The opportunity to provide technical commentary on the Treasury’s draft SI closed on 23 May, while on 28 May, the FCA published ‘CP25/15: A prudent regime for cryptoasset firms’.
With this year’s AMPS’ May conference dedicating a great session to the topic, I find myself pondering, is the UK pensions industry missing a trick, or is the investment still too cryptic?
There are four broad categories of cryptoassets:
- Cryptocurrency – a digital currency that uses cryptography to secure transactions on a decentralised system. Examples are Bitcoin, Ether and Ripple.
- Stablecoins – a cryptocurrency whose value is backed (and relatively stabilised) by a specific asset and are used for trading cryptoassets.
- Central Bank digital currencies – digital money (not notes or coins) that a country’s central bank can issue.
- Non-fungible tokens – unique, irreplaceable, digital assets that use the same blockchain technology that powers cryptocurrencies to link ownership to one-of-a-kind physical or digital items, such as artwork or music.
“Crypto” translates from Latin as “secret” or “hidden”, therefore the visibility and transparency of cryptoassets has to be understood and validated for them to be considered by professional trustees as a suitable pension investment.
Perhaps it is encouraging, then, that CP25/15 covers draft rules on stablecoins, asset safeguarding and improved financial resilience of crypto-operators.
Crypto translates from Latin as secret or hidden
The safeguarding elements must deliver, given the imperfections of the Blockchain technology that cryptocurrencies run on – it’s not foolproof against fraud, Bitcoin mining is grossly inefficient (a speaker at the AMPS conference suggested that mining 1 bitcoin uses the same energy as a 1000-mile car journey), and the process is not fully secure from online criminals.
So, if it becomes a question of “when” rather than “if” cryptoassets are a suitable investment for a pension scheme, what are the real deliberations that professional trustees should be considering right now in relation to an appropriate discharge of their duty of care?
Fundamentally, cryptoassets can be deemed property and held, so it is an investment.
FCA opens consultation on cryptoasset trading
However, an uncertain legal backdrop, coupled with widely drawn investment powers set within the scheme’s governing Trust Deed & Rules, mean that just because you can, doesn’t mean you should.
Prudent investment requires avoidance of hazardous, speculative investments, so would a professional trustee be branded a “gung-ho gambler” by sanctioning crypto investments within their scheme?
The modern portfolio theory, involving a more holistic view of risk levels across an entire portfolio, might suggest not, but with investment consultants and managers fundamentally disagreeing over the appropriateness of digital assets within a pension scheme portfolio, cryptoassets carry a much higher risk, which makes exercising the duty of skill and care far harder for a professional trustee.
The acid test comes in the form of whether or not the investment is in the best financial interests of the current, and future, beneficiaries of the scheme.
The reality is that it is likely to take a test case, possibly several, to determine the level of risk appetite
When Nikhil Rathi (FCA CEO) goes on record and says that, as he did, in March this year when addressing the Treasury Committee on cryptoassets, “there’s a very high risk and you could potentially lose all your money” and with case law to date generally supporting trustees where they’ve been more risk averse, there can’t be a professional trustee in the country sleeping soundly at night with cryptoassets in their scheme’s portfolio.
The reality is that it is likely to take a test case, possibly several, to determine the level of risk appetite professional trustees might deem acceptable where cryptoasset investment is concerned.
Responses to CP25/15 close on 31 July. The proposals on safeguarding cryptoassets appear to need balancing with the FCA’s statutory objective to support UK growth in the medium to long term, a conundrum that will no doubt strike a chord with many Professional Trustees around the country.
Bored Ape Yacht Club anyone?
For professional trustees, the answer (for now at least), surely has to be no.
Roger Howman is a committee member of AMPS
