AIMA’s recently published Global Crypto Report, in partnership with PwC and Elwood, stated that around one fifth of hedge funds are now investing in digital assets. This figure cannot be ignored, and it naturally brings focus on to how and when crypto can and should be regulated.
In additional to the publication last week, the FT reported that the US authorities are taking a more active role in overseeing the crypto market, now estimated to be worth $1.5tn. This of course was inevitable. It is impossible for the currency to continue at its current rate of growth with lack of proper oversight.
It’s difficult to know where to start and to also understand who might have authority to oversee the market. The US have built an inter-agency team involving the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation to start to figure out the process. China recently signalled a crack down on the use of digital coins and in the UK discussions around the asset class have accelerated dramatically this year. Crypto is unwieldy as best and volatile at worst. We saw that just last month with a chain of events that affected values quickly and significantly.
For traditional funds, the news the currency is starting to align with other asset classes is positive as it perhaps opens up options not seen as viable before. The AIMA report cited regulatory uncertainty in the top three challenges funds face when considering investing in digital assets. If the reports coming out of the major financial centres globally are correct, then regulatory uncertainty might be set to change. The other challenges cited were client or reputational risk and lack of infrastructure.
It is unlikely that there will be any turning back from the blockchain technology that sits behind the currency – there is very rarely any turning back from new tech – so funds and managers that aren’t already considering digital assets might be considering how to incorporate them into their fund now. One of the concerns raised in the AIMA report, as well as others, centred around the unique requirements for managers operating in the digital asset space, and whether managers currently operating in traditional markets are in a position to expand their interests.
An elevated, centralised data management strategy is key as firms are looking beyond their own research in the asset class and bringing in outside data to aid decision making. Digital assets also demand a decentralised, best in class, cyber security service. RFA are adopters of next generation technology and our AI driven cyber tools can enhance network security to a level not available before. By ensuring systems are secure, we can work with our clients to remove the barrier to adopting new asset classes and allow managers instead to focus on their strategic planning.
Fintechs and technology platforms are devising tools that bring great promise for the future, but as with all new technology there is always a greater risk. Building a robust business IT architecture is critical for any manger, but necessary for those in the crypto space as we see these tools and apps develop.