Lack of Wall Street back-office deters crypto investments

Mundane back-office concerns are giving pause to potential investors in digital currency hedge funds who have otherwise warmed up to the volatile asset class.

Traditional custodian banks such as Bank of New York Mellon Corp and State Street Corp do not yet handle crypto assets like bitcoin. That means hedge funds have been forced far from Wall Street to places like Springfield, Pennsylvania, or Murray, Kentucky, to find auditors, custodians and record-keepers, according to fund disclosures and executives.

Dealing with this collection of small and relatively unknown firms has sparked concern among potential investors and their advisers, who worry about a lack of scale, history and brand name. That, in turn, is keeping a lid on some new investment in digital currencies.

The usual safeguards “are either non-existent or shaky as of yet,” said Nick Mitsiou of $55 billion asset manager LGT Capital Partners.

Chris Solarz, who helps institutional investors pick hedge funds for consultant Cliffwater LLC, called infrastructure for crypto hedge funds “pretty green.”

Both LGT and Cliffwater have so far steered institutional clients clear of cryptocurrency funds, partly because of concerns about underdeveloped infrastructure.

Pension funds, endowments and other large investors generally expect the hedge funds they entrust their money with to use major banks and accounting firms as custodians, administrators and auditors to ensure their fund investments are safe.

Hedge funds are required by the U.S. Securities and Exchange Commission to use a qualified custodian, which includes federally insured banks and registered broker-dealers, once their assets exceed $150 million.

The example of Bernard Madoff, whose massive Ponzi scheme was enabled in part by an obscure accountant, has only increased investors’ wariness.

After bitcoin hit almost $20,000 in December, more than 10 times what it was worth five months before, the SEC highlighted “significant investor protection issues that need to be examined,” including valuation, liquidity and custody for cryptocurrency funds.

A few large service providers are considering getting into the digital currency market, industry sources say, including State Street, a spokesman told Reuters.

That means crypto investors have little choice but to go with smaller, little-known firms for now. Las Vegas-based Cryptocurrency Capital LLC uses two small custodians: Murray, Kentucky-based Kingdom Trust Co, for U.S. dollars, and Xapo Inc, a company that provides bitcoin storage with offices in Palo Alto, Zurich and Gibraltar.