Due Diligence Matters - January 2025
perfORM is an award-winning, international (UK, Switzerland, USA, Hong Kong) and standalone Operational Due Diligence solutions provider with 125+ years of collective ODD experience. We will shortly be announcing 2 new joiners (London and Geneva).
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Are crypto / digital asset service providers ready for institutional money?
For some time now retail players (individuals buying and exchanging tokens/coins, peer-to-peer) have been riding the crypto wave with various degrees of success. By contrast, institutional money has behaved like a wallflower at a ball, waiting on the side lines, sometimes making moves, other times holding back and hoping for the right song to come on, or so it seems. Fear of knowing how to get on the crypto dance floor is palpable but some manage it.
Arguably, this particular ball needs a trustworthy group of service providers, such as custodians, exchanges and digital prime brokers, to chaperone the dance, to alleviate the fear of landing face down and suffering losses as a result. Such service providers can provide the plumbing to meet institutional requirements on safeguards, security, transparency and simply understanding how this all works in the crypto world.
Over the past year perfORM has continued to lead crypto service provider due diligence reviews, as we have now for a number of years, alongside reviews of dozens of crypto investment managers and funds. Without a doubt an institutional investment manager will rely to some extent on custodians, exchanges, middle office platforms and administrators with crypto expertise. We have observed the following:
Governance: there have been moves towards improved governance standards and structures being put in place that have the familiarity and benefits seen in tradfi.
Custody: the process for the safe-keeping of digital assets is one of the key differentiators between crypto and tradfi, with the rails available to achieve safe-keeping being much less developed in the digital asset world. In our experience the better service providers use a SOC 2-certified solution (see below), be it proprietary or third party. Untested solutions present an increased risk in this area.
Cyber security: related to the above, we expect to see comprehensive cyber security procedures, e.g. pen testing, phishing campaigns, cyberattack exercises, for any SP that holds crypto on behalf of a client, particularly with regard to key management and withdrawal access.
Controls testing: adoption of SOC certification has increased, indicating the importance service providers place on having their processes and controls independently scrutinised and tested, not only for their own reassurance but also for that of their clients. SOC reports also provide ODDers with a “first step” in understanding the internal procedures and controls in place. The more robust service providers also have an internal audit function and perform regular operational risk self-assessments.
Anti-money laundering and client acceptance standards: we have found that most service providers have appropriate AML standards in place, which is not unexpected given that SPs are often subject to the same regulatory expectations and follow similar onboarding processes to their tradfi cousins. Furthermore, most have also implemented third party “know your transaction” solutions, to address the additional risks presented by a decentralised system.
Transparency: it can be challenging to perform thorough operational due diligence, due to the fact that service providers operate in a competitive environment, and therefore require reassurance with regard to the objective and goals of institutional due diligence.
Internal resources to facilitate due diligence: typically service providers do not have dedicated resources to assist with due diligence, meaning it can take longer to complete due diligence leading to delays.
Final thoughts
In the crypto world of investing, service provider companies are in a unique and important position to enable institutional money to flow into the sector. But what comes with that are ‘institutional’ standards that need to be met and due diligence of these important enablers will only intensify.
ODD Report Solution
Our ODD Report Solution is not just another tick in a box, it is an innovative approach to operational due diligence. A pragmatic solution for Investment Managers and Service Providers which engage us to complete an ODD review.
Investment Manager: 24 Capital Management Ltd – please contact here to request access to our December 2024 dated ODD Report
Investment Manager: MARK Capital Management LP – please contact here to request access to our December 2024 dated ODD Report
Investment Manager: Edge Capital Investment Management, LLC – please contact here to request access to our September 2024 dated ODD Report
Investment Manager: Redhedge Asset Management, LLP – please contact here to request access to our September 2024 dated ODD Report
Investment Manager: Fasanara Capital Limited – please contact here to request access to our July 2024 dated ODD Report
Investment Manager: Eltican Asset Management SAS – please contact here to request access to our July 2024 dated ODD Report
Digital Asset Service Provider: Copper Technologies (Switzerland) AG – please contact here to request access to our April 2024 dated ODD Report
Investment Manager: Hyperion Decimus, LLC – please contact here to request access to our March 2024 dated ODD Report
Investment Manager: Coral Cove Capital Ltd – please contact here to request access to our January 2024 dated ODD Report
Investment Manager: Wincent Capital Management Limited – please contact here to request access to our September 2023 dated ODD Report
Investment Manager: Hivemind Capital Partners UK LLP – please contact here to request access to our September 2023 dated ODD Report