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Magazine Issues » October 2021

Digital assets: Call for harmony as old and new worlds collide

ConnectionsA Funds Europe webinar on digital assets saw pleas for regulatory clarity, a level playing field and acknowledgement of the legitimacy of crypto from panellists.

The head of State Street Digital, Nadine Chakar, has called for more clarity from investors, fund managers, regulators and service providers in order to manage the inexorable rise of digital and cryptoassets. “I think it will be a fun ride if we can be super-clear what we’re trying to do,” she said.

Chakar was speaking at a Funds Europe webinar, sponsored by Calastone, on how digital assets are likely to transform the funds industry.

There was a broad consensus among the panellists that regulation could be a decisive factor in the development of the digital assets market. However, there were also diverging views on how rules are currently applied to both traditional market participants and digital newcomers.

The webinar, entitled ‘Digital Transformation of the Funds Industry’, featured representatives from both the old and new investment worlds.

Alongside Chakar were Jeroen van Oerle, portfolio manager for the fintech fund at Swiss private bank Lombard Odier, Adam Belding, chief technology officer at funds processing network Calastone, and Lex Sokolin, global fintech head at Consensys, a blockchain software company set up by Ethereum co-founder Joseph Lubin.

Sokolin outlined just how much he believed the investment world has already been transformed by digital assets, with billions of dollars of investment moving away from traditional to new asset classes. “There is now an internet for all financial services and products that is re-architecting how we pay and how we invest,” he said.

He cited the fact that the value of cryptocurrencies exceeded $2 trillion in 2021, thanks to greater interest from institutional investors. At the same time, according to data from eVestment, mutual funds and ETFs have suffered net outflows in four of the last five quarters. “The $2 trillion invested in crypto is not invested in mutual funds or ETFs. People have voted with their money,” said Sokolin.

He also queried the idea that the unregulated crypto world is susceptible to fraud: “If you look at the data, it is inaccurate to say that crypto networks are more fraudulent or used more nefariously than our actual banking industry.”

Not fair
According to van Oerle, it is not about whether criminal activity is taking place, but ensuring there is a level playing field between the “super-regulated” traditional players and digital newcomers. “Competition between traditional financials and these new types of firms is actually not fair at this point in time,” he said.

He cited the complex process, involving the creation of a special purpose vehicle and an audit, that a regulated entity like Lombard Odier has to undertake to tokenise assets. “If the new digital assets industry needs to keep to the same set of rules as the old one, is it still going to work? That is the big question,” he added.

Calastone’s Belding argued that regulators could actually benefit from open-sourced blockchain technology and the transparency it provides. “The technology potentially provides the solution as well as the problem.”

He said concerns over fraud in the crypto world are nothing to do with the technology. “It’s just because people who are nefarious tend to flock to places where they think they can exploit and make money illegally.”

Belding added that he would like to see fully working use-cases within the next year when it comes to the supporting infrastructure and services.

Panellists also debated the implications of growing institutional interest in digital assets, the danger that fund managers may have underestimated the impact on the market and the work needed to ensure there is the right infrastructure in place.

The industry could also face a chronic skills shortage as a result of new asset classes being made more accessible by tokenisation, said van Oerle. For example, if the tokenisation of luxury watches becomes the next big thing, there aren’t enough analysts to implement these new strategies.

“Within equities and bonds, we have the framework in place,” he said. “But these new asset classes are so specialised that you need to insource the expertise. However, it is not so readily available.”

In the past year, a growing number of digital or crypto custodians have emerged. Some of these are what could be described as digitally native newcomers, while others, such as State Street Digital, are new ventures borne from well-established asset servicers.

State Street Digital’s Chakar outlined her hope that well-established service providers such as State Street may play a role in encouraging more institutional involvement. “Right now, people are just jumping into the fray without really understanding the implications. For people like me that deal with market infrastructure, that all is changing. All of that,” she said.

“Crypto will become part of the mainstream, but it will take time and a massive education effort with our boards, regulators and our own clients,” she added.

“At some point, the old world and the new world will have to come together in harmony. State Street wants to help our clients manage that digital divide, but I am more than cognisant that banks like us, that are more than 200 years old, have to demonstrate to the world that elephants can truly dance,” said Chakar.

“That will require a totally different mindset from the banking industry, asset managers and regulators, and we all have to be a little bit more humble and curious.” fe

To access the webinar, go to our Webinars Channel.

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