Podcast « Au-delà du battage médiatique »

Alex Olivares : Bienvenue dans le podcast Behind the Hype (Derrière les coulisses). Je m’appelle Alex Olivares, de chez Invesco. Dans ce second volet en trois parties, Keith Bear et Michel Rauchs du Cambridge Center for Alternative Finance échangent sur l’ESG et la blockchain. Aujourd’hui, nous cherchons à savoir à qui s’adresse la blockchain et abordons la dimension sociale de la blockchain et autres considérations.  

Bonjour Keith. Bonjour Michel, merci de vous joindre à nous pour évoquer les dimensions environnementales, sociales et de gouvernance (ESG) de la blockchain. Aujourd’hui, nous nous intéressons à la dimension sociale, au « S » de ESG. Pour commencer, à qui s’adressent les cryptomonnaies ou la blockchain ? À qui servent-elles ?  

0:54 

Michel Rauchs :  

Je pense donc qu'ici encore, il est utile de séparer la crypto de l'écosystème blockchain plus large. Vraiment, revenez aux origines du Bitcoin. Et je pense qu'il est juste de dire que la cryptographie fonctionne plus efficacement sur ce que j'appellerais les franges de l'utilisation, donc les bords, d'accord ? En essayant de s'adresser à des géographies, des cas d'utilisation ou des entités mal desservies. 

Et la raison en est qu'en raison de leur nature sans permission, ils fournissent des rails de résistance à la censure pour stocker et déplacer la valeur à un niveau global. Maintenant, "mal desservi" peut vraiment signifier différentes choses dans différents contextes et circonstances.  

Je pense que les médias ont tendance à se concentrer sur les aspects négatifs. Vous avez sans doute entendu parler des crypto-actifs qui permettent ou facilitent les attaques de type ramsomware, d’acheter des drogues et toutes sortes de choses illicites en ligne sur des sous-marchés « dark » ou encore de pratiquer des escroqueries en ligne.  

1:58  

Mais les crypto-actifs peuvent aussi permettre de contourner les sanctions et les contrôles des capitaux, notamment dans les États « marginauxvoyous » comme l’Iran, la Corée du Nord ou le Venezuela.  

D’après Chainalysis, une société spécialisée dans la criminalistique des blockchains qui traque ou tente de traquer les activités illicites sur les blockchains publiques, les activités criminelles représentent entre 0,3% et 2,5% de l’ensemble des flux de transaction « on-chain ».  

Mais ce n’est qu’un aspect de la blockchain, n’est-ce pas ? Donc, un système de transfert de valeur neutre à l’échelle mondiale peut naturellement aussi servir des intérêts moins douteux et créer un réel impact social positif. Pour moi, le principal cas d’utilisation, c’est celui des activistes politiques et des groupes de défense des droits de l’Homme.  

L’un des exemples les plus célèbres est très certainement WikiLeaks qui a été victime d’un blocage bancaire après le scandale du Cablegate en 2010.  WikiLeaks a été contraint de se tourner vers le bitcoin sous peine de ne plus pouvoir recevoir de dons. Et point intéressant, Julian Assange, le fondateur de WikiLeaks, a remercié le gouvernement et certains sénateurs américains en 2017 pour avoir contraint WikiLeaks d’investir dans le bitcoin, ce qui lui a permis de dégager un rendement de 50 000% sur ces dons (ceci n’est pas un conseil financier). 

3:22 

Mais il y a d’autres exemples, et pas seulement anecdotiques, où des groupes de défense des droits humains, des dissidents russes, des activistes au Myanmar ou en Afrique subsaharienne etc. utilisent les crypto-actifs pour contourner les États autoritaires.  

Il est intéressant de noter que, par exemple, la Human Rights Foundation estime qu’environ 4,3 milliards de personnes, soit environ 53% de la population mondiale, vivent dans des pays autoritaires.  

Bien entendu, les crypto-actifs sont également utilisés par et pour des groupes marginalisés et des minorités. Par exemple, dans certains pays où les femmes n’ont pas le droit de posséder ou de gérer de l’argent, les cryptomonnaies leur donnent donc la possibilité de contourner cette interdiction.  

Mais il y a aussi les travailleurs du sexe ou l’industrie du cannabis, des secteurs victimes des politiques de diminution des risques mises en place par les grands fournisseurs de services de paiement depuis une bonne dizaine d’années.  

4:35 

AO: Merci Michel. Et quelle est l’attitude des consommateurs vis-à-vis des solutions crypto ou de blockchain ? Nous utilisons ici les termes « crypto-actifs » et « blockchain » de manière indifférenciée. Et est-ce que les habitudes d’utilisation varient d'une région à l’autre ou au sein des régions ?  

4:50 

Keith Bear : Oui. Je me permets de reparler de Chainalysis, qui a étudié la répartition géographique de l’utilisation des crypto-actifs avec des résultats plutôt intéressants selon moi. Chainalysis a analysé l’utilisation des crypto-actifs sur la base de différents facteurs, en la pondérant par le pouvoir d’achat des pays concernés pour obtenir une évaluation par habitant. Ce qui est intéressant avec ces mesures, c’est que les trois premiers pays sont le Vietnam, l’Inde et le Pakistan. C’est donc plus ou moins ce que disait Michel : ce sont des pays où il peut y avoir de l’intérêt pour les crypto-actifs, vous savez, dans le sens de donner accès aux crypto-actifs aux plus pauvres, des pays où il y a un risque de dépréciation de la monnaie, des pays avec des transferts de fonds importants où les crypto-actifs peuvent avoir un rôle à jouer et évidemment servir à effectuer des transactions commerciales. 

Et pour en revenir au rapport de Chainalysis, le premier pays développé qui apparaît dans le classement, c’est l’Amérique du Nord, pardon les États-Unisles Etats-Unis, à la 8e place.  

Donc, il y a cet usage important des crypto-actifs pour effectuer des paiements et des transferts de fonds, etc. pour le type de raisons que nous avons évoquées comme le manque de confiance dans les monnaies locales, etc. dans une plus grande mesure que dans les marchés plus développés où selon moi, l’activité est davantage tirée par les investissements institutionnels.  

6:16 

MR : Oui, si je peux me permettre, il existe une réelle grande différence d’attitude entre les économies avancées et les marchés émergents et les économies en développement. Donc, pour résumer de manière très générale, les économies avancées voient les crypto-actifs essentiellement comme un outil spéculatif, une classe d’actifs comme les autres.  

Alors que dans les marchés émergents et les économies en développement, les crypto-actifs ont essentiellement un côté utilitaire.  Donc, c’est un peu comme un instrument parmi d’autres. Et la plupart des gens ou des entreprises qui utilisent les crypto-actifs sur ces marchés ignorent la plupart du temps les outils qu’ils utilisent.  Donc ils se développent, gagnent réellement en puissance, en étant combinés à d’autres outils disponibles, que ce soient les marchés P2P ou les cartes cadeaux ou autres.  

Surtout dans les régions où il existe un niveau élevé de répression financière, que ce soit sous la forme de contrôles des capitaux ou de confiscations de patrimoine, ou seulement des difficultés économiques générales, une inflation persistante, des dévaluations périodiques, c’est réellement là où l’utilisation des crypto-actifs augmente sensiblement. 

Et je pense que nous, Occidentaux, avons tendance à ne pas nous rendre compte des privilèges financiers dont nous disposons. N’oublions pas que dans le monde, 1,3 milliard de personnes vivent avec une inflation à deux ou trois chiffres.  

Et pour en revenir à ce que Keith disait concernant les cas d’utilisation, nous menons actuellement une étude avec la Banque interaméricaine de développement pour évaluer la taille de l’écosystème crypto en Amérique latine et dans les Caraïbes. Les premiers résultats sont intéressants dans le sens où ils montrent que les crypto-actifs servaient à l’origine de « passerelles » pour soustraire ses économies à l’inflation ou à la confiscation de patrimoine, en permettant aux gens d’avoir accès à un compte bancaire stable qui peut être dépensé en ligne. À noter d’ailleurs que les comptes sont souvent libellés en dollars. 

Mais au fil du temps, les crypto-actifs sont devenus un tremplin vers un accès plus large aux services financiers. Certains acteurs de l’écosystème des crypto-actifs se sont ainsi progressivement transformés en prestataires de services financiers à part entière qui font aujourd’hui office de guichet unique pour les paiements, l’épargne et les produits d’investissement numériques, allant jusqu’à proposer des crédits et des assurances à leurs utilisateurs. Cela s’est fait de manière tellement progressive que les consommateurs ne se rendent même plus compte qu’ils utilisent la cryptographie en combinaison avec d’autres outils et réseaux.  

8:57 

Et c’est vraiment ce qui est en train de se passer, notamment en Amérique latine. Il existe aujourd’hui des sociétés telles que Mexican Exchange Bitso ou Mercado Bitcoin au Brésil qui revendiquent plusieurs millions d’utilisateurs dans toute l’Amérique latine. Et si l’on examine de plus près la structure démographique de leurs utilisateurs, elle couvre tous les groupes démographiques, toutes les tranches d’âge et toutes les catégories de revenus. C’est donc une évolution très intéressante.  

9:22 

KB : En effet, citons un autre exemple en Amérique latine, celui du Salvador. Nous en avions parlé dans le dernier podcast, mais en octobre, plus de 3 millions de portefeuilles bitcoin ont été ouverts lorsque le Salvador a fait du bitcoin une monnaie officielle, sachant que le pays compte 1,9 million de comptes bancaires traditionnels. Donc en théorie, la pénétration est plus bien élevée en ce qui concerne la population au sens plus large,  

en ce qui concerne l’accessibilité du bitcoin par rapport aux services bancaires traditionnels. Cette tendance a été récemment mise à mal en raison de la nature des marchés : les avoirs du Salvador en bitcoin ont fondu de près de 40 millions de dollars, soit à peu près l’équivalent de la prochaine échéance de la dette nationale du pays.  

Voici donc les avantages, mais aussi les risques qui accompagnent une mesure aussi radicale que celle qu’a prise le Salvador en faisant du bitcoin une monnaie officielle.  

10:24 

MR : Et je souhaiterais également ajouter quelque chose pour illustrer le fait que le bitcoin est davantage un outil qu’une fin en soi : dans une récente étude, des économistes [de l’UE] ont découvert que la grande majorité des transactions n’étaient pas effectuées à l’aide du portefeuille public officiel en bitcoin, mais étaient libellées en dollars. Donc au final, la population ne se soucie pas vraiment du bitcoin, mais grâce aux efforts du gouvernement pour créer ce portefeuille bitcoin, la population a au moins accès à un portefeuille numérique et peut aussi dépenser des dollars américains. Et c’est ce que nous voulions dire quand nous parlions du fait que les crypto-actifs sont un tremplin et se généralisent au fil du temps.  

11:05 

AO : Oui, ces statistiques sont intéressantes parce qu’elles montrent que l’attention se concentre sur le bitcoin alors qu’il y a tellement d’autres solutions de blockchains et autant d’utilisateurs différents.  

Quelques chiffres en passant : d’après la Banque mondiale, 1,7 milliard de personnes sont non bancarisées aujourd’hui, soit un adulte sur trois. Donc le moindre changement sur ce plan-là peut avoir un impact significatif comme les cas d’utilisation que vous avez mentionnés.  

Et vous Keith, pensez-vous que le secteur public ou les gouvernements ont un rôle à jouer là-dedans ? Vous avez mentionné des initiatives prises par certains pays, mais en dehors de cela, y a-t-il des mesures supplémentaires que les gouvernements devraient prendre, par exemple concernant les MNBC, les monnaies numériques de banques centrales ? 

11:45 

KB : Oui, tout à fait. Je pense que la monnaie numérique de banque centrale peut jouer un rôle essentiel. La Banque des règlements internationaux a effectué de nombreuses enquêtes auprès des banques centrales des économies développées et émergentes, et la principale thématique qui ressort pour de nombreuses économies émergentes tourne autour de l’inclusion financière.  

Ce sujet soulève des questions en termes d’accessibilité aux smartphones ou aux téléphones mobiles qui sont le moyen le plus évident de détenir des portefeuilles de monnaie numérique de banque centrale. Pour ceux qui n’ont pas de téléphones portables ou n’ont pas accès à Internet, des cartes intelligentes pourraient constituer une alternative.  

Et cela pose également la question de la compatibilité avec les paiements hors ligne qui sont une caractéristique naturelle de l’argent physique. Mais si l’objectif d’une monnaie numérique de banque centrale est très semblable à l’utilisation de l’argent physique numérique, il faut également des moyens pour garantir les paiements hors ligne. 

C’est donc une question clé, pas seulement dans les pays émergents, mais au Royaume-Uni par exemple où on estime que près de 1,7 million de personnes sont mal desservies en matière de services financiers. Donc, dans le cadre du projet de MNBC envisagé par la Banque d’Angleterre, l’inclusion financière constitue l’une des principales problématiques discutées concernant le lancement d’une livre sterling représentée sous forme numérique.  

13:09 

AO : Merci Keith, cette remarque, qui résume le potentiel des solutions de blockchain pour répondre aux besoins sociaux, conclut cette discussion en beauté. Nous avons passé beaucoup de temps à parler de la façon dont les blockchains, notamment les cryptomonnaies, peuvent servir de tremplin vers l’inclusion financière des personnes qui sont non bancarisées ou défavorisées, aussi bien sur le plan géographique que démographique.  

Merci d’avoir partagé avec nous ces cas d’utilisation et exemples que, j’en suis certain, nos auditeurs ont trouvé très instructifs.  

13:40 

KB : Merci Alex.  

13:42 

AO : La gouvernance est un sujet complexe, surtout concernant les solutions de blockchain. Donc que faut-il savoir sur la gouvernance dans le domaine des blockchains ? Rejoignez-nous pour la troisième et dernière partie de nos échanges sur l’ESG. 

Et pour de plus amples informations, consultez etf.invesco.com. 

00:10

Invesco: Welcome to the Beyond the Hype podcast. My name is Alex Olivares from the Invesco EMEA Marketing team, and today I'm joined by Alex Schmidt from CoinShares.

00:23

Invesco: Hi, welcome everybody and welcome to Alex Schmidt from CoinShares who's joining us today for a conversation on publicly listed companies with exposure to blockchain. Alex welcome. Could you maybe tell our audience a little bit about yourself?

00:37

Alex Schmidt - CoinShares: Hi yes, thank you for for having me. It’s a pleasure. Yeah so I work at currently at work at CoinShares UK in the equity index team where we manage the index with companies exposed to blockchain technology and cryptocurrencies. My background is I have a finance background starting in the City in 2013 where I covered a variety of sectors ranging from utilities, mining, that is hardrock mining and technology, and I think that's what made me well suited to to join Ellwood, which has been acquired by CoinShares in July this year.

01:22

Invesco: Super well, thanks again for joining us and diving right into the questions here.

01:27

Schmidt: Yeah.

01:27

Invesco: So what are some of the market trends for publicly traded companies utilizing blockchain?

01:32

Schmidt: Yeah, we have seen quite a big phenomenon in this area to be honest, uhm? To speak for myself, for example, when I when I joined Ellwood in September 2019, two years ago, we barely had any companies to invest in, in terms of pure players in this space. There there were very few exchanges, very few miners and um there were there was a big number of companies with some crypto and blockchain businesses.

I know for example Monex in Japan. They they have a big crypto currency exchange there, but obviously they cannot be considered pureplay because they have, you know, an FX broker in Japan and that's quite quite a big business as well.

However, going towards 2020 and especially the beginning of this year. You're seeing quite a lot of quite a lot of companies becoming listed. Uh, as pure place and the reasons why this is why this happened is, well, there's one of them is A) companies seeking capital for investment for growth. This is quite a quite let's say, relevant to the miners, which are capital hungry. And then there's been some growing investor appetite for blockchain. Especially because there's still lots of investors who cannot invest in cryptocurrencies themselves, so they have to go via the equity market via these proceeds, if you may, and and yeah, so this has been spurring quite a lot of growth in this sector.

03:30

Invesco: That's really interesting and and you've recently put together some research about publicly listed companies that have pure exposure to cryptocurrencies. Can you explain what that means?

03:40

Schmidt: Yeah, so these are companies whose core business is related to cryptocurrencies or blockchain technologies. We have split them into four categories in the report and if I may, I can go into a little bit of detail in each of them.

Uhm, so yeah, the first of them is cryptocurrency miners, which I think is perhaps the most obvious pure play company. They were one of the earliest coming to the market. They basically buy hardware, put them into some containers and start mining and make money out of it.

And then they we have the financial services companies in which we have a split. We made a let's say an umbrella term for banking services and consulting companies. You have, you know the likes of Silvergate, Galaxy. These guys are providing almost like investment banking services to companies like you know to some of these blockchain companies as well but also to other people involved with cryptos.

Then you have the exchanges which are quite obvious as well. More likely that people you and I are dealing with buying and selling cryptocurrencies.

Then you have the hardware companies which are the ones that make the mining rigs. Right now we could only identify two companies in this space, which are Canaan, Ebang and the let's say the two biggest ones, which are Bitmain and MicroBT, which produces most miners? They are still private. But yeah, I think Bitmain a few years ago I filed a prospectus to list but never in Hong Kong. But they never went ahead. But yeah, so initially it started with miners and financial services and now the exchanges make up the third largest groups in terms of number of companies. And then yeah, the hardware is still so quite small.

06:05

Invesco: Yeah, and you mentioned a lot of the functions there. Are there some kind of broader sectors that provide the exposure to cryptocurrencies and how are these firms concentrated in terms of geography?

06:18

Schmidt: Uh, do you mean broader in terms of other companies like I mentioned in the beginning, which have different exposures as well?

06:29

Invesco: Yeah, would you extend it more

06:31

Schmidt: Yeah, yeah.

06:32

Invesco: beyond beyond just you know, technology and financial services per say

06:35

Schmidt: Ah. I would say that the vast majority would be financial services and you know the if you take into account in the GICS, financials and technology like the vast majority of these companies.

There will be some companies that are in the media business as well that do provide some. We have some in South Korea that are, you know, Naver um, which is like, you know, kind of the Google or South Korea. So again, technology, but they are far more focused on media and they do also own bits in exchanges and stuff so you can find that it's also quite related. But yeah, I think it will struggle to find something outside those two or three.

07:31

In terms of listed ones, it's very, very dominant North America at the moment. US making up for like 44%, Canada 24% of companies listed companies. Then you have Europe, which Sweden, Germany with absent of identifying of 9% of each and the UK with 7%. There's some companies listed, pure players listed in Hong Kong as well.

And yeah, we didn't look into China mainland China because lots of these equities are off limits for most investors. You know the A-Shares is so very hard to to have a, you know, accurate view on that. But yeah, North American dominant actually US in terms of market caps. More than 80% of all companies so we very big dominance of North America there.

08:24

Invesco: Yeah, and could you talk a little bit more about the timing of, you know why we're seeing some of these firms list to market right now?

08:32

Schmidt: Yeah, uhm, actually in the beginning of the year was far more friendly than it is right now, but yeah. In terms of timing, I would say well initially the rally that you saw in the last quarter of last year, first quarter of this year, in terms of cryptocurrency prices, Bitcoin and Ethereum rallying quite a lot. A lot of these companies come to market right after these phenomenon phenomena happens, and actually in the report we have a chart showing that there's quite a big correlation.

It did happen as well in 2018 after the big rally in 2017, but also you're seeing a lot of capital hungry companies tapping into the market, and it's quite interesting. For example, NASDAQ makes it quite easy for companies to to file for they can file for um listing securities in advance of doing them so they can do as they require. Um, and they call it ATM financing, so that's that's extremely helpful for these companies. Lots of companies are enjoying the fact that, you know, market that does find a big premium and there’s quite a high valuations in the market, especially at the beginning of the year. And they decided to go to go public, then.

And then, finally you saw lots of SPACS. That also was a phenomenon in the beginning of the year. They were looking for targets. Lots of that has subsided now, but you're still seeing companies coming to market as well.

10:33

Invesco: Yeah, and could you add some a little bit more color on that so you know you started to discuss different types of companies? But how big are they generally and are they revenue making or loss making and what's the investor appetite for these types of equities?

10:47

Schmidt: Yeah, uhm, many of these companies um. They are revenue making. If you think if you break down into the categories I mentioned, you know the miners are inherently going to make revenue just because that's how their operations go, right? And financial services also. These companies that have come to market they are quite established in a way I would say it would be quite hard to IPO a company in this sector without any revenues at the moment, just because investors might be very skeptical in terms of that. Exchanges again are quite, you know, they make some good money.

However there are. There will be some companies which are still in project stage coming into the market still waiting to launch their their main product waiting to be regulated. They might not have that many meaningful revenues.

And then in terms of profitability it's a mixed bag to be honest. You will have many loss making companies. I think it's predominantly loss-making at the moment. And I I can actually relate to the beginning of my time at Elwood, in which you know, for example, miners were exclusively lossmaking because, you know, it's such a capital hungry industry and and and prices were really not very good back in those days.

However, if you look at them now. And with Bitcoin, even you know right now which some people might see those a bit depressed at 45K US. These companies are quite healthy in terms of profitability because their costs have not gone up so much. Actually they're finding power quite cheaply in North America right now. And so they can make some quite good money there and exchanges they did very well both

13:00

in the cryptocurrency rally that we saw in Q4 and Q1, but also on the way down because they don't depend on prices, they are really volume businesses, right. So they will make money when there's a lot of trading activity and depend on you know deltas, big deltas or lots of volatility in the market.

13:29

So yeah, they they still mainly loss making up. I would say 2021 will see quite a lot of improvement in for these companies and another point is difficulty hasn't gone up because you know, there's been so many backlog in the semiconductor industry and also the whole phenomenon with China banning cryptocurrency mining within the country.

So you would you know when conditions are so favorable for mining would expect lots of people to come into the market and difficulty to go up. But this has not happened. It has recovered a little bit in the last couple of months but hasn't gone back stratospherically like you would expect.

In terms of size in terms of market cap they are usually you know what you would call small to mid-cap. Lots of companies in the single hundreds to you know five/six million dollars market caps. And then you would see teams mostly under 100 employees. Now this can vary quite a quite a bit. Miners are companies that will have small management team and then, you know, maybe a few companies, two of them to overlook containers and you know supervised those operations, but really not that many because this is very automated.

Exchanges and financial services, you would see a little bit more because it would need developers to be adding features and maintaining those platforms.

And in hardware, you would see bigger teams because you need a lot of R&D and some manufacturing those companies.

I didn't address the last bit. In terms of investor appetite for the equities. I've mentioned before, that lots of people are trying to jump into cryptocurrencies, but they some of them are not allowed. And you saw in the beginning of the year, with all of these listings also there were lots of secondary listings as well and they were all amazingly, you know, over over subscribed and you know 1234x times, so there's this quite a lot of appetite for for companies getting to this Despite that they have to evaluations.

16:15

Invesco: That's really interesting about the investor appetite Alex. And could you maybe talk a little bit why investors would want to target equities as opposed to directly investing in the crypto currencies themselves? What are the advantages and disadvantages of equities?

16:29

Schmidt: Yeah, uh, I will start the advantages and I think the first mean of main one would be well, just because they can. You know some because there's so many restrictions you know these guys become a vehicle to emulate a similar performance as you will have with with Bitcoin or you know any other cryptocurrency.

But yeah, some of the other advantages is that you know these equity businesses are usually regulated and audited, meaning that you know that the figures that they present are reliable and you know, they are more solid businesses. That you would expect.

Also you have access to management teams and you can assess whether management teams are good or not. And you can choose to invest or not in those companies, and I think there's a lot of transparency going on with this.

And finally, you can. It's a way of acquiring crypto for for less money, especially in terms of when you look into mining, because you know, at Bitcoin at 45 and a mining business mining one Bitcoin for like $7000 or $8000. You were indirectly buying a big big discount.

17:55

Obviously these companies themselves traded valuation premiums, but that's one of the rationales for investing in these companies.

In terms of disadvantages. One of the things I could say about these companies as intermediaries, why add a layer somewhere that you know you could just go directly. And if you're looking at a portfolio and want to add crypto exposure to it, you may not get exactly the same performance as the underlying crypto you're looking at. So that there could be some noise in there.

And as I said before, this sector. Is insanely valued. The valuations are insane. And yeah, so people can be. People need to be very careful when they invest there.

18:52

Invesco: And Alex, a lot of our conversation has been focused on companies that have exposure to cryptocurrency. But what about those other companies that have exposure to kind of broader blockchain technology?

19:05

Schmidt: Do not have exposure to cryptocurrencies and you're talking about broader blockchain technologies, I would say A) they are rarer you don't find so much of that in the markets and B) it's a bet, right? You need to understand very well what they're doing. You need to investigate. Talk to them quite a lot.

We talked to some companies that we're doing something very interesting in terms of proxy voting, and they were using crypto blockchain. Sorry blockchain to make those ledges and mutable, and you know, for people to be able to do online voting and that eventually took off and became a very interesting business. But you're not finding so much of that.

I would also like to talk about companies that are not pure place so and advantages of investing them is that you have a whole other side business to support all that that whole operation. But the big disadvantage with that is that you don't get. The exposure that you might be looking for, so you might be you may end up with a lot of noise. And let's say you know Bitcoin goes up by 50% that business which is so diluted might go up by just you know 10 or 15%.

20:36

Invesco: Yeah, thanks for that answer and kind of. Shifting on tangents here, energy consumption has been a major headline for crypto currencies in particular, but one could even argue blockchain more broadly. And in a previous podcast we linked up with some colleagues at Cambridge who were able to shed light on the nuances of blockchain energy consumption. But what are you seeing on this issue in particular?

21:05

Schmidt: Yeah, so we talk a lot with cryptocurrency miners. I think we have talked to pretty much all of the listed ones there and also to other investors. So what's happening? What we're seeing is that a A) miners are seeking greener sources of energy. You see, there's a lot of miners based in, especially in Quebec, where they have a lot of hydropower capacity, some of them are based in Iceland, Sweden also hydro geothermal, so they're quite good.

Some of them are looking for excess for carbon capture, flare gas, and other sources which are not 100% green, but let's say better than, uh, you know, pure coal or pure gas, even an.

Also, you're seeing green energy mining pools. Where some miners are joining up together so that they can strengthen their ESG profiles. And you know, if you see a miner in that pool, that can mean that they will be, you know, using those greener sources of energy.

And then yeah, when you talk about energy usage itself, then there's a discussion between baseload and peak load power. So if they are, you know, if they are only using peak load you can see that they are having quite a quite a big burden on the system and you could you could you could say that you know they are A) taking

23:01

the place of someone who would be consuming that power, and B) usually peak load is far less environmentally friendly energy. So so there's that discussion.

But on the other hand you could also say that these companies are helping make projects viable because if you are taking, for example, intermittent sources of power.

You know, let's say a wind turbine is producing a lot of wind at 3:00 o'clock in the morning, and if you have a miner that's willing to take that power for for cheap, it makes you know A) the miner find a cheap source of energy and B) the wind turbine operator they get revenue at that point in which they wouldn't. So that's how they they can fill those gaps and help those increase the revenues of those projects.

And finally, you see some miners also who are offsetting to the carbon footprint with carbon credit and stuff. Now there are some some people who might see that as you know, hey, great and some others might see that you know it's not the way to go, but they're trying to certainly try to reduce their footprint.

24:25

Invesco: That's really interesting, and it adds a lot of nuances of the conversation because the headlines could sometimes be so, so distracting.

24:32

Schmidt: Absolutely, and I mean I think people like to jump into into those big headlines and see know the what Elon Musk says and take that at face value, but it's not black and white. There is a lot of things going on in the background and people need to take that into account. We also do that.

24:53

Invesco: Definitely, and along those lines, maybe there's some nuance to be said around the governance for companies that utilize blockchain or that have exposure to cryptocurrencies. Could you talk a little bit there about what you see is the major issues?

25:10

Schmidt: Yeah, well as you mentioned, yeah, we look into into equities more than the protocols themselves. Our focus is on the companies and I think, one of the going back to advantage incentives advantages, but one of the advantages is that. The level of scrutiny of on these listed companies is far bigger than than around crypto themselves. You know we have the SEC looking at these businesses and making sure that they have boards that are, you know, on top of things with management and and the businesses.

And shareholders are far more able to voice their concerns then you know in relation to companies than crypto users. Just think about Ichan or you know the elite funds these companies have been able to charge quite a lot whilst. Uhm, in crypto currencies and block some company some some users, you know the decentralized nature of them makes it very hard for users to have a meaningful voice, and sometimes they end up at the developers themselves have a bigger say. And it's almost like you know the community is to shareholders and the developers are management as a bit of a comparison. But I think in terms of equities. There's a whole legal framework that supports shareholders there.

26:51

Invesco: Great thank you. And finally, what's the outlook for blockchain, especially for publicly traded companies that utilize the blockchain as we were discussing?

27:03

Schmidt: The number of companies listing has been very high and you know, like I said, people are choosing to list after price rallies and and you have seen that happen this year an and you're seeing these companies mature. You're seeing them having hiring former people from Wall Street, former people from you know, mining businesses like you know, traditional mining businesses, from traditional other companies.

And that's very good, because you can see that both boards and all are taking this seriously. And also the CEOs believe in this company. And I think that helps the whole investment community around there.

I would say that you know the only negative I could see there is that the increased regulation around cryptos, they could make cryptos more appealing to investors and reduce some of the appetite towards the equities involved in that, but I don't think there's going to be any cannibalism there. I think both sides are able to grow, and actually increased regulation around cryptos could be beneficial to companies dealing with them because you know they could see higher volumes and and higher individual interest going into that space. So I think everybody is likely to win there.

28:36

Invesco: Great, thanks very much for sharing your outlook there and if people want more information on some of the research pieces that you mentioned, they should visit the CoinShares website. Or they could also look at etf.invesco.com where we have other research pieces on blockchain.

Well Alex thank you so much for a really fascinating discussion and sharing your thoughts, especially given your insights and where you sit in terms of the blockchain investing universe so thank you for joining us.

29:04

Schmidt: Thank you very much as being that big pleasure.

00:13

Alex: Welcome to the beyond The Hype podcast. I'm Alex Olivares from Invesco and today I'm speaking to our guest Amarjit Sing from EY. We're going to be having a discussion about blockchain use cases outside of crypto.

00:34

Armajit Singh is a partner at EY, leading its blockchain assurance practices across EMEA and India. He is responsible for some of the firm’s largest financial services clients and leads a handful of its diversity inclusiveness initiatives.

All right, welcome Amarjit to our podcast discussion. It's really good having you. How are you?

00:54

Amarjit: Fine, thank you Alex, and glad to be here with you.

00:58

Alex: Cool, so before we kick off into the heart of the matter and we're focusing on blockchain in non-crypto uses for this conversation, maybe we could start it off with a question that I like to pose to all of our guests here, which is ‘what is blockchain?’ How do you define blockchain?

01:14

Amarjit: That's a tough one, so I see blockchain as a way of effectively grouping transactions together in a block using cryptography, to then prove the block. And then chaining those blocks together into a long chain. The cryptography allowing very easily for each block to be validated. But very difficult in calculating the hash in the 1st place. So which comes with a lot of immutability as well as the ability to prove that something did happen.

01:58

Alex: Interesting OK cool. So you know we're talking about blockchain overall and a lot of the headlines are focused on the crypto side of the equation and we see lots of news flow there, but just how big is the opportunity size for blockchain? Especially if maybe you look at it in totality? Is it the monumentally transformative technology that lots of people are talking about? Or is it something different? How big is it relative to some of those other things that people talked about recently, such as Internet of Things and big data? AI, how do you approach the opportunity?

02:33

Amarjit: So I think Alex for me, I would look at it in 2 different ways. You know on one way is actually just comparing blockchain to the Internet and how the Internet and the curve, the Internet went through, and how it has grown from the beginning to where it is now and I think you are now starting to see a lot of firms now also put out a lot more insight and research papers, which are actually comparing the growth in Blockchain. Two at the growth of the Internet or, or more recently, the growth in cloud computing. And when you actually map it across Alex, you start to see a lot of a lot of similarities, including admittedly the trough of disillusion it went thorough as well. You know where technology is? Go ahead and then there's a little bit of a pause before you know we get the next step, right? So personally, I think there's a lot that we only get very much at the beginning of what this technology can actually do for us.

03:33

Alex: By the way, where do you see us in that cycle?

03:38

Amarjit:  I think interestingly, just more recently with regards to what's happening too. I know we're not concentrating on crypto in this conversation, but nevertheless trying to separate the crypto conversation from the blockchain conversation can be a little bit difficult, but I actually think that we are now starting to see organizations recognize and realize what crypto does for them. Sorry what blockchain does. That brings to them and actually the benefits on what they should do or what they can do in in looking at blockchain as a separate technology.

04:13

Alex: That's interesting for the explanation of kind of where you think we are right now in the cycle. It's an exciting technology and a lot of people are excited about the applications of it. Cynics could argue that people have gotten a little bit carried away. Is it a phenomenon of a new hammer in search of lots of nails? That kind of hammer down? Or how should people use blockchain technology?

04:38

Amarjit: I think that's a really, really good question, Alex, and you might find it strange that although I am a team leader for blockchain, I'm also a skeptic in terms of challenging firms as to the use cases and ensuring that actually they've thought about whether, as you say, they're not talking blockchain just because it's the latest hype, but actually that it does address their problems.

So we actually have put forward what we call five sort of indicators on where blockchain may be appropriate to address a particular need or a particular issue as opposed to, you know, as you say, a hammer in search of a nail. So the first one is block chains are generally more suitable when there are multiple parties working together. So you're sort of looking at an ecosystem party sharing data or ownership, or collaborating in a process and so having a look at how that data is shared. Across a distributed network is starting to be sensible.

The second one then we tend to look at is do you actually need a trusted platform? So you know if you are within an organization already, then you really need a trusted platform, or if your external to an organization you know, do you actually need a? Do you need trust between participants? Do you need multiple points of verification? Because if you do, then again block chains are helpful because they could reduce the need of reconciliation. A version of the truth which everybody shares and everybody understands, and it's maintained across all the parties involved.

The Third Point is, do you really, really need an immutable record of transactions, data or agreements, right? And you know, there might be some situations, Alex, where that is not actually helpful, for example with GDPR and the right to be forgotten. So if there is a process that requires data to be deleted, for example, then actually a blockchain may not be suitable. So we do need to consider those sort of challenges.

The 4th point which here we reflect on is looking at the blockchain as a digital twin of an asset or as a as in terms of tokenization and the need then to execute some logic between parties, right? So with smart contracts etc effectively create and with tokenization you can effectively automate some logic. Is that useful? Is that what we need among participants here, and you know? Or is it actually that all we need is to store data amongst parties in a trusted manner? At which point some other technology may be suitable, right?

And then the fifth point is do we actually need a transparent record of what happened? Yeah, do we actually you know that that immutability, that consensus of the blockchain gives participants a visibility, and while you can restrict in certain situations the visibility to certain authorized parties only and we've got for example nightfall, which is a tech, which is why I've open sourced which anybody can have a look at, you know, but if they are processes of data that should be strictly confidential to one party only, then maybe you need to consider whether again blockchain is for you or you should be looking. At other technologies.

08:13

Alex: Interesting, interesting. So you're saying that basically you and your colleagues at EY have this framework by which to decide whether blockchain is the right solution, and rather not just applying this as a blanket approach to other use cases that actually might be better served by something as simple as a proprietary electronic database. For instance.

08:32

Amarjit: Exactly, absolutely.

08:36

Alex: And it's interesting that you that it really kind of pivots around the number of people in the ecosystem, whether they're internal/external, the need for kind of verification, immutability of the records, access to that type of information, whether there's a programmable element of other transactions that you want to do. So all those are the key considerations, aren't they?

08:56

Amarjit: Yep, yeah very much so.

08:59

Alex: So having said that and this is the I think one of the more exciting parts of having you as a guest given your work as a consultant and the number of different businesses and organizations that you work with. Perhaps you could start bringing this to life a little bit more for our listeners and pointing out some examples of blockchain being used in a non-crypto sense amongst the financial services sector for instance. So what are some of those use cases?

09:27

Amarjit: So Alex, my view on this. My personal view on this. It's not an if, but I’m aware that we will be reflecting on and updating the pipes that we have in our financial markets infrastructure and the reason why I say that, Alex, is when we look at blockchain as a technology and we look at these points about, for example, different parties working here than the fact that you can actually settle across. And effectively you have immediate settlement, etc. Versus you know what we might have with DVP (trade settlement: delivery versus payment) for two days at the moment where you then have settlement risk between counterparties, you have monies tied up which are not in treasury. You have situations where big reconciliation hubs exist, all which is all of which are just, you know, different parties making sure right that actually trades did occur, that trades have settled. That you know that the counterparty is the counterparty they're dealing with.

And so when I reflect and think about how blockchain technology can really help make the financial services infrastructure better, I think personally it's a no brainer that there will be significant market infrastructure impact on things like trading settlement and custody because of the benefits that it will then derive to functions such as risk, treasury etc., settlement services organizations.

11:00

But the flipside, Alex is a little bit like and actually, I guess I should pick a maybe a more recent analogy because you know, some people might not even remember a fax machine now, but to me it's the network effect problem. Right, that you know you do need people to do come together to get this benefit, and so if you've just invented the fax machine and you only have one, well, it's not very useful really, is it? And so how do you actually get that network effect together?

And the second challenge that also then arises? With the multitudes of different. Proof of concepts going on etc. and people exploring this area etc. Which one do you go for? Right? Which bucket do you put? You know, do you put all your eggs in? Because again, it's a costly exercise. Updating your systems t into these external settlements. What do you go for? Which do you go for? How do you know you've picked the right one?

So I think there's definitely still maturity to come, and I think these proof of concepts are absolutely key, by the way, because they flush out and draw out what the challenges might be across the end to end ecosystem, right? But I think until we get further down there as well, I understand the reticence of firms to sort of, you know, go for it, but I also think that if you don't dip your toes in the water with some sort of proof of concept, etc, I think you are going to start to struggle as and when the market moves, because you're not going to have that know how, the experience, etc on how to progress. Very much so that you know there are positive use cases in the FS (financial services) space. Very, very valuable use cases. It's getting the timing right and getting that network effect right.

12:52

Alex: With regards to kind of those points that you made about network effect and kind of maybe coalescing around a singular type of technology. How do we achieve that as a as a sector? Or you know more broadly, is it that you know government or regulatory bodies have to kind of kickstart these things? Or is it private enterprise with a couple big players? Pushing things along and then suddenly everyone coalesces around that technology?

13:27

Amarjit: I think we're seeing a mixture of that happening so far, Alex. I think what we are seeing definitely is some of the big institutions, the big institutes may be the wrong phrase to use. Some of the big cross industry organizations.

13:40 The non-for-profit type industry organizations that handle settlements that handle trading etc all starting to look at this and starting to and all of them running and looking to see you know how do we actually get either the banks or the custodians or the asset services or the asset managers etc to start to look at? What might this be and how would any of these sort of settlement infrastructures get moving? And then actually plug into those individual companies to make it happen? And so your point about what firms may want to do is to make sure that they are also hooked into a lot of these industry consortiums that are, you know that are that are already running across many of the FS sub industries.

14:30

Alex: Right, right? So that's a good overview for the financial services, use cases and maybe financial services companies, how they could keep up to speed with the developments that are happening at pace for our investor audience out there. I think it singles how monumental the change could be because it's that infrastructure, the pipes and the wires of financial services.

Beyond financial services, how are companies looking at blockchain? Technology and what are the use cases there?

14:57

Amarjit: I think, and I think that's really interesting question, because there are some really really interesting. This case is happening in the non FS space, you know we we've been involved with some governments in terms of public finance and our public finance option that has helped certain governments track, for example, budgets all the way down to where it's being used. So budgets being approved tracked down to you know which vehicle or ambulance it was used for. We've been involved in traceability, blockchains being used for traceability, be traceability of wine. Or traceability of blood, human blood supplies.

15:39

In terms of making sure that you know. Again, you know to make sure that it's again tracing where it's where it's been, where it's come from, etc. And supporting it's all about giving trust, right? The immutability of blockchain and using that to give trust to people that you know be the food or blood or etc. How do you know where it's been and where it's come from?

16:02

Donation type situation right. And we've been involved in things like also firms now using blockchain with regards to ESG or ESG type approach to show source of materials you know these kind of like supply chain applications to show you know where has a piece of clothing been or how has it got there.

And most recently I saw when I bought a shirt over Christmas that actually there was a QR code which let you scan and when you scan the QR code it linked to a blockchain which proved that that was an authentic piece of clothing as opposed to a counterfeit.

So you know there are there are lots of use cases from the traceability side. With regards to using blockchain to prove where something has been to, because you do then have that situation of multiple parties, you need a trusted platform. You want the immutability of data you want to track it, etc, and you want a transparent record. It ticks all those boxes right? And it gives you that that view of where something has been and how it's got to you. So a lot going on in the non FS world as well which is really. Really quite interesting.

17:29

Alex: Yeah, it'll be interesting to see the creativity that some companies employ to the technology, because like you said, if it's a matter of traceability or supply chain management, there's obviously lots and lots of companies that dabble in that space.

17:43

Amarjit: Yeah, I think the one I saw earlier this week was one of the car companies and I'm just being safe in not naming anybody but you can. You can go look this up. I don’t know actually, but there was a European I can’t remember now that was issuing an NFT (non-fungible token) linked to each car and the NFT would then hold the car’s records.

18:03

Alex: I saw that too.

18:05

Amarjit: Yeah, and that's again a sensible use case, right? It makes sense, it's useful, it allows you to again track and then have your service history and your mileage and all that good stuff there. And you know, if you buy that for used, you can trust where that’s come from, because of the data.

18:28

Alex: Well you were touching upon it already on ESG. And you know, we could kind of understand in the example of the shirt, you know, that it gives insight to consumers on, you know, the origins of the shirt, the data behind the shirt, and how it was produced, and lets those consumers have trust in that data. But is there more nuance to the equation of ESG, especially related to blockchain? Or are there maybe some questions, or some points that you could put forward to us so that we could kind of chew about it a little bit more because I would imagine it's quite complicated in that space.

19:01

Amarjit: Yeah, I think I think, Alex, it's worth as you say, chewing on that a little bit more because you know, I'm sure people would have read some of the press out there. And I you've heard the Cambridge Centre for Alternative Finance on as well, on their podcast before. And you know there is a lot of challenge out there about the energy use case for blockchain, right?

And in particular in particular types of crypto and that may change as some of the chains move towards a proof of stake [mechanism], and in fact most of the blockchains that we work with, in terms of more for, you know what we've just talked about in terms of traceability etc tend to be built on Ethereum, and you know, hopefully ethereum as it's made public, is trying to move to a proof of stake [mechanism which is less electricity dependent], etc. And then you've also got some level-2 layers [middle layers] like Polygon, etc, which we've been working with.

But the reason why I think also it's a more nuanced conversation is if we look back to the point you and I were talking about earlier on about financial services companies and the value of the benefit potential of blockchain you know, and the pipes many many of financial service companies have, they have huge, you know reconciliation hubs around the world for example. And again, if you think about OK, if you move to blockchain then you don't need those hubs. Right and those hubs, you know, use a lot of energy. I think it's important for us to also think about the end to end and think about again. OK, so if we do bring blockchain in here then actually what ends up happening further down the value chain? Or you know there are savings, which is positive and easy to get excited.

20:57

Then flip it around, In the social part of the equation, what happens to all the people who work in those hubs? Right, so it's a nuanced conversation. Are they going to be deployed in more value-add activities? Well that would be a good thing. And how does that work? So to me, I think you know there is a question that it's not very straightforward, just sort of. You know it's not black and white, nothing ever is that simple.

21:41

Yeah, but then you know when you look at us again and touching on all the traceability use cases to me, there's a lot of good S (‘Social’) there. You yeah so you know how? How do we? How do we then give that benefit from a social perspective?

There's a lot happening on carbon trading now using blockchain as well and things like that so. Blockchain to validate trees in a forest and and how that then goes on to a table or etc. So there's a lot happening there which is to me again makes this much more nuanced argument.

Like if you go look at G on the governance. DAOs (decentralized autonomous organizations) those decentralized autonomous organizations are quite interesting. They're shaking up the idea of governance, right? They allowing anybody and everybody at the moment. They're sort of challenging that traditional structure point. Now, yes, again there's been some papers put out about at the moment. They're calling it the decentralized illusion. They really decentralized, are they? And I think that's some of that is because we are also in the sort of space for very much allowing back to the participation of the community, by the users.

23:00

Exactly and what we? Space again, we've been pushed by the regulators in terms of proxy voting etc. Here in terms of actually making sure that you know investors are voting and how do we get the retail investors to all these sort of good stuff? If you think about it that way, again, there's some interesting Gee. Food for thought there.

23:19

Alex: That's right, and some enablement as well as some questions. Some philosophical questions for us as well.

23:24

Amarjit: Yes, Sir.

23:25

Alex: Brilliant, brilliant. Well we packed a lot of content, a lot of questions and topics in a relative short amount of time, Amarjit. Thank you so much for joining us and you know your perspective from EY is an interesting one because you see more than just the financial side of the equation or just the crypto and the brokerages. And that part of the ecosystem. So this has been really fascinating discussion, and I'm sure investors have probably taken away a little bit more of the concrete use cases besides the crypto side. So thanks again for joining us and it's been a true pleasure.

23:59

Amarjit: Pleasure to be on, Alex. Thank you for your time.

24:02
Alex: For more information about blockchain generally or digital assets more broadly, please visit etf.invesco.com.

00:10

Invesco: Welcome to the Beyond the Hype podcast. My name is Alex Olivares from the Invesco EMEA Marketing team, and today I'm joined by Alex Schmidt from CoinShares.

00:23

Invesco: Hi, welcome everybody and welcome to Alex Schmidt from CoinShares who's joining us today for a conversation on publicly listed companies with exposure to blockchain. Alex welcome. Could you maybe tell our audience a little bit about yourself?

00:37

Alex Schmidt - CoinShares: Hi yes, thank you for for having me. It’s a pleasure. Yeah so I work at currently at work at CoinShares UK in the equity index team where we manage the index with companies exposed to blockchain technology and cryptocurrencies. My background is I have a finance background starting in the City in 2013 where I covered a variety of sectors ranging from utilities, mining, that is hardrock mining and technology, and I think that's what made me well suited to to join Ellwood, which has been acquired by CoinShares in July this year.

01:22

Invesco: Super well, thanks again for joining us and diving right into the questions here.

01:27

Schmidt: Yeah.

01:27

Invesco: So what are some of the market trends for publicly traded companies utilizing blockchain?

01:32

Schmidt: Yeah, we have seen quite a big phenomenon in this area to be honest, uhm? To speak for myself, for example, when I when I joined Ellwood in September 2019, two years ago, we barely had any companies to invest in, in terms of pure players in this space. There there were very few exchanges, very few miners and um there were there was a big number of companies with some crypto and blockchain businesses.

I know for example Monex in Japan. They they have a big crypto currency exchange there, but obviously they cannot be considered pureplay because they have, you know, an FX broker in Japan and that's quite quite a big business as well.

However, going towards 2020 and especially the beginning of this year. You're seeing quite a lot of quite a lot of companies becoming listed. Uh, as pure place and the reasons why this is why this happened is, well, there's one of them is A) companies seeking capital for investment for growth. This is quite a quite let's say, relevant to the miners, which are capital hungry. And then there's been some growing investor appetite for blockchain. Especially because there's still lots of investors who cannot invest in cryptocurrencies themselves, so they have to go via the equity market via these proceeds, if you may, and and yeah, so this has been spurring quite a lot of growth in this sector.

03:30

Invesco: That's really interesting and and you've recently put together some research about publicly listed companies that have pure exposure to cryptocurrencies. Can you explain what that means?

03:40

Schmidt: Yeah, so these are companies whose core business is related to cryptocurrencies or blockchain technologies. We have split them into four categories in the report and if I may, I can go into a little bit of detail in each of them.

Uhm, so yeah, the first of them is cryptocurrency miners, which I think is perhaps the most obvious pure play company. They were one of the earliest coming to the market. They basically buy hardware, put them into some containers and start mining and make money out of it.

And then they we have the financial services companies in which we have a split. We made a let's say an umbrella term for banking services and consulting companies. You have, you know the likes of Silvergate, Galaxy. These guys are providing almost like investment banking services to companies like you know to some of these blockchain companies as well but also to other people involved with cryptos.

Then you have the exchanges which are quite obvious as well. More likely that people you and I are dealing with buying and selling cryptocurrencies.

Then you have the hardware companies which are the ones that make the mining rigs. Right now we could only identify two companies in this space, which are Canaan, Ebang and the let's say the two biggest ones, which are Bitmain and MicroBT, which produces most miners? They are still private. But yeah, I think Bitmain a few years ago I filed a prospectus to list but never in Hong Kong. But they never went ahead. But yeah, so initially it started with miners and financial services and now the exchanges make up the third largest groups in terms of number of companies. And then yeah, the hardware is still so quite small.

06:05

Invesco: Yeah, and you mentioned a lot of the functions there. Are there some kind of broader sectors that provide the exposure to cryptocurrencies and how are these firms concentrated in terms of geography?

06:18

Schmidt: Uh, do you mean broader in terms of other companies like I mentioned in the beginning, which have different exposures as well?

06:29

Invesco: Yeah, would you extend it more

06:31

Schmidt: Yeah, yeah.

06:32

Invesco: beyond beyond just you know, technology and financial services per say

06:35

Schmidt: Ah. I would say that the vast majority would be financial services and you know the if you take into account in the GICS, financials and technology like the vast majority of these companies.

There will be some companies that are in the media business as well that do provide some. We have some in South Korea that are, you know, Naver um, which is like, you know, kind of the Google or South Korea. So again, technology, but they are far more focused on media and they do also own bits in exchanges and stuff so you can find that it's also quite related. But yeah, I think it will struggle to find something outside those two or three.

07:31

In terms of listed ones, it's very, very dominant North America at the moment. US making up for like 44%, Canada 24% of companies listed companies. Then you have Europe, which Sweden, Germany with absent of identifying of 9% of each and the UK with 7%. There's some companies listed, pure players listed in Hong Kong as well.

And yeah, we didn't look into China mainland China because lots of these equities are off limits for most investors. You know the A-Shares is so very hard to to have a, you know, accurate view on that. But yeah, North American dominant actually US in terms of market caps. More than 80% of all companies so we very big dominance of North America there.

08:24

Invesco: Yeah, and could you talk a little bit more about the timing of, you know why we're seeing some of these firms list to market right now?

08:32

Schmidt: Yeah, uhm, actually in the beginning of the year was far more friendly than it is right now, but yeah. In terms of timing, I would say well initially the rally that you saw in the last quarter of last year, first quarter of this year, in terms of cryptocurrency prices, Bitcoin and Ethereum rallying quite a lot. A lot of these companies come to market right after these phenomenon phenomena happens, and actually in the report we have a chart showing that there's quite a big correlation.

It did happen as well in 2018 after the big rally in 2017, but also you're seeing a lot of capital hungry companies tapping into the market, and it's quite interesting. For example, NASDAQ makes it quite easy for companies to to file for they can file for um listing securities in advance of doing them so they can do as they require. Um, and they call it ATM financing, so that's that's extremely helpful for these companies. Lots of companies are enjoying the fact that, you know, market that does find a big premium and there’s quite a high valuations in the market, especially at the beginning of the year. And they decided to go to go public, then.

And then, finally you saw lots of SPACS. That also was a phenomenon in the beginning of the year. They were looking for targets. Lots of that has subsided now, but you're still seeing companies coming to market as well.

10:33

Invesco: Yeah, and could you add some a little bit more color on that so you know you started to discuss different types of companies? But how big are they generally and are they revenue making or loss making and what's the investor appetite for these types of equities?

10:47

Schmidt: Yeah, uhm, many of these companies um. They are revenue making. If you think if you break down into the categories I mentioned, you know the miners are inherently going to make revenue just because that's how their operations go, right? And financial services also. These companies that have come to market they are quite established in a way I would say it would be quite hard to IPO a company in this sector without any revenues at the moment, just because investors might be very skeptical in terms of that. Exchanges again are quite, you know, they make some good money.

However there are. There will be some companies which are still in project stage coming into the market still waiting to launch their their main product waiting to be regulated. They might not have that many meaningful revenues.

And then in terms of profitability it's a mixed bag to be honest. You will have many loss making companies. I think it's predominantly loss-making at the moment. And I I can actually relate to the beginning of my time at Elwood, in which you know, for example, miners were exclusively lossmaking because, you know, it's such a capital hungry industry and and and prices were really not very good back in those days.

However, if you look at them now. And with Bitcoin, even you know right now which some people might see those a bit depressed at 45K US. These companies are quite healthy in terms of profitability because their costs have not gone up so much. Actually they're finding power quite cheaply in North America right now. And so they can make some quite good money there and exchanges they did very well both

13:00

in the cryptocurrency rally that we saw in Q4 and Q1, but also on the way down because they don't depend on prices, they are really volume businesses, right. So they will make money when there's a lot of trading activity and depend on you know deltas, big deltas or lots of volatility in the market.

13:29

So yeah, they they still mainly loss making up. I would say 2021 will see quite a lot of improvement in for these companies and another point is difficulty hasn't gone up because you know, there's been so many backlog in the semiconductor industry and also the whole phenomenon with China banning cryptocurrency mining within the country.

So you would you know when conditions are so favorable for mining would expect lots of people to come into the market and difficulty to go up. But this has not happened. It has recovered a little bit in the last couple of months but hasn't gone back stratospherically like you would expect.

In terms of size in terms of market cap they are usually you know what you would call small to mid-cap. Lots of companies in the single hundreds to you know five/six million dollars market caps. And then you would see teams mostly under 100 employees. Now this can vary quite a quite a bit. Miners are companies that will have small management team and then, you know, maybe a few companies, two of them to overlook containers and you know supervised those operations, but really not that many because this is very automated.

Exchanges and financial services, you would see a little bit more because it would need developers to be adding features and maintaining those platforms.

And in hardware, you would see bigger teams because you need a lot of R&D and some manufacturing those companies.

I didn't address the last bit. In terms of investor appetite for the equities. I've mentioned before, that lots of people are trying to jump into cryptocurrencies, but they some of them are not allowed. And you saw in the beginning of the year, with all of these listings also there were lots of secondary listings as well and they were all amazingly, you know, over over subscribed and you know 1234x times, so there's this quite a lot of appetite for for companies getting to this Despite that they have to evaluations.

16:15

Invesco: That's really interesting about the investor appetite Alex. And could you maybe talk a little bit why investors would want to target equities as opposed to directly investing in the crypto currencies themselves? What are the advantages and disadvantages of equities?

16:29

Schmidt: Yeah, uh, I will start the advantages and I think the first mean of main one would be well, just because they can. You know some because there's so many restrictions you know these guys become a vehicle to emulate a similar performance as you will have with with Bitcoin or you know any other cryptocurrency.

But yeah, some of the other advantages is that you know these equity businesses are usually regulated and audited, meaning that you know that the figures that they present are reliable and you know, they are more solid businesses. That you would expect.

Also you have access to management teams and you can assess whether management teams are good or not. And you can choose to invest or not in those companies, and I think there's a lot of transparency going on with this.

And finally, you can. It's a way of acquiring crypto for for less money, especially in terms of when you look into mining, because you know, at Bitcoin at 45 and a mining business mining one Bitcoin for like $7000 or $8000. You were indirectly buying a big big discount.

17:55

Obviously these companies themselves traded valuation premiums, but that's one of the rationales for investing in these companies.

In terms of disadvantages. One of the things I could say about these companies as intermediaries, why add a layer somewhere that you know you could just go directly. And if you're looking at a portfolio and want to add crypto exposure to it, you may not get exactly the same performance as the underlying crypto you're looking at. So that there could be some noise in there.

And as I said before, this sector. Is insanely valued. The valuations are insane. And yeah, so people can be. People need to be very careful when they invest there.

18:52

Invesco: And Alex, a lot of our conversation has been focused on companies that have exposure to cryptocurrency. But what about those other companies that have exposure to kind of broader blockchain technology?

19:05

Schmidt: Do not have exposure to cryptocurrencies and you're talking about broader blockchain technologies, I would say A) they are rarer you don't find so much of that in the markets and B) it's a bet, right? You need to understand very well what they're doing. You need to investigate. Talk to them quite a lot.

We talked to some companies that we're doing something very interesting in terms of proxy voting, and they were using crypto blockchain. Sorry blockchain to make those ledges and mutable, and you know, for people to be able to do online voting and that eventually took off and became a very interesting business. But you're not finding so much of that.

I would also like to talk about companies that are not pure place so and advantages of investing them is that you have a whole other side business to support all that that whole operation. But the big disadvantage with that is that you don't get. The exposure that you might be looking for, so you might be you may end up with a lot of noise. And let's say you know Bitcoin goes up by 50% that business which is so diluted might go up by just you know 10 or 15%.

20:36

Invesco: Yeah, thanks for that answer and kind of. Shifting on tangents here, energy consumption has been a major headline for crypto currencies in particular, but one could even argue blockchain more broadly. And in a previous podcast we linked up with some colleagues at Cambridge who were able to shed light on the nuances of blockchain energy consumption. But what are you seeing on this issue in particular?

21:05

Schmidt: Yeah, so we talk a lot with cryptocurrency miners. I think we have talked to pretty much all of the listed ones there and also to other investors. So what's happening? What we're seeing is that a A) miners are seeking greener sources of energy. You see, there's a lot of miners based in, especially in Quebec, where they have a lot of hydropower capacity, some of them are based in Iceland, Sweden also hydro geothermal, so they're quite good.

Some of them are looking for excess for carbon capture, flare gas, and other sources which are not 100% green, but let's say better than, uh, you know, pure coal or pure gas, even an.

Also, you're seeing green energy mining pools. Where some miners are joining up together so that they can strengthen their ESG profiles. And you know, if you see a miner in that pool, that can mean that they will be, you know, using those greener sources of energy.

And then yeah, when you talk about energy usage itself, then there's a discussion between baseload and peak load power. So if they are, you know, if they are only using peak load you can see that they are having quite a quite a big burden on the system and you could you could you could say that you know they are A) taking

23:01

the place of someone who would be consuming that power, and B) usually peak load is far less environmentally friendly energy. So so there's that discussion.

But on the other hand you could also say that these companies are helping make projects viable because if you are taking, for example, intermittent sources of power.

You know, let's say a wind turbine is producing a lot of wind at 3:00 o'clock in the morning, and if you have a miner that's willing to take that power for for cheap, it makes you know A) the miner find a cheap source of energy and B) the wind turbine operator they get revenue at that point in which they wouldn't. So that's how they they can fill those gaps and help those increase the revenues of those projects.

And finally, you see some miners also who are offsetting to the carbon footprint with carbon credit and stuff. Now there are some some people who might see that as you know, hey, great and some others might see that you know it's not the way to go, but they're trying to certainly try to reduce their footprint.

24:25

Invesco: That's really interesting, and it adds a lot of nuances of the conversation because the headlines could sometimes be so, so distracting.

24:32

Schmidt: Absolutely, and I mean I think people like to jump into into those big headlines and see know the what Elon Musk says and take that at face value, but it's not black and white. There is a lot of things going on in the background and people need to take that into account. We also do that.

24:53

Invesco: Definitely, and along those lines, maybe there's some nuance to be said around the governance for companies that utilize blockchain or that have exposure to cryptocurrencies. Could you talk a little bit there about what you see is the major issues?

25:10

Schmidt: Yeah, well as you mentioned, yeah, we look into into equities more than the protocols themselves. Our focus is on the companies and I think, one of the going back to advantage incentives advantages, but one of the advantages is that. The level of scrutiny of on these listed companies is far bigger than than around crypto themselves. You know we have the SEC looking at these businesses and making sure that they have boards that are, you know, on top of things with management and and the businesses.

And shareholders are far more able to voice their concerns then you know in relation to companies than crypto users. Just think about Ichan or you know the elite funds these companies have been able to charge quite a lot whilst. Uhm, in crypto currencies and block some company some some users, you know the decentralized nature of them makes it very hard for users to have a meaningful voice, and sometimes they end up at the developers themselves have a bigger say. And it's almost like you know the community is to shareholders and the developers are management as a bit of a comparison. But I think in terms of equities. There's a whole legal framework that supports shareholders there.

26:51

Invesco: Great thank you. And finally, what's the outlook for blockchain, especially for publicly traded companies that utilize the blockchain as we were discussing?

27:03

Schmidt: The number of companies listing has been very high and you know, like I said, people are choosing to list after price rallies and and you have seen that happen this year an and you're seeing these companies mature. You're seeing them having hiring former people from Wall Street, former people from you know, mining businesses like you know, traditional mining businesses, from traditional other companies.

And that's very good, because you can see that both boards and all are taking this seriously. And also the CEOs believe in this company. And I think that helps the whole investment community around there.

I would say that you know the only negative I could see there is that the increased regulation around cryptos, they could make cryptos more appealing to investors and reduce some of the appetite towards the equities involved in that, but I don't think there's going to be any cannibalism there. I think both sides are able to grow, and actually increased regulation around cryptos could be beneficial to companies dealing with them because you know they could see higher volumes and and higher individual interest going into that space. So I think everybody is likely to win there.

28:36

Invesco: Great, thanks very much for sharing your outlook there and if people want more information on some of the research pieces that you mentioned, they should visit the CoinShares website. Or they could also look at etf.invesco.com where we have other research pieces on blockchain.

Well Alex thank you so much for a really fascinating discussion and sharing your thoughts, especially given your insights and where you sit in terms of the blockchain investing universe so thank you for joining us.

29:04

Schmidt: Thank you very much as being that big pleasure.