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Meet an Investor: Castle Island Ventures’ Founding Partner Matthew Walsh

Signs are starting to appear that the blockchain industry could be emerging from another “winter” of depressed crypto prices and negative headlines. Despite negative press surrounding the FTX trial, the industry has won some key legal cases against U.S. regulators of late, and major financial institutions are trying to make it easier to invest in the industry through so-called Bitcoin ETF instruments.

There are few people better qualified to discuss crypto’s moment than Matthew Walsh, the founding partner of Castle Island Ventures – a Boston-area VC firm that focuses exclusively on public blockchains. In this wide-ranging interview, Matthew discusses why he got into crypto in the first place, his outlook on the sector, and the blockchain technologies that are attracting his attention.

SB: What attracted you to blockchain technology, and why the continued focus there?

MW: I was working at Fidelity and started to look at blockchain through the lens of it cutting out middlemen in certain transactions. I saw this could make transactions more efficient, and then went down the proverbial rabbit hole, and started to become familiar with Bitcoin and some of the differences between that and other platforms. So for me, it was really the financial services angle that initially got me excited.

SB: And given all that’s occurred over the past year – FTX and SEC crackdowns, as well as the progress in the space – how do you see 2023 shaping up, and what are your views for the coming year?

MW: Not surprisingly, there's been an increased focus on regulation, and I think that will be a great thing for a lot of the good actors in the blockchain space. So you finally have pretty comprehensive cryptocurrency/blockchain bills that are working their way through Congress right now. One is a market structure bill that would really drive regulatory clarity in terms of what it takes to operate a blockchain infrastructure company in the United States, especially if you're a bank or a broker dealer. And the other offers stablecoin regulation.

It would be the first time there's ever been blockchain-specific regulation at a federal level. And so I think that'll be the story certainly throughout the end of this year into next. Just where do those bills end up? Do they get through? Even the fact that they're being discussed right now is very bullish for the industry.

SB: And with all the talk of launching Bitcoin ETFs, do you think that those moves will make Bitcoin and other cryptocurrencies more widely accepted?

MW: The fact that Fidelity and BlackRock have applied for a Bitcoin ETF is very telling in terms of institutional interest in Bitcoin as an asset class. The facts and circumstances certainly merit that being approved. And certainly the fact that two of the largest institutions in the world applied for it tells you that their customers are really interested. That will have a meaningful impact on the market.

SB: And as far as Castle Island Ventures goes, how are you adapting your investment to meet changes in the market?

MW: We've been really consistent. We invest in early stage companies at the pre-seed, seed and series A stages. We do a lot of investing in the infrastructure categories. So things that would benefit financial services firms such as custody software, exchange technology, data companies and things like that. To us, having more BlackRocks and Fidelity’s enter this market is a very good thing for startups in our portfolio who are, generally speaking, selling things to companies like that.

SB: Do you subscribe to this notion that, after the hype of the NFTs last year and the start of the crypto winter, people are more focused now on the underlying infrastructure that will build out this ecosystem for web3 and crypto?

MW: I would agree with that. In the blockchain space, you go through eras of hype cycles. So in 2015 you had this big hype cycle around Bitcoin forks and altcoins, and a lot of those things petered out. But out of that came Ethereum.

And then in 2017, you had this big ICO [initial coin offering] phase, where a lot of scam coins got introduced and 99% of those went away. But there was enduring value in some of those projects that persist to this day.

And I think the same thing will happen in this cycle, where we had a swath of bad behavior in the market, FTX being the most notable. But really underneath that you have a lot of institutions that are really building real-world use cases for blockchain. Unfortunately it was a tough cycle for a lot of folks. But I think you'll have some real builders coming out of this.

SB: Do you see any scenario where blockchain can ride the AI wave, or is there any intersection between the two technologies that could take off right now?

MW: One thing that we think about a lot is, if you strip out all of the buzz, what is a blockchain? It's a notary system that anyone in the world can use; it’s permissionless. And it strikes me that there are a lot of things in the realm of artificial intelligence where you need to authenticate whether a model input is real, or who actually owns the underlying intellectual property that goes into a model. It might not be the most glamorous use case in the world, but I think a blockchain could be a really interesting use case as a timestamp and a property record for things that go into the AI models,

SB: Any other technologies that interest you right now, or new technologies that are on your radar?

MW: Within the context of blockchain, I'd say the two biggest things going on right now from a technical perspective are scalability and privacy. And so if you think about where we are in the blockchain space, it's probably similar to where the Internet was in 1993, in the dial-up, pre Internet Explorer Netscape type of moment. And there's a lot of work going on in scaling these blockchains and a lot of different approaches. I'd say there's probably a lot of debate in the community around the best way to scale these things.

And then the other thing is privacy. One of the drawbacks to some of these blockchains is that every transaction is fully visible on the chain. You wouldn't want that at scale for every sort of transaction. So some of the zero knowledge cryptography that's being introduced right now is really promising.

About the author: Randall Woods is a former editor at Bloomberg News and currently is a Senior Vice President at SBS Comms, a communications agency for technology companies and startups.

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