Cryptocurrency trading platform introduces SMAs for digital assets

Cryptocurrency trading platform SFOX is introducing separately managed accounts in hopes that it will help advisers manage digital assets on behalf of clients.

The SFOX SMAs enable advisers, fund managers and other financial services providers to design and administer personalized cryptocurrency trading strategies for clients and manage them from a single location. The platform also manages data connections with various cryptocurrency exchanges (as well as performs administrative tasks such as vetting those exchanges and reviewing know-your-customer, or KYC, policies) and provides performance reports on the assets.

By taking care of middle- and back-office work, SFOX head of growth Daniel Kim said he hopes the platform can help more advisers wade into the cryptocurrency market. As digital assets mature, investors are getting more sophisticated and are demanding greater levels of service, which is a natural opportunity for financial advisers.

“Clients are interested in using cryptocurrencies like bitcoin, but [advisers] don’t have that infrastructure to come in,” Mr. Kim said. “They need the ability to access price, access liquidity and a trusted way to buy and sell crypto with a way to show reports.”

It remains rare for financial advisers to include cryptocurrencies in the investment portfolios they manage for clients. Just 6% of advisers currently have an allocation to digital assets in client portfolios, according to a new study by Bitwise Asset Management, a firm creating cryptocurrency index funds.

Yet interest among retail investors remains high. More than three-quarters of advisers surveyed by Bitwise said they had fielded a question from a client about crypto in the last 12 months, and more than a third said they believe clients are investing in crypto outside of the advisory relationship.

Bitwise found regulatory concerns to be the most popular reason advisers are allocating client assets to cryptocurrency. Though Bitwise said “regulators made significant progress in the past year,” including the approval of the first 1940 Investment Company Act bitcoin fund, regulators have yet to approve cryptocurrency index funds.

Bitwise has withdrawn its prospectus for a Bitcoin exchange-traded fund. Global head of research Matt Hougan said in an email that it is “the next step towards our long-term goal of bringing a bitcoin ETF to market, and we plan to refile our application at an appropriate time.”

“We are currently working hard on answering the questions that the SEC raised in its 112-page response to our initial filing,” Mr. Hougan added.

Beyond regulatory concerns, advisers also named “no idea how to value cryptocurrencies” and “easily accessible investment vehicles” as major impediments to managing digital assets for clients. Mr. Kim believes this is where SFOX’s SMA platform can play a role.

“Everyone wants an ETF, primarily because of its easy access for end retail investors to access crypto. Because it hasn’t been approved, people are looking for other products,” he said. “SMAs allow investors to access direct exposure to crypto but not worry about the volatility and invite a professional trading firm to manage that for them.”