As cryptocurrencies fell, 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 UK investment group, recently took a stake in digital asset exchange Archax. BlackRock opens direct access for customers to the Coinbase crypto exchange. Schwab has launched a crypto-related exchange-traded fund.
Skeptics will say that asset managers are scrambling to exploit an immature and speculative market, while unwary clients betting on cryptocurrencies are still vulnerable to hype or even fraud. Underscoring the risks, the Caisse de depot et placement du Quebec, a large Canadian pension fund manager, 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 was pulling bitcoin in 2017, the crypto’s foundations were more shaky than they are today. It’s no surprise that companies such as BlackRock, which is also developing a cash bitcoin trust for institutional clients, are looking to tap into new groups of investors.
Asset managers must be open to the multiple futures of finance. Cryptocurrency could become a legitimate means of hedging the portfolios of sophisticated investors, like other alternative assets such as wine or gold. He could still pay to have some exposure. But whether or not cryptocurrencies recover to previous levels, market history suggests that there is usually something useful left over after bubbles burst.
By investing in the market superstructure now, asset managers can also prepare for the possible advent of central bank digital currencies, which deliver some of the promised benefits of crypto with the security of central bank backing. They improve their understanding of the underlying technology, such as blockchain. And they can put themselves in a position to hire young, innovative employees and fintech experts laid off by shrinking crypto companies. 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 for mainstream investors, the growing ties between high finance and crypto seem one step away from the origins of digital currencies as a tool of establishment demolition. But at least by screening their investment through orthodox institutions, they limit their exposure to theft and fraud. Even so, cryptocurrencies are still largely unsupervised, have the potential to contribute to greater market instability, and are a risky home for savings for retail investors accustomed to stronger regulatory protection.
The obvious solution is to put in firm guardrails, as this journal has repeatedly suggested. Unfortunately, different organizations and countries have differing attitudes. Financial entrepreneurs and innovators will naturally seek to exploit these differences. For example, crypto companies are pushing to ensure that cryptocurrencies are regulated by the Commodity Futures Trading Commission, which regulates derivatives, rather than the more hawkish Securities and Exchange Commission.
In what remains a market where buyers are wary, the involvement of asset managers provides an additional thin layer of security. Their interest could bolster surviving crypto companies that want to gain 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 it does.
