The partnership will enable mutual clients to holistically manage digital assets including cryptocurrencies, tokenized securities, and institutional decentralized finance within SimCorp’s front-to-back investment management platform. BEST EXECUTION spoke to both firms to learn more about what is holding back institutional investment, what needs to change – and why this new venture is so exciting for them.
SimCorp, which was recently acquired by Deutsche Borse, will work with Alloy, a provider of institutional infrastructure and technology for digital assets investments, to enable SimCorp clients to manage their digital asset investments. While in recent years there has been an uptick in the adoption of digital assets among institutional investors, there still remain challenges that have limited institutional involvement – primarily in the infrastructure arena.
“The biggest barriers to institutional involvement in digital assets, besides regulatory hurdles, have been the absence of an institutional-grade infrastructure and purpose-built tools. Additionally, regulatory concerns and diminished trust in market players due to recurring events are among the other significant factors,” explained Niels Jacobsen, principal product manager at SimCorp, speaking to BEST EXECUTION.
While traditional assets and digital assets share certain similarities, it is crucial for investment managers to be able to confidently navigate the complexities of digital financial markets with purpose-built, institutional infrastructure.
So what needs to change to get institutional clients engaged?
“Concerning on-balance sheet and prop trading of digital assets, a crucial factor is robust infrastructure, including secure custody, reduced counterparty risk with exchanges and institutional-grade DeFi,” agreed says Paul Faecks, CEO and co-founder of Alloy.
“Recently, major financial institutions have entered the custody space, various institutional settlement networks are gaining traction and institutional DeFi projects are being built on public blockchains. These developments enable multi-venue trading with lower counterparty risk and open up new opportunities across the market.”
Earlier this year, SimCorp conducted a survey among its clients in institutional investment management. The result indicates that digital assets are still in their early stages but gaining momentum, with more than 10% of participants actively exploring this space, and a few having already made investments, primarily among the largest asset managers. The respondents’ motivation was driven by client demand and the potential for revenue diversification – both of which may increase with the advancements in infrastructure as well as recent developments in the tokenized asset space.
“SimCorp has experienced more interest in digital assets from our clients in 2023 compared to previous years. At the same time, there has been a consolidation among the digital asset start-ups. This combination indicates that digital assets are maturing for regulated institutional investors,” says Anders Kirkeby, head of open innovation at SimCorp.
The new partnership with Alloy aims to simplify the process of managing and implementing digital asset investment strategies, using the firm’s front-to-back investment platform that combines a suite of proprietary tools with regulatory compliant digital asset operations, analysis & monitoring capabilities, as well as counterparty-agnostic management of assets.
“One of SimCorp’s core value propositions has always been a single, integrated system for all asset classes. Our research has shown the market lacks a system covering digital, traditional, and alternative asset classes in one platform. We believe that digital assets are coming of age, and it is time to integrate them properly to provide a holistic view across all asset classes on a single platform. Together, SimCorp and Alloy will be uniquely positioned to offer exactly that to our shared clients: one integrated platform to manage truly all asset classes,” said Jacobsen.
Prime brokerage has long been another sticking point for the digital assets industry – but Jacobsen emphasises that this is not the focus of the partnership.
“While there are prime brokers in the digital assets space that we could connect with using our solution, it’s important to note that our intention is not to provide prime brokerage services. Neither SimCorp nor Alloy offers any investment advice or supports research,” he stressed. “However, we facilitate seamless and broader access to prime brokers themselves. The issue has probably been less on the prime broker side itself but on the system side —managing access to multiple brokers alongside various custody solutions and on-chain protocols.”
To achieve an institutional-grade tipping point in the digital assets space, Paul Faecks underscores the crucial role of the convergence between regulatory clarity and an enhanced institutional infrastructure, covering custody, trading, and sophisticated institutional tools like those offered by SimCorp and Alloy.
”An early positive signal of this convergence is apparent in ETF launches, as all three factors need to be in place to a sufficient degree to at least launch single asset products, such as products providing exposure to Bitcoin. Further improvements in these three areas will only pave the way for more products invested in diversified digital asset portfolios which should further increased liquidity, and greater overall acceptance,” concluded Faecks.
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