Steven McClurg is a founding partner and CIO at Arca Funds, a crypto asset management firm that creates and manages institutional and retail investment products investing in and utilizing blockchain technology. Prior to Arca Funds, McClurg was a managing director and portfolio manager at Guggenheim Partners. We recently spoke with Steve, who will be a speaker on the Blockchain and Crypto-Currency Craze session at our upcoming Inside Alternatives & Asset Allocation conference(Sept. 24-25 – Las Vegas).
Inside Alternatives: Where do you believe we are in the evolution of crypto assets?
Steven McClurg: We are still very early. Crypto assets have been in an experimental stage for the last eight years, mostly as a way to transfer money across borders, such as in remittances. This has led to another major use case, which we do not often understand here in the US or in other developed countries. Most of the world is unbanked, and crypto assets have become a way to allow the unbanked to access a safe store of value. Eventually this will lead to wider adoptions of programs such of microlending, which have the potential of bringing people in undeveloped countries out of poverty.
In the developed world, some applicable features have arisen in securities tokens. These are cryptocurrencies that either represent or are actual securities. Mostly Reg D. Shares of private companies are now more liquid and tradable. At Arca Funds, we are developing financial products similar to an ETF built on a multiple blockchain protocol, that have the potential of lower fees than ETFs, Mutual Funds, and structured products.
Inside Alternatives: Do you think cryptocurrencies have been tested or is there more negative volatility around the corner?
Steven McClurg: It depends on the nature of the crypto asset. They can represent anything from a decentralized or distributed network digital currency, mainnet gas (the cost of using a blockchain or network), asset-backed tokens that represent securities or sovereign fiat, or even in-platform rewards or tokens such as gold bars in Candy Crush. Digital currencies such as Bitcoin, Bitcoin Cash, Litecoin, or Cardano are meant to be mediums of exchange. Of the large cap tokens, the most volatile in the nearterm are public permissionless blockchains that double as platforms for developing decentralized application, Ethereum, EOS, and Stellar are examples. These a not meant for B2C use nor are meant for the masses to speculate on, but since they do, we get volatility. Asset backed tokens should have less volatility, depending on the underlying asset. For example, if the underlying asset were real estate or gold, they would likely mirror those assets but with some premium or discount depending on the structure of the security (similar to an ETF or closed-end fund).
Inside Alternatives: How do you think the Security Token Offering structure will change traditional assets?
Steven McClurg: What is most commonly known as an STO are equity shares in a private company issued through a Reg D or Reg A/A+ offering. In the world of crowdfunding or venture, these are very important – an innovation that the JOBS Act needs to be successful legislation. However, I believe in much larger applications in financial products.
Inside Alternatives: How do you believe an ETF will transform the Cryptocurrency market?
Steven McClurg: Most of the ETFs of Blockchain companies today are worthless. They are based on indexes of companies that have a blockchain division or in some way are experimenting with blockchain. Most have a large allocation to Google or IBM. Blockchain is not going to move the needle for these companies anytime soon. The reality is, these ETFs have a great marketing spin, but you are only getting the NASDAQ with some extra downside risk.
On a Bitcoin ETF, I believe the SEC is right in denying it. 1) There is no need for it. On Robinhood.com you can buy Bitcoin directly alongside ETFs and equities. Other online brokerages will quickly follow and are already Beta testing. I wouldn’t be surprised if Fidelity gets there by year end 2) ETFs are meant to be diversified. An ETF that holds only Bitcoin is not diversified. 3) An exchange-listed ETF cannot hold instruments that are subject to market manipulation. At the moment, Bitcoin moves more like a penny stock than a major exchange-listed equity. Though this has been changing for the last year. https://www.crowdfundinsider.com/2018/08/138319-the-securities-and-exchange-commission-is-right-on-bitcoin-etf/
Inside Alternatives: Do you believe crypto assets are ready for the mainstream? If so in what applications?
Steven McClurg: Quick answer is no. Most people do not understand what they own and how it will be used. Ethereum is an example of delivering on a promise to launch Dapps that have real use cases, and speculators drove the price of ETH up from $0.30 to $1200+. Now it is below $300, but still too expensive. The Ethereum network can barely support 1mm transactions per day. As a comparison, The iOS store had 10 million downloads in the first 3 days it launched on the iPhone in 2008. Next-generation blockchains like EOS promise to offer the performance and scalability necessary to power decentralized applications with broad consumer adoption, but developer tooling and UX has still not caught up. In the short-term remittances and financial products will remain the main applications of blockchain until development of mainstream decentralized applications becomes more accessible and feasible.