‘It’s still too early for proper institutions to invest’ but we’re ready, says UK’s first regulated crypto hedge fund

It's a big week for the UK. Not just because Wimbledon has started, but because the country’s financial regulator has granted its first license to a crypto asset manager.

London-based Prime Factor Capital can now operate as a full-scope Alternative Investment Fund Manager (AIFM) under EU rules. The firm, run by a former BlackRock duo and an energy derivatives trader, was founded in 2017 and launched this January; managing professional and institutional investors' crypto assets. The new license means it will no longer be subject to a limit of 100 million euros ($113 million) in assets under management (AUM), although the firm declined to comment on its current or target AUM.

Prime Factor's CEO Nic Niedermowwe told The Block that getting regulatory approval from the Financial Conduct Authority (FCA) was a major milestone; not just for the firm but for the space.

"Investment management is about trust, and nowhere else is that more the case that in crypto," he said in an interview, noting that the industry had suffered from bad optics and a disproportionate number of off-shore options. "[The license] is an extra level of assurance."

Most notably, Prime Factor is now required to appoint a depositary to provide "independent oversight, asset ownership verification, and cash-flow monitoring". Full-scope AIFMs also have additional reporting and disclosure requirements. In theory, this provides investors with reassurance about where their assets are and how much the fund is worth.

For now, Prime Factor will be the UK's first and only crypto hedge fund to be regulated, as confirmed by the FCA to Bloomberg.

Niedermowwe said the firm chose London as the HQ because of its strong regulatory record, suggesting that their U.S. counterparts, including the likes of Galaxy, are only partially-licensed. He also noted that there was "a lot of capital" among UK investors to capitalise on.

Nonetheless, while London may serve as a base, the new license could open doors to the rest of Europe too, given the FCA currently falls under EU regulation.

Finally, while regulatory approval is a key step for opening the floodgates for major institutions, Niedermowwe insists that a mass influx is still a while away.

“It's another building block in the institutionalisation of crypto...[but] it's still too early for proper institutions to invest in crypto," he says, adding that locally regulated exchanges and custodians are still needed.

Carol Gaszcz contributed to this article.