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Regulated Crypto Funds

Long gone are the days when cryptocurrencies only attracted the interest of private investors. Although the field of digital assets remains uncharted territory for many institutions, the number of professional actors is nevertheless growing steadily. In this article, we will look at a few of the most prominent regulated crypto funds.

One of the most famous crypto funds in the world hails from the Swiss firm Crypto Finance AG. Crypto Finance AG is a fintech company that provides institutional and professional investors with products and services in the digital asset space. Founded in June 2017, the Zurich-based company has 40 employees and three operationalsubsidiaries including Crypto Fund AG, Crypto Broker AG, and Crypto Storage AG. With just over 50% of the overall Crypto Finance Group business linked to international clients, Crypto Finance is continuing international expansion and product and service development.

Crypto Fund AG offers an active as well as a passive investment approach for crypto assets. The passive approach tracks the performance of the Crypto Market Index 10 (the “CMI10”), which is independently calculated and maintained by the SIX Swiss Exchange. The Index does not include privacy coins like Monero, indexed crypto assets, or pegged crypto assets, such as gold-backed stablecoins. Indexed crypto assets refer to crypto assets which are, for example, based on a basket of other crypto assets such as a “fund token” or similar. These are excluded as they are an indirect representation of other assets, similar to pegged assets. Furthermore, crypto assets which cannot be safely stored in an institutional-grade storage solution are also excluded. This may be an issue when a crypto asset based on a new blockchain would be eligible for an index where storage of that asset is
only possible via exchanges.

The fund employs a strategy involving automated trading algorithms that take long and short positions on Bitcoin. Assets under management in the active strategy are currently at €25 million, and the year to date return is between 33% and 40% — dependent on the share class. The active strategy is deployed with Bitcoin futures only. Crypto asset custody is, therefore, not a necessity. For the passive strategy, crypto assets are stored with the depositary, Bank Frick. The fund does not self-custody any crypto assets. Both funds are alternative investment funds (AIFs) administered by CAIAC Fund Management AG in Liechtenstein.

Domiciled in Liechtenstein, SwissRex AG operates a crypto fund with a British Virgin Islands (BVI) structure and a tracker certificate setup by GenTwo Digital AG and MTCM Investments AG. The main advantage of the certificate is that it can be subscribed without any problems via any bank thanks to its Swiss VALOR number. The VALOR number, which is incorporated in the Swiss ISIN number, is a code which uniquely identifies listed securities and financial instruments in Switzerland. Both products are distributed to qualified investors by Crypto Consulting AG in Switzerland.

Fundamental analysis of crypto tokens forms the basis for the investment decisions of their actively managed crypto fund. The strategy gives the investor access to a diversified basket of Bitcoin and altcoins (alternative coins). The tokens are analyzed on a daily basis, and the positioning is actively managed. The strategy takes care of the timing for the investor. The exposure is determined on the basis of valuation models and the cycle model described below and ranges between -20% and 120%. In February, the allocation was reduced to 50% due to a slight overvaluation and the hype around the Bitcoin halving. It was increased to 100% again during the correction that the Corona crisis caused. In addition, the choice of individual tokens is of great importance. The largest 50 tokens are analyzed, and a fair value is calculated. On this basis, 10 tokens, of which the greatest potential is expected, are purchased and stored safely. The asset allocation mixed with the right choice of altcoins contributed to a fund performance of 120% in 2020 (net in CHF as of July 28, 2020). Bitcoin generated a return of 49% over the same period. The AUM now stands at CHF 8 million.

SwissRex distinguishes four phases in the cycle of crypto tokens: the beginning of a bull market, the outperformance of altcoins, the hype, and the bear market. When investors seek exposure to crypto again after a prolonged downtrend, they typically buy Bitcoin, as it is the most liquid and best known of all tokens. Since Bitcoin is one of the few tokens that are trending up in this first phase, altcoins are sold and the correlation between Bitcoin and altcoins can be negative for a short period of time. Through these shifts, high quality altcoins become bargains and value investors make their first purchases. Individual altcoins show better returns than Bitcoin in this second phase. As soon as Bitcoin reaches a new high, the third phase begins; the masses start buying crypto. Since Bitcoin already seems expensive, purchases are made in the second and third phase.

The most important decision is when to exit the market in order to have as little exposure as possible in the fourth phase, the bear market.

SwissRex differentiates between three categories of tokens: stores of value, currencies, and securities. As there are no cash flows for securities and currencies, the analysis must be based directly on supply and demand. On the supply side, velocity and inflation are important, while on the demand side the adoption rate is estimated using an S curve. The fair value is calculated and multiplied by an individual success rate that weighs factors such as liquidity, trading venues, and the survival chances of the start-up. For tokens with security character, traditional valuation methods such as a dividend discount model are used.

The fund’s assets are held with Crypto Broker AG and Bitcoin Suisse AG on segregated accounts with individual client wallets. They also hold a small part on a few exchanges which passed their due diligence process for trades in tokens and futures that aren’t covered by their storage providers.

Among the terms that are mentioned quite often in connection with cryptocurrencies and digital assets are ETPs and ETFs, but how is their market availability at the moment? Next week, we will look into this in detail in another article!

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Marketplace for Security Tokens and Digital Assets

Digital asset trading presents many challenges to interested parties, some of which are technical and some regulatory in nature. This is not only true for traditional cryptocurrencies, but also for many other forms of digital assets, such as security tokens.

Although there are many security tokens coming to the market, there is still not an easy way for professional traders to trade security tokens. However, the SIX Digital Exchange owned by the SIX Group is working on solving this problem.

“Blockchain technology has the potential to modernize, simplify, or even potentially replace current trading and clearing and settlement operations.”

– Mary Jo White, U.S. Securities and Exchange Commission Chairwoman

In addition to the SIX Digital Exchange, Liechtenstein also has a token issuance platform, called area2invest. As a tied agent of Bank Frick & Co. AG, the fintech company built a network of banks, brokers, asset and fund managers in order to become Europe’s first marketplace for securities and token issuances.

Another one of Switzerland’s banks that are involved in crypto is Swissquote Group Holding SA. Professional and retail traders can trade Bitcoin and 11 other cryptocurrencies. In 2020, the bank started offering regulated institutional cold storage, and it is already used by WisdomTree and other institutional clients. In terms of the custody solution, one of Swissquote’s technology partners is Switzerland’s Crypto Storage AG, which is a subsidiary of Crypto Finance AG. While Crypto Storage’s solution has been used as the foundational layer, Swissquote has built its own additional security layers upon it. The other main pillar is Swissquote’s trading platform. Swissquote has an API (FIX and Websocket), so its institutional clients are able to access liquidity. APIs are Application Programming Interfaces that allow trusted larger partners to communicate directly with one another super quickly and without barriers — like having a phone line that is always open. FIX is what traditional financial institutions generally use for the electronic transfer of financial data. Websocket is a more modern version of FIX that is often preferred by crypto funds. For larger orders, the bank also supports OTC trades.

Currently, Swissquote’s DLT/Blockchain team already counts twenty team members, reassuring that all the different processes and procedures work just fine — be it in the front office, development, compliance or risk. Concerning fees, Swissquote’s crypto retail pricing is, on the face of it, more expensive than most of the unregulated exchanges. Fees range from 0.50 and 0.99 percent. This is due to a combination of reasons, including the fact that Swissquote is a highly regulated Swiss bank with operating costs much higher than most of its crypto exchange competitors. Oftentimes traders use different exchanges to send crypto assets around. This costs additional gas fees, which can make the overall transaction cost of trading through “cheaper” unregulated exchanges just as expensive as using a regulated platform such as Swissquote.

Staying within Swissquote’s ecosystem will save a trader these kinds of fees. On the institutional side, the fees are very competitive and they can be tailored to an institution’s needs. Interestingly, Swissquote has quite some plans for the future regarding blockchain and crypto assets. As a matter of fact, the bank wants to expand into Bitcoin futures and options, tokenized securities and staking. Many of these new features are planned for Q1 of 2021.

Online trading platforms need to find the right balance between a rich feature set and user-friendliness. However, it is precisely through saving on fees that a plus in user-friendliness can be gained, without this having to be at the expense of the feature richness. This is especially clear when the concentration of numerous functions in one place itself provides the basis for the savings.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

The Custody of Crypto Assets

When thinking about investing in crypto assets, investors should not only keep an eye on the actual buying process. The custody of the assets also plays an important role in addition to the purchase, because a careless approach can lead to the loss of significant sums. There are fortunately already a wide variety of solutions to this problem.

In the research for this article, a new tendency regarding crypto custody could be observed. As described above, the custody of digital assets has been a much-discussed topic due to the regulatory initiative in Germany. Therefore, several startups have focused on this subject. However, the custody of crypto assets can be carried out by applying very different technological solutions.

Next-Generation Technology on the Horizon

The majority of the custody startups, e.g., Finoa, Tangany, and Upvest, rely on so-called hardware security modules (HSMs) for the storage of crypto assets. The main task of an HSM is to generate, store, or manage cryptographic keys and to protect them from unauthorized access.

Established banks such as Solarisbank AG and Bankhaus von der Heydt, however, already utilize the next technological generation for crypto custody called multi-party computation (MPC). Also, CommerzVentures, the corporate venture arm of Commerzbank, invested in the Series A funding round of the custody startup Curv, which specializes in MPC. Simply put, MPC is a cryptographic mechanism that requires multiple instances to sign a transaction. Therefore, such a solution eliminates the single point of attack for hackers.

Regardless of the technological stack, however, one problem currently appears to be common to all players. Insurances that protect investors against any form of loss of crypto assets are too expensive. This can be seen as the missing piece of the puzzle for comprehensive investor protection.

Insurance premiums for assets under custody are currently around 1% for cold storage solutions and between 2% to 3% for MPC based solutions. In the next few years, however, insurance providers will probably acquire more technological know-how for risk assessment so that lower insurance premiums can be expected.

Another rising trend is phone applications that enable investment in digital assets. One such application out of Switzerland is Relai, which has become one of the hottest trending apps on the Android app store. The Relai app allows anyone to buy Bitcoin without giving up their identity. The phone app works with one of the first Swiss regulated crypto companies, Bity, in order to buy Bitcoin. In addition to requiring no KYC, the phone app does self-custody, so there is no need to trust counterparties with private keys.

This app has made Bitcoin ATM transactions possible within the privacy of one’s own home and internet connection. In Relai’s first three months, they had more than 2‘000 app downloads in 20 different EU countries, more than 1‘000 investments per month, and more than €500‘000 in volume. This is a good innovation as many Bitcoin ATMs in Germany have had to shut-down due to Germany’s new licensing raj.

This variety of approaches and solutions shows that there is a constant discussion in the area of crypto-assets about the tension between usability, security, and the principle of “be-your-own-bank.” This debate is not only one of principle but, as we have seen here, also one of technology.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Structured Products for Digital Assets

Many institutional investors cannot or do not want to invest in digital assets directly. To meet this demand, there are several products that enable participation in price trends without holding onto a private key. These structured products for Digital Assets include Exchange-Traded Notes (ETNs) and other financial products that we will take a closer look at in this article.

Börse Stuttgart, for example, offers several ETNs which mimic the price development of Bitcoin and Ethereum. Another financial instrument that allows investors to participate in price developments are certificates. The certificate from Bank Vontobel with Bitcoin as an underlying is, for instance, available at Börse Stuttgart and Börse Frankfurt.

In addition to structured products, investors can invest in regulated fund products that give exposure to digital assets, such as the alternative investment fund (AIF) offered by Postera Capital in Düsseldorf. The company was founded in 2017 and deals exclusively with crypto assets and blockchain. Postera is the initiator of the Postera Fund — Crypto I, the first regulated crypto fund in Europe. The fund invests directly in crypto assets such as Bitcoin, Ethereum, and Dash. Since its launch in April 2018, the fund’s investment universe has been steadily expanded and currently comprises 15 crypto assets. The portfolio is actively managed, with individual positions being over- or underweighted based on fundamental data, technical analysis, and AI-supported sentiment analysis. The fund is aimed at professional investors and is approved for sale in Germany, Liechtenstein, Great Britain and Switzerland.

Another fund offering an actively managed AIF in the DACHLI region is Immutable Insights’ hedge fund. The hedge fund applies proprietary on-chain-analytics to generate a trading signal for the first BaFin registered Crypto Hedge Fund from Germany — the Blockchainfonds I GmbH & Co. KG for professional investors only. Different from other funds, it does not hold Bitcoin but instead focuses on the underlying value of tokens and the potential of the applications on the Ethereum blockchain. The fund applies a very conservative risk management and aims to achieve superior risk-adjusted returns that are catering to the needs of fiduciary asset managers with a view on the overall portfolio allocation and balanced risk. It also applies its own proprietary anti-money-laundering and compliance detection analyzes, making it as safe and clean as possible to invest in the new asset class. The fund is up 20% year to date.

Crypto-Enabling Structured products for Digital Assets

As already implied in the service offerings above, some banks are also positioning themselves in the Banking-as-a-Service (BaaS) segment. For this purpose, these companies provide the regulatory and technical infrastructure for trading crypto assets. This allows other financial institutions to integrate these products into their existing offerings.

Already embedded as a BaaS platform in the German ecosystem for crypto assets is Berlin-based Solarisbank AG. Its white-label platform for digital banking services is implemented by companies like BSDEX, BISON, and Bitwala. Furthermore, Solarisbank AG founded the subsidiary Solaris Digital Assets GmbH in December 2019 to also provide the technical and regulatory infrastructure
for crypto asset custody.

Another infrastructure provider offering regulatory and technically compliant white-label solutions is the Bankhaus von der Heydt. With its experience in the structuring of financing solutions, Bankhaus von der Heydt now offers a digital platform for the issuance of security tokens, crypto custody, and fiat-on-ramp. The latter enables its B2B and B2B2C clients to trade crypto assets into euros.

Fidor Bank AG, which also provides BaaS, however, offers access to crypto assets for retail and B2B clients alike. Its solution for financial institutions enables trading of Bitcoin against the euro with SEPA transactions. Also, Fidor Bank AG offers corporate bank accounts for crypto exchanges as well as for investors and companies conducting ICOs.

TEN31 Bank, a venture of the fully regulated German WEG Bank AG, works on a bridge for payment processing between digital currencies and the euro. Together with its partner Salamantex, a provider for PoS terminals, consumers will be enabled to pay with, e.g., Bitcoin, while the merchant receives euros. Also, TEN31 partnered with Nimiq enabling its clients to trade crypto assets against the euro by using SEPA bank accounts. Both services are, nevertheless, still subject to regulatory approval.

Another bank actively working on innovative, blockchain-based solutions for the capital market is Bankhaus Scheich. In February 2020, Bankhaus Scheich declared the successful replication of a DAX share as a digital security users of the German crypto phone app within 1.5 years 100,000 + on the blockchain together with Cashlink and Finoa. Now, in August 2020, Bankhaus Scheich announced to offer trading of Bitcoin & Co. to professional investors in cooperation with the German crypto custodian Finoa. The service offering seeks to enable in-custody trading, without exposing clients to transaction and counterparty risks of multiple trading venues.

For the retail segment, several players can also be found. Here, offerings have been available for some years. Nevertheless, it can be assumed that increasing investor protection and more user-friendly products will be beneficial for the retail market in general. Via Germany’s oldest exchange bitcoin.de, for instance, retail clients can trade crypto assets in a regulated environment provided by Fidor Bank AG. While bitcoin.de provides the peer-to-peer marketplace and the custody of crypto assets, Fidor Bank enables the corresponding SEPA transactions for customers.

Also, BISON, backed by Börse Stuttgart, provides an application that aims at retail clients and offers trading of Bitcoin, Ethereum, Litecoin, and Ripple. As for its institutional counterpart BSDEX, the solution includes the partners Solarisbank AG and blocknox GmbH.

Another player targeting retail clients is Bitwala. In this offering, customers are required to set up a SEPA bank account with Solarisbank AG in order to trade Bitcoin and Ethereum. Also part of this cooperation is BitGo, which is responsible for the management of private keys. Bitwala also offers debit cards to its customers, which can be used by converting crypto assets into euros.

Statistics like the 100,000+ users of the German Crypto Phone App show, that the demand for such financial products is rapidly growing but also that there is a real need for custodial solutions to reach all parts of the financial landscape.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Retail and Professional Investors in Germany’s Target Market

What is the actual number of people interested in cryptocurrencies? Are there any indications that the German target market is of a relevant size? Several studies have been conducted on these questions within the last few years. We would like to shed light on the results of these studies in this article and look at them in an intra-European context.

In 2018, the German retail bank Postbank surveyed 3,100 Germans and found that 29% of Germans believe that cryptocurrency is a desirable investment opportunity. This number is high given that the survey was conducted between February and March of 2018 when Bitcoin was in a bear market. The study found that 6% of respondents in the 18 to 34 year old group own cryptocurrencies and that 14% planned to buy cryptocurrencies during the next 12 months. This is in contrast with the 3% of the whole survey sample that owned cryptocurrencies.

A survey carried out half a year later by the German Consumer Centers of Hesse and Saxony found similar results to the Postbank survey. In this study, 28% of respondents from the age group 18 to 29 were interested in buying cryptocurrency. The survey polled 1,000 Germans in Hesse and Saxony.

Blockchain Research Lab conducted a survey of German cryptocurrency adoption in 2019 and found that 87% of Germans had heard about cryptocurrencies. According to the study, 24.8% of respondents had invested in cryptocurrencies. 14.1% owned cryptocurrencies at the time of the study, and 10.7% owned cryptocurrencies in the past. The overwhelming interest was in Bitcoin. Out of the 14.1% of respondents that held cryptocurrencies, 85% of the respondents were invested in Bitcoin. Ethereum was the second largest coin held by respondents (30%) followed by Litecoin (23%) and Bitcoin Cash (20%). The survey had a sample of 3,059. In the sample, German investors trusted Bitcoin.de the most, followed by Coinbase and Kraken. The average size of a respondent’s original investment was €2,546.

ING Bank also published a survey that asked 12,813 people across Europe what their perception of cryptocurrencies were. German respondents had a more friendly attitude toward cryptocurrencies than Austrians with 20% of Germans saying they found cryptocurrencies to be positive compared to only 13% in Austria. Interestingly, ING Bank found that 12% of Austrians wished that banks would offer cryptocurrency-enabled accounts.

In early 2020, the market research institute Intervista and Migros Bank in Switzerland published a survey showing that 13% of investors under 30 believe that Bitcoin and altcoins will play a more prominent role in their basket of savings. The survey also reported that around 7% of Swiss people have invested in crypto. The survey studied Swiss aged 18 to 55.

Source: Cointelegraph Research, Postbank, Blockchain Research Lab, Migros Bank, Official population estimates

To summarize the surveys, retail ownership of digital assets ranges from 6% in 2018 to 24.8% in 2019 in Germany and 7% in Switzerland. In Austria, the estimate is 12%. Taking the average of the two German surveys, the current size of the target addressable market for retail cryptocurrency in investment products is approximately 15.4% of the adult population aged 18 to 59. This is approximately 5.5 million potential clients out of German’s 46.05 million adults. Relying on the only survey of average investment amount that was conducted by the Blockchain Research Lab, this gives an estimate of an addressable market worth over €14 billion in Germany alone. The current size of the target addressable market in Switzerland is approximately 7% of the adult population or 343,923 people. The current size of the target addressable market in Austria is approximately 12% of the population aged from 18 to 59 or 657,766 people, and it is the second-largest addressable market for retail cryptocurrency in investment products in the DACH region.

In conjunction with improved technological solutions, companies are now offering institutional investors the appropriate setting for professional crypto trading without needing to hold on to private keys. The Börse Stuttgart Digital Exchange (BSDEX), for instance, targets financial institutions and is offering the first regulated trading venue for crypto assets in Germany. For its trading platform, BSDEX partnered with Solarisbank AG, which holds a full banking license and, therefore, handles the bank accounts, as well as blocknox GmbH, responsible for the custody of crypto assets. Currently, institutional investors can trade Bitcoin against the euro, and the addition of more digital assets is planned.

Following this figure, the target market for cryptocurrencies seems to be of a magnitude that should arouse the interest of retail as well as professional investors. A potential customer base of 5.5 million in Germany alone and another million potential customers in the other DACH countries is certainly a relevant figure.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

The Financial Landscape for Digital Assets

How are investors in the DACH region accessing cryptocurrencies? What digital asset investment vehicles are particularly popular among professional investors? Which difference is there between the financial landscape in individual states within the DACH region? Questions like these play a particularly important role in a global context, for instance, when it comes to economic analyses for the various German-speaking jurisdictions.

The European Securities and Market Authority (ESMA) reported that investment in alternative investments across Europe was €4.9 trillion in 2019. According to Preqin’s 2019 study on alternative investments in Europe, Germany has €58 billion invested in alternative assets. The largest sector of Germany’s alternative investments is private equity and venture capital, accounting for 23.4%. This is followed by real estate (13.5%), hedge funds (12.2%), infrastructure (5.1%), and private debt (2.9%). Per adult capita, Germany’s investment in alternative assets is approximately €1,248. In comparison, Switzerland has approximately €60 billion in assets under management dedicated to alternative investments. Hedge funds are the most attractive investment vehicle for Swiss investors representing 24.9%. This is followed by private equity and venture capital (14.4%), infrastructure (12.3%), private debt (5.0%), and real estate (2.1%). Per adult capita, Switzerland’s investment in alternative assets is approximately €12,212. Despite Switzerland’s smaller number of potential cryptocurrency investors, the investment amount per adult capita in alternative assets is 10x higher in Switzerland than in Germany. This provides evidence that Swiss investors may have more of an appetite for digital assets.

In the USA, some institutional investors have already invested in financial products that give them exposure to digital assets. Two pension funds in Virginia including the Fairfax Police Officer’s Retirement System and Employees’ Retirement System invested $55 million (€46.2 million) in Morgan Creek’s cryptocurrency fund in October of 2019. Yale University invested in two cryptocurrency funds during 2018 including Paradigm’s $400 million (€336 million) fund and Andreessen Horowitz. The University of Michigan’s endowment also invested $3 million (€2.5 million) in the Andreessen Horowitz cryptocurrency fund. Other university endowments including Harvard, Stanford, Dartmouth, Massachusetts Institute of Technology (MIT), and the University of North Carolina have all invested into digital assets via various financial products.

This section discusses how investors in the DACH region actually gain access to cryptocurrencies and highlights the most popular crypto asset investment vehicles for professional investors in each region.

Financial Landscape in Germany

The recent developments in Germany show that financial intermediaries are heavily investing in blockchain infrastructure. In early 2020, over 40 German financial intermediaries applied for a license from BaFin to be allowed to take custody of digital assets. This represents over 2% of Germany’s 1,800 banks. The license costs approximately €175,000 which indicates that many banks are banking on blockchain-based systems becoming the infrastructure technology of future financial markets. For this reason, the legislator is creating the necessary regulatory requirements and engaging in discussions that will decisively shape the financial market of tomorrow. Regarding the development of the necessary regulatory framework for digital assets, two aspects stand out. First, in December 2019, crypto asset custody was incorporated as a financial service in the German Banking Act (KWG) and, therefore, requires authorization from the financial market authority, BaFin, since January 1, 2020. Second, the German legislator published a draft bill in August 2020, which intends to abolish the mandatory paper-based certificate for securities. This development can be regarded as revolutionary — as it signifies a break with a system that is over a hundred years old.

However, besides the regulatory development, companies that actively offer products and services are the foundation for driving the adoption of blockchain technology. For this reason, we provide an overview of the companies in Germany that enable institutional investors to access crypto assets, such as Bitcoin and Ethereum. The analysis shows that the current market is already more fragmented than one may think.

The German legislator has created a regulatory framework that enables financial institutions to invest in crypto assets. At the same time, several companies and banks have also set up the appropriate technical infrastructure for the professional trading of Bitcoin & Co. In sum, this leads to an increased and more differentiated offering around crypto assets. Financial services in the crypto segment have, for some time, included instruments which, for example, reflect the price of Bitcoin or market places for retail investors. Now, however, fully regulated trading venues for professional investors like BSDEX are emerging. Also, some banks are establishing themselves as a BaaS platform. Solarisbank AG and Bankhaus von der Heydt, for instance, provide other financial institutions with the regulatory and technological infrastructure to enable access to crypto assets for their customers. It will be exciting to see how the market develops, given the fact that BaFin will issue first licenses for crypto custody later this year.

How interesting, then, is the German target market for professional investors and what is the difference between it and the Austrian or Swiss markets? We will explore this question in the next part of this series, with the Swiss market in particular being an interesting object of observation.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Pension Funds and Investments in Digital Assets

In the previous article of this series, we spoke with Stefan Andjelic from Raiffeisen Bank International (RBI) about Digital Assets. In this week’s installment, however, we wanted to look at this topic from a different angle, which is why we talked to Professor Dr. Michael Hanke from the Stiftung Personalvorsorge Liechtenstein.

Bringing a different perspective to the discussion, Professor Dr. Michael Hanke from the Liechtenstein-based pension fund explained that although regulations are not holding them back from investing in digital assets, there are other problems. Hanke points out that pension funds invest on the behalf of pensioners, but they have no way of gauging what the pensioners want them to invest in unless the pensioners actually call up on the phone or send an email requesting their pension to invest in crypto assets.

“Pension fund management is different from other asset management, like fund management, because with funds, you manage the money of clients that have voluntarily selected to invest in your strategy, so you know that they are okay with your asset allocation and strategy.”

— Dr. Michael Hanke, Stiftung Personalvorsorge Liechtenstein

The general public is still very skeptical about digital assets. If pension funds were to invest in assets that are still viewed critically in the eyes of the general population, they risk damaging their reputation, especially if something goes wrong. After all, pensioners cannot choose their pension fund themselves — the choice is made by the employer — which is why this duty of care is required. Hanke also discussed how pension funds in Liechtenstein are not held back from investing in digital assets by regulators. As a second tier pension fund in Liechtenstein, the laws that impact them are set at the federal level in Liechtenstein.

Pension funds, in particular, have another argument against digital assets: Apart from the liquidity that an asset class has to provide to a pension fund, they invest with a very long time horizon. However, the crypto world still seems to be characterized by short-term hypes, rapid incidences of success but also sudden loss stories. In this sense, according to the perception on the part of
pension funds, the world of digital assets does contradict the long-term view of pension funds.

Stiftung Personalvorsorge Liechtenstein is managing CHF 1.2 billion, and Hanke says it would take between 18 months to 24 months before they could actually invest, if they decided to invest, due to the administrative processes that exist when adding a new investment.

Source: Cointelegraph Research

Not being held back by regulations was also echoed by the survey respondents. Rather, asset allocators felt more
constrained by their own employer than by government policies.

How do these figures from the pension fund segment fit into the overall financial landscape? The European Securities and Markets Authority (ESMA) reports that the number of investments in alternative assets across Europe was EUR 4.9 trillion in 2019. We will take a closer look at this figure and its distribution in our next article.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

RBI Sees Potential in Digital Assets

We spoke to Stefan Andjelic from Raiffeisen Bank International (RBI) about his views on digital assets for our report. This interview was one of eleven case studies with investors at pension funds, banks, insurance companies and family offices that were conducted via phone call and in addition to the survey that was sent to all professional investors registered in German-speaking countries. While most of our interviewees wished to remain anonymous, Stefan Andjelic and others allowed us to release statements from the interview.

RBI has over 16.7 million customers, more than 46,000 employees, and €152 billion in total assets. Mr. Stefan Andjelic from RBI’s Blockchain Hub accepted to be interviewed by Professor Dr. Alfred Taudes from the Vienna University of Economics and Business for this report. He discussed with us how the digital asset market no longer refers only to Bitcoin, but rather has expanded into a broad array of assets. He also mentioned that as investors are becoming more informed about the potential of this emerging asset class, they are not being as easily persuaded by the negative connotation that traditional media usually attaches to cryptocurrencies.

“As investors are becoming more informed about the potential of this emerging asset class, they are not being as easily persuaded by the negative connotation that traditional media usually attaches to cryptocurrencies. Contrastingly, they also assess the potential that digital assets and blockchain technology in general can bring to society in the long term.”

— Stefan Andjelic, Raiffeisen Bank International

Although RBI is not currently invested, Andjelic feels positively about digital assets. As someone working in the field, Mr. Andjelic sees the potential for digital assets to be offered by incumbent financial players as an alternative investment vehicle that would allow them to create new streams of revenue. From a purely technological point of view, he also believes that digital assets can be a trigger for many traditional fields of finance to improve in the future.

When asked why RBI has not invested in digital assets yet, Andjelic said that the lack of regulatory clarity around what services financial institutions are allowed to offer in this field is still a major barrier. That said, there are still a lot of compliance topics to be clarified in these regards.

Once the regulatory framework related to digital assets is established, either by local jurisdictions or on an EU-level, financial institutions will be able to accurately assess the opportunities in this field and potentially invest in digital assets. On that note, the European Parliament is currently working on a digital assets framework. According to their timeline, in Q4 of this year, a framework should be in place.

Regarding timeline and which types of digital assets RBI would be interested in, Andjelic says, “I believe there is a much higher likelihood that we as a financial institution, once there is a full regulatory clarity, would initially focus on tokenized traditional assets, such as tokenized commodities, stocks, funds, etc. Potentially, we might also decide to offer some of these products ourselves based on both internal business decisions and a market demand.” RBI currently has 1% of their assets under management in alternative assets, which in absolute terms, equals to approximately €1.5 billion.

If RBI were to invest in crypto assets, several key decisions would need to be made. For instance, RBI would need to decide on whether the entity would aim to invest directly and store the digital assets itself, or would do so by teaming up with third-party service providers. In addition, if RBI decides to start offering crypto assets to its clients, then the decision would have to be made whether the bank wants to build the entire infrastructure on its own or to team up with an already existing crypto assets provider
in the market.

One option on how such constellation would work is that the third-party service provider would be connected through APIs to RBI’s infrastructure, while RBI’s banking platform would be the face to its clients. In such a scenario, the digital assets would be stored by the service provider instead of RBI. This would allow RBI to ensure that clients can only buy and sell their digital assets through Raiffeisen banking platform without being able to transfer them outside of the ecosystem. This would help Raiffeisen keep control on whether these digital assets are being used for any kind of illicit activities. RBI did make a successful venture capital investment into Bitpanda GmbH, via the SpeedInvest venture capital fund. Bitpanda is a licensed digital asset exchange operating in multiple countries across Europe.

In addition to Stefan Andjelic, we also interviewed Professor Dr. Michael Hanke from the Stiftung Personalvorsorge Liechtenstein, who allowed us to publish his statements. He brought in a different perspective, as other challenges are relevant for pension funds. This will therefore be the topic of our article in the next week.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Why do some investors shy away from “risky” Digital Assets?

The number of potential risks surrounding Digital Assets is relatively high, but risk in and of itself is not an absolute criterion for exclusion for financial institutions. We asked institutional investors about their opinion on risky Digital Assets and about how they evaluate the associated risk. Here are their answers:

Several of the asset managers in the survey mentioned that digital assets are too risky for them. However, financial institutions already invest in risky investments in the traditional financial markets, such as insurance-linked securities, sub-prime mortgages, emerging market treasury bonds, junk bonds, and much more.

Cyber-Crime and Fraud

Source: Cointelegraph Research

Operational Risks (e.g. Technological risks)

Source: Cointelegraph Research

So why are digital assets different? According to some respondents, in the traditional world, there are indeed investments that are risky. However, they are part of the traditional system and, therefore, cannot fall to zero without causing fundamental problems for the financial system as a whole. Digital assets, on the other hand, deliberately exist outside the traditional world, which is their purpose. Consequently, they are even riskier. Essentially, the asset managers are saying that traditional assets are too big to fail, the central bank and government gives them an implicit safety net in the lower-bound of the price of the asset. However, if a large financial intermediary supports digital assets and digital assets fail spectacularly, the government might actually let that business fail just to show what happens when you invest in a technology that challenges the government’s monopoly on money production and monetary policy.

“Investors are well served when innovation flourishes. I recognize that innovation involves risks, but it is investors who should get to choose the winners and the losers of the market. Regulators should not impede investor choice; rather, they should ensure that investors have access to accurate disclosures about the range of available products, including their risks.”

— Peirce, Securities Exchange Commissioner

Market risks (e.g. Volatility)

Source: Cointelegraph Research

Asset managers were asked to rate the importance of perceived risks when investing in crypto assets; the possible risks were the following: market risks (e.g. volatility), liquidity risks, operational risks (e.g. technological risks), cyber crime and fraud, and regulatory risks. All of the risks mentioned are in the “important spectrum” of the charts. However, the most important risk for those surveyed was regulatory risk, as almost 80% of the sample fell in the “important region” of the graph. With approximately 71% and 70% of responses in the “important region”, market risk and liquidity were ranked as the second and third most important risks, respectively. Operational and cyber crime risks have the same number of responses in the “important region” (~ 68%).

Liquidity risks

Source: Cointelegraph Research

A specific risk was mentioned that is not related to digital assets, but rather to the bank’s entire business model. Some banks fear that if they offer bank accounts to blockchain-based companies and offer clients the ability to invest in digital assets, they would lose their US dollar correspondent banks. This is a relevant concern as some banks have already lost their US dollar correspondent bank because they moved into the digital asset space. One respondent mentioned that their correspondent bank softly warned them that if they were to invest in digital assets, their banking relationship with the correspondent bank would be damaged or even terminated. It’s probably not a coincidence that these correspondent banks have the most to lose if digital assets eclipse the dollar.

Layering in money laundering is the process of making the source of illegal money as difficult to detect as possible by progressively adding legitimacy to it.

Regulatory Risks

Source: Cointelegraph Research

“If cryptocurrencies fail to provide easy liquidity, then they fail as mediums of exchange, one of the principal roles of money.”

— Michael Parsons, Former Cardano Foundation Chairman

For many institutions these risks are already outweight by the benefit of accessing a new revenue stream and they are therefore already invested into this asset class or they are at least planing to do so. We spoke with Stefan Andjelic from Raiffeisen Bank International and will present his insight into this topic in next weeks article.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

Institutional Investors and Blockchain Education

Most professional investors can point to a formal education when it comes to their expertise in finance. This formal education, however, does not cover information about the Blockchain technology and Digital Assets. It is therefore of importance for institutions venturing into this new industry sector, to educate their employees first. For our report we asked them about their approach to Blockchain education and want to present this information here.

When asking about how financial intermediaries learn about blockchain, the highest ranked sources included encouraging employees to research the topic during working hours and an individual within the firm is spearheading the internal dialogue. Participation in conferences and webinars on crypto also promotes interest in the subject.

There is also a general openness to educational training concerning digital assets, but the survey participants generally do not rely on hiring external consultants or attending university courses in order to learn more.

Source: Cointelegraph Research

Digital Assets for me, but not for thee

Several of the case study respondents stated that they had privately invested in Bitcoin and other digital assets, while their institution had not yet made any direct investments. However, the majority of the respondents had a high level of decision-making ability within their firm.

A possible explanation for this can be that asset allocators are investing with more risk aversion when investing on the behalf of others than when investing their own wealth.

Source: Cointelegraph Research

The majority of the respondents had a master’s degree or above in formal education.

QUESTION: What level of education have you completed?

Source: Cointelegraph Research

Education about the Blockchain technology behind Digital Assets is not only important when it comes to choosing an asset to invest in, but also when it comes to safely handling this asset. These technological risks around purchasing and storing an asset can prevent an institution from investing into this new asset class. In the next article we will take a look at these risks to understand what companies fear the most.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.

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