Asset managers have a vested interest in crypto’s future
While cryptocurrencies fell, established asset managers such as Abrdn, Charles Schwab and BlackRock worked hard to secure a foothold in the market. Not by investing directly in volatile cryptocurrencies. Abrdn, the UK investment group, recently bought a stake in digital asset exchange Archax. BlackRock opens direct access for clients to crypto exchange Coinbase. Schwab has launched a crypto-linked exchange-traded fund.
Skeptics will say that asset managers are trying to exploit an immature, speculative market, when unwary customers betting on cryptocurrencies are still vulnerable to hype or even fraud. Underscoring the risk, Caisse de dépôt et placement du Québec, a major Canadian pension fund manager, has written off what it admitted was a premature investment in bankrupt crypto-lending platform Celsius Network.
BlackRock CEO Larry Fink was an early bitcoin critic, opening him up to accusations of inconsistency at best. But when he sniped bitcoin in 2017, crypto’s foundations were more fragile than now. It’s hardly surprising that companies like BlackRock, which is also developing a spot bitcoin trust for institutional clients, should be looking for new groups of investors.
Capital managers must be open to multiple futures in finance. Cryptocurrency can become a legitimate way to hedge sophisticated investors’ portfolios, like other alternative assets such as wine or gold. It can still pay to have some exposure. But whether or not cryptocurrencies recover their previous levels, the history of markets suggests that something useful usually remains after bubbles burst.
By investing in the market’s superstructure now, asset managers can also prepare for the possible use of central bank digital currencies, which offer some of the promised upside of crypto with the security of central bank backing. They improve their understanding of the underlying technology, such as blockchain. And they can put themselves in a position to hire innovative and fintech expert young staff who are being made redundant by shrinking crypto companies. In other words, it is entirely possible to embrace the technology, entrepreneurial spirit and innovation of crypto while staying at arm’s length from the asset class itself.
As far as ordinary investors are concerned, the growing ties between high finance and crypto seem a step away from the origins of digital currencies as a tool to tear down the establishment. But at least by filtering the investments through orthodox institutions, they limit their exposure to theft and fraud. Yet cryptocurrencies remain largely unregulated, have the potential to contribute to greater market volatility and are a risky home for savings investors accustomed to more robust regulatory protection.
The obvious solution is to install permanent railings, as this newspaper has repeatedly suggested. Unfortunately, different agencies and countries have divergent attitudes. Financial entrepreneurs and innovators will naturally seek to exploit such differences. For example, crypto companies are lobbying to ensure that cryptocurrencies are regulated by the Commodity Futures Trading Commission, which regulates derivatives, rather than the more hawkish Securities and Exchange Commission.
In what remains a buyer-beware market, the asset managers’ involvement provides a thin layer of extra security. Their interest could bolster surviving crypto companies looking to win access to institutional clients. But with the power of asset managers comes a responsibility to help the crypto market grow up, and to protect more vulnerable investors as it does so.
