An asset manager with stakes in Facebook, Google and Tesla is looking to diversify its portfolio into the cutting edge of investment, but a barrier of regulatory hurdles exists between the idea and its execution.
Two years ago, New York-based ARK Invest became the first firm of its kind to buy exposure to bitcoin. Now, its founder and CEO Catherine Woods has her eyes set on what she considers the next frontier – initial coin offerings (ICOs), or sales of blockchain protocol data she believes could appreciate in value.
Obstacles to an investment fund focused on these projects, however, include an uncertain tax climate and the fact that some consider the ICO model itself – which lets individuals gain exposure to the value created by interesting new blockchain tech without middlemen – as potentially disruptive to Ark Invest’s own model.
But the single biggest issue facing Ark Invest and its peers may be a lack of trusts offered either on public exchanges or via over-the-counter options, according to Woods.
In conversation with CoinDesk, Woods called for the creation of a trust that would assure a degree of due diligence had been done on a number of ICOs.
“We’d need someone to create a kind of a security backed by the ICOs or a group of ICOs. Then we’d have assurance that it’s passed all of the regulatory requirements that we need it to pass before we can invest in it.”
Unlike other venture capital investors who have already begun to participate in ICOs (including Fred Wilson, Naval Ravikant and Tim Draper), Ark Invest and other ETF managers are required to comply with stringent investor protections. But there’s opportunity in navigating this hurdle.
Since Ark Invest’s initial bitcoin investment in 2015 via an exchange-traded trust, the weight of the investment has grown from 1% of its total portfolio to 10%.
Yet, since Ark Invest first announced its bitcoin investment products, several other firms have also entered the space.
SEC-registered Kinetics Mutual Funds now includes two funds with bitcoin exposure in excess of 2% each, and Acatis Datini’s ValueFlex fund consists of a 5.3% bitcoin stake, its largest position. Further, since Ark first announced its bitcoin investment vehicle, the price of bitcoin has increased by 880% from $230 in September 2015 to around $2,300 today.
By comparison, the total number of ICO sales denominated in ethereum, waves and other blockchain asset platforms reached $103m last year, and between 1st January of this year and 10th May, 37 ICOs have already generated $136m in funds, according to ICO data provider Smith + Crown.
But before firms like XBT Provider, Revoltura and Vontobel will likely consider building a trust based on one or more of these token sales, Woods expects that more regulatory certainty will be required.
Specifically, she expressed concern over whether using one token to buy another token is an in-kind exchange and therefore not taxable, or if it constitutes a taxable event based on capital gains law.
“I actually would like the IRS to weigh in on this,” said Woods. “I would like them to say this is an in-kind exchange and the capital gains are therefore not taxable. If they decide otherwise that is going to upset the apple cart here.”
In a sense, the transition from being an investor in disruptive technologies to being an investor in disruptive investment models has already begun. In spite of being prohibited from buying a stake in an ICO until a trust is created, Ark Invest is already building out its expertise in the field.
Since its earliest days in the world of digital assets, the firm has been sought after by startups looking for a more accurate way to appraise their valuation, according to Woods.
Increasingly, she said her firm is being contacted by entrepreneurs looking for more advanced valuation techniques that take into consideration the potential net savings to an industry by moving its transactions to a blockchain.
While Woods calls the work a “bridge between financial services and the blockchain world”, she said her involvement in the tokens sales themselves will always be limited until someone else builds a bridge of a different sort.
“We can’t buy them because they’re not financial securities, but I can see [us] in the ICO world, picking and choosing, because some of them are going to hit it big.”
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