Newly developed cryptocurrency index funds are targeting institutional asset owners such as pension funds and endowments, but the lack of custody capabilities in the asset class is keeping these investors from jumping in.
While there are more retail-oriented custodians such as Kingdom Trust and Coinbase Inc. that have capabilities in bitcoin, ethereum and other cryptocurrencies, the main players in institutional custody — Bank of New York Mellon Corp., State Street Corp., Northern Trust Corp. and J.P. Morgan Chase & Co. — have not built up their crypto business, sources said. And in institutional investing, they added, it's all about being comfortable with the custodian.
"For chief investment officers, there's only downside risk in cryptocurrency," said Blake Estes, counsel, financial services, and co-leader of blockchain and distributed ledger technology at Alston & Bird LLP, New York. "It would take a leap of faith with a new custodian with no brand recognition. That presents a real risk for them."
Matthew Hougan, vice president and global head of research at Bitwise Asset Management Inc., San Francisco, added that compared to family office and high-net-worth investors, pension funds, endowments and foundations "are the furthest away from making substantial allocations to this space. They have the most questions on the fundamental drivers of returns. They're also in the position of career risk. The drawdowns that can happen in cryptocurrency can be difficult to bear career-wise."
Mr. Hougan, whose firm in December introduced the Bitwise Hold 10 Private Index Fund, which tracks the 10 largest cryptocurrencies based on market capitalization and trade volumes, said that CIOs who would take a chance on cryptocurrency "might do it with the index category because it's more simplified. Investing through the index fund is an easier way for them to make their first asset-class bet."
But that simplification might not be enough. No asset owner investment executives contacted for this story would comment on the record. One CIO said cryptocurrency index funds were a non-starter for the pension fund investments he oversaw because "you don't know what's backing the assets." Added another pension fund CIO: "I wouldn't want to take a chance on this. Where's the assets backing this? How secure is it? And who is watching it?"