Crypto in your pension pot? No thanks

The State’s funds sector, home to investment pots holding €4 trillion of assets for global investors as of the end of 2021, has had plenty to deal with in recent months as equity and bond markets have taken a hammering. But that hasn’t stopped the industry from plotting to add a little more spice to your average investment fund.

Irish Funds, the industry lobby group representing the world’s third-largest domicile for investment funds (behind the US and Luxembourg), published a white paper this week pushing for funds marketed to small-time, or retail, investors to be allowed to put money into crypto “assets” — among the most volatile bets around.

It follows on from the Central Bank this year allowing two funds aimed at professional investors — so-called qualifying alternative investment funds (Qiaifs) — to have a low level of indirect exposures to bitcoin, the grandfather of almost 20,000 cryptocurrencies in the market today and an asset that has slumped almost 60 per cent from its peak last November.

The Irish Funds document argues that the regulator’s reluctance to allow funds aimed at retail investors to invest in crypto is leaving crypto-curious small guys to fend for themselves. “They are typically investing in crypto assets directly through crypto exchanges and rely on wallets for safekeeping of their crypto assets,” it said. “However, these entities are not subject to the same rigours, standards, and supports as the investment funds offering managed exposure to qualified investors.”

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It may appear a valid point. But affording cryptocurrencies — a speculative, unregulated field that leaves investors open to scams — the veneer of respectability by allowing them into regulated investment funds cannot be the way to go. For now, at least.

First of all, they are next to impossible to value compared to, say, stocks, bonds or property, where pricing is ultimately based off expected dividend, interest or rental income (now or in the future). Also, claims by proponents that cryptos are tantamount to digital gold, which doesn’t produce an income for investors either but has had fundamental uses for millennia, have also proven, so far, to be nonsense. The safe-haven status of gold, which has had fundamental uses ever since the first coins were minted in 643BC in present-day Turkey, has only been reaffirmed during the recent spike in inflation and turmoil across financial markets. It has risen almost 4 per cent over the past six months.

Bitcoin’s creation in 2008 is said to have been a reaction to the financial crisis and a history of central banks reducing the value of fiat currencies by printing money. But there’s no getting away from the fact that the almost 14-fold surge in the price of bitcoin between the start of the Covid-19 crisis in March 2020 to its peak late last year (notwithstanding a massive correction in between) was turbocharged by the trillions of dollars that central banks pumped into the financial system in response to the pandemic.

The Irish Funds paper itself acknowledges that bitcoin has yet to meet three key tests to call itself a currency. Wild price fluctuations in recent years show that it has failed to become a store of value. It is also, clearly, not a unit of account that would be easily understood by people so they might know the value of something when quoted. Bitcoin’s unstable value also makes it difficult to function properly as a medium of exchange.

Michael MacGrath, Davy’s head of global investment selection, cut to the chase in a recent article in financial news publication Citywire, saying: “The tipping point and ultimate test of its value is whether you are willing to be paid in a cryptocurrency for your house.” Who’d settle for that?

A Competition and Consumer Protection Commission (CCPC) survey published last September, at the height of crypto mania, suggested that 11 per cent of adults in the Republic that had investments were holding some kind of crypto in the digital purse. The figure was one in four in the case of millennials aged between 25-34.

While the European Union is trying to lead the way internationally by establishing a specific regulatory framework for cryptos, its planned Markets in Crypto Assets (MiCA) rules, aimed at being in place in 2024, have their own shortcomings. For a start, while it’s proposed that only crypto coins authorised in the EU can be offered to investors, the assets themselves and exchanges on which they are traded will be subject to much less oversight than is in place for other financial instruments and exchanges.

But Irish Funds doesn’t even want to wait for that.

“There are significant downsides domestically to adopting a ‘wait and see’ approach to crypto assets pending MiCA’s implementation,” the paper said. “Investor demand for crypto assets exists now and is being satisfied now. Market participants, including traditional financial services providers, are developing, and launching solutions to meet this investor demand now.”

In fairness, the paper is a decent read for anyone vaguely interested in crypto and it doesn’t shy away from the issues cryptos have had. These include the hundreds of billions of dollars that have been wiped off the value of such assets in recent months, the collapse last month of TerraUSD, a so-called stablecoin that was supposed to be pegged to the US dollar, and the ongoing risk of cryptos being used for criminal activities, money laundering and fraudulent offerings.

But this can only support the conclusion that cryptos have yet to earn a right to have any place in regulated retail investment funds.