The rapid development of digital assets and cryptocurrency have resulted in a new type of investment fund, the crypto fund. Often started amongst friends seeking to gain access to the new elusive assets, crypto funds now attract large institutional money (Andressen Horowitz just raised $2.2 billion for its Crypto Fund III).
The sector is booming with more tailored strategies being run (long only, long/short, quantitative and private equity type investment) and increasing investment in digital assets from traditional hedge funds.
Crypto funds do not typically constitute a different form of investment vehicle and largely fall under existing fund regulations in terms of structuring. The assets, however, do raise specific differences in terms of management and administration:
- Safe keeping and custody options
There are limited custody/depositary options available and counterparty risk is a real concern. Any fund seeking to hold digital assets outside the top 10 cryptocurrencies will need to consider self-custody arrangements. Consideration should be given to: how counterparty risk will be handled, recovery options, multi-sig arrangements and how absence of team members will be managed.
- Valuation and accounting
Extremely high frequency trading, 18 decimal places and transactions that involve no interaction with traditional fiat currencies present a number of challenges for traditional software solutions. With new specific accounting standards in place, a crypto fund must consider existing requirements: existence of an active trading market, valuation and possible impairment, classification of assets such as intangible assets or inventory.
- Investor onboarding
The bridge between fiat and crypto remains tenuous and as a result potential investors will often seek to subscribe to a fund directly in crypto assets. This form of in-specie subscription may require consideration in terms of completing source of wealth and source of funds checks necessary to comply with AML regulations.
- Regulatory changes and challenges
MiCA, FCA registration scheme... regulators across the globe are considering and assessing digital assets. Crypto fund structures will need to evolve and be flexible to survive.
With increasing market attention and investors seeking out yield not being provided by traditional bonds, I expect interest from all types of investors to keep growing.
PwC global survey on crypto funds just identified Gibraltar as the 3rd biggest jurisdiction in the world and the leading 1st European jurisdiction in the number of crypto funds.