Blockchain technology is already changing the world, but those changes haven’t yet had a large impact on investor relations. Ben Ashwell and Alexandra Cain outline how the technology could affect IROs in the future
In 2008 Satoshi Nakamoto – an anonymous individual or group of people writing under a pseudonym – published a white paper about a ‘peer-to-peer electronic cash system’: Bitcoin. Just 13 years later, Bitcoin’s market cap exceeds $1 tn and Coinbase, the world’s largest cryptocurrency exchange, is a public company with a listing valuation of $65 bn.
The growth of cryptocurrencies and blockchain technology, which provides the infrastructure for most cryptocurrencies, has been explosive in such a short space of time. Blockchain and distributed ledger technology (DLT) has the potential to be transformative in many parts of society – healthcare, voting, banking, insurance, retail – or so the evangelists say.
At IR Magazine, we’ve watched the growth of blockchain technology and cryptocurrencies with interest, but questioned whether any of these technologies would likely affect investor relations professionals any time soon. Most people we speak to say it’s unlikely for some time. Given the nature of the work, the IR profession tends to be late to adopt new technologies, looking for proof of concept, regulatory compliance and reassurances of technical security before trialing speculative technologies.
Even so, the last few years have seen pilots of proxy voting on blockchain, distribution of dividends as securitized tokens and public firms integrating cryptocurrencies into their equity stories in several ways – either by enabling the use of cryptocurrency to make transactions (Visa, PayPal, Microsoft, Tesla, AT&T, Overstock and more), or by buying cryptocurrency as a capital-allocation decision.
Institutional money is taking note, too. Private fund managers at Morgan Stanley and Goldman Sachs will now offer Bitcoin and other digital assets to its private wealth clients, while ETF providers are getting the regulatory sign-off required to launch Bitcoin ETFs.
In this article, we’ll look at some of the ways this new generation of technology could affect investor relations professionals in the future, and check out the ways in which it’s already coming into play.
Companies already integrating cryptocurrency and blockchain technology A growing list of public companies are increasing their integration of blockchain technology and cryptocurrencies. The word ‘blockchain’ has been mentioned 1,734 times in public company event transcripts during the last five years, according to Sentieo data provided to IR Magazine. The first mention of blockchain at a public company event was in November 2014, with mentions peaking in 2018 and 2019, though they have since decreased. Mentions of blockchain have appeared most frequently in transcripts associated with Broadridge Financial, Mastercard, Overstock and IBM.
Source: Sentieo
‘Bitcoin’ doesn’t have as many mentions during the same time period, even though its first mention was earlier, in September 2013. There have been 568 mentions of Bitcoin during the last five years, and the peaks have roughly correlated with peaks in the price of Bitcoin: mentions increase during Bitcoin’s run-up to a price of $19,000 in late 2017, and spike again during Bitcoin’s rise to exceed $60,000 for the first time.
As noted earlier, many of these mentions are from companies that have moved to integrate Bitcoin or cryptocurrency into their business model – with customers of PayPal, Square, Visa and Mastercard all being able to buy and use the currency.
Goldman Sachs ran a test earlier this year to examine the returns of companies that have integrated Bitcoin into some aspect of their business models. The 19 companies that were subject to the screen outperformed the S&P 500 by 34 percentage points, boasting a 46 percent return, compared with the 12 percent return of the S&P 500 during the same period.
‘On average, these stocks have dramatically outperformed the S&P 500 during the last several months alongside the surge in the price of Bitcoin,’ write Goldman Sachs strategists including Ben Snider and David Kostin. ‘An equal-weighted portfolio of the stocks has demonstrated roughly 60 percent correlation with Bitcoin and the Bloomberg Galaxy Crypto Index during the last several months.’
Companies investing in cryptocurrency for capital allocation In other cases, public companies have opted to buy cryptocurrencies as a capital-allocation decision. The two leaders in this field are Overstock and Tesla. Overstock started accepting cryptocurrency as payment in 2014. It also runs a cryptocurrency exchange, tZERO, which has attracted particular interest from retail investors during the last year, and prompted Overstock's share price to rise sharply around the direct listing on Coinbase.
Tesla announced in its most recent 10K that it had purchased $1.5 bn of Bitcoin in the first three months of 2021. While it’s difficult to calculate precisely because of the volatile nature of cryptocurrency prices, one industry commentator – Francine McKenna – estimates that the company could have made up to $1 bn in the first quarter of 2021 from Bitcoin’s price increase alone. Tesla also announced that, from April 2021 onward, it would accept Bitcoin as currency from customers buying its cars.
Tesla’s enigmatic CEO Elon Musk has also extensively promoted Dogecoin, a cryptocurrency that was originally started as a joke, based on a meme of the Shiba Inu dog breed, and now boasts a market cap of $56 bn. While Musk is the undisputed Dogefather, other public companies have also recognized the social media following that Dogecoin has garnered – with brands such as Slim Jim and Mars tweeting on a daily basis about Dogecoin.
An IR representative from Slim Jim parent company Conagra Brands declined to comment on whether IR is involved in any of the promotion of Dogecoin on social media, but the company’s CEO, Sean Connolly, mentioned on the company’s April 8 earnings call that discussion of the cryptocurrency has led to ‘a marked uptick in audience engagement’ on social media. This was the first mention of Dogecoin on a corporate earnings call.
But while some consumer brands court engagement with potential retail shareholders on social media, there are other public companies that are discussing blockchain and cryptocurrency using more traditional, restrained methods. One example is Broadridge Financial, which is working to integrate blockchain technology into the financial services sector in a variety of ways.
‘The financial services industry has leveraged blockchain technology to create regulation-compliant private networks through which participants could collaborate over a shared ledger,’ Mike Tae, chief transformation officer at Broadridge Financial, tells IR Magazine. ‘We have seen the successful adoption of blockchain to address operational efficiencies throughout financial services firms. These uses of DLT are in production today, with the value seen through removing friction in asset movements, minimizing reconciliation efforts with a golden source for transactional data and reducing settlement windows through tokenization of securities and cash.
‘What were parallel but related paths outside and inside of financial services institutions are now converging. This is happening in a few ways. First, both institutional and retail investor interest in cryptocurrency is pushing financial institutions to support the trading and custody of crypto assets. Currently, these activities are dominated by fintechs like Coinbase. Second, traditional financial products like ETFs, futures and options have created new opportunities to invest in crypto assets.’
Will cryptocurrencies prompt greater competition for capital in the future? Many institutional investors and financial advisers have been cautious about investing their clients’ money in cryptocurrencies in the past, due to their highly volatile nature. Indeed, according to a survey of 3,400 institutional investors from JPMorgan in March 2021, 89 percent of respondents say their firm doesn’t trade or invest in cryptocurrency and the majority of those respondents say it’s unlikely their firm will change its position in the future.
As mentioned earlier, however, new products are coming to the fore for institutional investors, and the sharp uptick in cryptocurrency prices during 2021 is at least partly attributable to institutional money, according to PwC’s global cryptocurrency leader Henri Arslanian.
While the SEC has at least nine outstanding applications for Bitcoin ETFs – from the likes of Fidelity, VanEck, SkyBridge Capital and others – several have now been approved in Canada. Fred Pye, president and CEO of 3iQ, says he spent four and a half years working with Canadian regulators to secure approval of the 3iQ Coinshares Bitcoin ETF.
Pye says the initial challenge was that regulators couldn’t determine whether Bitcoin is a commodity or a currency. But after consultation with national Canadian regulators and Toronto securities regulators, he was eventually able to hold a public hearing and secure approval.
‘If you’re an investment adviser or director of a pension plan, you’ve got a fiduciary duty and you’re not investing in something that isn’t regulated,’ Pye says. ‘We spent all of that time in due diligence with the regulators to get the product done right so now the pension plans know the homework has been done and nobody rushed to a direct settlement.’
As more legitimate and regulated products come to market that allow institutional money to invest in cryptocurrency, it raises the question of whether public companies could face greater competition for capital in the future. After all, it’s not often an asset class grows from being a nine-page white paper to being worth $2 tn in the space of 13 years.
Changes to settlement and clearing Another way blockchain technology could change the capital markets – and therefore the role of IR teams – is through settlement and clearing times. A bright spotlight was shone on the world of clearing in the US in early 2021, after Robinhood CEO Vladimir Tenev testified to the House Financial Services Committee that the broker halted trading on certain securities – including several cryptocurrencies – to ensure compliance with clearinghouse rules.
It came at a time when the Depository Trust and Clearing Corporation was actively talking about reducing the time to conclude settlement from two days to one. In Australia, however, blockchain is already being trialed as part of a potential rethink on the process of clearing.
The Australian Securities Exchange (ASX) is five years into a seven-year project to update its 30-year-old Clearing House Electronic Subregister System (Chess) with DLT. Chess is the technology platform that clears and settles trades made on ASX, Australia's main equities market. One of the main aims of the Chess update is to give third-party service providers access to the underlying technology, so they can build investor relations and other services for listed companies.
Although this is one of the most significant tech projects ever implemented by ASX, listed businesses probably won’t notice any major changes in terms of how trades are processed once the Chess replacement system goes live. The blockchain-based improvements will mean ASX-listed entities will have easier access to information about their register of holders. Investors will also have better information about the assets they own.
ASX has undertaken a comprehensive consultation process throughout the Chess replacement process. In fact, consultation for the blockchain replacement project began in earnest back in 2015 when ASX opened its Customer Development Environment to allow market participants to explore the new blockchain settlements and clearing technology.
During a recent consultation period, market participants indicated the system’s post-trade capacity needed to be increased. This request followed a particularly turbulent time on capital markets in March 2020, a period of never-before-seen trading volumes on most equities exchanges. As a result, the new system must be built to withstand the huge trading volumes experienced during this period of the pandemic and more.
ASX will open an Industry Test Environment before the project goes live for listed entities and service providers to connect to the system and explore its functionality. The Chess replacement project is just one of a number of upgrades ASX is making to its technology infrastructure. It has also launched a new secondary data center and upgraded its derivatives technology.
ASX has confirmed a go-live timeline of 2023 for the Chess replacement system. This date has been extended a number of times, most recently to account for the disruptions Covid-19 had on the project in 2020. The market can expect updates on the project’s milestones as the go-live date approaches.
Securitized tokens, blockchain proxy voting and other potential uses While many applications of blockchain technology may still feel speculative for some IR professionals, there have been other trials of the technology that are even closer to the traditional remit of an investor relations department.
In the Spring 2021 issue of IR Magazine, Linda Montgomery profiled another innovative use of blockchain technology, again by Overstock. ‘We wanted to give real value to shareholders and advance the adoption of blockchain in capital markets,’ Alexis Callahan, Overstock’s director of investor relations, told Montgomery when talking about the company’s offering of a blockchain-based securitized asset with voting rights and a small annual dividend. It was redeemable on Overstock’s tZERO exchange.
‘The education and outreach component to communicate what we were trying to accomplish was massive,’ Callahan continued. ‘It included current and prospective shareholders, regulators and institutional investors early in the process before the proxy vote. We did lots of industry-wide calls to answer questions. Then later, we had a high volume of retail investor calls when they noticed a new deposit in their account and wanted to understand what it was. Overall, once they understood, the response was positive.’
Montgomery says she believes securitized token offerings (STOs), like Overstock’s, could become an effective way for private companies to raise money in the future, and could lead to more private companies needing IR professionals.
‘STOs will become like a C or D round of venture capital funding for companies that are not yet ready or don’t fit the criteria for an IPO,’ she explains. ‘Companies could have thousands and thousands of shareholders and the IR job may be a lot like today’s buy-side IR, doing lots of outreach.
'While you don’t need an IRO for venture capital-funded companies with 25 investors, this could potentially amount to thousands and thousands of investors for significant or hot public companies.’
In another potential use of blockchain technology, Banco Santander trialed blockchain-based proxy voting, with the assistance of Broadridge Financial Solutions, JPMorgan and Northern Trust, in 2017 and 2018. At the time, representatives of Banco Santander and Broadridge Financial Solutions talked up the potential of blockchain-based proxy voting, saying it offered greater transparency and faster execution.
Wholesale transformation ‘still years away’ Ultimately, the practical uses of blockchain and cryptocurrency are largely limited right now to public companies that have a reason to experiment – either to meet client demand or realize marketing gains. But for Darrell Heaps, founder and CEO of Q4, the potential for greater implementation is exciting, even if it’s still hard to see.
‘I’m bullish on the technology,’ he says. ‘But the challenge is around the adoption and there being real benefits for the institutions the technology will change. The ability to disrupt these institutions will take huge momentum and I find it challenging to see how that happens in the short term. In reality, I think the innovation needs to come from inside the market.’
Tae agrees. ‘A wholesale transformation of the current capital markets infrastructure to leverage DLT is still years away,’ he says. ‘In the meantime, we expect pockets of use-cases across the capital market landscape will continue to leverage this technology and address market inefficiencies.’
