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Digital asset investments: as they mature, what’s next?

11 May 2022

Deirdre Hochman

Managing Director USA & Bahamas

Deirdre Hochman

Managing Director USA & Bahamas

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At a recent panel hosted by Intertrust Group, experts discussed the evolution of digital asset investments, the hot new trends and the challenges ahead

Institutional investors are moving into digital asset investments, with particular interest in non-fungible tokens (NFTs). But the infrastructure supporting them must be improved, according to experts at an Intertrust Group event.

They agreed we are in an exciting time for digital assets, with a White House executive order recognising their importance. Jennifer Murphy, CEO and founder of Runa Digital Assets; Camile Cordero, senior relationship manager at Anchorage Digital; and Michelle Perry, head of operational due diligence at Galaxy Digital, took part in a Distilled Insights event on topical issues for the funds world.

They discussed how investors are allocating to digital assets, the challenges they face – as well as the explosion in NFTs and decentralised autonomous organisations (DAOs).

The Digital Assets in the Mainstream: What’s Next as this Asset Class Matures? panel – moderated by Michelle Noyes, managing director of Alternative Investment Management Association (AIMA) – took place on 30 March in New York.

Digital asset investments are becoming mainstream

According to Cordero, institutional investors have warmed to digital assets, with banks, hedge funds, private equity firms, venture capital firms, corporate treasuries and family offices all making allocations.

She described investor behaviour as “crawl, walk and run”. Crawling refers to a conservative approach, with investment in blue-chip cryptocurrencies such as Bitcoin and Ethereum.

“At the end of 2021, a lot of asset managers wanted more interesting ways to generate alpha and they wanted a hedge for inflation. And so, the ‘walk’ was yield farming,” explained Cordero.

The “run” came in more complex products, such as options, futures and swaps. This approach is the least popular, according to Cordero, because infrastructure is lacking.

At Galaxy Digital, Perry said family offices and high net worth investors were allocating to digital assets as well as talking to institutional investors.

Noyes added that according to AIMA’s third annual crypto hedge fund report, published in May 2021, 21% of hedge funds have exposure to digital assets.

Turning to recent developments, Murphy highlighted last month’s White House Executive Order on Ensuring Responsible Development of Digital Assets – which she had expected to be critical, but was actually constructive. “That’s an incredibly interesting and unexpected way that digital assets are having an impact on the world,” said Murphy.

Challenges for digital asset investments

In terms of challenges for digital asset investments, Perry highlighted issues with emerging crypto managers that lack a back office or chief financial officer.

This means they don’t have the infrastructure to build a sizable business and can run into compliance problems or struggle with reporting.

“Even the biggest and brightest funds can be nine months late with their financial statements. I think it’s because administrators and service providers are struggling with the valuation recording,” she said.

Perry added that custody was “obviously something that keeps us up at night”, while accessing the assets was “one of the main pain points for fraud”. Two-factor authentication was crucial for security.

Cordero said her firm had introduced a multi-signature approval process, as well as strengthening biometric data via iPhone.

As a fund manager, Murphy said the lack of comprehensive historical pricing data was a problem: “There’s no S&P 500 of digital assets.” Combined with a disjointed and user-unfriendly infrastructure, this is preventing digital assets becoming mainstream, she said.

Murphy explained: “One of our goals is to help our clients get into this ecosystem. But the process to download a digital wallet is terrible.”

What’s next for digital asset investments?

NFTs have been one of the biggest – and most unexpected – trends over the past few months, according to Cordero.

Audit firms and fund administrators began purchasing NFTs to interact with them and understand how they work, as well as to test their potential for capital growth, she said.

Most recently, she’d helped hedge funds buy Bored Ape NFTs. “Last week the tokens had a $2bn market cap. That’s insane.”

For Perry, a huge focus is on DAOs – essentially leaderless investing collectives that have surged in popularity. She pointed to the former US presidential candidate Andrew Yang, who is pioneering DAOs for social activism.

Another priority, according to the panel, is improving security, following repeated hacks to blockchain bridges.

Murphy used the gold rush as a metaphor for digital asset investments, saying she was fascinated by the “picks and shovels” – the infrastructure around the assets, such as utility tokens, which provide data and solutions: “They don’t get much attention, they’re not sexy, but they’re really important.”

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