HDFC Bank, ICICI Bank, Infosys and more...in a blockchain ETF's portfolio? That's possible

In November 2021, Invesco mutual fund deferred the launch of its blockchain ETF. The Indian parliament deferred a discussion around India’s cryptocurrency bill. So, the ETF may not be launched till the cryptocurrency regulations are in place.

Although blockchain and cryptocurrencies are not the same, Invesco’s proposed launch sent wrong signals. Some investors believed it to be the same as investing in cryptocurrencies.

What is a Blockchain ETF?

Blockchain got tied up with cryptocurrencies mainly due to Bitcoin. The world’s largest coin with a market capitalisation of over $600 billion is built on top of blockchain, an open source technology that makes electronic cash transactions tamper proof, transparent and publicly verifiable without the need for an intermediary. But cryptocurrencies are just one use of blockchain.

A quick glance of the top 10 stocks in the underlying portfolios of both Invesco India – Invesco CoinShares Global Blockchain ETF Fund of Fund (Invesco ETF) and NAVI Blockchain Index Fund of Fund (NAVI FOF) shows that the funds will invest in the likes of NVIDIA Corporation, Taiwan Semiconductor Manufacturing Company, Microsoft and Accenture. NAVI's blockchain fund too has not yet been launched.

In other words, a plain-vanilla blockchain ETF buys equity shares of companies, just like any sector or thematic fund. Many of these funds do not buy cryptocurrency coins. Funds that actually buy such coins are typically cryptocurrency ETFs. These are available in the US, Europe and Canada.

Swapnil Pawar, Founder of Newrl blockchain, says that the first crypto/blockchain project, i.e., bitcoin was deeply political. When Bitcoin was initially founded in 2009, it aimed to replace traditional fiat currencies. “Blockchain doesn’t need a central authority to maintain records of transactions. However, the founders of Bitcoin went much further and said that they did not trust regular currencies and will use blockchain to create an alternative. That was a very political statement,” he says

Blockchain in our lives

Blockchain experts stress that the technology is used in many other industries where the control can be decentralised and transactions can be validated by multiple parties to bring in more transparency.

At its simplest, Navin Gupta, managing director, South Asia, Middle-east and North Africa at Ripple, a US-based fintech firm draws parallels to the age-old moneylender’s book. Each day’s worth of transactions are tallied at the end of the day, before the moneylender carries the total on the next page, made for the following day. “Think of all these pages linked together like a series of blocks in a blockchain. If someone wants to do mischief and alters some numbers on any page, the total would not just add up at the end,” says Gupta.

Ripple uses blockchain and crypto technology solutions for cross-border money transfers by tying up banks and payment service providers all over the world through their global financial network RippleNet. This helps their customers to transfer money from one account to another in real-time internationally, all year round.

Another popular emerging area where blockchain is used is trade finance in banks. It deals with the transfer of payments from one person to another; usually from an importer (the buyer of goods) to the exporter (seller of goods) when both are based in different countries, through instruments like Letter of Credit (LC).

To put it in a nutshell, a LC involves two banks to confirm the shipment and payment of goods. But there is a potential of fraud here if, say, the exporter forges the documents. Besides, both the exporter and the importer need to physically present a lot of documents pertaining to the shipment.

Blockchain aims to solve this problem. “If more banks come on to this network, the credentials of exporters and importers need to get registered only once and the risk of fraud goes down as documents are digitised and cannot be duplicated,” says Varun Bakshi, Head Transaction Banking Product, RBL Bank.  In fact RBL Bank is one of the 18 banks that have set up a new company, called IBBIC Pvt Ltd, which will develop the blockchain technology for processing inland LCs.

In other words, your blockchain ETF can buy equity shares of any these banks. Infosys is responsible for building this technology for IBBIC, so theoretically your blockchain ETF can buy Infosys’ shares, too.

The National Strategy of Blockchain document put out by the Government of India lists out many such areas where blockchain can be used, for nearly 40 industries and sectors. For instance, blockchain technology can also store your medical records. If you were to migrate to another town, you don’t need to carry your medical records. Your new hospital can access your medical records online.

Mathew Chacko, a lawyer and head of technology, media and telecommunications practice group at Spice Route Legal, a law firm says that cryptocurrency is the most pop-fiction application of blockchain. It has taken on popular imagination. And it has become a kind of torch-bearer for blockchain. But Blockchain is not cryptocurrency; cryptocurrency is a small subset of the hundreds of applications that are based on Blockchain.

Should you invest in a blockchain ETF?

Blockchain ETF is a new phenomenon globally with around a dozen such funds that manage around $2 billion, collectively.

Khaleelulla Baig, founder of a wealth start-up Fintapp, isn’t enthused about blockchain ETFs. Baig, a big believer in cryptocurrencies, says that blockchain ETFs are a bit of a misnomer. “Most of the underlying companies are merely experimenting with blockchain technology. The presence of blockchain in them is tiny; only a few of them have scope to become really big someday,” he says.

Both Invesco MF and NAVI MF refused to speak to Moneycontrol for this story.

Pawar cites the example of Microsoft, held by the index funds that NAVI’s blockchain ETF will invest in, as per its offer document. “Microsoft makes operating systems for computers and offers cloud computing - some of which can be used for mining coins; that could be one reason. Companies that make computer chips are also proxies for blockchain since most of the mining in the crypto world is driven by high performance chips. And since these cryptocurrencies are based on blockchain technology, these chip makers and technology companies become a somewhat distant proxy for blockchain,” says Pawar.

Also, cryptocurrency regulations in India are yet to be finalised, which casts a shadow over the launch of blockchain ETFs. Invesco MF’s underlying blockchain ETF invests partly in companies that are into cryptocurrency mining (the act of digitally making new coins by solving an algorithmic puzzle).

Most investors may not need blockchain ETFs in their portfolios, especially if their investments are conventional technology companies.