Ark Invest CEO: ICO regulation is the biggest obstacle preventing us from investing in cryptocurrencies

An asset manager with stakes in Facebook, Google and Tesla is looking to diversify its portfolio into cutting-edge investments, but a regulatory hurdle stands between the idea and its execution.

Two years ago, ARK Invest, a New York-based firm, became the first of its kind to buy bitcoin. Now, Catherine Wood, the firm’s founder and CEO, has set her sights on the next frontier: initial coin offerings (ICOs), or the sale of blockchain protocol data that can increase in value.

Still, investment funds focused on these ICOs face hurdles, including an uncertain tax environment and a view by some that the ICO model itself is potentially disruptive to Ark Invest’s own model of enabling individuals to invest without middlemen.

But according to Wood, the biggest problem facing Ark Invest and its peers is a lack of trust, both in public exchanges and OTC options. Therefore, Wood called for the creation of a trust that ensures a certain level of due diligence is performed on the numerous ICO projects.

Wood said:

“We need someone to create a security that is backed by an ICO or ICO group. Then we can guarantee that it has passed all the regulatory requirements that we need so that investment can be made.

Unlike venture capitalists who have taken part in ICOs, including Fred Wilson, Naval Ravikant and Tim Draper, Ark Invest and other exchange-traded fund (ETF) managers must abide by strict investor protection regulations.

But there is a chance to cross that hurdle. Since Ark Invest first invested in bitcoin in 2015 through an exchange-traded trust, the investment has grown from 1% to as much as 10% of its total portfolio, without any additional bitcoin investment.

Unexplored territory

With this development, Wood is now turning her attention to the ICO market. But she is not the only one to propose that Bitcoin be part of an ETF.

Kinetics Mutual Funds, which is registered with the SEC, currently has two funds with more than 2% of its Bitcoin investment. Acatis Datini's ValueFlex fund has a 5.3% Bitcoin share. In addition, since Ark initially announced other Bitcoin investment tools, the price of Bitcoin has increased from $230 per share in September 2015 to around $2,300 today, a full increase of 880%.

By comparison, ICOs based on ethereum, Waves and other blockchain asset platforms raised $103 million last year, while 37 ICOs raised $136 million from January 1 to May 10 of this year, according to ICO data provider Smith + Crown.

But before companies like XBT Provider, Revoltura and Vontobel might consider creating a trust based on one or more token sales, Wood expects more regulatory certainty will be needed.

Specifically, Wood expressed concerns about whether using one token to purchase another token is a physical transaction and therefore taxable, and whether it constitutes a taxable activity based on capital gains methods.

She said:

“I actually want the IRS to weigh in on this. I want them to say it’s an exchange of goods, so the capital gains shouldn’t be taxed. If they don’t think that, then it’s going to derail the industry.”

Connecting the World

In a sense, this transition from being an investor in disruptive technologies to an investor in disruptive investment models has already begun. Despite being prohibited from taking equity in ICOs before the trust was established, Ark Invest has already begun to build its expertise in this area.

According to Wood, Ark Invest has been sought out by startups since the earliest days of the digital asset space that are looking for a more accurate way to value themselves.

She said they are being approached by businesses looking for more advanced valuation technology and considering the potential cost savings by moving transactions to the blockchain.

While Wood calls the work “a bridge between the financial services and blockchain spaces,” she said her involvement in token sales will remain limited as long as someone else builds a different bridge.

She concluded:

“We can’t buy tokens because they’re not financial securities, but I can see that we’re in a world of ICOs, pick your picks, because some of these ICOs are going to be really strong.”

For more information about ICO, please refer to the special topic "Blockchain and ICO"