BlackRock, the largest asset manager in the world with $6.3 trillion in AUM, is reportedly evaluating the crypto-space, according to CEO Larry Fink, who told Reuters that the firm has assembled a working group focused on blockchain technology and digital assets such as Bitcoin.
Mr. Fink said that BlackRock is “a big student of blockchain” but does not see “huge [investor] demand for cryptocurrencies.” This statement contradicts recent remarks from institutions such as Goldman Sachs, which recently announced plans to trade Bitcoin derivatives contracts in response to interest from clients.
Mr. Fink’s emphasis on blockchain over cryptocurrency has been noted in a previous interview with Reuters in November of 2017 just before the cryptocurrency markets reached their all-time high in December.
Speaking about the possibility of a leveraged Bitcoin ETF, Mr. Fink said dismissively, “Those are not the kinds of products we would introduce at BlackRock. Our actions will speak louder than our words.”
These comments were viewed as especially scathing considering that BlackRock has had much success with their aggressive approach to ETFs--in 2016, BlackRock’s iShares ETFs brought in a total of $245 billion.
Despite his firm’s success in the ETF market, Fink has warned about the danger that leveraged ETFs pose. In 2014, he claimed that leveraged ETFs could potentially “blow up the whole industry one day.”
Leveraged ETFs are designed to multiply the daily gains or losses of an underlying asset or bundle of assets by a set factor. For instance, an ETF that tracked the price of gold with triple leverage would provide investors with triple the daily gains or losses in the price of gold. The proposed Bitcoin ETF mentioned above was double leveraged, meaning it would double the digital asset’s gains or losses on any given trading day. Naturally, these exotic financial instruments promise high risk and high reward.
Mr. Fink also told Reuters that he views Bitcoin as a fundamentally speculative investment, and that he believes it thrives due to its pseudonymous nature--neither of which made it appear to be particularly attractive as an investment vehicle. He also noted Bitcoin’s usefulness in money laundering, and said that he doesn’t understand the media’s intense fascination with the virtual currency.
Given Fink’s trepidation about both cryptocurrencies and leveraged ETFs, it only stands to reason that he would be highly skeptical of a leveraged Bitcoin ETF.
Based on these remarks, it appears unlikely that BlackRock will be expanding their portfolio to include cryptocurrencies. However, the firm might be preparing to make moves in the related blockchain sector.
Recently, another financial services giant, Northern Trust, announced that they will be providing fund administration solutions to a select group of hedge funds investing in Bitcoin and Ether.
Northern Trust has previously expressed in interest in using blockchain technology for private equity audits. Since the first quarter of 2018, Northern Trust has been assisting hedge funds by comparing their reported cryptocurrency holdings with the balances on record at the company’s custodian. Northern Trust has also helped these firms value their digital asset holdings as a part of its fund administration services.
Many of Northern Trust’s administrative services were designed for firms dealing with traditional assets such as stocks and bonds, however specific risk control frameworks for anti-money-laundering, asset existence validation, trade reconciliations, and the new net asset valuation arrangements have been developed specifically for funds dealing with cryptocurrency.
Despite the fact that Northern Trust has developed frameworks for dealing with crypto-funds and crypto-custodians, the firm’s President of Corporate and Institutional Services, Pete Cherecwich, told Forbes that Northern Trust is not planning on taking direct custody of digital assets at this time.
Rather, Cherecwich said that helping the company’s clients account for their cryptocurrency holdings is part of a larger effort to prepare for the day when fiat currencies are issued on a blockchain as digital tokens.
He said, “I do believe that governments will ultimately look at digitizing their currencies, and having them trade kind of like a digital token — a token of the U.S. dollar — but the U.S. dollar [would still be] in a vault somewhere, or backed by the government. How are they going to do that? I don’t know. But I do believe they are going to get there.”
Indeed, Cherecwich has high expectations for the future of blockchain-based tokens, saying, “You can take anything today. You can take movie rights, you can take all sorts of entities, and you can create a token for those. We have to be able to figure out how to hold those tokens, value those tokens, do those things.”
Northern Trust has also utilized Hyperledger Fabric to create a blockchain platform for private equity transactions. The platform was developed over six months by a team of technology and private equity experts. While the platform is still not commercially available, Northern Trust has demoed the service to “well over 100 clients” and has determined that it will be marketable.
Describing the advantages of the blockchain platform over traditional systems, Cherecwich said, “When I do a capital call [on the blockchain platform], I will get my money faster than if I had to do it via emails and paper and everything else. So my time to market, and therefore when I’m going to get paid, is shortened. The more automated that process becomes, it’s just less costly to run a fund.”
Northern Trust has also applied for two blockchain patents, one for a biometric identity verification system and another for hosting investor meetings via a platform such as Hyperledger Fabric or Ethereum.
Speaking about these patents, Cherecwich told Forbes, “What we’ve done is not only developed a patent that enables you to have the identity management that enables you to do transactions, but extends the transactions beyond buying and selling of the security to actual board meetings and votes.”
While much remains uncertain, it is likely that the acceptance and utilization of blockchain technology by financial services giants like BlackRock and Northern Trust will lend legitimacy to the burgeoning industry and likely result in more institutional capital entering the space.
About the author
Cameron Carpenter is a student of economics and computer science at Sarah Lawrence College in Bronxville, New York. He is the President and Portfolio Manager of Gryphon Capital Management, a student-run investment firm. In his spare time, Cameron enjoys reading and playing chess.