Investing in blockchain companies in 2021

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Blockchain chronicle. What is the current potential of this technology? What is the state of VC investment in blockchain?

“Information technology has changed the way people create economic value. This famous quote from Alan Greenspan now seems to extend to blockchain as well. Generating renewed interest since the beginning of the year, the technology behind Bitcoin or Ethereum has become a media sensation. It has taken root in the financial world, going beyond the simple framework of crypto-currencies. Understanding its potential, its limits and the broad guidelines defining its characteristics is now an undeniable asset in the range of skills and services of asset managers.

Definitions often suffer from their complexity. Explanation usually precedes example. Nothing speaks louder than examples of use to help conceptualise the potential of blockchain. In itself, the definition of blockchain can be limited to a succinct popularisation:

Blockchain is a digital technology that allows the recording of information that can be very varied: the identity of the owner of an asset, the history of a transaction, the value of an asset, the timestamp of a share, the status of a transaction,…

Several industries have significantly accelerated their implementation of blockchain solutions and infrastructure over the past 18 months.

This information is encrypted and then stored in a distributed ledger (Distributed Ledger Technology) in an immutable manner. This ledger, like a book of accounts, allows a complete and unalterable history of data movements to be kept and thus offers those who can read it full traceability.

Depending on the underlying technology chosen, this register can be completely decentralised. Decentralisation allows several actors to share ownership of the registry, each maintaining a copy through what is called a node. These nodes constantly communicate with each other and, through a consensus process, synchronise their internal copies and new information to converge into a single authoritative version.

Once data is recorded, encrypted and validated in the blockchain, it cannot be changed. For example, the value of a Bitcoin on 3 March 2018 is immutably recorded in the Bitcoin blockchain. Each node can thus cryptographically verify that what it sees in its internal copy corresponds to what the other nodes also see in their copy, without any intermediary or third party.

Several industries have significantly accelerated their implementation of blockchain solutions and infrastructure over the past 18 months. This is the case of A.P. Møller Maersk with its TradeLens solution co-developed with IBM, which has become the benchmark in freight and maritime trade. The Danish shipowner’s competitors such as MSC and CMA CGM have recently announced that they are joining its blockchain platform for sharing container transport information. Building on this, Al-Hamd International Container Terminal (AICT), one of Karachi’s largest container terminals, has become the first depot operator in Pakistan to join TradeLens to manage the digital logistics of its containers.

Blockchain-based solutions are also increasingly being commercialised in the banking and asset securitisation sectors. On 26 July 2021, J.P. Morgan reportedly opened up access to crypto funds to all its wealth management clients. According to a Business Insider report citing an internal memo, the bank’s wealth clients have been granted access to five crypto products since 19 July, four from Grayscale Investments and the last from Osprey Funds.

The banking world’s interest in blockchain technology goes beyond that of cryptocurrency.

The announcement comes just a week after the Financial Times reported that BNY Mellon had joined a crypto consortium of State Street and six other banks. This consortium of two of the world’s largest custodian banks is said to be supporting the London-based cryptocurrency trading platform Pure Digital. This inclusion in the blockchain world assumes direct demand from their clients, many of whom are large asset managers.

But the banking world’s interest in blockchain technology goes beyond that of cryptocurrency alone. The recent partnership between Oracle Financial Services Software and financial technology provider Everest is proof of this. As a result of this partnership, Oracle’s retail and corporate banking customers will be able to verify a customer’s credentials when creating an account using blockchain architecture.

As a result of this interest, Mastercard has launched several blockchain-related projects and initiatives. The most recent, in early August 2021, is the opening of its Start Path programme to blockchain-enabled businesses. This announcement by Mastercard also echoes the one made a week earlier. The US giant announced an alliance with Circle, Paxos, Bitpay and Uphold, all of which are active in blockchain, to integrate more features into its card programme.

A Goldman Sachs study reported by Bloomberg8 of 150 family offices around the world also shows the growing interest of UHNWIs in blockchain investments. 15% of them confirm that they have already invested in cryptocurrencies, while 45% say they are interested in doing so as a hedge against “higher inflation, prolonged low rates and other macroeconomic developments after a year of unprecedented global monetary and fiscal stimulus.”

Investing in blockchain startups and projects is thus becoming increasingly common. According to a Bloomberg report compiling data from CB Insights and picked up by Cointelegraph 129 blockchain startups received about $2.6 billion in funding in the first quarter of 2021. This figure already surpasses the total funding over the whole of 2020 for all blockchain startups by $300 million.

Energy use and sometimes high transaction costs limit the implementation of solutions.

With a new generation of out-of-the-box investors entering the alternative finance markets, these numbers are likely to increase in the coming years as well.

In the face of this enthusiasm from institutions and players in various industries, blockchain still faces some limitations. Energy use, the Achilles heel of many blockchains like Bitcoin, and transaction costs that are sometimes too high for public use during peak periods (e.g. Ethereum) limit the implementation of solutions. The lack of appropriate regulations is also a heavy sword of Damocles hanging over the promises of certain projects.

Several players are trying to make a breakthrough with their own answers. This is the case of Ethereum with its new EIP-1559 update, better known as Hard Fork London, promising a massive reduction in transaction costs, and which has been generating controversy and expectations for a few days. But the answers are still lacking, and the well-known problems of energy consumption or transaction costs are not yet solved.

The potential of blockchain is therefore growing, and projects that take into account the current limitations and focus on concrete and truly operational solutions are the ones that are now attracting attention. Several startups based on the pragmatism of the reality on the ground rather than on often unrealistic dreams and visions are leading the way, attracting investment, customers and talent with their operational blockchain-based products.

This is the case of FireBlocks, a platform that allows banks to store cryptocurrencies and that has just raised 310 million dollars, bringing its valuation to 2 billion. Another example is Swiss bank Sygnum, which tokenised a Picasso painting with the company Artemundi, or Wecan Group with its compliance solution Wecan Comply, which recently announced Julius Baer and Bank Syz as new users.

If there is one thing that is certain, it is that Alan Greenspan’s quote has never been more relevant.

 

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