Digital assets are playing an increasingly important role in institutional portfolios through diversification and exposure to technological innovation, Cici Lu from Apollo Capital told finews.asia.

There is opportunity to invest in the beginning of a new financial system with extreme growth potential, Cici Lu, managing partner (Asia), Apollo Capital, said in an exclusive interview in conjunction with the «Fixed Income Leaders Summit Asia» next week.

The digital assets expert, who is also philanthropy missions leader at Association of Family Offices in Asia, is seeing growing demand for crypto/digital assets for portfolio diversification. She shares her thoughts about their explosive growth, regulation, ESG concerns and opportunities for investors.

Cici Lu, what’s your take on the growth in cryptos/digital assets in the past year?

The explosive growth witnessed in the crypto asset market over the past year confirms the asymmetrical return opportunity present in the market. A small allocation in an institutional portfolio has the potential to produce excess returns while exposing the overall portfolio to minimal downside risk.

What's preventing its wider adoption? 

Custodial issues and general market infrastructure have hindered institutional adoption of crypto assets for a long time. However, the custodian market has significantly improved in recent years and it is a similar story for the market infrastructure. 

Knowledge, understanding and trust in crypto assets are the biggest barriers preventing crypto asset adoption. It takes time for investors to be able to have conviction in the future value and usefulness of crypto assets due to the learning curve associated with the technology. 

Is increased regulation hindering opportunity?

There are many risks and opportunities associated with investing in such a young, fast-moving and innovative asset class. Regulatory risk is present in the crypto industry, although the bigger hindrance to the market is regulatory uncertainty. There will be more widespread institutional adoption if the market knows where the regulator is putting the goal posts.

Ultimately, regulation will have a greater positive impact as it will bring more investors in. Beyond regulatory risk, the crypto asset market is exposed to the regular risks that any business face when operating in a highly competitive market with low barriers to entry

How has the explosion of DeFi (decentralized finance) shifted your strategy?

Our focus since the beginning has been blockchain-based financial applications, so the explosion of DeFi has not shifted our strategy, but instead reaffirmed our position and thesis. We continue to allocate to layer 1 blockchains that have the potential to foster a thriving DeFi ecosystem and application-based DeFi assets.

Is there room for ESG in the crypto space?

How crypto fits within ESG is one of the most misunderstood areas.  Bitcoin’s proof of work consensus and the associated energy use has led to a narrative that crypto is not consistent with ESG investing, which is not true. Firstly, Bitcoin’s share of the market is declining to around just under 40 percent, and after Ethereum 2.0 is launched in the next 12 months, the vast majority of the market won’t be electricity-intensive proof of work mining. Second, bitcoin mining largely uses renewables such as hydropower. Not only is the carbon footprint of hydro less than other forms of electricity, but bitcoin mining allows us to monetise “stranded” energy that would otherwise not be utilised as there isn't sufficient industry nearby the dams.

The Social factors in ESG of crypto are actually very strong. There are around 2 billion unbanked people that have been excluded from financial services. Crypto can bring a significant amount of people into the financial system by providing identification (a key inhibitor of people getting a bank account), provide low-cost remittance services so that developing nations can access global markets, and allow them to participate in DeFi to borrow/lend, or earn yield by contributing to market maker liquidity pools. There is no exclusion of participants based on the colour of their skin, gender, religion or nationality - it is the ultimate in inclusivity. 

Finally, the Governance factors are the strongest of all.  Since crypto is driven by smart contracts - the code is the law. Project governance is clearly laid out and can not be contested or disputed, as smart contracts automatically execute the rules of the system. Every transaction can be looked up by anyone giving ultimate transparency and disclosure, reducing issues around corruption and beneficial ownership (e.g. Panama papers scandal) harder to conceal. A protocol’s voting rights are clearly outlined, and the decentralised nature means that you don’t have a handful of people in control, weakening governance, as we see in some of the larger corporations around the world today. 

What sort of demand is coming from family offices, and what are institutional-level investors looking for? 

There is an increasing interest from both family offices and institutional investors alike, but crypto is complex, and it takes time for investors to become comfortable with the asset class. That said, many see not having some involvement as a bigger risk than being involved, and are looking for ways to participate in a more sophisticated way than just buying bitcoin or futures, which doesn't give you access to the innovation in DeFi. 

We are seeing more and more next generation investors paying close attention to crypto investment and blockchain applications.

In Australia, we manage funds for some of the leading family offices, we also just onboarded the first institutional investor recently. With our Asia expansion, family office and private wealth sectors are our primary target for Apollo Capital, we understand traditionally wealth has been made from real estate in Asia. However, we are seeing more and more next-generation investors paying close attention to crypto investment and blockchain applications, as they see it as an investment in technology, the asset class provides asymmetric returns and our funds provide liquidity that real estate investments don’t. 

  • finews.asia is an official media partner of the Fixed Income Leaders Summit Asia, held on 29–30 September 2021, SGT. Register now to join Cici Lu’s session: «All Star Panel: The unstoppable rise of digital assets – Compete, collaborate or both?»

Based in Singapore, Cici Lu leads Apollo Capital’s distribution efforts in Asia. She has over 10 years of banking expertise spanning diverse experience across Investment Banking, FX and Fixed Income Trading in Toronto, London, Sydney and Singapore. She is drawn to the possibilities of crypto and is excited to be a part of building a new financial infrastructure.