Technology
The Fast And The Curious: Tech In The Crypto Fund Asset Space
The rise of crypto funds has been rapid, and Trident Trust, the international provider of corporate, trust and fund administration services, has a ring-side seat on this development.
In this interview, Trident Trust’s European head of business development for fund services, Karine Seguin, discusses with Dan Smith, its head of US fund services, and Aaron Sammut, director of fund services in Malta at Trident Trust, the importance of technology in the administration of crypto funds and how human judgement and collaboration with reputable providers remain key in such a dynamic space. (More details on the authors below.)
The views are those of the authors, and not necessarily endorsed by the editors of this news service. Nevertheless, the team at this publication welcome this contribution to debate. To respond, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com
Five years ago, cryptocurrencies barely registered on most fund administrators’ radar. But like everything crypto, that has changed at an extraordinary pace. In 2020, crypto hedge fund total assets under management (AuM) were estimated at $3.8 billion - an increase from $2 billion in 2019. And that doesn’t take into consideration all the investment flowing into private equity and venture capital funds investing in crypto-related projects and technology. How can tech help fund admins and their clients in this new space?
“It’s an exciting time,” says Dan. “Figuring this stuff out feels more like a partnership, with service providers, auditors and cutting-edge tech providers working together to keep up with traders.” After all, he points out, this is new for everybody. “Four years ago, big traditional prime brokers were very circumspect about crypto. Now, getting into crypto prime brokerage is a primary initiative for their business.”
Crypto challenges
Crypto has its own particular challenges when it comes to tech.
When Trident first entered the space, back in 2017, Dan remembers
that “initially, we had to manually book crypto trading activity
into our traditional hedge fund accounting systems.” But Trident
quickly realised that there was very little support from other
industry participants to help in accumulating and then tweaking
the data to enable this. “We dove in and figured out how to pull
trades from the exchanges. But we then had to do a lot of manual
spreadsheet work so we could get it into a format which could be
put into our fund accounting system.”
Access to data can be an issue. “We must be as independent as possible from the fund manager,” says Aaron. “But certain crypto exchanges, for example, do not give access to anyone except the fund manager, so we have to get that information from other sources.”
And crypto-to-crypto transactions are a particular pain point. A traditional asset is bought and sold in fiat currency - but not necessarily with crypto. While that’s fine from a trading and economic perspective, it doesn’t fit with tax returns and many reporting requirements. “Here in the US, you invest funds and investors have to file tax returns in US dollars,” Dan says. “With crypto, you have to break down all the transactions into fiat currency so we can do the reporting we need to do for the auditors, the tax people and the regulators.”
Regulating dilemmas
Those regulators are also running to keep up. But many are still
in a dilemma as to how to classify cryptocurrencies and take the
evolving AML factor into consideration: how to tell if Bitcoin is
coming from a legitimate source?
Clients were initially willing to convert their bitcoin to dollars, but now, depending on the market performance, they want to hold on to it, Aaron says - and subscribe to crypto. “We have invested in data providers and tools which will help us forensically analyse where the bitcoin or the Ethereum is coming from. The regulations are there, but with respect to crypto they are still a little vague in terms of risk assessment. Without a doubt, there will be increased regulatory clarity and scrutiny in the near future, given the rapid growth of the asset class.”
Rapid reaction
So what is the way forward? “Partnering with the right technology
provider is crucial: Trident Trust was cutting-edge tech company
Lukka’s first fund admin client back in 2018. The tech has
evolved since then, but there is still room for it to grow,” says
Aaron.
“We invested a lot of time in our partnership with Lukka to seek ways in which to develop. For example, in 2017/18 we started with simple spot transactions, like fiat to crypto and vice versa. Derivative transactions, such as futures, swaps, options came in later and the technology had to keep up to date with all these new investment strategies - and now, we have the DeFi protocols as well. Technology providers have had to spend a lot of time and money to keep up with developments.”
“The recent pile into DeFi trades demonstrates just how quickly fund admins need to adapt. Sixteen months ago, Dan never had a client mention DeFi – then, almost overnight, clients started to do DeFi trades,” says Aaron. “He went straight to Lukka for assistance: they knew DeFi was out there but didn’t have a workable solution available at the time. There’s a constant race across the service providers and the technology to keep up with the evolving strategies that crypto managers are deploying.”
People matter
But great tech also needs great people. Human judgement is key in
such a dynamic space. “Trident’s team has been working with
crypto for five years, and there’s no substitute for experience,”
says Dan. “Good people can identify when something doesn’t look
quite right.”
Aaron agrees. “It’s not humans versus machines, it’s humans with machines. Anyone can download data, but you need someone to ask the right questions about the data available so that we can identify any issues.”
Normalising crypto
Crypto tends to be treated as something different and special.
But it’s just another asset class - and all asset classes should
be treated equally and with the same attention.
“We don’t just do crypto,” says Aaron. “We administer all asset classes. And when a client comes up with a new strategy, we’ll discuss it and work it out in partnership with auditors, clients and tech providers.”
In the future, Dan wants to see tech enable crypto fund administration to be normalised: no different from traditional equity, bonds or futures trading, with data in a format which everyone can consume.
“We’re now in the early phases of that, and it’s been fun for us to be part of that growth and help providers understand better what we need,” he says. “We're going to get the data, work with reputable providers and look at technology to help us do it the right way. Clients, investors and auditors like that approach. In this very fast-moving space, we are a safe pair of hands.”
About the authors
Karine Seguin
Head of Business Development - Fund Administration Services,
EMEA
Karine has worked in investment banking and the funds industry
for the past 25 years, with the last 10 spent at Trident Trust.
She has worked with a wide range of hedge funds and private
equity funds across Trident Trust’s global range of
jurisdictions, guiding them through their set-up period and
helping them put in place high quality administration, accounting
and investor services.
Dan Smith
President, head of Fund Services, US
Dan is a Certified Public Accountant with more than 20 years'
experience in accounting, finance and fund administration. In
addition to running Trident Trust’s US fund services operations,
since early 2017 Dan has led the development of Trident’s
presence in the rapidly-growing digital assets sector, with
Trident now working with more than 45 crypto funds
globally.
Aaron Sammut
Director - Fund Services, Malta
Aaron has over 15 years' experience in the fund services industry
and leads Trident’s fund services team in Malta, which provides a
wide range of international fund clients with a full suite of
fund administration services, including numerous funds following
digital asset strategies.