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CONTENTS
CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Nov 2018
Managing Editor: Beverly Chandler, beverly.chandler@globalfundmedia.com
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In this issue…
03 Crypto and blockchain continue with
slow but steady progress
By Beverly Chandler
07 Digital Asset Custody solution
Interview with Mark Lally, Swisscom Blockchain
08 Investors embrace crypto assets
By Nicholas Cooper & Dr Hartmut Neff, Crypto Fund AG
CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Nov 2018 www.globalfundmedia.com | 3
Since the last publication of a crypto/
blockchain report across Global Fund
Media’s sites in August, news has come
that Fidelity Investments, which administers
more than USD7.2 trillion in client assets,
has launched a company dedicated to
digital assets.
Fidelity Digital Asset Services will handle
custody for cryptocurrencies such as
bitcoin and will execute trades on multiple
exchanges for investors such as hedge
funds and family offices.
“Our goal is to make digitally native
assets, such as bitcoin, more accessible
to investors,” said Abigail Johnson, Fidelity
Investments Chairman and CEO.
Huhnsik Chung, a partner at Stroock
& Stroock & Lavan LLP in New York,
commented on the move from Fidelity
saying: “This is demand driven. Hedge funds
and others have been looking for a custody
solution for these assets – as they exist in
the cloud with a key providing access. The
lack of such services has stifled the growth
of the digital asset class. Entry of Fidelity
lends creditability to the asset class and
there has been much demand for a custody
service and trading platform.”
Since Global Fund Media last published
on the Crypto & Blockchain space, pressure
has been gathering on the sector for
the development of quality infrastructure.
In the last iteration, firms such as Silver
8, Veridium, Kryptoin, JP Integra, Protos
OVERVIEW
Crypto and blockchain
continue with slow but
steady progress
By Beverly Chandler
CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Nov 2018 www.globalfundmedia.com | 4
OVERVIEW
of Outlier Ventures (OV), a firm that was
launched in 2014 as the first European VC
focused on blockchain technologies and
has since extended activities into North
America, said: “We completely agree with
the Committee’s view that there would be
benefits from greater regulatory oversight
in this area, and that the implementation of
an appropriate and proportionate regulatory
environment for crypto assets could position
the UK well to become a global centre for
this activity.
“However, we have concerns that
the report fails to account for the broad
spectrum of possible functions for crypto
assets. For example, adopting a one-size
fits all approach to the regulation of ICOs
(such as, through treating all crypto assets
in the same way as equity or debt under the
Regulated Activities Order) isn’t necessarily
appropriate. Such an approach risks
‘throwing the baby out with the bathwater’
for those crypto-assets that have serious use
cases for advancing say a particular industry,
or digital ecosystem.”
Asset Management and DMS Governance
displayed their skills in the crypto space,
and supported development of formal
infrastructure for this new asset class.
This edition sees them joined by
Swisscom Blockchain, an initiative run by
three founders with an extensive background
in consulting with Ernst & Young, and
joint ventured with Swiss telecoms giant
Swisscom, plus Crypto Finance AG’s
Crypto Fund.
Since the last Crypto & Blockchain
Special Report, in the UK, crypto assets
have not had such a good run, with the
publication of the UK Treasury Committee’s
unanimously agreed upon report from the
Digital Currencies inquiry which saw Rt Hon
Nicky Morgan MP, Chair of the Treasury
Committee, commenting that crypto assets
exist in the ‘Wild West’.
The report found that problems including
volatile prices, hacking vulnerabilities,
minimal consumer protection, and anonymity
aiding money laundering. At a minimum,
regulation should address consumer
protection and Anti-Money Laundering
(AML), the committee said.
Blockchain was deemed currently slow,
costly and energy-intensive, but there was
potential for data storage uses.
The report said: “There are a number of
examples of blockchain being deployed in
the financial services industry and supply
chain management. The Committee is
supportive of good innovation, but notes
that blockchain should not be pursued
for its own sake. Rather, Government and
industry should identify what problems exist
and consider whether blockchain offers the
most appropriate solution. The Committee
recognises that blockchain technology
may have the potential to solve problems
caused by a lack of trust in data integrity
and may be a more efficient method of
managing certain types of data in the long
term, offering higher levels of security than
centralised databases.
“However, at present – although small
scale uses for blockchain may exist – the
Committee has not been presented with
any evidence to suggest that universal
applications of the technology are currently
reliably operational.”
In answer to this, Jamie Burke, CEO
CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Nov 2018 www.globalfundmedia.com | 5
OVERVIEW
market participants regarding these financial
instruments.
Mike Venuto, CIO of Toroso Investments
and co-founder of the TETF index, which
is designed to mirror the ETF industry,
commented on the news, saying: “I think
this is a normal reaction by the SEC.
They haven’t shut down the tracking
shares, they took a pause to clarify the
messaging. It makes sense, most of the
media misunderstood what these tracking
securities actually tracked. Additionally,
many of the custodians like TD and Schwab
had not made them available yet anyway.
Fidelity was the most progressive in allowing
access and trading to these securities even
before the tracking stocks were issued.
This is a tracking security of an ETN listed
in Europe that is designed to track specific
crypto assets. That clarity was lost in the
US media.”
All of these developments and news since
August this year make it extra clear that in
order for the crypto/blockchain industry to
continue to develop, it needs firms such
as those featured here to build sensible
infrastructure and practical offerings. n
The path to the launch of a crypto
ETF has not got any smoother since the
publication of the last crypto report either.
The SEC has now knocked back nine
applications to list a crypto ETF from the
great and the good, including VanEck and
Silicon Valley darlings, the Winklevoss twins.
Even the merest rumour that Coinbase was
in talks with BlackRock about establishing
a crypto ETF whipped up excitement in
the industry.
BlackRock, the world’s biggest provider of
ETFs, is rumoured to have been investigating
blockchain and cryptocurrency but the
potential launch of an ETF based on these
assets was pretty thoroughly dismissed
by BlackRock CEO Larry Fink, who stated
that his clients had ‘zero interest’ in trading
cryptocurrency.
More bad news came in September when
the SEC suspended the trading of Bitcoin
Tracker One (CXBTF) and Ether Tracker
One (CETHF) issued by XBT Provider AB in
Sweden, the closest thing to crypto ETNs
available in the market, citing a lack of
current, consistent and accurate information
which has resulted in confusion amongst
Swisscom Blockchain
Digital Asset Custody
Secure digital asset storage
from a trusted global brand
www.globalfundmedia.com | 7CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Nov 2018
SWISSCOM BLOCKCHAIN
Digital Asset Custody
solution
Interview with Mark Lally
Mark Lally, Principal Advisor
at Swisscom Blockchain
securely stores the digital asset private
keys, a web based UI dashboard and a
backend Relay Service to facilitate safe and
secure movement of the stored assets when
required. It can be fully integrated into existing
core banking infrastructure if required.
“Clients vary and range from start-up
crypto funds, Wealth Managers, Family
Offices, Private Banks all the way up to
multinational retail banks. What we are
witnessing on the market right now is savvy
end clients of these financial institutions
have done their research over the past
number of years and have arrived at the
point where they want a percentage of their
investable portfolio to have blockchain digital
asset exposure.
“However, they want their trusted bank
to take care of this for them. They want a
percentage of their portfolios invested in this
space but don’t want the hassle of learning
how to do this safely themselves.
“We have invested heavily in the
development of our Digital Asset Custody
solution and expect to see exponential
global growth from early 2019 onwards,”
Lally says. “The digital asset custody market
is currently in its infancy. Interested clients
are currently investigating potential market
offerings which matches their respective
needs and are waiting for the regulatory
landscape to become clearer before they
‘pull the trigger’ on a custody storage
solution for their business operations.
“Every single financial institution that
manages portfolios on behalf of clients will
have digital assets exposure to some degree
in the near future. We predict that it will form
a core offering of all financial institutions
within the next 5-10 years. Swisscom
Blockchain is here now to help such
institutions compete for this new business
revenue.” n
Swisscom Blockchain AG, a joint venture
between ex Ernst & Young executives and
Swisscom, the Swiss communications
giant, have launched their new Digital Asset
Custody solution into the global Financial
Institution market place.
Mark Lally, Principal Advisor with
Swisscom Blockchain, explains: “We
offer key products and services across
three specific areas: Firstly, the Enterprise
Blockchain business unit delivers consulting
services and project implementation
expertise to existing businesses.
“Secondly, our Tokenisation Services unit
focuses on asset tokenisation where real
world assets get tokenised on the blockchain.
This also includes fund raising ICO’s for
established or start-up businesses where we
act as the technology and expertise provider
to help execute a successful ICO.
“Thirdly, our Blockchain as a Service
business unit focuses primarily on the
development and delivery of our Digital Asset
Custody solution which is aimed at financial
institutions of all sizes who wish to offer digital
asset custodial services to their clients.”
Lally explains: “We started off
understanding the business needs and
concerns of financial institutions from big
global retail banks down to small private
banks or family offices that want to enter into
the digital asset custody space. Right now,
our prime target clients are those who have
done the research into blockchain based
digital assets and have arrived at the point
where they want to gain exposure to this new
asset class. On top of securely holding the
assets they also want the ability to move/
trade these assets at any given moment.
“We offer an off-the-shelf solution that
allows these financial institutions to achieve
exactly that. The solution consists of three
core components. A vaulting hardware which
www.globalfundmedia.com | 8CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Nov 2018
CRYPTO FUND AG
Investors embrace
crypto assets
By Nicholas Cooper & Dr Hartmut Neff
Act and Japan’s crypto exchange regulatory
announcements). Increasingly, the crypto
world is open to regulation: it improves legal
certainty and speeds up adoption.
As the crypto market evolves, so do
industry best practises and standards. Fewer
operational issues will occur on crypto
exchanges with increased regulatory oversight,
more professional custodian practices, and
highly secure crypto asset storage. Insurance
products are being released to cover risks in
the event of compromises, as is necessary in
traditional banking.
Regulators of asset management
companies are increasingly embracing the
crypto industry. Crypto ETFs and other
similar collective investment schemes are
edging closer to approval with the biggest
regulators, such as the SEC. Crypto Fund
AG is the first, and presently the only, Swiss
crypto asset manager authorised by the
Swiss Financial Authority FINMA under the
Swiss Collective Investment Schemes Act.
The addition of crypto assets to the
investment portfolio is on the rise among
professional and institutional investors. What
makes this move increasingly interesting for
institutional investors? Swiss-based Crypto
Fund AG, a subsidiary of Crypto Finance
AG, explores the market with the advent of
regulated business partners and crypto asset
technology breakthroughs.
Opportunity in the crypto asset market
The crypto asset market saw its first major
influx of investment, resulting in a price surge
through December 2017, followed by the recent
period of substantial public interest in crypto
assets and blockchain. The recent drop in
prices has not deterred the financial industry
from investing, as seen in the growth in crypto
fund assets under management. Last year’s
inflow of financing is now being harvested
to develop the innovative and disruptive
technology. Three factors appear to be
playing a role: positive regulatory signals, the
arrival of institutional providers, and expected
technological advancements – all significant
for institutional players to enter the market.
The decreasing price volatility against the
US dollar over the last six months indicates
possible maturation in the industry. Lower
volatilities during a period of stable prices
can indicate an expectation of a positive turn
in the market.
The positive long-term prospects for the
crypto ecosystem continue. This presents
the opportunity to invest at the currently
deflated price points. Prices should reflect
the long-term positive expectations and
upcoming technological advancements.
Positive regulatory environment
Regulators around the world are taking
crypto seriously, issuing guidelines and
laws (such as Liechtenstein’s Blockchain
Dr Harmut Neff, Portfolio
Manager, Crypto Fund AG
Crypto funds – assets under management (in USD millions)
675
2,200
5,860
5,580
7,110
1,000
2,268
10,622
6,097
5,040
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Jan 17 Jul 17 Jan 18 Apr 18 Jul 18
AuM CMI10 Price
Comparison: Crypto funds assets under management and crypto asset prices.
Sources: Bloomberg; Crypto Fund Research
www.globalfundmedia.com | 9CRYPTOCURRENCY & BLOCKCHAIN GFM Special Report Nov 2018
CRYPTO FUND AG
brings diversification and strengthens a
portfolio, based on the long-term potential
of this new industry. Crypto assets added to
a portfolio as an allocation in an alternative
investment quota can ensure an investor
does not miss potential bull runs. This
position could be considered as similar to an
equity option without maturity.
Adding crypto to a portfolio should be
considered as a long-term investment.
Investors should review specific tax and legal
advice in their jurisdiction.
Crypto investment fund vehicles
Using collective investment vehicles to gain
crypto asset exposure brings the benefit
of crypto experts and financial services
professionals managing the products without
the difficulties of direct investment. Crypto
funds can also offer favourable liquidity terms,
such as weekly Net Asset Values (NAVs).
Passive funds track indices, such as the
Crypto Market Index 10, calculated by SIX
Swiss Exchange AG, are constructed to
represent the broad crypto market. Active
fund products differ in investment style and
objectives, such as a systematic approach
using algorithmic filter analysis, to name but
one example. Unregulated crypto funds often
lack basic corporate governance, controls,
and processes expected of asset managers.
Most hold their crypto assets in self-custody.
Third-party crypto storage providers with
top-tier institutional storage infrastructure
solutions are an essential requirement for
any professional investor.
The crypto industry is moving towards
institutional professionalism
According to Bloomberg: “Institutional
investors are becoming more involved in the
USD220 billion cryptocurrency market than
many observers may realise”. The drivers of
this increased investment include the growth
of institutional partners available, expected
technological breakthroughs, and supportive
regulatory advancements.
As the importance of crypto assets grows
and matures across many markets, the Swiss
authorisation from FINMA for Crypto Fund AG
is an important acknowledgement for crypto
assets around the world. It allows professional
investors a pathway to invest easily and
transparently in the crypto industry. n
Institutionalisation of the crypto industry
Institutionalisation has arrived. Crypto
Finance AG, launched in 2017, has worked
closely with FINMA in building a bridge
between the traditional financial world and
the emerging crypto asset market. Financial
services professionals, including former
UBS and Credit Suisse employees, and
technology specialists back up CEO and
co-founder Jan Brzezek’s team.
With recent institutional announcements,
the larger players are now entering the market.
The crypto fund assets under management
increased significantly this year, counter to the
substantial fall in crypto market capitalisation
(as crypto prices fell). The indication: vast
crypto fund inflows during 2018.
Technology as a market catalyst
Looking further afield, the potential for
widespread crypto adoption is visible in
financial services, healthcare, insurance,
supply chain management, internet of things
(IoT), wealth storage, and global settlement.
Crypto technology breakthroughs are
expected in one to three years. The highest
potential projects have achievable and
impressive ambitions with professional
development teams. Extensive manpower
is being dedicated to finding solutions
to current challenges, including effective
decentralised governance protocols, faster
transaction speeds and scaling systems,
lower energy mining consumption, denial
of service resistance, geographical
disbursement solutions, and mining pool
concentration safeguards.
Allocating crypto assets into portfolios
The broad crypto asset market exhibits low
correlations with traditional asset classes
such as equities, fixed income, currencies,
and gold. The addition of crypto investments
Low Correlation: Crypto Market
Index 10
NASDAQ Index 0.00
UST 10Y -0.04
Gold -0.06
Crude Oil (WTI) 0.00
EM Bond Index 0.01
EM Currency Index 0.10
Sources: Bloomberg; SIX Swiss Exchange AG
