Digital money may well be the future but some of the world’s largest investors don’t invest in cryptocurrencies, and the development of central bank digital currencies may be a key reason for that.
Canada Pension Plan Investment Board (CPPIB) and Singapore sovereign fund GIC, holding an estimated $800 billion in assets between them, remain unconvinced of the benefits of Bitcoin and its peers, going by recent comments from two of their top executives.
“I still don't understand how you underpin the value of cryptocurrencies,” said Alain Carrier, London-based head of international at CPPIB at the Greenwich Economic Forum this month. “I think the technology that underpins them… will be useful for a number of applications, but I just don't see CPP Investments investing in cryptocurrencies in the short term.”
Mark Machin, head of the C$434 billion ($333 billion) fund, expressed similar views in a speech in November 2017, saying he didn't think the bitcoin and blockchain space was "investible" but that CPPIB was monitoring it with interest.
Speaking on the same panel as Carrier, Jeffrey Jaensubhakij, group chief investment officer of GIC, was more circumspect about whether his organisation would invest in crypto. But he too was clearly sceptical about private-sector digital currencies such as Bitcoin.
Jaensubhakij acknowledged the usefulness of distributed ledger technology, on which cryptocurrencies are based, pointing out that China’s central bank is using it to develop its own digital currency and that others may follow.
Ultimately, the same technology can be applied to government fiat money, he said, “and it could be just as convenient [as cryptocurrencies] and it’s a stable store of value”.
If the value of a fiat currency comes into question because of loose monetary policy, he added, what should people hold in its stead? “Is it a privately created but scarce, limited-in-production digital asset? How would that compare with fiat money or with an asset like gold?
“The things you need to believe in for government-issued fiat money, you need to believe very strongly for privately issued money as well,” Jaensubhakij said. “And it’s not clear to me that it’s so easy to have that same faith transferred to private money.”
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And such views are unlikely to weaken now that central bank digital currencies (CBDCs) are “immiment and are going to be big”, said Gary Smith, founder and managing director of London-based consultancy Sovereign Focus.
“Sovereign wealth funds and institutional investors with links to governments are not keen on crypto because central banks are not keen on crypto,” he told AsianInvestor.
“It would be tricky for some sovereign funds to be speculating in Bitcoin when there is an alternative offering in the form of a CBDC.”
“Governments need to offer a digital currency that is an attractive alternative to these private sector solutions,” Smith added. “There’s great demand for digital money. That’s partly tied to the collapse of cash. And governments and central banks realise they should be part of this process.”
Ultimately the technology employed by crypto and CBDC is very similar, he said: the key difference is that the latter is centralised and the former is decentralised.
Cryptocurrencies are also largely unregulated, loved by criminals and speculators, and highly volatile. That was underlined by the unexpected price crash in Bitcoin – the most popular such asset – yesterday (November 26) to below $17,000 after it was close to its historical peak of nearly $20,000.
Regulators are certainly wary. Just last month, for instance, the UK’s Financial Conduct Authority published rules banning the sale to retail consumers of derivatives and exchange-traded notes that reference certain types of crypto assets.
Yet there is evidence of rising interest in crypto assets among some institutional investors.
Research based on interviews with 50 asset owners with $78.4 billion under management between them – largely pension funds and insurers – was published in September. It showed that over the next five years 26% of those polled believe pension funds, insurers, family offices and sovereign wealth funds will ‘dramatically’ increase their level of investment in cryptocurrencies such as Bitcoin and crypto assets in general. A further 64% anticipate a slight rise.
It should be noted that the poll was commissioned by a not-disinterested party: Evertas, a crypto asset insurance company.
Nonetheless, even GIC and another huge state investor – Korea’s National Pension Service (NPS) – do reportedly have indirect exposure to cryptocurrencies.
The Singaporean institution put an unspecified amount into a $300 million fundraise for US crypto exchange Coinbase in 2018 alongside the likes of Yale University, according to Bloomberg. Meanwhile, the $650 billion Korean fund had reportedly invested about W2.6 billion ($2.44 million) into the four companies that operate cryptocurrency exchanges in Korea through two venture capital funds.
GIC and NPS both declined to comment on whether the reports were accurate or on whether they still held the investments in question.
In any case, such allocations would make more sense for a long-term investor looking to gain stable exposure to a growing market than buying crypto currencies directly.
The advent of CBDCs, however, is likely to trump such ventures for public asset owners, Smith said.
“Two years ago maybe there was an argument that a sovereign wealth fund could invest in crypto – because they needed to learn about it and it seemed to be performing quite well," he noted. “But when there’s the alternative of CBDC, it’s a lot harder for a government-owned investor to be embracing private-sector crypto.”
This story has been updated to include a reference to the comments by CPPIB's Mark Machin.