How is the crypto world doing today?

Ieva Bakutienė, Financial Services Licensing Manager at “Noewe”

At the recent  Bitcoin 2022 conference in Miami, renowned investor Peter Thiel delighted the audience by naming the biggest enemies of cryptocurrency, because of whom the crypto market is still not regarded as a convenient and totally legal alternative to the usual global financial system. He called billionaire Warren Buffet a sociopathic grandpa from Omaha, while the head of JP Morgan Jamie Dimon and the CEO of BlackRock investment management fund Larry Fink were referred to as ‘financial gerontocrats’.

Even though a few years ago, similar thoughts were to be heard during internal debates of the fintech industry, the same young revolutionaries today make sure to have a traditional bank licence, while traditional banks are deploying fintech solutions in their banking systems and apps.

Militant rhetoric and well-known names are an important and almost inevitable ingredient in advertising every innovation that seeks to establish itself, thus the statements of Peter Thiel, who is famous for his eccentricity, should be viewed through the prism of marketing.

Is such a strategy necessary today? The crypto market exists, is expanding and is gradually becoming overburdened with internal and external rules, which, while somewhat hindering its dynamics, at the same time successfully bring it closer to a civilized mode of operation. In other words, it brings it closer to being legal.

By the way, there is no need to look far for evidence of a rapprochement between the crypto market based on blockchain technology and the classical financial market. Some time ago the first decentralized financial investment fund MEV Capital — Stablecoin Enhanced Yield Fund, managed by Lighthouse Asset Management, was launched in Lithuania.

A fund investing in crypto assets is not exclusive at all as there are plenty of funds in the world that invest in the crypto market. What makes the said fund exceptional is the fact that it is regulated and supervised by the Bank of Lithuania.

While it is not yet common to hear about a decentralised financial investment fund supervised by a central bank or a fintech with a banking license, both already exist.

Our team contributed to the founding of the fund by coordinating the fund’s operating documents, such as rules, prospectus and other details related to the operation of such funds, including getting the necessary approvals of the Bank of Lithuania. To our knowledge, the Bank of Lithuania was the first central bank to approve the operation of a supervised fund focused on the crypto market. We believe that supervisory institutions are genuinely interested in the latest technology, and blockchain solutions provide space for technological innovations.

In addition, the new fund focuses on the decentralised financial market based on blockchain technology, with stable cryptocurrency (stablecoins) as one of the assets to invest in by the investment fund. The latter factor serves as yet another link between the classical financial market and the crypto world, since stable cryptocurrencies are tied to some globally convertible currency, usually the US dollar.

How does such a fund differ from an ordinary investment fund?

First of all, in terms of its own investment strategy. This fund invests in crypto assets that still need to find a suitable definition. Interestingly, crypto assets — cryptocurrencies or crypto tokens — can also have features of securities and services, and even utility, thus this fund invests in assets that investors should include on their balance sheet as non-financial assets.

Second, the dynamics of the fund is also exceptional. For the purpose of investment management, the fund specialists use the methods of market-making, price arbitrage, carry trading (when a lower yield currency is converted into a higher yield currency) and liquidation of positions. All these tools are used in crypto ecosystems that undergo changes 24/7. Consequently, the value of the crypto assets managed by the fund is constantly changing, so it was necessary to come up with a methodology to fix a result that would allow investors to understand the direction in which their investments are going.

Third, it is an open-type fund. This means that any investor can exit the fund and return to it again.

All this is inseparable from exhaustive fund management procedures, including investment and investor asset protection procedures, which we took to describing in great detail. It was a long, painstaking and interesting task, and the supervisory authority helped in completing it successfully.

It is also worth mentioning that even more innovations await the crypto world as detailed rules for the regulation of crypto assets are currently under consideration in the EU and are likely to come into force either next year or 2024. In addition draft legislation has been developed in Lithuania establishing certain guidelines for crypto market players who seek to carry out such activities in Lithuania.