At the same time as he decamped for Singapore, Carnegie went from crypto sceptic to high-profile cheerleader. He became Australia’s most forceful advocate for a national cryptocurrency strategy. He accused regulators of lacking the vision to understand this financial innovation, and claimed every Australian saver had lost out because of “the collective decision of their [fund] managers to thumb-suck – like me – on an emerging asset class”.
Carnegie speaks with the wild intensity of a man determined to change the world, and with the self-awareness of how outlandish his predictions are.
“I sound like some kind of utopian here or some religious convert,” he admits. Central to his message is that distributed-ledger technology – the technical term for blockchains – is “unequivocally” a significant and positive force for society. “This is an opportunity to take back control from monopolists,” he says.
If the government legalises exchange trading by the end of this financial year, Carnegie promises to hold a party for the entire industry at Bondi Icebergs. Franz Navarrete
It’s a technology that will break the power of tech oligopolies and empower citizen democracy. It might even stop 12-year-old girls being sold into marriage in Barotseland, an unrecognised African kingdom near where Carnegie almost died.
A lot of wealth could be up for grabs
When it comes to the blockchain, many have promised much. The technological blueprint behind bitcoin and other cryptocurrencies is, they say, a much-needed hedge against inflation. It can make global finance fairer. It can guarantee contracts, improve commercial trust, curb the power of social networks, protect private property, online privacy and human rights, and – this is the important bit – generate a lot of wealth.
We’re talking 5 per cent to 10 per cent of the global economy. Wealth beyond Apple, Amazon, Facebook and Google. If Carnegie and others are right, the forces unleashed will be as economically powerful as the steam engine, railways, electricity and the personal computer. Society will be richer, fairer, better.
The economic exploitation of blockchain-dependent commerce is known as Web 3.0 (or Web3), the latest iteration of digital development. Web 1.0 began with the first web page in 1991, which inspired static websites that made information accessible to anyone with a modem. Web 2.0 marked the rise of social media, which led to the exploitation of our most personal details by tech giants.
We’re not more than 10 per cent into the next phase, Web 3.0, according to Carnegie. Its potential is unclear and unrealised. Carnegie tries to explain it, but I struggle to understand. He sends me links to podcasts, which are fascinating but so conceptual that it is difficult to nail down what they’re talking about.
At its most simple level, Web 3.0 means an online system that is free from governments and where everything can be done without the need of big tech or, when it comes to moving money, the banks.
It encapsulates a world where traders can create “smart contracts” that automatically transfer funds as soon as whatever is being traded hits a given price. Artists can sell digital artworks as non-fungible tokens (NFTs), and can set the terms of the sale so that they automatically receive a royalty each time their artwork is resold.
There was a particularly creative use for the blockchain in 2020 when a 23-year-old Frenchman, Alex Masmej, “tokenised” himself, raising $US20,000 from investors who in turn get to vote on his life choices and ultimately share in whatever income he earns.
It’s an idea that some believe could create a new business model for tomorrow’s celebrities. Instead of signing to a record label, an up-and-coming singer could raise funds directly from fans who would, in turn, own a sliver of all the income they later make.
“If you’re creative in Web 2.0 you are a serf,” Carnegie says. “You can’t own the product of your own labour because you have to deal with monopolists like Facebook and Snap. The economic balance of power is profoundly unfair. It’s not like that for the creators in Web 3.0. You will find those fans. They will want to have a one-to-one connection with you. This is an opportunity for interest groups to take back control from monopolists. Web 3.0 is why I am full-time employed again.”
A radical path
I admit to Carnegie I’m not a believer. In late 2019, I wrote two sceptical articles about a Perth blockchain start-up that promised to revolutionise electricity trading, Power Ledger. The co-owner, Jemma Green, sued for defamation and won, even though Power Ledger didn’t make any operating profits in the first five years of its existence, and doesn’t predict any in the next three. The joke seemed to be on me.
Carnegie is sympathetic. His faith isn’t unconditional. He tells investors to limit investments in crypto assets to 5 per cent of their portfolios. “The truth is, it’s a bubble,” he says. “These things are insanely overpriced. Do not hear my evangelism as a recommendation to go beyond a modest allocation of your savings.“
At the same time, he argues blockchain technology is a force for good. He invokes the leading figure of modern economic development, Muhammad Yunus. The social entrepreneur’s Grameen Bank pioneered microfinance in 1983, lending small amounts to impoverished Bangladeshi women, who proved to be more reliable creditors than many would-be billionaires.
Blockchain technology offers a modern equivalent, Carnegie argues. He later emails me with advice for any young entrepreneurs who want to follow him. “Realise this is far more about your labour than your capital,” he says. “You spend two to three hours a day on social media, and you are a slave to the monoliths. Take your time back and invest in finding your 1000 true fans in Web 3.0.“
Just like the women who received Grameen’s microloans to buy a cow and create an income stream for their family, a disintermediated finance system allows people to raise capital, borrow money and transact with customers, all on their terms. “The Web 3.0 economy is not resource constrained,” Carnegie says. “What is determined to be valuable is going to be determined by the strength of the various communities during the hard times coming.”
It is a radical path for a man raised among Australia’s business establishment. Carnegie’s father, Roderick, founded the McKinsey & Co consulting business in Australia, and became managing director of CRA, now Rio Tinto, in 1974. A sister-in-law, Maile, runs technology at the ANZ Banking Group. Brother James is the local representative of Blackstone US private equity group.
Carnegie himself has a science degree from Melbourne University, studied jurisprudence at Oxford, entered the world of private equity, and went into business with John Wylie and John Singleton. Neither relationship ended well. Wylie, who also runs an unconventional investment firm, Tanarra, last month described cryptocurrencies as a classic late-stage excess that depends “almost entirely on a pass-the-parcel investor mindset and the maintenance of collective investor belief”. Ouch.
Carnegie at the Ritz-Carlton Singapore. Franz Navarrete
Ten years ago, when Carnegie turned 50, he began hosting dinner parties to discuss great works of literature to broaden himself intellectually. The final book club was held last year at Sydney’s National Art School, where 200 guests took part in a Middle Ages-inspired banquet.
Young actors performed scenes from Romeo and Juliet. Carnegie’s oldest friend, Melbourne philosopher and teacher Robert Leach, led a discussion of the play’s merits. “I’ve been fortunate in life,” he told the room, “and I’d like to share some of that good fortune.“
Betting on bitcoin
Carnegie and his Russian-Australian business partner, Sergei Sergienko, own a nascent crypto investment bank, MHC Digital Finance. Last year they created two investment funds to buy shares in Web 3.0 companies. They hold bitcoin and other cryptocurrencies for investors to ensure they aren’t stolen.
They’re working on a quasi-crypto stock exchange, known as an over-the-counter market, for institutional investors. The Digital Asset Fund, which started with private investments by Carnegie and Sergienko, uses futures and options to bet on the price of bitcoin and other cryptocurrencies.
“We can give you 70 per cent of the upside and 40 per cent of the downside,” Carnegie says. Its assets include a stake – he says it’s worth several hundred million dollars – in Crypto Gaming United, which provides credit to players in a play-to-earn computer game called Axie Infinity.
It’s insanely popular across south-east Asia, where people use it to learn English while earning crypto. To the outsider it looks a bit like Pokémon, but to Carnegie it’s a workforce management and microlending business.
“People want work, they will respond to any jobs that can be done on a shitty smartphone with poor Wi-Fi. The question is what are those jobs going to be?“
Their Market Neutral Strategy Fund exploits gaps in cryptocurrency prices created by amateur traders to make money whether bitcoin prices rise or fall. They claim returns of at least 15 per cent even if prices fall. Last November, the price of bitcoin hit almost $88,000, although at the time of print it was bouncing around $61,000.
If bitcoin is a bubble, it’s not alone, according to Carnegie. “So are the fintech stocks and all the tech stocks,” he says, “and so is Australian real estate. All those bubbles got inflated simultaneously by governments. Because we recovered from the 2008 financial bubble, people think there is no downside. They’re wrong.”
Young Rich Lister Sergei Sergienko: Driven by a fierce desire to make money. Dominic Lorrimer
His danger scenario starts with rising inflation, which pushes the yield on 10-year US Treasuries from 1.5 per cent to 6.5 per cent. The value of future income falls, pulling share prices down. Higher interest rates push up borrowing costs, causing home buyers to pull back on the size of mortgages, which in turn drives down property prices.
From October 2020 to November last year, Carnegie and his lawyers tried to convince authorities to let him list a cryptocurrency fund on the Australian Securities Exchange. The laws weren’t suitable. The tax system wasn’t ready. Scammers and “pond scum” needed to be chased out.
He watched Singapore, Dubai and Switzerland do what advanced-but-insular Australia would not. The political process couldn’t keep up with his ambition. “Until sensible regulation comes, the level of bad behaviour in this sector will be out of control as the most vulnerable are currently the least protected,” he says.
NSW Liberal senator Andrew Bragg, who spent much of last year developing a crypto policy blueprint, was sympathetic. “I thought what he was seeking to do was reasonable in a developed financial system and economy like Australia,” Bragg says. “As you know, we can be sluggish to move on laws and policies that would improve our competitiveness.”
Unable to bend the institutions of state to his will, Carnegie agreed in December to sell half of MHC Digital Finance to a small Singapore investment fund, Intraco, for shares and cash worth as much as $50 million. The payment will be split with Sergienko, whose eventful life mirrors, in some ways, the wildness of the crypto industry.
After his family fled a mafia-controlled Russian steel town in 1996, the Sergienkos settled in Western Sydney as almost-refugees. A man with a bad haircut, thick accent and no financial training, Sergienko was driven by a fierce desire to make money. He ran brothels, took part in a Russian reality TV show called Secret Millionaire and lost millions in a Russian Ponzi scheme. Last year, he debuted on the Financial Review’s Young Rich List at No. 60 with an estimated wealth of $97 million.
Munger is a hero to Carnegie
Completion of the sale to the Singaporeans will depend on Carnegie and Sergienko’s success in investments so unconventional that some sophisticated investors reckon they’re a blight on humanity, including Warren Buffett’s business partner, Charlie Munger.
In May, Munger described bitcoin as disgusting and “contrary to the interests of civilisation”. “I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth,” said Munger. “Nor do I like just shuffling out of your extra billions and billions of dollars to somebody who just invented a new financial product out of thin air.”
Munger is a hero to Carnegie. And he doesn’t entirely disagree with the veteran investor. Bitcoin, he says, is a distraction and “I wish it died tonight”. But the story is bigger. “Munger’s comments about bitcoin and those dedicated to trading ‘shitcoins’ are fair and accurate but massively incomplete about what is happening in the Web 3.0 ecosystem,” he says.
Charlie Munger has described bitcoin as disgusting. Getty
To explain his point, Carnegie moves the conversation to Barotseland, a region straddling Namibia, Botswana, Zimbabwe, Zambia and Angola. Carnegie got to know the area through buffalo hunting in Zambia, a sport he is reluctant to discuss despite a belief it helps indigenous communities and is more ethical than industrial animal farms.
“Most of the foreigners who hunt in Africa are genuine f—wits,” he says. “It’s so fraught, and the people you are defending are such pigs.”
In western Zambia, Carnegie was introduced by a friend to the ugly economics of African families. In a patriarchal society, boys are valued for their labour, girls for dowries.
“You have these bright and talented young women who are stuck in situations where their value to their fathers is really the bride price, which is three to five cows,” he says. “The mum would want the kid to stay in school. The father’s got status and capital from selling the kid at 12 years old.”
For $1000, girls’ marriages could be delayed four years, or maybe even eight. The extra education would have a huge impact on their lives. Finding the capital isn’t hard. Africa is awash with public and private donations. The problem is a matter of trust. Donors have no way of enforcing a do-not-marry-off-your-daughter contract.
Developing world courts aren’t reliable. The blockchain, says Carnegie, can allow a charity in London to strike a deal with a west Zambian farmer that pays him bitcoin on his daughter’s birthdays if she’s not married. Enforcement of agreements – one of the greatest problems in economic development – can be automated. “The promise of crypto is you create trust in a trustless situation,” Carnegie says.
The blockchain can work at the national level, too. In Argentina, Myanmar, Nigeria, Venezuela and other countries where citizens don’t trust their government, cryptocurrencies are a protection against capricious capital controls. Carnegie has found that nations with the biggest gap between official and black-market exchange rates are the most enthusiastic cryptocurrency buyers.
And that is perhaps the ultimate reason for his enthusiasm: crypto doesn’t just fulfil a basic human need in parts of the planet that are still developing, it can help people protect their fundamental human rights.
‘I couldn’t breathe’
Carnegie embraces danger, physical and financial. He’s kayaked from Scotland to Ireland, gone deep-sea fishing in northern Queensland, and ridden Sumatra’s Kampar River tidal bore. In February, he went on an archeological expedition to Chad and Sudan, countries engaged in perennial civil wars.
Last summer, he was rafting with his oldest daughter, Bella, and two guides on the Zambezi River beneath Victoria Falls. At points where the river was narrow and shallow, rapids bounced the small boat around.
At a treacherous section, they flipped. Usually, capsizing is not a big deal. They were wearing helmets and life jackets, and should have floated to calm water.
Carnegie was caught underwater. His face was pressed against one of the raft’s cushioned seats. “I couldn’t breathe,” he says. “I thought I was going to die.” A guide pulled him out after what Carnegie estimated was five to 15 seconds. He was badly flustered. Apart from the near-drowning, something else was wrong. His body had been pumping so much adrenaline that his heart was beating too fast, a problem known as tachycardia.
“I had no idea what was going on,” he says. “We had to walk out of the valley. I am not feeling great, but I’m not really bad either.”
Carnegie didn’t see a doctor. He was on an African holiday. Six weeks later, during a drinking session in London, he was hit again. His heart began racing. It felt like he was breathing through gauze. He didn’t know if he was dying.
“It was one or two minutes of what-the-f—,” he says.
“I went to see a doctor. He took my pulse and said: ‘You are going straight to the Chelsea and Westminster Hospital.’”
He was diagnosed with atrial fibrillation, a heart irregularity that reduces the organ’s ability to work. Without treatment, blood clots can form in the heart, travel to the brain and trigger strokes. For a man who revels in physical and verbal action, being unable to speak or walk properly would be a cruel ending.
Carnegie submitted to a 2½-hour operation at Sydney’s Royal North Shore Hospital by cardiologist and professor Mark McGuire to toughen his heart. Recovering at an apartment overlooking Bondi Beach, he contemplated the defining question of existence.
“I thought: ‘Oh f—, what am I doing with my life?’”
The answer is crypto. If the government legalises exchange trading by the end of this financial year, Carnegie promises to hold a party for the entire industry at Bondi Icebergs.
The deadline will not be met. Carnegie will probably hold the party anyway, if Australia welcomes his business home. He can’t help himself. Death lasts too long.
- Mark Carnegie will be a guest speaker at the Financial Review’s inaugural Cryptocurrency Summit in Sydney on April 6.
The March Innovation issue of AFR Magazine – plus Machine – is out on Friday, February 25 inside The Australian Financial Review. Follow AFR Mag on Twitter and Instagram.