industry events at the level of Miami’s Bitcoin Conference or NYC NFT.
Despite such lack of visible hype and a couple of high-profile departures, dozens of major crypto companies continue to maintain office space in San Francisco, and the Bay Area still receives a plurality of VC funding. A report by CB Insight showed that 28% of all funding to crypto and Web3 companies went to startups in the San Francisco Bay Area ($973 million) in the first half of this year, compared with 20% ($678 million) in New York City and 4% ($141 million) in Miami. A majority of all crypto funding globally, 57%, went to Web3 companies specifically, those with the perhaps quixotic ambitions of building a new decentralized version of the web on top of the old one.
‘WAIT AND SEE’
Where Web 2.0 saw the growth of companies such as Facebook, Twitter and Google at the center of how information was shared online, Web3 wants to decentralize it.
And that’s where a new third wave of crypto companies are emerging, seeking to answer inherent challenges in predecessors such as Bitcoin and ethereum.
Take, for instance, Solana, founded in 2018 and still based in San Francisco along with its co-founders.
“Both of us live here, we’re not going anywhere, and I think the space that we have here is all about the ecosystem,” said Raj Gokal, co-founder of Solana. “And I can’t think of a better place in the West Coast, PST timezone, for people to come together in person than San Francisco.”
Using programmable currencies and public ledgers of transactions, Solana and other Web3 firms are building ecosystems of apps that allow users to earn and transact value through online communities and exchanges. The Solana blockchain essentially sacrifices some decentralization to make the network more energy efficient and scalable.
To build out this ecosystem, Solana is leveraging the local community. It allows smaller companies building on Solana to use its office space in the financial district, and hosts a hackathon every quarter.
Gokal says he hopes hiring freezes and layoffs at some of the major tech corporations in the area will drive developers and entrepreneurs into building in the crypto space.
“That’s another reason to have a presence here in the Bay Area,” he said. “There’s a tremendous amount of people moving from big, established tech giants, looking for their next career move, looking for something new.”
Web3 has given developers a new sense of purpose, he says, especially for those that feel underutilized at traditional tech companies like Google and Facebook and simply improving upon stale technologies. Web3 gives these workers a chance to build something with the potential to be groundbreaking.
Just around the block from the Solana office, is the mostly empty office of Magic Eden, a rising star on the Solana ecosystem that managed to raise $130 million this June right in the wake of the industry’s crash, a sign there is still hope for crypto companies to make deals in a bear market and amid widespread uncertainty of the sector’s future. The company operates a marketplace for NFTs, essentially certificates of authenticity for digital goods that are logged on the blockchain.
“We definitely feel that we need presence in the Bay Area, like most of the talent still here,” said Sidney Zhang, co-founder and CTO of Magic Eden. “However, a lot of people are in this wait-and-see period of whether or not to leave the city, to see if this post-pandemic remote work thing is for real. A lot of people I know want to move out.”
A few blocks away at a co-working office in the Ferry Building, another company is building a rival Web3 app ecosystem. Skale is setting out to solve a similar problem as Solana — scalability — but building it on top of the ethereum blockchain. The company also hosts a number of apps from third-party developers it supports by doling out cash from a $100 million grant funding partnership.
“The projects and builders in San Francisco are focused on creating the infrastructure for the next internet,” said Jack O’Holleran, CEO of Skale. “You’ll see and I think a lot of the highly speculative and over-leveraged financial components of the industry were happening in different cities. And happening, I think also with people behind those projects more focused on getting returns than they were on sustainable value and growth.”
RISK ASSESSMENT
Not everyone in the Bay Area sees the rose-colored tint in the Web3 future. Many say the project will fail to attract end users to applications that are currently cumbersome and difficult to even begin using for the uninitiated.
Nicolas Weaver, a researcher at the International Computer Science Institute at UC Berkeley, posits that the underlying technology of cryptocurrencies is flawed and the massive organizational endeavor will end in catastrophic failure.
“A ‘blockchain’ is a fancy name for ‘append only data structure,’” he said. “If you said, ‘Finance is going to be revolutionized by a public Google Sheets document where you can only add 3-7 entries per second,’ you’d be laughed out, but that is what Bitcoin produces.”
Weaver contends that blockchain has yet to find a compelling use case that would make it superior to traditional financial products and is “an attempt to disguise securities fraud or other financial shenanigans with a veneer of technobabble.”
“In the past six months, the amount of cash in Coinbase accounts has dropped from $10B to $7B, and the amount of cryptocurrency value from $270B to $90B,” he said in an email. “[The market] is going to collapse slow then quick.”
Prominent tech CEOs from the Web 2.0 era are joining in on the critique. Aaron Levie, CEO of San Francisco-based fintech Box, has made a very public case against Web3 public on social media, podcasts and media interviews.
“I think there’s wild overpromising going on, and oversimplification of why the web works the way it does today,” Levie wrote on Twitter. “I wouldn’t normally care but (1) we’re dealing with real peoples money now given tokens, and (2) I think this is a net worse vision for users in practice.”
THE FUNDING MUST GO ON
The future of Web3 and crypto represent a massive bet for Silicon Valley investors who, critics be damned, are pouring billions into the sector. Globally crypto companies raised $6.5 billion in funding the second quarter of 2022, down 29% from the quarter before, according to CB Insights. Despite the cooldown funding for the first half of the year, $15.7 billion was significantly higher than the same period the quarter before $9.2 billion.
Despite a slowdown in deals, fresh funds are continuing to be raised.
In June, fresh off the crash, Andreessen Horowitz’s Crypto fund raised $4.5 billion in a bid to snap up investment deals on the cheap.
Menlo Park-based Pantera Capital, another large blockchain-focused VC, says it has raised a $1.3 billion blockchain-focused fund this year on top of a $600 million fund the year before.
“Give it another few months, and, maybe there’s going to be a bit of stabilization, or more of an uptick in the global macro environment,” said Paul Veradittakit, a partner at Pantera. “I think we’re starting to see some valuations reset on the Series A and Series B level, and I think, especially at the seed stage valuations, reset, then I think we’ll start seeing a lot more capital come in.”
Ben McMillan, CIO of crypto analyst firm IDX Digital Assets, says the crypto industry is in an awkward liminal phase similar to the aftermath of the dot-com bubble, where a swath of unviable companies built on faulty premises were wiped out setting the stage for a more mature tech sector to rise from the ashes.
“I just gave a presentation to potential institutional investors a couple of weeks ago, where I showed the Pets.com Super Bowl commercial example, at the peak of the market in the early 2000s, and then, sure enough, we saw the famous Crypto.com Matt Damon Super Bowl commercial years later,” he said. “But among institutional investors looking past the hype, five to 10 years out, I think they’re starting to see blockchain as a transformational technology.”
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