Blockchain firms ready to emerge out of the shadows, conference told
Institutional investors looking for ways to get a piece of bitcoin’s massive gains
Deepak Kaushal, director of research at GMP Securities LP, had a word of caution for the business crowd assembled under the Fairmont Royal York’s crystal chandeliers in Toronto on Thursday.
GMP was hosting a conference on blockchain, the technological innovation that makes cryptocurrencies such as bitcoin possible. In a testament to the explosion of interest from the finance community as the price of a single bitcoin surges past US$15,000, the vast majority of people in attendance were wearing suits and ties, not jeans and hoodies. After the previous speaker had colourfully described the cryptocurrency community’s attitude as “zero f---s given,” Kaushal issued a retrospective heads-up to anyone more used to a different tone.
“I just wanted to warn you,” he said. “You can’t get through a blockchain conference without hearing an f-bomb.”
Just a few years ago, bitcoin was best known as a curiosity, of principal interest to geeks, hackers and drug dealers on the dark web. Today, institutional investors are looking for ways to get a piece of the sector’s massive gains in the hopes of getting in early on a technological innovation some predict will be as transformative as the internet.
GMP’s chief executive Harris Fricker wants to help match those investors with blockchain companies looking to raise capital. Fricker said he sees an opportunity to help such companies go public using a mechanism familiar to Canada’s mining and oil industries: reverse takeovers to list blockchain firms on the TSX Venture exchange.
“The real opportunity has been to do what we always do,” Fricker said .“And that connects really good entrepreneurs with good management teams and good boards with really smart people who want to invest money in them.”
The strategy comes with some big risks. Governments are still grappling with how to regulate blockchain and cryptocurrencies, which make it possible to anonymously transfer value across borders without involving currency issued by central banks.
To stay on the right side of the regulatory enforcement, Fricker said GMP does rigorous due diligence on every blockchain deal it underwrites. Ultimately, however, he said his firm is looking for the same qualities that make any startup a good bet.
“It all starts with, do you have a good management team? Do they have a logical and compelling idea? And do they have, in their structure, good governance?” Fricker said. “We pass, probably, on eight out of 10 opportunities.”
To some blockchain companies, going public through a reverse takeover on a junior stock exchange represents the old-fashioned way of raising money. The past year has seen unproven companies with little more than a website and an idea raise hundreds of millions of dollars through initial coin offerings, in which founders sell units of cryptocurrency to the public representing shares in the company.
Fricker said he thinks the ICO market will eventually calm down and become a permanent fixture, with founders able to use the mechanism if they comply with the same regulations as anyone else selling a security. However, he said companies will still need the services of investment banks like GMP if they want access to big-name institutional investors.
“We’re dealing with large institutional money managers, pension funds, endowments, trusts,” Fricker said. “They want to know the due diligence has been done, they want to know there’s a toptier auditing firm in the mix, a toptier legal firm in the mix.”
There’s also a risk governments will one day decide they don’t like the idea of a stateless digital value transfer system and attempt to ban cryptocurrencies outright. Regulatory decisions that are unfavourable to the sector have caused wild swings in the value of bitcoin in the past, with more and more capital at risk as the mainstream financial community enters the space.
Speaking on a panel, Mat Cybula, chief executive of Cryptiv Inc., a Toronto-based cryptocurrency wallet software company, said he thinks governments would have a tough time making a move that drastic now.
“At this point, if you try to kill bitcoin, it will just make it stronger,” he said. “There’s no going back at this point.”
GMP’s chief executive Harris Fricker wants to help match institutional investors with blockchain companies. He sees an opportunity in reverse takeovers that list blockchain firms on the TSX Venture exchange, though it comes with huge risks in the Wild...