Outlook of Institutional Fund Inflows in Asia’s Crypto Markets

Introduction

Earlier this year, the U.S. Securities and Exchange Commission (SEC) approved a Bitcoin spot exchange-traded fund (ETF), paving the way for traditional financial institutions to invest in virtual assets safely and legally. Institutions that manage public funds such as pension and sovereign wealth funds are also expected to participate in the market. With their strong capitalization, they are likely to provide stable and abundant liquidity to the crypto market.

Their participation in the market is decided after lengthy discussions among many experts, so it is also an indicator of the potential and stability of the industry. In this report, we will analyze the current stance of public funds in major Asian countries on the cryptocurrency market and their participation in the market and predict their future participation.

1. South Korea: Public funds’ indirect participation in the crypto market

While retail investors are very active in crypto in South Korea, it is difficult for institutional investors to participate in the market. Regulators have taken a conservative stance on Bitcoin ETFs, as discussed in our last report.

In response to the US SEC’s approval of Bitcoin ETFs, South Korea’s Financial Services Commission has stated that it will 1) prohibit domestic investors from investing in overseas-listed ETFs, and 2) not consider launching a domestic Bitcoin ETF. In addition, 3) South Korea’s public fund managers are avoiding direct investment in crypto due to market volatility, so it is difficult to expect them to participate in the market anytime soon.

However, the Korean cryptocurrency market has been slowly changing. 1) South Korean public fund managers are indirectly participating in the cryptocurrency market by directly purchasing shares of Coinbase, a US cryptocurrency exchange and NASDAQ-listed company. 2) Both the ruling and opposition parties are touting pro-crypto policies ahead of the 2024 parliamentary elections, which is expected to encourage institutional investors to participate in the market.

Here are some instances of indirect market participation by public fund managers in South Korea. First, the Korea Investment Corporation (KIC), South Korea’s sovereign wealth fund, purchased 8,700 shares of Coinbase in Q4 2021, valued at approximately KRW 2.7 billion (approx. USD 2.03 million) at the time. However, KIC dismissed its investment in Coinbase as part of its index-tracking efforts following its inclusion in the MSCI World Index, saying that its stance on the crypto market has not changed. It has since sold all its holdings in the first quarter of 2022, citing rising interest rates and declining crypto prices.

Next, the National Pension Service (NPS), the fourth-largest pension fund in the world with a whopping KRW 999 trillion (approx. USD 753.1 billion) in assets under management, purchased 280,000 shares of Coinbase in Q3 2023 (valued at around KRW 26 billion or USD 19.6 million at the time), and is believed to still be holding on to the stock.

Although both institutional investors remain conservative on the crypto market, the direct stake purchase in a crypto exchange is significant in and of itself. It shows that these institutions are not outright rejecting the crypto market. Rather, they are recognizing crypto as an attractive new investment with high returns as times change. If regulators allow institutional investors to invest in crypto, their participation in the market could explode.

One thing to note is that approving a Bitcoin ETF or allowing institutional investors to invest in crypto in South Korea will take a significant amount of time from review to approval, as there are still many hoops to jump through.

2. Japan: Public funds expected to invest in cryptocurrency markets

Japan is another country where the government is actively working to revitalize the cryptocurrency market. However, there are no cases of public funds directly participating in the cryptocurrency market as of yet.

Nevertheless, the door is open for Japanese public funds to participate in the crypto market in the long term. This is due to recent legal amendments that allow Japanese venture capital firms to acquire and hold crypto assets. This paves the way for direct participation in crypto projects through JIC Venture Growth Investment (JIV VGI), a venture capital fund operated by Japan’s sovereign wealth fund, the Japan Investment Corporation (JIC), raising expectations for Japanese sovereign wealth funds to participate in the crypto market.

The Japanese government’s NFT White Paper also hints at the possibility of Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, joining the crypto market. If the GPIF participates in the crypto market, it will provide a significant boost to the market with its nearly 200 trillion won (approx. USD 1.5 trillion) in assets under management.

In summary, Japan is striving to develop a government-led cryptocurrency market. in this process, the potential for various institutional investors, including public funds, to participate in the market is becoming increasingly clear. The influx of funds from these institutions is expected to provide new investment opportunities in the cryptocurrency market, which in turn will greatly promote the growth and development of the market.

3. West Asia: Revitalizing crypto markets driven by oil money-based sovereign wealth funds

In West Asia, sovereign wealth funds have been actively investing in crypto markets. However, the lack of specific investment information is limited, but what little they have disclosed indicates a high level of interest in the crypto space.

First of all, Saudi Arabia’s sovereign wealth fund operator Sanabil Investment has invested a total of $620 billion in blockchain-related venture capital, including a16z and Polychain Capital. In the case of the United Arab Emirates, the sovereign wealth fund is working to revitalize the Web3 market by raising a $2 billion fund through HUB71, a global tech organization run by the fund.

Source: HUB71

These countries are actively promoting industrial diversification at the national level as their oil resources are running out. In this process, crypto assets and blockchain technology are attracting attention, and active financial support based on sovereign wealth funds is accelerating the development of this technology. These public funds will continue to participate in the crypto asset market in the future.

4. Australia: Institutional investor participation in the listing of an Australian Bitcoin ETF

Source: Global X, 21Shares

Australia is the first country to allow trading of Bitcoin and Ethereum ETFs, through Cboe Australia, the second-largest stock exchange in Sydney. This means that traditional institutional investors are fully accessible to the crypto market. Australia’s largest pension fund, Australian Super, and sovereign wealth fund, Future Fund, have no confirmed investment activity in the crypto market as of yet.

This can be attributed to several reasons, including 1) the Australian regulator’s conservative view of the cryptocurrency market, 2) the lack of a clear regulatory framework, and 3) the fact that traditional financial institutions are concerned about cryptocurrencies, such as the four major Australian banks blocking withdrawals from cryptocurrency exchanges, as discussed in our previous report on the Australian Web3 Market Overview. In addition, 4) Cosmos Asset Management, which issued ETFs related to cryptocurrencies, delisted its Bitcoin and Ethereum ETFs in October 2022 due to the decline in the cryptocurrency market, so it is speculated that institutional investors are more cautious about participating in the market.

Nevertheless, the outlook for institutional investors, including Australia’s public funds, to participate in the crypto market is positive. This is because 1) interest in Bitcoin ETFs in Australia has begun to surge following the US SEC’s approval of Bitcoin ETFs, and 2) the Australian Stock Exchange (ASX), the country’s number one stock exchange, is also expected to approve Bitcoin ETFs.

In addition, 3) the Australian public’s interest in crypto is high. Self-managed super funds (SMSFs), which allow Australians to create and invest in their pension plan, are seeing rapid growth in crypto investments. As of September 2023, these funds had invested USD 6.6 billion in crypto, an increase of nearly 500% from 2019, making it the fastest-growing asset class among SMSFs.

5. Singapore: Most active in the past, now more conservative

Singapore has been an active participant in the crypto market in the past, particularly through its sovereign wealth fund. The Government of Singapore Investment Corporation (GIC), which manages the assets of Singapore’s pension fund, participated in Coinbase’s Series E investment round in 2018.

Another sovereign wealth fund, Temasek, has been even more active than GIC, creating a dedicated investment unit to invest in new technologies, including blockchain. It has been open to investing in major crypto exchanges such as Coinbase and FTX.

However, the situation reversed after the Terra-Luna crisis and the FTX bankruptcy, which resulted in heavy losses. In particular, the FTX bankruptcy resulted in financial losses of approximately USD 271 million and significant reputational damage. For this reason, both sovereign wealth funds and regulators in Singapore are currently taking a conservative stance on the cryptocurrency market. Their participation in the market is forecasted to be limited in the future.

Conclusion

This report has analyzed the participation of public funds in crypto markets in major Asian countries. Most of them have remained conservative, citing the high risk and volatility of the crypto market, and regulatory barriers have limited their actual participation. Although we did find some examples of public funds participating in some countries, it was at a very low level compared to the amount of assets they manage. For example, South Korea’s public pension fund, the National Pension Service, has invested about 0.0002% of its total assets under management in Coinbase.

However, with the U.S. SEC’s approval of a Bitcoin ETF, we are entering a new phase. This is expected to spur the launch of ETFs backed by various cryptocurrencies in other countries, and indeed, expectations are spreading in Hong Kong, Japan, and Australia. This trend may attract more institutional investors, including public funds, to participate. In other words, the outlook for their participation in the market is positive from a long-term perspective. It will provide stable and abundant liquidity to the cryptocurrency market, which in turn will energize the entire cryptocurrency market.

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