INTERNATIONAL MANAGEMENT SERVICES
“In no other investment-related
sector is cyber risk more
important and more pertinent
than in this one.”
CAYMAN FUNDS | 2019 53
Shutterstock / Valery Brozhinsky
Rationalising the virtual
For the uninitiated in the world of cryptocurrencies, it is worth explaining
what they are and how funds are investing in them.
A cryptocurrency is a digital currency that is based on the use of
encryption techniques to allow for or manage the creation of new units
of currency and monitor the transfer of these units. Importantly, they
typically exist independently of a centralised body such as a central bank.
There are many types of cryptocurrencies, the best known probably
being Bitcoin. They also vary in their value, which fluctuates anyway
and, depending on the particular cryptocurrency, how easy it is to
identify the source of the funds and their ownership.
Investment funds invest in digital assets in three main ways, Inggs
In the first model, it is possible for open-ended funds to accept
subscriptions in either cryptocurrencies or fiat currencies (depending
on the controls set up within the particular fund) and then invest the
proceeds in, for example, index-based positions whereby they will
invest in the top cryptocurrencies for a period on some sort of rotational
basis (essentially holding liquid assets).
In the second structure, open-ended funds again accept subscriptions
in either cryptocurrencies or fiat currencies and invest directly into
certain listed or liquid cryptocurrencies while also taking positions in
companies operating in this sector raising early stage capital often in
the form of initial coin offerings (ICOs).
These investments are akin (in some but not all aspects) to a venture
capital-style investment and the complex question for these funds is
how and when they allow redemptions to be made: does the fund look
to lock up capital for a specific period?
In the third investment model a close-ended investment fund
accepts investments in fiat currencies (and potentially cryptocurrency)
and invests more deliberately in private equity or venture capitaltype
investments whereby the fund’s capital will be locked up for,
typically, between five and seven years depending on the life cycle
of the fund.
From a compliance and governance perspective, one of the key
considerations for all these funds, says Inggs, is that they can trace
where the assets come from and the ultimate beneficiary of the
named investor. Some cryptocurrencies are less transparent than
others on this front, and funds make risk-based judgement calls