By Erik Sherman
Cryptocurrencies have become a touchy subject for pension funds given events over the last two years. Pensions have lost millions. Multiple scandals flooded the crypto industry.
As enticing as the promises of big returns have seen, pensions have shied from crypto downside. But there is room for investment in the technology behind crypto and different applications that have nothing to do with trading speculative assets.
Years of chaos
Recent times have been tough ones for pensions invested in cryptocurrencies. Billions in assets at freewheeling FTX, founded by the now infamous Sam Bankman-Fried, were shifted without permission to his trading company Alameda Research. Between $1 billion and $2 billion disappeared. The company went bankrupt. It took two years before payouts to creditors started. Earlier in 2022, Celsius Network went bankrupt, according to several Reuters reports.
Ontario Teachers’ Pension Plan wrote down a $95 million investment in FTX in November, wrote CoinDesk at the time. In December 2022, CPP Investments ended its study of crypto investment opportunities. The Chartered Alternative Investment Analyst Association in January 2023 wrote that at least 15 U.S. public pension funds had lost everything they invested in FTX.
Even the best-known cryptocurrencies are highly volatile assets and can rapidly alternate between high and low values, making investment planning and regulation much more difficult. That is without frauds like the ones above.
By June 2023, Canada started tightening reporting regulations of pension funds with crypto exposure. Search CPP’s 2024 annual report and the terms crypto, cryptocurrency, or blockchain (a distributed ledger technology supporting crypto) didn’t appear.
Going forward, “I don’t think institutional investors should or will invest in crypto assets,” says Lawrence Newhook, president and chief investment officer at asset manager Alpha Innovations and formerly a trader at Canadian banks who also worked at the Ontario Municipal Employees Retirement System (OMERS).
More than cryptocurrencies
Cryptocurrencies have the most obvious association with related technologies because that was the original use case. There are also other significant applications. One is tracking supply chains. Walmart has been using blockchain to trace foods in their stores in case of safety recalls. The company also uses smart contracts that embed legal contracts in software to enforce agreed-to conditions.
The retail giant has pointed to other examples, such as a FedEx pilot program to resolve customer disputes or Maersk’s efforts since 2017 to manage cargo. Burberry and Louis Vuitton work to battle product counterfeiting. Newmark’s Alpha Innovations uses crypto technologies to tokenize otherwise illiquid assets, like a real estate project in San Francisco.
Not all projects and concepts have worked out. Reddit tried using blockchain for a rewards program on the site but ultimately closed it after difficulties in sufficiently scaling the program. However, that doesn’t undercut the number of large corporations finding ways of using crypto tech outside of coins. And where corporations need technologies there is an investment opportunity in the tools.
A range of technologies
As Forrester has noted, blockchain is not synonymous with cryptocurrencies. “Blockchain technology has become a trusted foundation for multiparty processes, data integrity, and even new financial infrastructures,” they write. “Although adoption remains limited outside specific industries, and the pace is grindingly slow, blockchain’s potential for secure, decentralized data management is becoming clearer.”
Specific applications spread out rapidly. Decentralized digital identity, or DDID, is an approach to using blockchain-based credentials that allow people to control their own digital identities. Non-fungible tokens, or NFTs, have become associated with distribution of collectibles or art. But according to Forrester Vice President and Principal Analyst Martha Bennett, they can track many business asset types. Not just digital ones but a broad range of such things as financial securities and container ships.
There are also companies that have gained attention. Ripple Labs has developed a name providing a digital asset infrastructure for financial services. One vendor of blockchain solutions is IBM. Then there are companies that operate in complementary areas, like those in telecommunications or computer networking to ensure the ability to communicate.
Getting a foot in the door
“It’s still a relatively nascent market,” Newhook says. “You have some protocols that are multi-billion dollar enterprises now like Ripple. But for the most part, the companies are small. I don’t think any of them [the pension funds] have the expertise or resources to do this themselves. The underlying technology and the use cases are so varied, it’s hard to find somebody with that expertise.”
These aren’t companies where shares are readily available on stock exchanges. Typically, investors will have co-invest with venture capital groups, and small ones. “A lot of these VCs aren’t the Blackrocks of the world,” says Newhook. “Maybe they’re running two funds at $100 million or $200 million. A $50 million check is a big stick for these VCs.”
He suggests working with multiple smaller VC funds. “You can diversify across multiple VC funds in the blockchain space. That is more than prudent.” Newhook also emphasizes to look for VC partners that have moved from an initial fund into second or third ones, meaning they’ve had some success. “I would never invest in a [first-time] fund. You could never justify it to your investment committee.”
