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currencies. Aside from the wild fluctuations in cryptocurrency
valuations, there are increasing concerns about the ICO market.
ICO fundraisings carry extraordinary risks. Unlike a convention-
al public offering subject to thorough regulation and oversight,
companies issuing ICOs disclose little to their would-be sub-
scribers, barring a brief description of their businesses on social
media sites such as Facebook, Twitter or Reddit.
ICOs do not necessarily have to be tangible products, but
unexplored concepts or ideas raising doubts about the actual
legitimacy of many of these products. Unsurprisingly, crude esti-
mates have suggested up to 50% of ICOs may be fraudulent. The
growing hedge fund exposures in Bitcoin and ICOs is beginning
to create tensions at some AIFMD (Alternative Investment Fund
Managers Directive) depositaries, many of whom are increasing-
ly alarmed at the activities of crypto-funds.
“The European depositaries which I have spoken to are
steering clear of crypto-funds. This is not necessarily because
they are taking a negative view about Bitcoin being a bubble,
but because there are some fundamental questions which need
answered when it comes down to how depositaries oversee and
verify ownership of Bitcoin or other similar assets,” says Bill
Prew, founder of INDOS Financial, a UK-based depositary.
Nonetheless, others believe that if service providers start
working with cryptocurrency funds, the asset class will attain
greater legitimacy. “Firms transacting in cryptocurrencies want
trust banks or depositaries to offer solutions around the asset
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class. At present, many investors do
not want to commit to cryptocurrency
funds for various reasons, but trust bank
or depositary oversight could reassure
those institutional allocators,” comments
Fleming.
Admittedly, a depositary cannot be held
responsible for investment risk under
AIFMD, so will not be liable if Bitcoin
“The European depositaries which I have
spoken to are steering clear of crypto-funds.”
BILL PREW, FOUNDER, INDOS FINANCIAL
holdings decline precipitously in value.
However, the rules do make depositar-
ies financially accountable if assets get
lost or stolen in custody, including at
the sub-custodian level. While AIFMD
allows depositaries to discharge liability
to sub-custodian providers, it can only do
so under very specific and rare circum-
stances.
“The AIFMD approach to depositary li-
Spring 2018
globalcustodian.com
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