How Is Rising Interest in Bitcoin and Blockchain Affecting Investment Markets?

The future of hedge fund law may look drastically different as these technologies become increasingly prevalent.


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TRAVIS/FOTOLIA

While financial analysts argue over when the “Bitcoin Bubble” might burst (or if it even exists), there has been little doubt that such an astronomic run as the one cryptocurrencies saw at the tail end of 2017 would shake up the investment community. Cryptocurrencies and businesses utilizing blockchain architecture are garnering widespread attention from mainstream investors seeking to diversify their portfolios — and such new, under-regulated waters appear rife for hefty profits despite their risks.

Elmsford’s Stephen Bielecki is a hedge fund attorney at law firm Kleinberg, Kaplan, Wolff & Cohen, P.C. in Manhattan, and finds this emerging technology is creating not just new avenues for investment, but the need for highly specialized experts who boast hybrid skill sets from once-disparate technical fields.

 

How is cryptocurrency futures trading different from regular currency speculation or stock trading?

There’s more volatility built in if you’re talking about cryptos in general, but then certainly there’s futures.

CBOE futures, which launched [in] very early December, get their pricing from one source…. The issue there is one exchange may not accurately capture the consensus of what the price is worldwide for this asset. CME, which launched about a week later, they use a handful of different Bitcoin prices.

There’s also a planned NASDAQ futures launch sometime during 2018, and they’re expected to use dozens of global Bitcoin prices…. That A) smooths out the pricing and gets you to a more accurate consensus, and B) takes in more of the world rather than just an auction price from New York or a few major exchanges.

 

Bitwise recently came out with their Hold 10 Index Fund, billed as the first managed index fund that trades in the most popular cryptos. Is this something you think will become more popular?

Indexes and exchange-traded funds are another step to sort of get people exposure to these assets that they want exposure to, but can be tricky to acquire. If you’re talking about something other than Bitcoin, Ethereum, or Litecoin, [they] can be tricky to hold because the question is, “What’s the safest way for me to store this?”

For a hedge fund you need to consider whether you have something called a ‘qualified custodian’ available to take custody of these assets if they fall within what would be called funds or securities. A lot of people have taken great pains in offering their coins to make them look more like “utility coins,” i.e. something that looks more like a token you can use to leverage a file-sharing system once that system is up and running. A lot of what we’ve seen in the ICOs [Initial Coin Offerings] are actually securities tokens and not utility tokens, and so [should be] subject to securities laws just as if they were a shared stock.

We’re seeing people setting up new hedge funds…. We’re seeing existing hedge funds say, “Does my investment mandate allow me to invest in something like this since it’s a bit more exotic?” We’re also seeing … more traditional asset making a large piece of their money go into an already existing fund that has a lot of specialists and great expertise in this area. That’s a different way to get exposure to this type of investment without necessarily having to build out your own team.

You can think of it as paying that premium to get that service of not having to worry about, ‘Where do I keep my coins?’ and knowing someone is managing it [who] is very well versed in this and is as familiar as can be within an ever-developing space.

I think this will be something that’s pushed more and more for. I think also there are reasons why you may not want to invest in an index fund or ETF, if you can sort of wrangle the resources and the wherewithal to take custody of things yourself.

 

How does Blockchain, the underlying security protocol that allows coins to be traded openly and transparently, translate to being utilized by other technologies or industries?

Twenty years ago you could throw “dot com” on the end of just about any word and that sounds like it was about the equivalent of putting the words “blockchain,” “crypto,” or “BTC” in the name of a company now. There’s definitely opportunity for gaming that if you’re a company looking for a boost in your stock price. At the same time, there’s going to be legitimate companies using this type of technology to not totally change or disrupt industries overnight, but maybe push them forward in a new direction.

The most prominent recent example is KodakCoin. The idea, as I understand it, is if you can store photos on the blockchain and create a currency to be utilized to purchase those photos, then you can sort of protect photos better…. That photo can be traced all around the Internet to see where it has been posted or used.

A lot of people would like exposure to a painting that costs $30 million, but very few of us can afford that. Something you could do with the blockchain … is you can virtually chop up that art into as many little pieces as you want, have people purchase it on the blockchain, and then once all of the slots are filled … the painting could go to market. You can do this for companies right now, but it’s not quite as simple or intuitive a thing, as rarely is there a stock in a piece of art. It solves the problem of “How do you divide up something that is indivisible?”

 

What other applications are possible?

Restaurants or farmers could track exactly where each apple came from, or each piece of fish. It would be tagged when it’s pulled out of the ocean and then registered on the blockchain. At each step along the way you’d need two people with a private key to verify that fish got from Point A to Point B, was inspected, and could only move to Point C if both people at Point B … buyer and a seller … sign off. It would allow you to know with certainty where exactly your products are originally sourced.

One other example is the possibility of self-executing contracts. One day complex transactions typically housed in multi-page legal documents could be coded onto a blockchain and sort of automated…. It’s very exciting and sounds very futuristic and cool. On the other hand, oftentimes legal documents can become so complex anyway that it’s very difficult to draft them in words. Having to then figuring out how to code that….

I think it could change what it is to be a lawyer much further down the line, where you may even need more programming and technical expertise as much as legal. Do I learn how to code, or is it a new hybrid employee at a law firm? Or can you outsource it to coders? Where do the people within this industry fit into that going forward?

There’s a lot of exciting, potentially interesting stuff going on that has the potential to upend a lot of industries in a way that even the Internet probably did not twenty years ago.

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