Cryptocurrency and Other Digital Assets for Asset Managers

Abstract

Digital assets can serve several functions. Some digital assets, such as Bitcoin or Litecoin, are widely regarded as decentralized stores of value or mediums of exchange due to certain common economic features that support these functions; these are sometimes referred to as “pure cryptocurrencies.” Other digital assets, such as Monero or Zcash, are a subset of pure cryptocurrencies that also possess certain features designed to enhance transaction privacy and confidentiality (“privacy-focused coins”). Beyond pure cryptocurrencies and privacy-focused coins, there exists a broad array of general purpose digital assets (“platform coins”), such as Ethereum, NEO and Ravencoin, which are designed to facilitate various peer-to-peer activity, from decentralized software applications to “smart” contracts to digital collectibles, such as CryptoKitties. Platform coins also enable the creation of new digital assets called “tokens”, which are described further herein. The digital asset market extends beyond the assets themselves. As this industry continues to grow, it has captured the attention of retail and institutional investors alike, including asset managers seeking to develop investment strategies and products involving these emerging assets and companies. Some strategies resemble early-stage growth strategies, featuring long-term investments either directly in certain digital assets or in start-up ventures developing complementary goods and services for the industry. Other strategies include hedge fund strategies, such as long/short funds, which often use derivatives, or arbitrage strategies, which seek to capitalize on the price fragmentation across the hundreds of global online exchanges. This chapter outlines the current U.S. regulatory framework applicable to cryptocurrency and other digital asset investment funds (“digital asset funds”) offered to U.S. investors and how those regulatory considerations affect fund structuring decisions.