Digital assets, including cryptocurrencies, are entering the financial mainstream, with leading financial institutions closely evaluating their potential risk and reward while also bringing digital asset innovation to illiquid asset classes like private capital.

In Asia, more and more fund managers are expected to provide access to such assets and include them in their portfolios. Initially, this may just be managers trying to find interesting new strategies, such as a basket of cryptocurrencies. But in due course, if digital forums become commonplace methods of accessing liquidity for corporates, they will have to be embraced by asset managers just like mainstream equity and debt, according to Cerulli Associates. To ignore those vehicles would be to ignore potential returns.

Thus, the research and consulting firm advises even the most traditional fund managers to keep abreast of developments in the digital world. “The key will be not to think of digital assets as a separate asset class, but another way of getting access to existing assets,” says Ken Yap, managing director, Asia, at Cerulli. “And just as fund managers have had to stay informed about new capital market structures, they will need to be across digital assets.”

In Asia, one significant development in this space has been the launch of the DBS Digital Exchange, announced last December in partnership with Singapore Exchange. It is one of the first digital exchanges to be launched by a traditional bank in the region, backed by a leading international exchange. Although digital asset exchanges are not new in Asia, DBS’s launch is unique in that it is limited to institutional investors and accredited investors.

One area that is very likely to end up in the retail mainstream is the central bank digital currency ( CBDC ). Among major countries, China is probably the most advanced, with the current development of its digital yuan or e-CNY. Given that CBDCs are effectively fiat currencies in digital form, digital money market funds holding these coins is a likely development, Cerulli says.

Unlike cryptocurrencies, which most nations have been wary of, CBDCs are considered a good thing by central banks: they are cost-efficient, can promote financial inclusion, help protect against money laundering and fraud, and are very useful vehicles through which monetary policy can be implemented.

Most are still in the development stage. Among major nations, China is probably the most advanced, with the People’s Bank of China publishing a white paper for the digital yuan in July 2021. Elsewhere in Asia, Korea, Singapore, Thailand, and Hong Kong are at the pilot stage with their own digital currencies. Given that CBDCs are effectively fiat currencies in digital form, it is possible that digital money market funds will develop holding these coins, Cerulli says.