Dhe crypto industry and blockchain technology are inextricably linked. For many, bitcoin, blockchain, and cryptocurrencies are almost synonymous. But this far-reaching equation ignores the nature of the matter. “Cryptocurrencies are just one example of blockchain usage,” says Jon Piskorowski.
Because the blockchain is just an encryption technology that can be used in many ways, including in the financial industry. The transfer of value using cryptocurrencies is just one of the possibilities, clarifies the lead portfolio manager of the BNY Mellon Blockchain Innovation Fund. This has attracted much speculation in the past, and much like the internet once did, the industry has now gone from explosion to crash.
“What hasn’t worked in the real world is the dream of democratizing finance,” he adds, referring to tendencies toward empowerment in ostensibly decentralized systems. That is why clear regulation is needed, and the institutions in the financial sector are currently waiting for that. “In the end, the central question is: How important is crypto for the large financial institutions?” A lot will still change: the focus of Bitcoin or the role of crypto exchanges such as Coinbase, which could develop into financial service providers. “What many are still missing is a scenario beyond cryptocurrencies. Who needs 10,000 of them anyway?” The crash of the crypto world was ultimately inevitable – because “there was no adult in the room”. But in the long term, the crash is an advantage in terms of a cleanup, as cryptocurrencies could bring advantages in a well-regulated framework, even if the goal has not yet been reached. “Cryptocurrencies can make payments easier. All information on the blockchain is reliable and accurate and cannot be changed. Ultimately, this enables fully traceable payment channels, so that with an appropriate framework in place, this would be an opportunity to end the money laundering cycle,” says Piskorowski.
A spectacular fall
An example of use from the financial industry that is said to have great potential is the tokenization of assets, i.e. their legal division into small units, which makes ownership of illiquid assets possible even for smaller wallets. This is still largely limited to the private markets, such as real estate, vintage cars or other things, but can actually be used for everything. “The problem here, too, is regulation. The financial service providers want to see the result. And so there is no marketplace – basically the problem of chicken and egg once again,” says Piskorowski. But there is progress. There are tests in the bond market, and the Australian stock exchange, for example, is currently in the process of replacing its trading system from ancient computer times with a new one based on blockchain.
Industrial uses are often overlooked. One example is the Aura consortium, which the French luxury goods group LVMH founded together with other companies. This is developing blockchain applications, including digital ID cards for bags, to make them counterfeit-proof. The consumer goods industry in particular is well advanced, says Piskorowski. But SAP has also been working on a blockchain application for years. “Many projects are in the initial phase,” admits Piskorowski. “It’s just an early stage technology where we make early investments. However, the potential is immense. According to our estimate, by the year 2030 there will be an added value of 2.6 trillion dollars. Blockchain technology gives more control over information and makes it possible to share this information more securely and in a more targeted manner. We aim to identify true opportunities and provide investors with early access.”
He has identified the shipping company Maersk, which can track its containers in real time via blockchain, as one such opportunity. Alongside SAP and the Australian Stock Exchange, Maersk is also one of the fund’s largest holdings. The company is currently in the process of reducing its weighting in stocks that have been the focus of public interest in the past. For example, the crypto bank Silvergate, which was still weighted at 7 percent in the fund at the end of April, is currently no longer among the ten largest positions, which means that the weight has been reduced by at least half.
Overall, the weighting of financial stocks and software stocks in the fund has fallen significantly. Unsurprisingly, the fund’s performance reflects the crypto industry’s phenomenal success as well as its spectacular decline. The share value of the fund launched in 2019 rose two and a half times from the Corona crisis to last November and then collapsed by more than half by mid-June. With the cryptocurrencies, the price has stabilized somewhat since then. The volatility over three years is therefore very high at almost 30 percent.
