Blockchain: the real subject is the tokenization of assets

For Jonathan Piskorowski of BNY Mellon Investment Management, the appeal of blockchain technology goes far beyond cryptocurrencies.

The possibilities offered by so-called blockchain technology are constantly expanding to various applications Update with Jonathan Piskorowski who is lead portfolio manager for the Blockchain Innovation strategy at Newton Investment Management, a company that makes part of BNY Mellon Investment Management.

You invest through your fund in companies that are active in different areas of activity such as financial services, life sciences, supply chain management or traceability in the food industry and others. Among the various applications of blockchain technology, which sectors do you focus on in particular?

Regarding the investment universe in which we operate, it must first be emphasized that the use of the blockchain is not limited to its best-known applications such as cryptocurrencies or non-fungible tokens, or NFTs. The use of blockchain technology is much broader than that – and it keeps growing. A parallel can be drawn between the developments related to the Internet in the late 1990s and those of blockchain technology: today, blockchain-related applications are emerging across all industries and sectors in order to improve the speed, security and transparency of a wide variety of business processes.

How do you choose companies that have a blockchain connection?

When the fund was set up three years ago, our investment universe consisted of around fifty companies. Currently, our investment universe consists of around 200 companies. And the number of opportunities in this field continues to grow – we regularly add a new company to this universe.

Institutional investors need to be able to show that they are placing their money in a regulated area before they can invest, regardless of whether or not they are convinced of the theme.

By sector, we focus in particular on three or four areas of adoption of this technology. First, there is the use of blockchain in connection with the financial system. Blockchain technology can be used to improve financial services in a number of ways – not just in relation to cryptocurrencies but also to improve the speed, security and costs of performing certain transactions, for example when managing settlement-delivery transactions. We can also mention the management of cross-border payments, operations that are often still very complicated today, expensive and resource-intensive. This is also the case for other types of services such as check-in procedures at airports. In short, there are a multitude of areas where the use of blockchain technology still holds enormous potential.

A second important area is that of health. There are a multitude of possible applications for the blockchain here, for example for tracking, sharing and documenting patient records in a secure way.

Third key application area: asset tokenization, i.e. the ability to convert all kinds of assets into digital tokens, regardless of whether they are physical or digital assets. Here, too, NFTs certainly garner the most public attention, but they are not the key opportunity in this area. The real subject is the tokenization of assets, because it makes it possible to provide liquidity even in assets that are basically very illiquid. From real estate to artwork, tokenization allows a digital token to be assigned to a given asset, which then facilitates its transmission over a blockchain-based network. Once you manage to tokenize assets, it then becomes much easier to transfer them from one owner to another. That’s the real issue.

How are regulators reacting to these developments – won’t they want to regulate them more?

Of course, regulators are not going to sit idly by – regulation will increase sooner or later. But it’s also a good thing for us. Indeed, institutional investors need to be able to show that they are placing their money in a regulated area before they can invest, regardless of whether or not they are convinced of the theme. Regulators make their decisions based on two criteria: on the one hand, there are the benefits that an innovation brings to investors; on the other, there is the need to protect investors. Personally, I think that increased regulation of the various activities related to the blockchain is rather favorable for the companies that we hold in our portfolio. Without such regulation, it would be difficult to attract new investors, especially when it comes to institutionals that have taken a cautious approach to investing in digital assets.

We have developed our own proprietary scoring system that determines how material a company is to the blockchain theme.

I think we’re very lucky to have the private markets team at Newton Investment Management because there’s so much blockchain innovation happening in private markets. The insights we gain from the private market team help us make more informed investment decisions. Secondly, our knowledge of private market positions is critical as these companies will eventually go public or be acquired by public companies that feature in our thematic investment universe.

How do you define whether a company is sufficiently involved in blockchain technologies or not – is there a specific blockchain-related revenue threshold?

We have developed our own proprietary scoring system that determines how material a company is to the blockchain theme. Our job is to verify the relevance of this score for each company, then assess how much impact blockchain will have on its revenue, cost structure, operational efficiency or sustainability efforts and according to ESG criteria.

Don’t some companies tend to want to overstate the importance of blockchain in their business model, in order to make themselves more attractive to investors?

It’s happened a few times but not very often. Our extensive theme research platform at Newton constantly tests how significant that theme is to a business rather than taking management at their word.

In one case, an Asian company was looking to highlight this aspect, without the blockchain being really that important for its business model.

There is something truly unique about bitcoin – it is a very special “animal” in the sense that its value depends on what its holder wants to use it for.

How do you rate the defensiveness of cryptocurrency investments in times of crisis or financial market turbulence?

I think we have to distinguish between Bitcoin, on the one hand, and other cryptocurrencies, on the other. There is something truly unique about bitcoin – it is a very special “animal” in the sense that its value depends on what its holder wants to use it for. For some of them it is a means of payment, for others it can be a way of storing value. Other cryptocurrencies are often more suited to a more specific functional use, as is the case with Ether, which is used to facilitate transactions on decentralized finance (DeFi) platforms.

How do you assess the potential of cryptocurrencies for institutional investors – will they maintain a niche position or take a bigger role in their asset allocation going forward?

As already mentioned before, the evolution of regulation will in my opinion play a very important role for the adoption of cryptocurrencies by institutional investors. The engagement of individuals in the cryptocurrency markets is quite broad at this point – there are a wide variety of platforms that allow the individual to invest in this space. For a pension fund or endowment that manages the assets of a university, the situation is a little more complicated, as these institutions must consider the impact that the inclusion of digital assets will have in the context. of their larger wallets. Overall, institutional interest in this theme is growing and I expect more money to be allocated not only to cryptocurrencies but also to blockchain-related opportunities, both in public and private markets. .

At the beginning of April, Helveteq, a Swiss investment boutique, and the University of Zurich announced that they wanted to offer a carbon-neutral investment product in the field of crypto-assets. How do you integrate the dimension of energy consumption into your investment decision related to blockchain and cryptocurrencies?

The BNY Mellon Blockchain Innovation Fund invests in public companies that facilitate or adopt blockchain technology, but this fund does not invest money directly in cryptocurrencies. Blockchain applications are migrating to so-called proof-of-stake applications from energy-intensive proof-of-work mechanisms, which largely mitigates the environmental impact for transactions executed on the blockchain. Newton’s equity research analysts, portfolio managers and responsible investment team assess energy use as part of ESG analysis, which takes place before a company is added to the portfolio . It is an integral part of the investment process throughout society.

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Blockchain: the real subject is the tokenization of assets

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