Amplify Files For Blockchain Technology Fund With SEC

Investing, News, Regulation | November 24, 2017 By:

Christian Magoon, CEO of Amplify, has filed an application with the US Securities and Exchange Commission (SEC) to create a blockchain-focused exchange-traded fund. Unlike the previous efforts that sought to create ETFs based on bitcoin, Magoon’s play will focus on companies that are likely to profit from blockchain, and exchange-listed products that invest  in blockchain applications for digital currencies.

By taking this approach,  Magoon hopes to circumvent the SEC’s stated concerns about bitcoin and other cryptocurrencies, plus provide an avenue for investors who don’t like digital currency’s volatility to still gain some exposure to the sector.

He talked with Block Tribune about his plans.

BLOCK TRIBUNE:  So, you filed with the SEC. Tell me what happens next.

CHRISTIAN MAGOON: So, generally after you file for a new ETF, there’s about a 30-day period where you will expect comments from the SEC, so we’re still within that 30 days. Those comments would be regarding the subject matter of the fund. They essentially review the entire prospectus for any comments or clarifications that they would ask us for, and when you file, you’re generally on a 75-day clock to go effective, meaning to launch your fund within 75 days.

So, this is kind of part of the normal process you go through to launch an ETF. Get your first comments within that 30- day period. Some times there are comments, some times there’s not. You generally clarify those comments or potentially make any adjustments as needed and then, again, you’re trying to go to launch that fund after that kind of 75-day period goes into effect from the original filing date.

BLOCK TRIBUNE: What’s your sense of the SEC and their attitudes towards ETFs at this point? Because obviously we all know that they rejected a few applications in the past. Why now for you?

CHRISTIAN MAGOON: Yeah. So, I think there’s been maybe seven or eight exchange traded fund applications submitted to the SEC. They really haven’t gone anywhere. They’ve kind of been either being rejected or continuing on in the comment period. All those funds really have one thing in common, and that is that they were trying to own cryptocurrency like bitcoin directly, or most recently were trying to hold cryptocurrency features, like bitcoin features that many believe will come to market some time in the next quarter or so on the major exchange.

Our approach in our filing is quite different. What we’re seeking to do is own companies that are defined as leaders in blockchain, and the leadership definition is a company that either is a leader in receiving revenue today from blockchain-related activities, a leader in research and development as defined by being involved in multiple research consortiums, or a company that is going to be involved in some type of related service to the blockchain technology. Maybe they’re producing mining equipment or software, etc.

So, these are companies versus actual cryptocurrencies. Now, the fund and the filing does contemplate owning a percentage of the portfolio in what’s called exchange-listed digital commodities. So, these would be exchange-listed products. They’d already be listed on a major exchange. And today there really aren’t any here in the US, but there are some outside the US and Canada and Europe, and the fund contemplates owning some of those. I think they’re in the form of a closed-end fund or an exchange-traded note that would be available overseas. So, that would be the minority of the funds exposure, the majority of the funds exposure would be to actual what we call blockchain leaders.

So, we’re taking an approach where we’re only owning things that are already approved in trading on listed exchanges. The stocks that we would own would most likely already be in existing ETF vehicles. And then the exchange traded products we’re contemplating owning are likely already held by other exchange traded funds or 40 Act funds here in the US.

So, one of the funds that is owned by several ETFs here in the US is the Grayscale Bitcoin Trust, GBTC. I think one of the ARK ETFs owns some of that GBTC in, I think, their disrupted technology product, and there hasn’t been a problem with them owning that. I think there’s some ownership restrictions in place. So, I guess essentially our approach is not necessarily being a cryptocurrency fund, but instead going one layer deeper and trying to own blockchain and then through to the companies that are kind of doing the leading work in it that are publicly traded. And then second, having some exposure to the leading or most widely recognized application on the blockchain right now, which is cryptocurrency, but doing it through vehicles that are already exchange-listed, whereas all the other filings are anticipating either being able to buy bitcoin directly, which is not exchange-listed. Seems like there’s some concerns about the market structure of bitcoin or some of the other digital currencies, since they don’t trade on kind of these established exchanges.

And then second, the other approach of owning futures, there aren’t any futures contracts. Seems like the CME may be the first group to list futures contracts on bitcoin here, and I think the most recent interview I saw was maybe December 14th. And if that happens, that will probably change the posture of the regulators. I think their concern primarily is that what goes inside the ETF has enough regulations around it in terms of its market structure, because I think they get concerned from an investor standpoint that perhaps there’s risks that investor would be exposed to if they were owning things inside the ETF that weren’t on these national kind of exchange platforms. So, I understand their viewpoint, but I also understand that it seems to be that some of the cryptocurrencies will have at least derivatives options or futures traded on them on major national exchanges, at least one.

If that happens, I’d expect there’d be digital currency, bitcoin type ETPs to launch very soon after that.

BLOCK TRIBUNE: The SEC seems to have woken up as far as initial coin offerings. Does that help or hurt you?

CHRISTIAN MAGOON:  I think it helps us. I think a lot of people aren’t familiar with blockchain being kind of this underlying technology to digital currencies, and the more digital currencies are accepted or are understood, the more I think people become interested in the underlying technology, which is blockchain, and I think that’s ultimately good for us. We really view blockchain as a technology that’s foundational, where many types of businesses and applications can be developed off of it not unlike the Internet was originally and initially there’s software that’s developed like browser systems, which are great businesses and applications build off the Internet infrastructure.

There’s social media companies that are built off the Internet infrastructure. We think that today in blockchain, the digital currencies, cryptocurrencies are kind of this first major application built off blockchain and a lot of people don’t realize there’s kind of a foundational technology. So, anything that I think promotes kind of the use of blockchain, whether it’s cryptocurrencies or other applications I think is good for us.

The focus of our fund, which is to try to own leaders in blockchain, because we think that Blockchain technology could have a substantial financial impact on companies that are embracing it and are researching it and receiving revenue from it, not unlike what companies who are focused kind of in the Internet or applying the Internet to their business models did.

We have another ETF, our online retail ETF, and if you look at the out-performance of online retail stocks versus brick and mortar retail stocks, there’s over a 50 percentage point performance difference just in the last 18 months between those two groups of stocks. One embraced technology and the other really hasn’t, and there’s been a gulf, and we think that similar analogies going to happen with blockchain here in the coming years. Companies that do embrace blockchain technology and some of the applications that come from it will have a significant advantage over those that don’t.

BLOCK TRIBUNE:  How do you determine what companies you’re interested in, beyond that broad stroke that you just mentioned there? What are you looking for in what they’re doing, or their management team, or their fundamentals?

CHRISTIAN MAGOON: Yeah. So, it’s definitely one of the challenging parts right now in terms of security selection, because there aren’t many companies that 100% of their time and efforts are focused on blockchain. There’s certainly private companies and enterprises that are doing it, but from a public standpoint, it’s a little bit more challenging. So, the basis of our fund is an underlying index that considers several variables and the variables currently, which are probably going to change as the industry changes, but initially we’re looking at companies that have publicly invested the most amount in blockchain technology and research. So, there’s several databases out there that you can access to show some of the actual dollar amounts that are being invested in blockchain technology, we would consider them leaders in that research kind of sleeve.

The second area is companies that are actually receiving revenue today from blockchain, and that would be broken down in their financials. And it’s either businesses or equipment or services that are relevant to blockchain. So, it could be selling processing equipment or mining rigs, or consulting services kind of towards the blockchain. So, those are kind of the two primary economic factors. And then the third area in terms of just kind of what we call R&D, research and development, is companies that are joining more than one research consortium around blockchain, because some of these companies, they’ll join one just for PR purposes, but there’s definitely a smattering of firms that are not just joining one, they’re joining a variety of them and seem to have a underlying tilt towards working on blockchain from a research and development standpoint, and we think that’ll ultimately impact their business.

So, those are essentially the three groups of kind of leaves, if you will, that make up the underlying equity portfolio. As we see the industry develop, there will be more what we call probably blockchain-persistent companies that are essentially all their revenue, all their research and development, all their cost that their putting into their business or investment in their business are blockchain-focused. But today there really aren’t many companies like that that are public. And this isn’t unlike the Internet, where, early on, many telecom companies, software companies started to have initiatives in research and development going into Internet-related ventures that ultimately ended up creating, becoming their full-time business, the majority of their business, or spinning-off units that became just focused on kind of Internet-related applications.

We really still think we’re in the early days of this, but our approach is really the pick and ax approach on blockchain, these companies that are kind of working in the space and doing a lot of…they’re not looking for the home run, so to speak, but instead, they’re working on development, developing business models, research, unique applications in their existing business model that incorporate blockchain.

You know, we see it even at some of the big banks, where some large banking CEO will come out and be very critical about bitcoin or maybe even ICOs or cryptocurrency. But then you turn around and look at some of their corporate statistics and they’re investing heavily in blockchain technology, and maybe even they’ve talked positively about blockchain technology. So, we think there’s a little bit of noise here where maybe some of these financial firms especially are dismissive of digital currency and ICOs, but it’s quite interesting when you kind of get through that initial noise and maybe it’s due to valuation, etc., or maybe them not being familiar with it.

You get down a little bit further in their organization, you find out they have significant initiatives and research development investment into blockchain technology. So, they seem to really love the blockchain technology, they just seem to have some issues with maybe the current valuations of digital currency.

BLOCK TRIBUNE:Let me ask you this, what do you see as the barriers to growth going forward? Right now there are people talking about the lack of developers, for instance. What do you see?

CHRISTIAN MAGOON: So, I think one of the barriers I think is there hasn’t been a killer app outside of, granted the ICOs and cryptocurrency is a pretty prominent application of blockchain technology. But there hasn’t really been a killer app that I think has really drawn in the financial or investment firms. I think there’s a lot of promise for a killer app, some type of application that would really transform their business, reduce costs. But I think it has, there just hasn’t been that out there yet. And I think once that happens and a company’s really able to take advantage of it and show on an earnings call or an annual report how they were able to save some significant money internally in terms of transaction costs or verification costs or data management costs. Until that happens, I think one of the barriers is you’re not going to see a flood of an overwhelming amount of money going towards that, and to me, when the corporations start putting money towards blockchain in a major way and implementing firm-wide initiatives, when that money starts to come,

I think the educational system starts to correspond, the job market starts to correspond. So, I think that’s what, to me that’s one of the big barriers is there’s not a poster child so to speak yet for a business application. I think there’s been some interesting stories about the promise of where some of the efficiencies could come from, but we haven’t seen a major company that I’m aware of yet roll out some financial results that show blockchain in action and significantly reducing costs, liabilities, time. All of those things seem to be the benefits of blockchain. I think we’re going to see that sooner than later, and to me, that’s when the ball really starts to roll in a big way and then it rolls kind of downward from once corporations start to do it, then the government starts to notice a little bit more and that starts to percolate there. Suddenly, that gets more into the individual market and certainly then the job market blooms for that. That kind of hits the educational system and then I think you got a really a steady kind of group.

So, what is that application? I’m hoping one of these major multinationals would roll something out. Could be even a cybersecurity solution, that could be an interesting way, because kind of like doubling up on the concern and the spending on cybersecurity. Some type of blockchain application that makes it a lot more expensive for hackers to go in and attack a company when it’s not one server but when it’s spread to thousands of computers in terms of having to attack that to bring something down. I think that’s quite interesting.

To me, that might have the most interesting application that if blockchain, a blockchain cybersecurity solution were to develop, because there’s already intense interest there, I think that would be an unbelievable way to really jump-start the blockchain technology and make it more mainstream. What’s interesting to us is since we filed for the fund, we’ve certainly been talking to a lot of people who I think are fairly sophisticated in the finance world and it’s amazing how many people have never heard of blockchain or just they’ve heard of it but it’s hard for them to explain or they don’t quite understand it.

So, I think just awareness is going to be a big deal and I think even for us, getting the first 40 Act fund, if we have the first 40 Act fund or ETF out in the marketplace, I think that is even a step forward as we’re able to talk to the financial community a little bit more about what blockchain is and the impact it could have.

BLOCK TRIBUNE: I want to ask you three questions, so put on your prediction hat, about 2018. First, what do you see bitcoin’s price being midway through 2018?

CHRISTIAN MAGOON: That’s a good question. Boy. Given that it’s been, I think it’s had a 25% correction here in the last maybe two and a half weeks and now right back at the $8000 mark, it’s interesting ’cause from our standpoint, we look at … we have ETFs that have invested in stocks and we have ETFs that invest in bonds. We really aren’t exposed to an area like this that’s had such significant volatility, and I would say thus far the price of bitcoin has really surprised me. Really, a lot of the, I mean I guess ethereum and Litecoin, too, would be another one to throw in there. So, it seems to me that the trend should be, continue to upward. I think there’s enough-

BLOCK TRIBUNE:Give me a number.

CHRISTIAN MAGOON: Give you a number. Boy. I don’t think $10,000 is out of reach given what its price activity has been. Some people say I may be conservative, but others I may be a dreamer on that.

BLOCK TRIBUNE: All right. ICOs. What do you see?

CHRISTIAN MAGOON: I think, you know, like any area that’s white hot in terms of returns and an interest, I think there seems to be way more many, way too many ICOs out there. I think ultimately, we may be able to get out with some decent market capital initially and get some funding, but ultimately, I think it’s going to depend on that network you build around it in terms of the user base, but then also what’s the unique application that the coin is able to deliver? And many of these seem to be more about branding than they are about the size of their network or the functionality of the coin.

So, I’m guessing this is not unlike other areas we’ve seen where whether it’s the automobile industry or the recording industry where initially thousands of companies literally spring up and start manufacturing or making things, goods and services. And eventually, a big consolidation happens and you get a dozen or so meaningful players that most of the assets tend to be concentrated in the top four or five.

So I think, my opinion it’s going 80/20. Doesn’t mean that … I still think there are some, probably some new ICOs that will come that will provide unique functions that people haven’t really thought of yet that will still get their place. So, I still don’t think we’ve seen the top 10 ICOs launch. I think there’s still some more that will join the top 10, but definitely seems like bitcoin, ethereum, will have … Gosh, be hard to think that they wouldn’t be in the top five three or four years from now.

BLOCK TRIBUNE:What do you see, finally, as the impact of sovereigns getting into the game of cryptocurrency?

CHRISTIAN MAGOON: Well, it seems like it’s a double-edged sword, because it could be massive if some of the demand that they could create and awareness that they could create. The same time, some of the, depending on if they take the step and become an issuer versus just an investor, so just taking that apart, if they become an investor, I think that is very constructive to the whole ICO market because it starts to legitimize it when large institutions with trillions of dollars start to take an, even just have a four or five percent allocation into an asset class, it legitimizes it to all the investors below. It starts to make it more of a fundamental part of peoples’ portfolio, which is big. So, that could be huge from an investor standpoint.

If they start going all the way into issuer’s standpoint, that’s where it could, to me, be a double-edged sword, just because I think it could eat into some of the existing markets. Although I’d caution that the issuer being sovereign and being an issuer of these coins might actually kind of work against them, because of potentially the connection they have to some of the, let’s say the politics and the government kind of ties to have. I could see that being actually a negative point to people in the ICO market.