19 October 2021 |

While cryptocurrencies evolve, investors still have second thoughts about cryptofunds

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There is no denying the transformational impact of cryptocurrencies on financial markets and, potentially, on everyday lives. Yet banks are still debating whether cryptocurrency funds can hold enough appeal to investors.

Evrard Bordier, CEO and managing partner, Bordier & Cie, said that his bank’s relationship managers have developed an understanding of the asset class based on the assumption that its relevance will only increase with time.

But speaking at Asian Private Banker‘s webinar Income Week 2021: Appetite for cryptofunds in private wealth management, Bordier argued that to most investors — HNWIs or otherwise — cryptofunds are perhaps less relevant because they have easy and direct access to the “democratised” asset class.

The limited-use case for cryptofunds may be in alternative coins, “where there is value from institutions such as a private bank or others to provide easier access for accredited investors”. One reason for that, he explained, is that — unlike the better-known Bitcoin or Ethereum — alternative coins are more complicated in light of the vast variety of cryptocurrencies.

Two potential use cases
Bordier’s comments were in part echoed by Daniel Lee, executive director, head of business and listing, DBS Digital Exchange. Lee believed that there are two potential use cases for cryptofunds.

One is for institutions or corporates that do not have the mandates for digital assets. “For corporates or institutions whose mandates do not allow them to get into alternative coins directly, they can gain access through cryptofunds,” said Lee. Those can be the plain-vanilla, tracker funds that give them direct exposure to specific cryptocurrencies.

The other use case is for those who want exposure to the boom in alternative coins: “When investors see a lot of opportunity happening in the alternative coin world but do not have the time to analyse it,” he said.

Such investors may lack the time or resources to study each of the protocols, each of the projects in detail, he explained. For that reason, there is an opportunity to come up with cryptofunds for “people who are well plugged into” alternative coins.

Lee pointed out that there is a fundamental difference between the investment thesis for investing in gold and cryptocurrencies. The philosophy behind investing in cryptocurrencies is “risk-on”, he pointed out. “Investors buy gold if they think the market is too risky. But when they buy something like a cryptocurrency, they are actually going into a risky market.”

Diverging regulations
The consensus among the speakers is that cryptocurrencies should expect more regulations as they appear on the regulators’ radar screen. David Lewis, executive secretary, Financial Action Task Force (FATF) called regulations “a real positive driver of innovation in the sector”, and argued that business volumes have soared since regulations were introduced.

There will, however, be a divergence in how governments approach regulating cryptocurrencies globally. “Regulations in China and the US are trying to address different things,” said Lee. “I believe that China is trying to address things such as capital outflows, whereas in the US there have been more talks around investor protection.”

Despite governments taking different approaches to regulating — or outright banning — cryptocurrencies, Lee added that anti-money laundering and countering the financing of terrorism are overarching themes across different markets.

Colm Furlong, managing director, head of SaaS, OSL, is upbeat about developments in the digital asset market — including the regulatory step-ups, which he sees as the way for further adaptation and greater acceptance of cryptocurrencies.

“What we’re seeing is much like what we saw in the late 1990s — though it is an unfair comparison at some levels: a kind of explosion of new applications of technology. As we know with the Dot Com boom, only the best ideas and best-run businesses survived,” Furlong noted.

“There are obvious parallels with that, having worked through that myself — not forgetting the kind of return of retail participation in the capital markets. I think all of those things lend themselves to a compelling opportunity for private institutions and private investors.”

The private wealth industry continues to remain cautious about cryptocurrency, but could cryptofunds – or the incorporation of crypto into funds – be an inevitable solution? And what should Asia’s wealth managers expect given growing government intervention and evolving regulations?

Gain unique and diverse perspectives across the private bank, regulatory and digital asset space featuring representatives from Bordier & Cie, DBS Digital Exchange, Financial Action Task Force and OSL.

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