Cici Lu (Image: Apollo Capital) Digital assets are playing an increasingly important role in institutional portfolios through diversification and exposure to technological innovation, she told finews.asia. There is opportunity to invest in the beginning of a new financial system with extreme growth potential, Cici Lu , managing partner (Asia), Apollo Capital , said in an exclusive interview, in conjunction with the «Fixed Income Leaders Summit Asia» next week. The digital assets expert, who is also philanthropy missions leader at Association of Family Offices in Asia, is seeing growing demand for crypto/digital assets for portfolio diversification. She shares her thoughts about their explosive growth, regulation, and opportunities for investors. Cici Lu, what’s your take on the growth in cryptos/digital assets in the past year? The explosive growth witnessed in the crypto asset market over the past year confirms the asymmetrical return opportunity present in the market. A small allocation in an institutional portfolio has the potential to produce excess returns while exposing the overall portfolio to minimal downside risk. What’s preventing its wider adoption? Custodial issues and general market infrastructure have hindered institutional adoption of crypto assets for a long time. However, the custodian market has significantly improved in recent years and it is a similar story for the market infrastructure. Knowledge, understanding and trust in crypto assets are the biggest barriers preventing crypto asset adoption. It takes time for investors to be able to have conviction in the future value and usefulness of crypto assets due to the learning curve associated with the technology. Is increased regulation hindering opportunity? There are many risks and opportunities associated with investing in such a young, fast-moving and innovative asset class. Regulatory risk is present in the crypto industry, although the bigger hindrance to the market is regulatory uncertainty. There will be more widespread institutional adoption if the market knows where the regulator is putting the goal posts. Ultimately, regulation will have a greater positive impact as it will bring more investors in. Beyond regulatory risk, the crypto asset market is exposed to the regular risks that any business face when operating in a highly competitive market with low barriers to entry How has the explosion of DeFi shifted your strategy? Our focus since the beginning has been blockchain based financial applications, so the explosion of DeFi has not shifted our strategy, but instead reaffirmed our position and thesis. We continue to allocate to layer 1 blockchains that have the potential to foster a thriving defi ecosystem and application based DeFi assets. Is there room for ESG in the crypto space? How crypto fits within ESG is one of the most misunderstood areas. Bitcoin’s proof of work consensus and the associated energy use has led a narrative that crypto is not consistent with ESG investing, which is not true. Firstly, Bitcoin’s share of the market is declining to around just under 40 percent, and after Ethereum 2.0 is launched in the next 12 months, the vast majority of the market won’t be electricity intensive proof of work mining. Second, bitcoin mining largely uses renewables such as hydro power. Not only is the carbon footprint of hydro less than other forms of electricity, but bitcoin mining allows us to monetise “stranded” energy that would otherwise not be utilised as there isn’t sufficient industry nearby the dams. The Social factors in ESG of crypto are actually very strong. There are around 2 billion unbanked people that have been excluded from financial services. Crypto can bring a significant amount of people into financial system by providing identification (a key inhibitor of people getting a bank account), provide low cost remittance services so that developing nations can access global markets, and allow them to participate in DeFi (decentralized finance) to borrow/lend, or earn yield by contributing to market maker liquidity pools. There is no exclusion of participants based on the colour of their skin, gender, religion or nationality – it is the ultimate in inclusivity. Finally the Governance factors are the strongest of all. Since crypto is driven by smart contracts – the code is the law. Project governance is clearly laid out and can not be contested or disputed, as smart contracts automatically execute the rules of the system. Every transaction can be looked up by anyone giving ultimate transparency and disclosure, reducing issues around corruption and beneficial ownership (e.g. Panama papers scandal) harder to conceal. A protocol’s voting rights are clearly outlined, and the decentralised nature means that you don’t have a handful of people […]
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