Crypto Funds: The New Frontier of Asset Management. Understanding Custodians, Managers and Risks

Transcript

all right fantastic welcome back to the crypto Valley Conference 2024 day two I'm glad you all made it I'll bite uh the crazy rainy weather that we had this morning hopefully that's it and that we'll enjoy the boat ride in a few hours thank you so much for being here so uh early we have a great uh panel for you uh next a lot of master classes and the like so without further do I'll leave it over TOA to talk to you about everything crypto funds hello everybody very much uh looking forward to this panel so we are talking about today about funds in general but a little bit also about um tokenized funds and uh other

products what I would like today to do is a little bit of introduction on the topics because I'm not sure whether you are all fond of funs uh and then um then we will first do an introduction and directly deep dive in the topic um I leave my wonderful panelist present themselves thank you BBA uh good morning everyone my name is Julie boura I'm the head of legal and compliance of 6m which is an alternative investment fund manager for crypto funds good morning everyone thank you Viva and thank you CVA for having us here today uh my name is Anna sanan and

I run the C of financial institutions in Mia uh for fire blocks and I'm also the country head for Switzerland pleasure to be here good to all of you I'm Laur Marini I'm head of innovation for societ General in Luxemburg I'm based in Luxemburg and I'm and crypto leader for soci General group okay so let's Deep dive so we have two people from Luxembourg one people from Switzerland and half people from Luxemburg and Geneva so Let's uh first begin Julie and Laur about the fun industry the fun industry where is it positioning exactly where Luxembourg is positioning versus Europe

maybe versus swiland um yeah give us a little bit of introduction and oversight okay so I will start if I M wrong thank you so um the so uh fun industry in the Bron uh I would say that um luxur is uh very well positioned uh because it's the second place in the world just behind the United States uh for fund management and fund Administration and the first one uh in uh in uh in Europe uh when you speak about crypto funds uh more broadly I would say that uh everything started in

2013 uh with uh big funds big crypto funds in in the US uh for instance pona Capital uh was starting um in in 2018 2016 2018 uh we can say that this is the rise of crypto funds uh in Europe with first uh with for lmour first uh small crypto funds let's say we call it de minimis fund uh under uh the the ifm directive uh which started uh with investment in uh early stage token uh in companies having some uh projects uh in in in in blockchain or uh like uh in

different blockchain or in custody firms for instance things like that so really at this point it was uh the start of the of the of the of the of the crypto funds in in in Lor so the small Ripple in 2017 2018 exactly the the the rise yeah yeah and um I think that since then uh 2020 2021 uh with the the the bull the bull market there was really uh a lot of funds coming to Luxembourg uh with still the same things small funds uh with asset under management of different level uh and this uh the the type of investment that we that we we talk about

maybe um in terms of opportunity ities if we speak about we want to speak about figures uh we have to say that um all the the old investment industry investment fund industry in uh in Europe uh all asset strategies uh mixed it's uh 10,000 billion of of Euros of opportunities if you look at the opportunities from a crypto asset perspective uh even if it's small portion it's still uh 50 billion based on own resch but it's still 50 million billion of of opportunities so making this investment opportunities in this investment strategies uh from a fund perspective very very

interesting um now speaking of the landscape uh in in Luxembourg and in Europe um the six months the company I'm working with is the first uh authorized alternative investment fund manager uh in Europe uh which is able to manage uh crypto fund for third party Pro fund promoter uh which can go beyond in terms of asset and their management which can go beyond uh the threshold of the ifm directive meaning that in terms of fundraising and in terms of uh asset under management it give the fund promoter lot lot more uh opportunities uh this is also um as to

put into into into interest because uh the ifm uh as such as an entity in in Europe uh give you um um a passport to distribute the shares of this fund uh in Europe so meaning that uh based on on on specific notification that you have to do in some dediction um the the the the the thanks to the the the the the framework of the ifm you can passport and distribute this fund uh very Broad in Europe which is very interesting yeah so so just to give a little bit of picture for people that are not familiar with Luxemburg so

typically you have an ifm which is a manager of funds that are go over the threshold of 100 Bill million and then that's only for the management but you need actually a depository Bank maybe a custodian and then you have promoter of the funds so the funds will be setup it will be managed by a third party because it's the law and then you have to have someone that does the depository and the custodian and we have actually here and also providers for c for for Key Management and for custody and typically like an so we have here the perfect panel because we see the view of an AFM

we see the view of a service provider and we see the view of the depot bank so please also give us our your perspective on the so my my perspective so I am in the space of the crypto since 10 years so I will celebrate my 10 years time because I started to mine personally in April May uh 10 years ago but uh so we we had a lot of solicitation uh during the years 2017 to to to 2020 I have to admit but uh what I have seen is the a lot of crypto funds have been established in kimman during this time because it was quite easy to to set up a crypto Fund in kimand okay now uh it's uh it the

ecosystem is Wy uh not in all countries in in Europe in Luxembourg as you said uh we have all the piece of the puzzle now so we have we are able to uh establish a crypto fund we have we have a lot of demand in um in Luxembourg I have about 80 to 100 demand of crypto funds per year here uh and uh it's coming from Switzerland in Switzerland they want to launch crypto funds but they want to use Luxembourg to to better distribute uh in France in Luxembourg and in UK but always through Luxemburg in Ireland I have some solicitation but

I have to say less than uh than in luxemborg but uh after I think we will discuss about the type of uh demand we have but uh I have to se that before it was in kimman because the ecosystem was not ready and as you have said now the ecosystem is ready we have Depot Bank uh we have u6m in Luxembourg asmd finally yeah we have the lawyer ready we have the crypto custodian the tech provider so everything is ready uh and uh what what is interesting in Luxembourg we have a dozen of virtual asset service provider and me as a bank if you want to work uh launch a crypto funds and if you

want to work with a bank we we will just tell to you okay we want to work with you by the way we need to work with regulated actors with the vasp so if you have the vasp it will be more than easy to move forward right because you have so the depot Bank the ifm but the depot Bank like Society General they need to have a custodian that does the custody of crypto assets otherwise you are missing one piece yeah maybe to to add um because the the the fmd is a very specific framework uh which is a directive which is a directive a European directive uh which comes to uh regulate uh the management of the fund

in Europe which is made by the afmd on a day-to-day basis um but if you have a fund an alternative investment fund uh managed by ANM a depository Bank is mandatory you cannot do uh without it and we we speak about the operational model afterwards but uh yeah so we set up a little bit the the scene of uh the crypto funds but what I wanted also to ask the panel is to give a little bit of uh the big picture and say okay the crypto funds are actually one product but actually you have probably the crypto funds you have the tokenized funds like traditional funds that would

be tokenized and you have the ETF and ETP so here um the same if it's we can begin with you but to give a little bit of position between crypto funds versus tokenized traditional funds or toiz funds and then ETP ETF it's fine can start with crypto funds because it's uh it's uh it's what we do um uh when we speak about crypto funds you can speak about different things uh different type of product different investment strategy crypto funds first when you think about cryst funds the first thing you think about is okay I have an investment fund I raise funds from a numerous number of

investors which the purpose is to invest in uh in assets uh which are crypto assets so we can have either uh the fund investing in uh token Blue Chip token like Bitcoin eum these kind of things uh and you can also have um funds that are more set up with a venture capital let's say strategy because as you see in the as you know in the in the web in web tree Investments uh uh you have companies which have uh a project uh of uh product or Services which are quite new in the field and which are looking

for uh funds to start the project and to run it ET Etc and so we we call it the web web three VC capital investment so these companies issue sometimes shares or sometimes uh uh tokens early we call it early stage tokens which are here to support the project and the funds invest in this kind of uh of of asset either shares or early stage token um you can also have uh funds which are investing in tokenized assets real world assets which are tokenized uh so but we still call them call it uh crypto funds even if they are investing in in in crypto uh in crypto tokenized asset and what is interesting as well is

that this early token they may have a very low value so you are under the threshold of 100 million assets under management and suddenly because of their value because they get listed puff they go on the threshold and then they need you actually because they go out too much the fund is way uh the valuation of the the tokens are suddenly booming right yeah it's true for the early stage token with more time I think to gain in value but it's also true for the you right for The liid Tokens The Very liid tokens theity exactly the the we we spoke about de minimist funds earlier today which are uh the first layer of the ifm directive we we spoke about and

which uh we call it this type of funds we call it um d minimist funds which because they are under the threshold of 100 million or 500 million of asset under management and then you're right with the with the volatility of the market uh with the BN Etc you can finally uh all of a sudden if you decide to to stick under the 100 million threshold you can go above and in that case this is where you will need an authorized ifm uh instead of a registered one exactly which and and then the ifm directive will be fully applied to you but uh this is a so we hope that all the funds go like this so they do need exactly Anna on your side

on my side I think we've seen and we've talked a little bit about crypto funds um one of the areas that is raising a lot of interest and a lot of headlines this year is actually the second part so uh traditional funds that have decided to launch new share classes or even new vehicles uh on a tokenized format um and it's taking a lot of attention because it's breaching a new demographic of investors uh for the traditional asset managers obviously uh we were discussing just before the panel how nowadays the largest crypto fund is managed by a traditional player which is Blackrock with their uh Bitcoin ETF um the other Trend aside of the ETF that is gathering a lot of attention at the

moment both in the US but mostly in Europe is what other asset classes can we tokenize and money market funds are coming up as a very very interesting instrument um there are billions of assets uh in stable coins at the moment uh many market makers many crypto funds uh many crypto investors use the stable coins as a way to take risk of the table uh and keep money in cash however with the current environment of high interest rates uh you're leaving a lot of money on the table and so there is a very strong demand for instruments that are yield bearing that have a fast settlement cycle that can be uh taken under custody uh by exchanges or by custodian Banks um that may or not might

be uh using fire blocks as an underlying technology and the more interesting part is that it can be transferred quickly and used as collateral uh within the crypto ecosystem so I think in addition to funds with cryptocurrencies as underlying um the tokenization of of traditional funds themselves is starting to find a very interesting foot within the uh within the crypto digital asset uh ecosystem and this is where we are seeing a lot of the traction a lot of the projects happening uh this year and luron tokenized funds ETF ETP what do you think yeah so uh so for crypto funds as I said there is the interest of the market and you have two type of crypto

funds the one who are doing investment in the top 10 top 20 uh cryptocurrency so I see a wising interest in uh in Europe I see also uh wising interest in VC that are doing investment in uh web Three Special inforce A lot of VC inforce they want to uh to launch uh alternative investment funds with an exposition in cryptocurrency but they also want to have utility token also so they need to to work with a Depot Bank uh so this is for crypto funds ETP ETF they are not coming to me to tell luro I want to launch an ETF can you help me by

the way uh it's happening now in us uh for the ETF it was already happening in Europe because we do not have ETF crypto but ETF crypto physical one but we have already ETP since four five years with coin shares 21 shares so uh it is already the case by the way for ETF ET P for my side as a Bankers uh it's more interesting from the investor side because now the investor uh they can have an exposition to cryptocurrency directly so my mother for example she just have a problem with a phone she has a problem with a digital bank if she

wants to buy she she will never buy Bitcoin but maybe with the bank she can buy ETF crypto in the future so she can have the exposition directly through the bank so uh I see the interest for the investor side uh for for the ETF and ETP and the last part it was the tokenized fund yes so in Luxemburg juli just tell that we are the second place in the world we have five sp5 trillion of US dollar in asset under Administration in Luxemburg in us I think they are at 20 or 25 uh so it's a huge Market we have seen the example of Black Rock but uh we have

example of templon a lot of com a lot of asset managers they are coming in this field also yeah with the stable coin but also to to put uh tokenized fund as a collateral so it will be the next big thing also in the future but my trend is uh everything is happening everywhere MH especially in luxemborg now I'm joking but in Switzerland in France in Luxemburg but I have to say crypto fund is happening now tokenized fund is happening now and uh the last one ETP ETF is happening now and regulation is happening now so we have all the green light to move forward together and maybe

just a point on the ETF and ETP uh it's true that with the raise of the ETF uh from Black Rock and and others uh it's attract the appetite of Institutional Investor uh so clearly um the the the the the the the investor is it's very interesting what Lauren said because investor side people are looking at the crypto funds from an Institutional perspective now uh because if they can invest in ETF it means that they could also invest in regulated product uh investing in crypto assets so it's uh give uh the world and maybe the the the the world of alternative

investment fund more uh information more more more more sense of what uh as investing in a in uh in in crypto asset mean and and regarding ETP uh this is also very interesting because we have a client uh who decided to uh set up a fund investing directly in an ETP because investor didn't want Institutional Investor or professional investor didn't want to invest directly in thep but there was uh looking for investing in a regulated project uh because it give it gives them more Comfort uh from the the the a product perspective an investment perspective

and from an investor perspective as well that's and for Depot Bank Less know um but we still need you in any case yeah okay interesting but so who will win the battle ETP ETF Krypto difficult to say they will all win the battle it's I I don't I don't believe there is a competition because it's completely something different different because for me a crypto fund they can invest in top 10 crypto for example I have un boarded a crypto funds he wants to do

investment in Bitcoin ether but also there will be a cash part the money market part so it's like a it's like a traditional fund but with a crypto component so it's completely different that the ETP or ETF ETF mono Bitcoin for example it's like the Bitcoin but you don't have my mother in this case she has no problem with the wallet but anyway it's the same as Bitcoin and after a tokenized fund for me it's like it's like a traditional fund but on a token on a token format it will be more easy to do the circul ation from an efficiency perspective it will be more easy for all of us it will be a new distribution channel so I don't

believe it's a competition uh I will not speak about competition by the way for me it's three different product but the they will definitely find new investors and a great efficiency in the system as well I agree I I don't think at this stage where the the penetration of crypto within the overall inv universe is so small competition is is the right word uh I think we will have greater adoption in all of the three segments certainly as L was mentioning probably uh the tokenized funds are in a different category because it is the same invest in vehicles simply with different rails for settlement the investor will at the end of the day not

really noce is what happens in the back uh I think when it comes to actively managed funds and ETFs as we see the universe mature they will be room for investors that have more a preference for better pure cheap investment link products and there will be also room for active investment and certainly within the ecosystem of a lot of innovation uh and a lot of volatility there is a lot of room for actively managed funds and an alpha to be generated so I think as we see portfolios mature on the traditional side and also crypto investors becoming more sophisticated and U not only investing directly uh in uh in the cryptocurrencies but also starting to trust uh professional asset

managers to deliver Alpha for them we will start to see uh all of these um different products uh raising in adoption so like a diversification of risk and diversification of portfolio for me uh so you do not have a competition per product by the way if you are not moving forward the other will do by there will be a competition between countries uh there will be winners and there will be loser per countries even if in Europe we have mic and we have an harmonization it's up to the local regulator to to move forward and it's up to the local ecosystem to to move forward and I believe that the

winners of Tomorrow will be linked to the efficiency of the ecosystem that's why we are speaking about luxemborg why it is uh important for us because we are the second worldwide Place uh in the fun industry uh tomorrow we can be at risk if we are not moving forward in the crypto tokenization format so for me there will be competition there will be loser and winner in the future but in terms more in terms of uh in terms of country and geographical Zone that's very interesting what you said because um in Switzerland typically you had a lot of AMC that were developed and then ITP when they when you wanted to trade so it

has been come very early and then you had Frank for for instance that came as well um then you have the ETF of the US coming now so yeah everybody is looking a little bit and searching yeah that's true and in Europe if you come back to to Europe uh maybe the approach with The Regulators um it's uh it's very specific when it comes to crypto uh if I may had because um you you have to uh and and speaking about our experience at the level of 6m because we had to go through uh the the the the instruction five with the with the regulator to obtain our lense our ifm lense uh and you have to um take

them by the end I would say and explain uh the all the aspects of a crypto fund uh in terms of risk management in terms of portfolio management the way the decision will be made because we have to reassure uh The Regulators we have to to reassure the public with respect to the volatility of an crypto assets but that's interesting uh we actually had this discussions and we prepared questions but actually we are speaking so we don't follow at least the question but that's interesting can you elaborate a little bit more on um the setup actually um so um setup of a of of a regulated fund uh under the if fmd or crypto Fund in general um

so from the beginning the initiator the fund sponsor come with the ID of a of a strategy sometimes investment strategy and the project to invest in a specific crypto asset or maybe a diverse diverse Diversified portfolio as we said so sometimes they come to us Sometimes they come to the depository Sometimes they come to the lawyer uh but they come with an idea of setting up a fund here um our job at 6m or job of B for instance or even from a Cody perspective is to explain how what is the operational model and how will the fund will will will operate on a day-to-day basis uh so to um operate a crypto fund you will

need as we say uh a regulated crypto fund the ifm which is managing the fund on a day-to-day basis from a risk management perspective from a portfolio management perspective from a fund governance perspective uh and from a fund and Counting perspective as well uh because it's very specific when it we we we speak about crypto assets uh you will need a depositary uh depositary Bank uh as Lauren said uh which will take uh which will act as safekeeper of the of the of the assets uh in general but you also need in the in the in the in the operation a custodian uh because sometimes the the dep itary Bank cannot

do uh the Safeguard of the virtual asset of the crypto asset so we we need also a custodian that will take care of the assets that will take care of the of the private Keys uh and will uh and will reinforce the security around it uh interesting can you develop on the keys typically because you are providing Solutions typically so so how does it would work in that uh very happy to explain and actually this is one of the things we were talking about the history and how things evolve from 2017 until today the main difference is that in the earli stages of the cycle because there were not many custodian banks that were able to offer the service outside of Switzerland there was not a regulatory

regime in Europe uh a lot of the funds and a lot of the entities were we going for self- custody where the uh portfolio manager effectively uh will be in some cases holding the private Keys uh protecting the Assets Now when we go into at funds obviously you do need a qualified uh Bank holding the custody of the digital assets and what we're seeing now across Europe is that in the light of MAA we are starting to see the first uh the first Banks outside of Switzerland really offering regulated custodian services so the First Bank in Italy is about to launch Services the First Bank in Spain is about to launch Services we have some in Germany already Luxembourg and France are also

progressing very fast and so now you do have uh as a as a portfolio manager as a project sponsor the ability to really choose and have uh the full value uh of services so at fireblocks what we do is we provide uh very secure um key management and wallet infrastructure which regulated Banks uh will be uh uh will be leveraging to provide U custody of cryptocurrencies uh in some cases we will have some depositary banks that have the ability to take uh to take both roles uh but in many cases these roles are um segregated yeah and there are with Casp a crypto asset service provider exactly we call it like this in EU or vasp in Switzerland

Affiliated um would you accept someone that would say I want to have a hosted W uh un hosted wallet uh un hosted selfhosted uh I'm working for regulated company so we need to work with a regulated actors by the way um after it will depend on the setup because we have as I said we have already unboarded a French client and uh that that is working with fire blocks and uh so uh we we have added a regulated layer on top of fire blocks uh which allow us to be uh s

compliance from a French perspective so I just have to say uh we will work always with regulated actors and if not we will need to add uh regulated uh layer so we do need this custodi we do need and and as we said sorry I think there is a question ah sorry uh can we take a just after but we we would I would love to take some question oh if it's line yeah yeah as we said earlier uh we need a depositary bank uh for a regulated fund and sometimes a deposit depositary Bond can also do the custody of the crypto assets sometimes not but in any case you will

do it uh in Luxembourg when you set up a fund it's mandatory uh so meaning that uhing what sorry mandatory by law and regulation mandatory by regulation yeah because as we say the um if the fund needs to have a depositary bank uh which is monitary so the same goes for the from the from from the custody of crypto asset this is the requirements by the regulator in luxemborg but I think that it has to be seen in in in a good way uh self hosting wallet would not be possible for a regulated fund which can be see badly for some of the actors which I understand completely but it has

to be seen as a a guarantee of security around the asset that the the fund will have uh and in terms of uh appetite of investor that will invest in the fund uh in terms of um um I think Serenity of the market etc etc I think it has to be seen as a in a positive way instead of a negative way yeah hello us

can so retail you mean or in general okay okay yeah but maybe if here we are more speaking about uh regulated or at least semi-regulated funds uh which are not uh which are which will come in the fund Prof at least professional investor meaning that this professional investor will invest in the view to to um to to to they will expect some some specific layer of Regulation I would I would say so

meaning that in this framework this is the framework they expect uh it's not the same that for private investor or retail investor because they expect this level of Regulation this layer of Regulation so this is something which is which is in the requirements and the and and this is why they are looking for either from a fun perspective this is the reason why they want to set up a regulated fund and from an investor perspective this is what they are looking for the protection the regulation the guarantee of the the good safekeeping of the assets I think from from our perspective what we're seeing working with many fintech platforms that want to offer that 247 service is something that many people have picked

upon you are often very busy during the week you're reading the newspaper on Sunday and you come up an idea and you just want want to trade uh and so this is where tokenized funds are coming into place in Europe there is the DT pilot regime that has tried to put some safeguards around this the reality is the limits and the conditions are so strict that very few projects are seeing the light with any success there's a lot of conversations ongoing with Regulators to try to make this more efficient to allow for e- money tokens to be allowed to be leveraged so that you can also trade without having to wait for the bank to open on Monday at 9:00 a.m. so I think it's coming um there are two bits that need to or several pieces that need

to to happen uh Fiat has to be available uh and that is certainly coming uh we are starting to see projects coming up in July this year uh this year already you need to have uh the exchanges with the appropriate licenses to be able to hold uh not only cryptocurrencies but also security tokens and many of them are in process of obtaining the appropriate licenses and then finally you need that Supply demand too much at the moment there is a demand for money market funds that is the easiest way to access there is appetites from the asset managers and the investors to continue the conversation probably listed equities will come next and probably alternative funds will take a bit longer but but the path and the trajectory and

the interest is already there nobody's adoption is adoption is coming and there will be I believe an acceleration uh this year or next year because because there will be the experimentation at the Central Bank European Central Bank level so there will be a lot of uh live experimentation in the coming months so it will uh it that will mean that we will have more adoption more player in this field and in term of customer journey I suppose that it will happen for pilot regime uh I don't know if it is a real success no not really you have a lot of restriction uh it's live since 3 until 26 for additional three years so until 29 so

there will be the cbdc so DJ Euro D Swiss frank because we need to have cash on chain uh there will be adoption because uh if you have experimentation we will have adoption and stable coin and so on so we have all the green lines to to move forward you will just need to find the white product after so so we have a like four 8 47 second but do you have any questions we seen yeah but they are very liquid and

difficult to access for the majority of investors if you do have access to uh you know that very much no you can toonize what you want uh it depends it depends uh where the market is and the interest of the investor so uh today we we see also wising interest uh in tokenization and we have made uh all all the top 10 banks in the world they have tokenized Financial product so and you have the famous BCG report that shows that we can toonize up to 10% of the GDP by 2030 so it's coming now uh and we see

that the giant are coming in this field like GP Morgan like HBC like societ general of course but anyway it's coming now any other question otherwise yeah so yeah um I I think you know even if

it's decentralized and distributed you do have inter domestic interest so you will still have interest from countries to regulate it to to adapt to their own local interest it's not necessarily in the best interest of the investors nor uh for the best interest of the technology that we love uh otherwise we would not be here so but um we have to see uh I don't think it's necessarily unfortunately always bottom to top but sometimes stop to the B bottom and this is why uh um there was a huge interest by having the CTF in us

because we say okay so maybe regulation is not that hard for for the us and we can move forward and the same for for Europe um they will still be fragmented and there will still be uh countries that want to develop a specific type of products because they know it you heard today that typically Luxemburg but Island as well hi colen uh would typically be uh uh knowledgeable they have this the The Reflex the the the mindset typically to move in this type of assets or this way of moving to this type of assets and then it would grow and then the

regulation would adapt as well so I'm I'm I'm very fond of having business and products driving the regulation and not the opposite unfortunately uh that's very very uh strong strong in in in Switzerland Less in Europe unfortunately you mean business that drive the the practice and uh uh yeah um it's different from uh it's it has to be seen on a Case by case basis I think uh this is uh we we we didn't leave the things like this uh we we we once again

we we try to um adapt the current at least for because there is M and there is the specific regulation for virtual asset service provider and you WR the step is very high and for some of them it's it's quite difficult to to to to pass this uh this this step uh but when you speak about fund management I think that was very important was to adapt uh the the the the the the crypto aspect to uh the current regulation and to the expectation of the market and the regulator 6m is typically a good example because you are the first alternative investment fund manager that is authorized to to handle crypto exactly

and typically that's typically the fmd so the usual directive but it's the regulator who just push through an initiative so once someone decided to set up an AFM and go to the regulator and push the limit of the regulator to have one ifm that is not handling private Equity or private Deb or but crypto assets so you see sometimes it's just pushing a little bit the the interpretation of the regulation okay thank you very much for your time