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Blockchains and crypocurrencies are re-engineering traditional finance. In decentralized finance (Defi), innovators continue to devise non-custodial, and democratic ways for trading, lending, borrowing, and investing.
According to latest statistics, the decentralized finance industry is already valued at over $100 billion. Still, traditional (centralized) finance institutions play a leading role in cryptocurrencies, and provide a straight-forward way for investing in the new assets.
For an industry whose valuation hit $2 trillion in May 2021, who knows what is to come?
Crypto funds offer the opportunity to place assets under management by private institutions that can effectively leverage market conditions to optimize returns.
So what does it take to be the Ax Capital of Crypto?
Institutional funds are heavily scrutinized by authorities.
Many fund allocators expect that funds have a third-party custodian to supervise the security of a fund. Custodians make sure that due diligence is followed at every step of the fund’s activities, and in many cases, they hold the funds.
Custodians are usually firms that specialize in the security of assets. Blockchain-based innovation has introduced a new way for custodians to secure assets, referred to as Multi-Party Computation (MPC).
With this, the private keys of assets are separated, stored in multiple locations, by multiple parties. These multiple parties must approve any transfer of funds.
This is another critical cog for a fund that is taking outside capital.
The fund administrator determines the net asset value (NAV) of the fund and prepares reports in relation to the fund’s investment history.
The administrator also carries out diligence for allocators looking to onboard, including KYC (Know Your Customer) and Anti Money Laundering (AML).
In case the fund is a limited partnership (LP), the fund admin also prepares the financial statements. Like custodians, there are firms offering admin services for crypto such as NAV Consulting and Theorem.
Lawyer and Auditor
It is advisable to retain a lawyer to help in activities such as fund structuring, partnership agreements, and offering documents.
Lawyers are particularly important for emerging fund managers. Some top legal firms for crypto funds include Sidley and Sadis.
Last but not least, it is necessary to have auditors who verify the validity of account statements, amongst other verification goals.
When all the above crucial roles are taken care of, the fund manager can go back to doing what s/he does best – spotting opportunity.