This article appears in the February 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
With the digital space giving rise to new investing opportunities and inquiries from clients, financial advisors must keep abreast of technological developments.
What seems like an investment outlier today can move into the mainstream tomorrow. The world’s first crypto ETFs, launched in Canada just last year, have grown to hold almost $6 billion in assets under management, and the Ontario Teachers’ Pension Plan Board has invested in a crypto exchange. According to price-tracker CoinMarketCap.com, cryptocurrencies worldwide have a market capitalization of more than $1.6 trillion as of Jan. 31. (The TSX and TSXV have a combined market cap of $3.4 trillion.)
With crypto adoption in mind, here’s a short summary of three digital developments that are already having an effect on the financial world.
1. Blockchain, a.k.a. distributed ledger
While blockchain is associated with cryptocurrency, digital ledger technology has applications in many industries and business processes.
Blockchain is a digital ledger of transactions recorded in real time across a network of computers or nodes, according to a Deloitte primer on the technology. The assets can be tangible (for example, cars), intangible (patents) or digital (Bitcoin). Blockchain is so named because it stores transaction data in blocks; each block contains a unique digital identifier as well as the previous block’s identifier, thus linking the blocks to form a secure chain.
As transaction volumes grow ever larger, trading and tracking assets using blockchain reduces risk and cuts costs because the blockchain is secure and efficient. Its features protect against fraud, for example, thus reducing the need for oversight.
More than three in four (78%) senior executives responding to Deloitte’s 2021 Global Blockchain Survey said there is a compelling business case for blockchain within their organization. The survey polled 1,280 senior executives in 10 regions worldwide.
For investors, potential exposure can be found in myriad areas: supply-chain management, cross-border payments, identity verification, regulatory reporting, insurance fraud prevention and anti–money laundering tracking.
2. Non-fungible tokens
A non-fungible token (NFT) represents a digital asset that is composed of unique data stored on a blockchain (most commonly, Ethereum), which can prove the token’s authenticity and keep track of ownership. The most popular NFTs represent digital collectibles, such as cards, badges and video-game weapons; and digital art, such as images and music.
To be clear, buyers don’t own the collectible or art. Law firm Gowling WLG likens NFT ownership to buying a limited-edition print of a painting, with the buyer owning that unique, individual copy and a certificate of authenticity.
NFTs became popular in 2020 after auction house Christie’s sold a token representing the artwork of U.S. graphic designer Mike Winkelman for slightly less than US$70 million. Since then, many celebrities have joined the fray, offering and acquiring their own NFT art collections.
If the phrase “more money than brains” comes to mind at the thought of someone buying a pixelated image for tens of millions of dollars, you’re not alone.
Still, NFT adoption may follow a path similar to that of Bitcoin — something Julian Klymochko, founder and CEO of Calgary-based Accelerate Financial Technologies Inc., suggested in a blog post in January.
That month, the firm stated it will launch an investment fund that will hold a portfolio of so-called “blue-chip NFTs.”
Klymochko described NFTs as a cultural phenomenon, a way to participate in and own the next generation of the web — Web 3.0 — which will be characterized by decentralized networks driven by tokens traded on blockchains. As digital identities become more important than physical ones, “NFTs present the most straightforward way to burnish your [Web 3.0] reputation,” he wrote. The most popular NFT collections may even become the next Alphabet Inc. or Amazon.com Inc., he suggested.
Given the risks of NFTs, however — volatility, liquidity and security, for starters — Klymochko suggested an NFT allocation of less than 1% of the portfolio.
3. The metaverse
In anticipation of Web 3.0, Facebook Inc. changed its name last year to Meta Platforms Inc. in reference to the firm’s stated mission to “help bring the metaverse to life.”
The term “metaverse” refers to the internet’s evolution toward an immersive digital reality, as described by Klymochko. Meta’s website states 3D spaces in the metaverse will allow us to “socialize, learn, collaborate and play in ways that go beyond what we can imagine.”
The firm Meta expects this metaverse will emerge over the next 10 to 15 years. Already, virtual real estate in open-source 3D spaces has sold for hefty sums, and companies, including Walmart Inc. and Nike Inc., have positioned themselves for metaverse-based sales.
Virtual reality (VR) and augmented reality (AR) technologies will build the metaverse, and global spending on those technologies is expected to reach about US$73 billion in 2024, up from US$12 billion in 2020, according to a recent report from Morgan Stanley.
Whether businesses and consumers ultimately prove pumped or skeptical about this brave new digital world, VR/AR technology is experiencing uptake in the real one. The Morgan Stanley report noted that this technology is being used by businesses to allow consumers to try on clothes virtually, for example, and in manufacturing to train workers on heavy machinery.
Furthermore, a more digitally connected world means more cyberthreats and greater need for high-speed wireless connectivity. That presents opportunities for cybersecurity companies and telecommunications infrastructure, such as 5G mobile connectivity, Morgan Stanley stated.