A couple of things to think about when it comes to crypto
Cryptocurrencies have taken a thrashing this year, yet plenty of people remain believers. One is Max Gould. Gould was a senior at Elon University in Elon, N.C., when he founded the Elon CryptoClub last year.
The organization brought together students interested in understanding blockchain technology, emerging cryptocurrencies, and investment strategies. Why? “We’re young and eager to apply the principles of what we’ve been learning in class to real-world situations,” Gould says.
Focusing on cryptocurrency investing and blockchain was a no-brainer.
Among professional investors, the cryptocurrency frenzy has cooled this year along with Bitcoin’s almost 70 percent tumble from its 2017 high of almost $18,000. Yet about 370 crypto-focused funds, with $8 billion to $10 billion of assets, have been started, according to estimates by Autonomous Next. That was up from only 155 such funds in August 2017. Autonomous Next’s figure doesn’t include existing hedge funds and asset managers that are dipping their toes into crypto as an asset class.
Simply developing an investment thesis around cryptocurrency investing isn’t enough, though. Registered investment advisers have a fiduciary duty to mitigate risks, and this new asset class presents some unique risks and operational challenges for investment managers.
While regulators wrestle with how best to protect investors and their assets, hedge funds contend with some basic practical problems.
Among them are custody, identifying trustworthy service providers such as exchanges, and applying traditional portfolio valuation methodologies to a very nontraditional asset. Legal and compliance staffs need to create policies for personal trading by employees, cybersecurity, and even contractual provisions in partnership agreements to protect crypto keys and guard against misbehavior by rogue employees.
1. Make sure to conduct due diligence on service providers. Whether you’re trading on an exchange, investing through wallet companies, or hiring digital asset custodians to hold your keys, satisfy yourself that the service provider you’ve chosen is reputable.
Monitor media for adverse news about the service providers so you don’t expose your enterprise to undue reputational risk. Many of this new asset class’s service providers are startups themselves.
To minimize risk, screen service providers, their related entities, and individuals before engaging them. Bloomberg’s Entity Intelligence allows you to do that. Consolidated reports provide information related to bribery, corruption, regulatory fines, financial crime, and adverse media.
Ongoing monitoring means you’ll know if there’s a change in status so you can take immediate steps to minimize the impact on your institution. Go to {KYC} on the Bloomberg terminal or to ei.bloomberg.com on the web for more information.
2. Many regulatory regimes extend traditional anti-money-laundering (AML) requirements to wallet companies and money transfer entities just as they do to traditional financial institutions.
When opening accounts, are you providing proof-of-identity documents containing specimen signatures, Social Security, or tax ID information? Are your service providers collecting and storing your personal information securely?
To provide know-your-customer {<KYC <GO>} information confidently, use Bloomberg’s secure, web-based Entity Exchange. For more info, go to ee.bloomberg.com. The permission-based platform has encryption both at rest and in transit with a comprehensive audit trail of all activity to protect your most sensitive enterprise data.
3. Remember where you left the keys. Companies investing directly in digital assets face unique challenges in holding those investments. Are you looking to hire a custodian? (If so, consider whether you are interested in hot storage that is, connected to the internet— or cold storage, offline.) If you are going to hold your keys in-house, have you secured your hardware appropriately so it can’t be exposed to the open internet? What about a safe location in the office with appropriate security to offer protection from theft, loss, or damage from fire or water?
Finally, who has access to the keys? A partner? An employee? What if that person leaves or there’s a rift in the partnership? Make sure your company has thought through the practical aspects associated with digital asset ownership.
Bloomberg’s Entity Exchange is a secure web-based solution for exchanging critical documents and sensitive data.
Another consideration: Does compliance know how your employees are spending their time? If your company is investing in cryptocurrencies or other digital assets, give some careful thought to your compliance policies and procedures with respect to your employees’ activities.
Will you permit employees to invest in cryptocurrencies in their personal trading accounts?
What about initial coin offerings: Will you require employees to preclear and report their transactions? How will you monitor activity? Does this affect your insider-trading policies and procedures? Some employees are likely already checking their Coinbase accounts during the day and visiting crypto and blockchain chat rooms.
Make sure you understand how employees’ outside activities will affect your company, then develop policies and procedures geared toward protecting your information and your investors.
Entity Exchange reduces friction and delays to help you build key relationships.
Funds investing in crypto face custody, key storage, research, asset transfer, and reporting issues. Choosing a service provider you can trust needs to be a focus.
Collecting information about the service provider and screening both the company and its beneficial owners can help companies make sure they’re contracting wisely. In this new area, KYC and AML screening tools may end up being critical to longevity and success.
