Originally published in The Block
As regulators seek to develop appropriate investor protections for digital assets, more traditional investors are moving into the asset class. Asia’s stature in global crypto markets means it will be highly influential in shaping a more institutional market, said leading market figures during a recent webinar organized by The Block and sponsored by Eventus Systems.
Institutions such as pensions, endowments, family offices and even sovereign wealth funds are all investigating the place of digital assets into their portfolios. This interest will change the market, panelists said, as these investors seeking infrastructure and products emerge that meet their needs for diversification and acceptable risk parameters. In a recent report, ‘Overview of Digital Assets and Blockchain,’ Goldman Sachs notes that more than 40% of value transfer in cryptoassets takes place in Asia Pacific, and according to a Chainalysis study, the region will be front and center in shaping institutional adoption globally. In the more mature markets of North America, Western Europe, and East Asia, increasing adoption has been powered largely by institutional investors, the study found.
“While they want to participate in the crypto megatrend, most institutions’ fund covenants and operational limitations prevent them from directly accessing coins and tokens,” said James O’Brien, Chief Operating Officer at Valkyrie Investments. “Institutions turn to a range of indirect approaches to access crypto performance, such as managed accounts, funds of funds, and private funds.”
“Many are attracted to exchange-traded funds, which segregate the operational risk of cryptoassets from their price performance,” added Vincent Turcotte, Sales Director for Asia Pacific at Eventus. “Non-deliverable forward (NDF) products developed by investment banks also promise to achieve this goal.” And as maturing crypto service providers such as exchange platform Coinbase go public, their shares represent a conventional, regulated route to accessing crypto market growth.
Regulators are listening
Regulators’ growing focus on market integrity and investor protection are driving changes on the part of crypto market players, Turcotte pointed out. “Recognizing the benefits of greater regulatory clarity to its business, crypto infrastructure provider FTX US has joined both the Futures Industry Association and the International Swaps and Derivatives Association (ISDA) – bringing it within the traditional finance or ‘trad fi’ space,” he said.
In turn, legislators and regulators are responding to crypto’s growing scale and increasingly mainstream status: total market capitalization more than doubled in 2021 to $2.13 trillion. A Fidelity survey of global institutional investors in July this year found that more than half of global institutions already invest in digital assets, while in Asia, it was 71%.
And a clearer picture is beginning to emerge of how crypto will be regulated in the region’s two key international financial centers: Hong Kong and Singapore. Hong Kong is expected to introduce legislation bringing all crypto exchange licensing under its Securities and Futures Commission (SFC) – likely restricting access to professional investors – while the Monetary Authority of Singapore (MAS) has started licensing exchange operators under the country’s Payment Services Act.
Cooperation between crypto actors and regulators does more than drive new regulation. “Bringing regulated products to the US market has been educational to product creators and to the regulators,” said O’Brien. “It is spurring more innovation which gives legal status to tokenized assets.”
As crypto becomes more regulated, more conventional client suitability rules come into play, ensuring that investors taking on the higher leverage inherent in many crypto derivatives have the necessary sophistication and resources. “Regulation will also clarify anti money-laundering (AML) and know-your-client requirements (KYC),” said Turcotte. “This enables institutions to quantify and account for these risks.”
As crypto markets attract a broader range of investors, the market is bifurcating. “In the case of family offices, the smaller players run by first- or second-generation principals are aggressive yield-seekers,” explained Gerald Goh, Co-Founder and CEO of Signum Singapore, a digital asset specialist with a banking license in Switzerland and an asset management license in Singapore. “But others are running along institutional lines with separation between responsibilities with an investment committee more likely to implement through funds with a buy-and-hold approach.”
“While individual yield-seekers can realize 20% on their investment, institutions’ risk committees will see this as signaling too much risk and are willing to trade down in return for comfort, trust and peace of mind,” said Goh. “As they are often driven by the wish to diversify portfolios, a lower return is not a problem for them.”
“Portfolio diversification is the strongest impetus for institutions’ crypto curiosity,” said Leslie Lamb, CMO of CoinFLEX crypto derivatives exchange. “But what really hooks them in is understanding how the crypto yield landscape works, and how it’s changing fairly quickly.”
Sygnum’s Goh agreed. “A year ago, conversations tended to be based on simple questions like ‘what is Bitcoin?’” he said. “Now, queries are more nuanced, reflecting interest in volatility strategies, illiquid exposure and venture-capital type exposure – and products are changing in response.”
“With more interest coming from passive allocators, the intermediary’s role is to act as their trusted guide, walking them through the asset class and building products on their risk-return preferences,” added Lamb at CoinFLEX. “Once investors hold coins or tokens, they recognize there are a lot of uses for them – DeFi innovations open up new sources of yield, like putting their coins to work as a market-maker or liquidity provider.”
The increased comfort brought by regulation will channel more activity away from unregulated platforms towards regulated institutions and financial market infrastructure, panelists said. “This will also bring investment banks into play,” predicted Turcotte. “They are monitoring progress and when the opportunity versus risk equation shifts sufficiently, they will come in and package product for institutions and private banking clients.”
“The core ethos underlying decentralized cryptoasset markets has always been direct market participation – and this will remain a driving force in crypto markets,” added Lamb. Agreeing, Turcotte at Eventus concluded, “But constructive dialogue between investors, market service providers and regulators is propelling a rapid outgrowth of new products and services that promises to surpass the direct yield-seeking sector of the market, enabling participation from a much wider range of investors.”