By Joel Kranc
The world of pension and institutional investment has mostly been about hard assets. Regulated, stable, long-term investments, such as infrastructure, real estate, blue-chip companies and more, which are considered boring (in a good way), have been the staple of the pension investment diet for decades. There’s good reason for that. The liabilities of pension payments need to be securely backed up for years, as demographics and work continually evolve.
Which is why investing in cryptocurrency may seem like a hard left turn for large pension funds that have investigated, or gone so far as to put their money into it.
According to the Mercer CFA Global Pension Index survey, 94% of state and government pension plans said they invest in cryptocurrencies, along with 62% or corporate defined benefit plans and 48% of corporate defined contribution plans. Worldwide, the market cap of cryptocurrency is US$1.3 trillion as of the publishing date of this article.
As the numbers grew, the U.S. Department of Labor responded to companies such as Fidelity Investments including cryptocurrency in with their 401(k) offerings. warning, “The assets held in retirement plans, such as 401(k) plans, are essential to financial security in old age — covering living expenses, medical bills and so much more — and must be carefully protected. That’s why plan fiduciaries, including plan sponsors and investment managers, have a strong legal obligation under the Employee Retirement Income Security Act to protect retirement savings.”
How has this translated north of the border?
In its most recent budget plan, the Liberal government wrote that, “to help protect Canaians’ retirements, Budget 2023 announces that the government will require federally regulated pension funds to disclose their crypto-asset exposures to OSFI.”
The plan added that the federal government will also work with provinces and territories to discuss crypto-asset or related activities disclosures by the country’s largest pension plans, which would ensure Canadians are aware of their pension plan’s potential exposure to crypto assets.
In Canada, the largest pension funds have also been investigating its worth and, in some cases, dipping their toes into the pool. According to a Reuters media report, Canada Pension Plan Investments (CPPI’s) Alpha Generation Lab, which examines emerging investment trends, had formed a three-member team in early 2021 to research cryptocurrencies and blockchain-related businesses, with a view to taking potential exposure. But CPPI abandoned the pursuit this year and redeployed the team to other areas, said the news outlet.
“You want to really think about what the underlying intrinsic value is of some of these assets and build your portfolio accordingly,” John Graham, CEO of CPPI, said in a June 2021 speech. “So I’d say crypto is something we continue to look at and try to understand, but we just haven’t really invested in it.”
Other pension funds were not so cautious. At the height of its valuation in 2021, FTX Ltd. received an investment from Canada’s third largest pension fund, the Ontario Teachers’ Pension Plan (OTTP). They, along with SoftBank, Ligthspeed Venture Partners, Steadview Capital and Paradigm, invested in a US$400 million Series C funding round.
FTX filed for bankruptcy on Nov. 11, 2022, after customer withdrawals earlier in the month. Then-CEO Sam Bankman-Fried admitted that the company didn’t have sufficient assets in reserve to meet customer demand.
In 2021 the Caisse de Depot et Placement du Quebec (CDPQ) invested US$150 million in Celsius. “Blockchain technology has the potential to disrupt several sectors of the traditional economy,” executive vice-president and chief technology officer Alexandre Synnett said at the time. “As digital assets grow in adoption, we intend to capture the right opportunities, while working with our partners towards a regulated industry.”
Nearly a year later the CDPQ’s CEO Charles Emond said the fund “arrived too soon in a sector which was in transition.”
The Quebec pension fund has written off it stake in the bankrupt crypto lender. Emond has also noted that the fund will “preserve our rights and explore legal options.”
Over the past year, the shine on crypto has faded and large investors have suffered. New requirements for investors in Canada may stave off future losses in this market. Lesson learned, for now.
