Michael Bodley

Though there have “obviously been some well-publicized failures of crypto hedges funds” over the past 12 months, allocators this quarter have turned their attention to additional digital asset strategies, an attorney told Blockworks.



In a recent interview, Scott Beal, a New York-based partner at the law firm Barnes and Thornburg, said there’s been “decent interest” of late when it comes to launching liquid institutional strategies keying in on a number of digital asset sectors.&nbsp;



There’s also been a 2023 uptick when it comes to getting cryptocurrency-focused fund of funds vehicles off the ground, Beal said in unpacking a Barnes and Thornburg study from May on the outlook for fund managers this year.&nbsp;



The study is based on a February survey commissioned by the law firm that tallied “125 limited partners, sponsors and service providers,” representatives for the firm said in a May statement.&nbsp;



A veteran of Wall Street fund formation, Beal said he’s been eyeing a number of trends lately when it comes to the adoption, as well as the diversification, of crypto assets into traditional finance portfolios.&nbsp;&nbsp;&nbsp;



Beal assisted in putting the survey together and said that “last year reinforced the volatility of the asset class,” adding that it is “fair to say that a certain set of investors looked at the drawdown of crypto assets last year” in fleshing out their portfolios.&nbsp;



Since the fourth quarter of 2022, though, when crypto markets were rattled, Beal said there’s been a resurgence of interest in what allocators “viewed to be higher quality assets as something of a buying opportunity.”&nbsp;



<h2 class="wp-block-heading">Distressed specialists may be eyeing digital assets</h2>



Part of the last dropoff in traditional finance investors backing crypto portfolio managers at scale, industry participants have said, can be attributed to liquidity.&nbsp;



Barnes and Thornburg found that “cryptocurrency is a risk many are still willing to take” in its study.



A full 52% of respondents said “the current state of cryptocurrencies has significantly impacted their company in a negative way,”  the survey found. “Yet even as regulatory scrutiny picks up, the majority are still considering or actively deploying capital in the space in 2023.” 



But that view “hasn’t stopped many of them from actively investing or considering investing in the space,” the law firm said.&nbsp;



Beal is the co-chair of Barnes &amp; Thornburg’s Private Funds and Asset Management Group — and he’s worked in compliance roles for a number of buy side fund operators, as well as in external compliance functions.&nbsp;



In the US, Wall Street appetite for closed-ended crypto funds, including venture capital and acceleration capital vehicles, generally declined toward the end of last year. Mounting state and regulatory concerns at the time were said to have played no small role.



Regulators including the <a href="https://blockworks.co/tag/sec">SEC</a> and the <a href="https://blockworks.co/tag/cftc">CFTC</a> could still use “to give a little bit more guidance” to current and prospective digital asset fund managers, Beal said.&nbsp;



The law firm’s survey cited a March 17 <a href="https://www.coinbase.com/institutional/research-insights/research/weekly-market-commentary/bank-mismanagement-march-17-2023">note</a> from Coinbase’s institutional research arm. It cited a number of macro factors in making the exchange’s case that “the medium to long term outlook for cryptocurrencies has been reinforced to the upside.”&nbsp;



And Coinbase researchers at the time drew unfavorable parallels to the downfall of Silicon Valley Bank (SBV), as well as a number of ensuing banking implosions.&nbsp;



“The technology behind open trustless blockchains and transparent smart contracts stands in stark contrast to the poor risk management practices that led to the turmoil witnessed in the US banking sector this week,” Coinbase researchers then wrote.&nbsp;



<h2 class="wp-block-heading">RIAs still wary of SEC oversight</h2>



Beal said his practice is continuing to advise registered investment advisers (RIAs) overseen by the SEC to “have some understanding on the risk you are taking,” considering that a “substantial portion” of crypto assets “may ultimately be deemed securities, even if the SEC hasn’t come out one way or the other.”&nbsp;



Fewer hedge and venture fund capital survey respondents — 46% and 40%, respectively, reported being “negatively impacted” by cryptocurrencies broadly.&nbsp;



In the study, Jahan Sharif of Barnes and Thornburg wrote that “hedge funds are definitely paying close attention to the cryptocurrency sector.”&nbsp;



Added Sharif: “For instance, the FTX bankruptcy — with its multiplicity of involved entities and their competing claims — could create opportunities for distressed funds to find value in potential recoveries.”



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Potential ‘Buying Opportunity’ for LPs in Distressed Digital Assets

Ben Strack

<div id="highlights-block_61ef27c31cae3" class="highlights">
 <ul>
 <li>“The risks of investing in cryptocurrencies are high, and the investment case is weak,” a Vanguard spokesperson said</li>
 <li>BlackRock’s blockchain ETF may have trouble surpassing the assets of Amplify Investments’ Transformational Data Sharing ETF (BLOK)</li>
 </ul>
 
</div>



BlackRock has <a href="https://cms.blockworks.co/blackrock-files-for-crypto-etf/" target="_blank" rel="noreferrer noopener">new plans</a> to launch a blockchain ETF could spur large competitors to follow suit, according to industry participants. 



How such products will fare in the crowded space, however, remains to be seen.&nbsp;



The world’s largest asset manager in <a href="https://www.sec.gov/Archives/edgar/data/1100663/000119312522014777/d286885d485apos.htm" target="_blank" rel="noreferrer noopener">a regulatory filing</a> outlined an ETF that would invest in companies involved in the development and usage of crypto technologies.&nbsp;



“I think this underscores the idea that blockchain technology is now mainstream,” said Sumit Roy, crypto editor and analyst for <a href="https://www.etf.com" target="_blank" rel="noreferrer noopener">ETF.com</a>. “I do believe it will encourage competitors like State Street and others to launch similar products.”



State Street, which oversees about $40 trillion of assets, <a href="https://cms.blockworks.co/state-street-launches-digital-finance-unit-for-crypto/" target="_blank" rel="noreferrer noopener">launched a new digital finance division</a> last year. A spokesperson declined to comment on whether its asset management division is considering ETFs in the space.&nbsp;



A representative for Vanguard, which manages more than $8 trillion in assets —&nbsp; including $2 trillion in US ETFs — said the company has no plans to pursue a digital assets product.&nbsp;



“In Vanguard’s view, the risks of investing in cryptocurrencies are high, and the investment case is weak,” the spokesperson said. “Unlike traditional asset classes, such as stocks and bonds, cryptocurrencies lack intrinsic economic value and typically generate no cash flows, such as interest payments or dividends.”



The representative added that the company believes blockchain has potential, noting that Vanguard used blockchain technology to improve its data indexing and digitizing certain currency markets.



David Botset, head of equity product management and innovation at Schwab Asset Management, said clients are increasingly interested in cryptocurrencies.&nbsp;



Charles Schwab already offers four mutual funds and four ETFs with crypto ties from third-parties.



“We are currently evaluating how and when we could offer our clients additional opportunities for exposure to cryptocurrencies, including opportunities such as spot cryptocurrency or blockchain technologies in the form of an ETF,” Botset told Blockworks in an email.



Invesco, another top-5 ETF issuer, <a href="https://cms.blockworks.co/invesco-proposes-crypto-economy-etf/" target="_blank" rel="noreferrer noopener">launched</a> the Invesco Alerian Galaxy Crypto Economy ETF (SATO) in October. The asset manager said <a href="https://cms.blockworks.co/invesco-and-galaxy-team-to-build-suite-of-crypto-etfs/" target="_blank" rel="noreferrer noopener">in September</a> it was teaming up with Galaxy Digital on physically backed digital asset ETFs.



Amplify Investments’ Transformational Data Sharing ETF (BLOK) is currently the largest blockchain-focused ETF. It launched in January 2018 and has grown to roughly $1 billion of assets.



Other large funds in the space include the Siren Nasdaq NexGen Economy ETF (BLCN) and the First Trust Indxx Innovative Transaction &amp; Process ETF (LEGR), which have about $230 million and $150 million of assets, respectively. Most that have launched in the last year have not yet gained significant assets.&nbsp;



“If I’m in a product development area of an ETF company, and I’m looking at this…[the space is] way oversupplied right now,” Bloomberg Intelligence Analyst Eric Balchunas said. “On the flip side, if you’re a big firm, and you have a relationship with a bunch of advisors and your salespeople go out to talk to them, now that BlackRock has this in their toolkit, maybe you need it, too.”



<h3 class="wp-block-heading">Will BlackRock overtake BLOK?</h3>



Despite BlackRock’s reach, Balchunas said he doesn’t expect its blockchain ETF to instantly dominate markets.&nbsp;



“Even BlackRock is going to have a tough time unseating the first to market — BLOK is very known, the ticker’s easy, it’s liquid,” Balchunas said.



Despite BLOK’s lead, Roy argued that there has not yet been a “breakout product” in the blockchain category.



“I think BlackRock coming in with the respected iShares brand is going to catch a lot of investors&#8217; attention,” Roy said.&nbsp;



And the ETF could be one of several steps into crypto investments for the firm, according to Balchunas.



“This is a baby step into I think a larger ETF suite for BlackRock, which would include spot ETFs, crypto baskets,” he said, adding that he doesn’t expect the company to file for a spot bitcoin ETF until one is approved by the US Securities and Exchange Commission (SEC).



A spokesperson for BlackRock, which manages about $10 trillion, declined to comment on future crypto investment products.&nbsp;



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



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investment fund