AIMA expert group to drive the industry’s response to digital assets and blockchain

By Oliver Robinson, Associate Director, Markets Regulation, AIMA

Published: 21 May 2018

This month AIMA kicked off its work on behalf of the global hedge fund industry to respond to the rapid rise of digital assets and digital assets funds, and discussions regarding the potential applications of distributed ledger technologies (DLT) in the asset management industry.

With over 1,800 coins and tokens in circulation globally and over 250 digital assets funds in the US alone, it is arguable that  digital assets are beginning to move beyond the realms of a concentrated group of private investors and coin miners, towards becoming a new institutional asset class. However, there are significant political and regulatory challenges to overcome before the potential benefits associated with digital assets can be more fully enjoyed by investors and issuers.

Criticisms levied at cryptocurrencies include that they are not backed by any physical holdings, nor by any central bank. ICO tokens are criticised for being a tool for surreptitious issuers to attempt circumvention of securities laws. Questions also abound regarding how to categorise the new assets, what constitutes a security and how exchanges are to be regulated. These come in addition to fundamental concerns around anti-money laundering and other client checks which are preventing many large institutions committing to the asset class. There are also environmental concerns regarding the computer processing power necessary for contributors to the blockchain to ratify each set of transactions; for example, the electricity consumption for Bitcoin alone is currently broadly equivalent to that of Ireland, and rising.

However, to write-off digital assets and DLT would likely be short-sighted. Tokens and the use of smart contracts enable greatly enhanced flexibility for issuers in their capital raising. Cryptocurrencies can facilitate secure settlement  of transactions between anyone in the world with a cryptocurrency wallet, wherever they may be. The DLT underlying cryptocurrencies also offers potentially significant operational cost savings in the asset management space where a highly-secure database is required and for which speed is not the upmost priority. For example, significant investment is being made in DLT in post-trade and settlement services, as well as regulatory reporting. Although it is clear that DLT has a way to go before commercially viable solutions are broadly available to the buy-side, it presents a rare opportunity to potentially revolutionise certain elements of the current operational landscape for the better.

What is clear is that key political and regulatory decisions regarding digital assets are being made now and that there is a significant role for AIMA to play in educating legislators, policymakers and regulators, and acting as an advocate for AIMA members active in the digital assets space globally. To this end, AIMA has committed to become the authoritative global voice of the alternative investment industry in the digital assets and DLT space.

AIMA recently held the first call of the AIMA Digital Assets and Blockchain Core Group, a senior-level industry steering group consisting of a global cross-section experts tasked with driving AIMA’s policy engagement, educational initiatives and operational guidance on all aspects of digital assets and DLT. The initial focus of the Core Group will be on policy and regulatory engagement, as well as broader member education to help AIMA members find answers to their questions relating to the new space.  As the regulatory and operational environment becomes more stable, AIMA will also develop industry operational and regulatory guidance tailored to digital assets – including a new AIMA DDQ module for digital assets funds and an AIMA Guide to the regulation of digital assets globally. The AIMA DAB Core Group is complemented by the AIMA Digital Assets and Blockchain Circulation Group, which is open to any and all AIMA members wishing to stay up-to-date with AIMA’s work in the cryptocurrencies, ICO and DLT space.

If you have any questions on AIMA’s work or would like to be part of the DAB Circulation Group, please do get in touch (orobinson@aima.org)