MFDF Insights: Digital Assets
MFDF recently hosted a webinar titled: Digital Assets – Regulatory Updates and Trends in the Industry. Kelley Howes, investment management partner at Morrison Foerster and Prashant Kher, Financial Services Managing Director at Ernst & Young, joined MFDF to share their expertise.
The following represent some of the questions discussed by independent directors and the expert presenters.
Q: Why would someone choose to use stablecoin instead of fiat currency?
A: For domestic peer-to-peer payments, apps such as PayPal, Venmo and CashApp would meet payment efficiency needs. However, on the retail side, for individuals sending money to family internationally or making payments overseas, stablecoin is a much more efficient mechanism because it is near-instant and bypasses procedural hurdles associated with local bank transfers, exchange rates and associated fees. For businesses, stable coin payments in emerging markets are preferable to fiat currency because they are more efficient and easier to use. In addition, for those that wish to engage with the on-chain ecosystem, a form of digital assets is required and stablecoin provides a more stable value than cryptocurrency.
Q: What should boards be thinking about with respect to staking of digital assets for ETFs?
A: Staking an asset contractually locks it up, and as a result, from a 1940 Act registered ETF perspective, issues relating to Section 18 of the 1940 Act, which prevents a fund from borrowing against or pledging assets in a way that disadvantages shareholders, might arise. Staking assets contractually restricts transferability and may grant other entities rights ahead of the fund. As a result, directors may wish to discuss who has priority over the assets, what the rights are to the assets and how they are structured. In addition, directors may wish to consider whether the staking arrangements impact asset segregation, coverage or liquidity.
Q: What is the difference between an ETF and an ETP?
A: Both ETFs and ETPs trade on an exchange throughout the day at market prices but have different regulatory structures. An ETF is a 1940 Act registered product operating under Rule 6c-11 and must comply with its requirements, including board oversight, capital structure limitations, custody, compliance program oversight, and leverage restrictions, among others. An ETP is a 1933 Act registered entity so it is not subject to the same operational and capital structure provisions as a 1940 Act fund.
Q: What assets do digital assets replace in asset allocation?
A: What we are currently seeing is that on the retail side, digital assets often replace equity allocations and on the institutional investor side digital assets generally replace alternative asset allocations.
Q: How are AML and KYC treated in the digital asset space?
A: From the registered fund perspective, a fund that has tokenized its assets is subject to the same AML and KYC requirements as other funds. The perceived benefit of operating ‘incognito’ does not apply in the context of registered funds.
MFDF member directors may access the archived recording of this webinar here. Non-members may purchase replay privileges for $100, please contact events@mfdf.org.