As regulators seek to develop investor protections for cryptocurrencies, institutional investors are beginning to shift into the asset class. Asia’s stature in global crypto markets means it will be highly influential in shaping a roadmap towards institutional crypto adoption in Asia, according to five sources that GlobalTrading spoke with on and off the record.
Institutions such as asset management firms, banks, pensions, and even sovereign wealth funds are exploring the place of digital assets into their portfolios across Asia. The interest will change the market as investors seek products that meet their diversification and acceptable risk parameters. In fact, portfolio diversification is the strongest impetus for institutions crypto curiosity, according to Leslie Lamb, Chief Marketing Officer of CoinFLEX.
Asia is becoming crypto hub for asset buyers
In a recent report titled ‘Overview of Digital Assets and Blockchain,’ Goldman Sachs notes that more than 40% of value transfer in digital assets happens in Asia Pacific, and according to a Chainalysis study, the region will be leading in driving institutional adoption globally. In the developed crypto markets of North America, Western Europe, and East Asia, increasing adoption has been driven largely by institutional investors, the study found.
Within Asia, there are already clear leaders emerging by creating clear regulations for asset managers to operate in.
“While the market in Asia has taken strain with the banning of Bitcoin miners by China in May 2021, the major financial centres such as Singapore and Hong Kong remain very well poised to take advantage of further growth in the cryptocurrency and digital asset space,” said Mark Witten, CIO First Degree Global Asset Management. “We believe that Singapore remains best positioned to remain as the ‘Switzerland’ of the east and continues to attract most new funds and investors due to its favourable tax regime and ease of doing business, as well as the inherent appreciation of the regulatory stability and transparency that Singapore provides.”
Mark Witten, First Degree Global Asset Management
Asset traders face challenges in Asia
Regulators’ growing focus on market integrity and investor protection are driving changes on the part of crypto market players, but asset managers still face a plethora of challenges when looking into buying digital assets in Asia, according to Witten and a few others that GlobalTrading spoke with off the record.
The main barrier to entry is the language and operational complexity that comes with buying crypto. The chain of custody is different to traditional assets such as equities, fixed income, or real estate. In crypto assets, whoever holds the keys controls the funds and this creates an additional layer of complexity and risk for investor’s, according to Witten.
A key challenge when entering the market for asset buyers are finding reputable service providers that are properly licensed and meet tier one regulatory standards in terms of compliance and insurance. There are no simple comprehensive solutions, so asset buyers must add on each service providers independently, such as administrators, brokers, compliance, custody, investment platform. Due to there being no economies of scale, this can make launching a fund expensive, especially for smaller asset management companies. The set-up costs are around $35,000 - $50,000 depending on the jurisdiction and structure chosen, and the first years running costs including audit fees are around $100,000.
Another key challenge that asset buyers face is turning their fiat currency into crypto, as most banks and asset managers don’t have those capabilities yet, according to Patrick Chiu, CEO and Founder of AP Capital.
“I think that one of the challenges is fiat-on-ramp because most banks are risk-averse against crypto, and retail users can only choose between one or two banks in each country to access the exchange market,” said Chiu.
Patrick Chiu, AP Capital
Regulators are listening
Although the digital asset industry is still in its nascent stages in Asia, regulators are keen on finding a way to bring it under their financial system, which would allow institutional buyers to step in.
Government officials and regulators are responding to crypto’s growing scale and increasingly mainstream status: total market capitalization more than doubled in 2021 to $2.13 trillion. A Fidelity survey of global institutional investors in July last year found that more than half of global institutions already invest in digital assets, while in Asia, it was 71%. Is your asset management firm ready to start trading crypto in Asia?