When cryptocurrencies declined, established asset managers such as Abrdn, Charles Schwab and BlackRock worked hard to gain a foothold in the market. Not by investing directly in volatile cryptocurrencies, beware. Abrn, the British investment group, recently took a stake in digital asset exchange Archax. BlackRock opens direct customer access to the Coinbase crypto exchange. Schwab has launched a crypto-related exchange-traded fund.
Skeptics will say that asset managers are trying to exploit an immature and speculative market, while unwary customers betting on cryptocurrencies are still vulnerable to hype or even fraud. The Caisse de depot et placement du Quebec, a major Canadian pension fund manager, underlined the risks and canceled what it admitted was a premature investment in bankrupt crypto lending platform Celsius Network.
BlackRock chief executive Larry Fink was an early critic of bitcoin, exposing it to accusations of inconsistency at best. But when he withdrew bitcoin in 2017, the crypto’s fundamentals were shaky than they are today. It’s no surprise that companies like BlackRock, which is also developing a cash bitcoin trust for institutional clients, are looking for new groups of investors.
Wealth managers must be open to the multiple futures of finance. Cryptocurrency could become a legitimate means of hedging the portfolios of sophisticated investors, just like other alternative assets such as wine or gold. He could still pay to get some exposure. But whether or not cryptocurrencies recover to previous levels, market history suggests there is usually something useful left after the bubbles burst.
By investing in the market superstructure now, asset managers can also prepare for the possible arrival of central bank digital currencies, delivering some of the promised benefits of crypto with the security of central bank support. They improve their understanding of the underlying technology, such as blockchain. And they can put themselves in a position to hire young, innovative workers and fintech experts laid off by shrinking crypto firms. In other words, it is perfectly possible to embrace the technology, entrepreneurship and innovation of crypto while remaining aloof from the asset class itself.
As far as mainstream investors are concerned, the growing ties between high finance and crypto seem a step away from the origins of digital currencies as a branch destruction tool. But by at least screening their investments through orthodox institutions, they limit their exposure to theft and fraud. Yet cryptocurrencies are still largely unguarded, have the potential to contribute to greater market instability, and are a risky savings home for retail investors accustomed to tighter regulatory protections.
The obvious solution is to put up sturdy crash barriers, as this magazine has repeatedly suggested. Unfortunately, different organizations and countries have different attitudes. Financial entrepreneurs and innovators will naturally try to exploit these differences. For example, crypto firms are pushing to ensure that cryptocurrencies are regulated by the Commodity Futures Trading Commission, which regulates derivatives, rather than the more aggressive Securities and Exchange Commission.
In what remains a market where buyers are reluctant, the involvement of asset managers provides an extra thin layer of certainty. Their interest could bolster surviving crypto firms seeking access to institutional clients. But with the power of asset managers comes the responsibility to help the crypto market grow and to help protect the most vulnerable investors while they do.