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Risk management for direct and indirect investments in cryptocurrencies

Why specialized risk management systems are essential in any case – an interview with Falko Pingel, HANSAINVEST
Crypto Risk Metrics
23.06.2024
Crypto Risk Management - Risikomanagement für direkte und indirekte Kryptowährungsinvestments

Executive Summary

Indirect cryptocurrency investments bear similar and sometimes greater risks, such as counterparty default risks, than direct cryptocurrency investments. For this reason, it seems advisable to use specialized risk management systems that adequately address the special requirements of this asset class, even for indirect investments via vehicles such as ETPs or ETCs. In the case of funds, the KVG is responsible for maintaining adequate systems and processes in accordance with KAMaRisk, while the depositary is responsible for reviewing their appropriateness.

Risikomanagement bei direkten und indirekten Investitionen in Kryptowährungen

Mr. Pingel, as Head of Risk Management & Data Governance at HANSAINVEST, you are responsible for compliance with regulatory requirements and have been managing the open-ended special AIF “BIT Crypto Opportunities”, which invests directly in crypto assets, since January 2022. What is your current opinion of the market situation in the crypto sector?

The approval of Bitcoin ETFs in the United States and the current discussions surrounding the possible approval of Ether ETFs are also causing cryptocurrency prices to rise sharply at present. Against the backdrop of the recent Bitcoin halving, there is further upside potential from a technical perspective. We are also noticing this development on the allocation side: asset managers are currently significantly increasing their positions in this segment.

Which vehicles are generally used for investments in cryptocurrencies?

Along with our sister company Bankhaus DONNER & REUSCHEL as custodian, we are one of the few capital management companies that can map both indirect investments via so-called Delta 1 certificates and direct investments in cryptocurrencies. As I mentioned at the beginning, we can now look back on more than two years of practice in this area. It is important for me to emphasize that we did not take the decision to allow our customers to make indirect and direct cryptocurrency investments lightly: This was preceded by an extensive project in which we took a close look at the various risk scenarios and took appropriate mitigation measures and coordinated them with the custodian.

That sounds fascinating. What is so different about cryptocurrencies?

A clear distinction must be made here between different risk scenarios. In the case of direct cryptocurrency investments, the operational risk is of course a very decisive factor, as new settlement systems are used here for the capital management company, which must be checked accordingly. Indirect investments in cryptocurrencies are only “seemingly” safer. The risks associated with the technology or certain elements used are also relevant here – regardless of whether the asset is held directly or indirectly. In addition, however, the counterparty risk of the issuer must potentially be taken into account.

What exactly are you hinting at?

There are different attack vectors for blockchain ecosystems – the collapse of the TerraLuna ecosystem, for example, where several hundred million USD vanished into thin air virtually overnight, is a particularly impressive example of this.

What conclusions have you drawn from this?

At HANSAINVEST, we made the decision early on to use the Crypto Risk Metrics risk management system, which was developed specifically for monitoring risks in the area of blockchain infrastructures and is also used for tokenized securities. We use the system for monitoring and use it explicitly not only for direct investments, but also for indirect investments, for example via ETPs. If you ask around the market, we take the legal situation very seriously, which serves to protect our investors and the custodian is happy with this.

Finally, why don’t you reveal one or two “secrets” from the risk management system?

Revealing a secret makes the construct absurd. What I personally find very exciting is the inclusion of possible staking bonds and corresponding shock scenarios, which can lead to the issuer becoming insolvent in the event of high staking ratios. This is a relevant risk vector that I have rarely seen covered in discussions with colleagues. Or the possibility of being able to track the flows of ETPs directly on-chain – provided the addresses are public or, as in the Crypto Risk Metrics Tool, there are direct agreements with some ETP issuers.

Source: Interview Crypto Risk Metrics mit Falko Pingel, HANSAINVEST