Diligence Framework for Blockchain
The Questions Du Jour in 2017: Does DiligenceVault employ blockchain technology? Does DiligenceVault offer diligence questionnaire for blockchain investing? The answer to former is Not Yet, and latter is Yes. So thought this focus on diligence for blockchain could be a nice way to close the year, especially as new investment options are knocking on the investors door.
Almost all institutional investors and asset managers have been evaluating or educating themselves on this new technology, and its tremendous potential given its ability to enable a trustless distributed consensus. However, the two different use cases of the tech have received differentiated investments from the institutional community.
Non-currency applications of the technology have proven to be an attractive investment destination. For example, there has been over $4.5 billion of new investment in blockchain firms this year, with funding coming in from asset managers with institutional LP backing as well as corporate ventures. The most common applications of blockchain in asset management and capital markets world is in smart contracts to enable mutualized settlement and clearing infrastructure, transfer agency, proxy voting, to asset administration to client onboarding use cases. These non-currency applications are expected to transform productivity across the industry and result in massive cost savings.
Currency applications or cryptocurrency have emerged as new store of value, without requirement of association with a trusted financial institution, but rather by leveraging the technology and the network of users and miner base. We have come a long way from barter system to paper currency to cryptocurrency as a medium to facilitate transactions.
For institutional investors to participate in this area, they would partner with external manager specialists, given the regulatory and operational challenges. Any evaluation of this investment partnership should involve diligence around 4 key areas:
Asset class diligence
Portfolio manager expertise diligence
Business operations diligence
Given the level of uncertainties, expected price volatility, and limited comfort with non-traditional fundamental basis for pricing, institutional allocation to currency applications of blockchain have remained muted. Consequently most funds listed in our map manage tens of millions which is insignificant portion of the overall market size.
For institutional investors,the adopters are already invested in the concept via either their venture capital allocations, or by being a user of blockchain technology product. Investing in cryptocurrency have MTM implications, and the volatility is a tough pill to swallow. It remains to be seen how a specialist cryptocurrency allocation develops in their opportunistic buckets over time.