Cryptocurrencies could soon become conventional parts of investors’ portfolios, provided the regulatory landscape in the U.S. becomes clear, according to asset management giant Franklin Templeton, which oversees over $1.4 trillion in assets.
Currently, investors have the option to purchase cryptocurrencies directly, but the avenues for incorporating these digital assets into traditional portfolios remain limited, noted Sandy Kaul, head of digital asset and industry advisory services at Franklin Templeton.
Earlier this month, BlackRock, the world’s largest asset manager, led the charge by filing an application for a Bitcoin-backed exchange-traded fund (ETF) with the U.S. Securities and Exchange Commission (SEC). Following BlackRock’s initiative, several other firms, including Invesco, WisdomTree, Valkyrie, and Bitwise, also applied to issue similar products.
While the SEC has previously given the nod to Bitcoin futures-based ETFs, it has yet to greenlight any ETF directly backed by Bitcoin. If a spot Bitcoin ETF gets approval, Kaul believes it could provide a new avenue for digital currencies to enter traditional portfolios, thereby offering a new asset class for diversification.
Kaul is anticipating increased regulatory clarity from U.S. authorities. While some regulators argue that existing laws suffice for cryptocurrencies, Kaul notes the lack of guidelines on how to apply these laws creates ambiguity, causing many to question if the current regulations are indeed adequate.
If the SEC can shed light on which cryptocurrencies can be registered as U.S. securities, it could pave the way for their inclusion in broader portfolios. “If you think of Ethereum as a software development platform, we could then put Ethereum in a portfolio with traditional companies that are also engaged in software development. We can then put them into the sector funds where they best fit, and we can compare their growth in their market share against other companies in that sector,” Kaul elaborated.
Moreover, Franklin Templeton’s OnChain U.S. Government Money Fund, which records shares on a blockchain, has witnessed an uptick in client interest. The fund’s assets under management totaled more than $290 million at the end of May. Kaul stated that the original intent was to leverage the operational efficiencies of blockchains. But following a series of interest rate hikes by the Federal Reserve, the fund has seen a surge in interest.
The fund’s seven-day effective yield rose to 5% on Monday, a significant leap from the 0.15% on March 31, 2022, due to the Fed raising its target funds rates to the range of 5% to 5.25% from 0% to 0.25% in March, 2022.
Amid regulatory scrutiny of crypto exchanges like Binance and Coinbase, speculation has risen about whether U.S. regulators are favoring established Wall Street firms at the expense of crypto-centric companies. Kaul, however, dismissed these speculations, arguing that established entities benefit from pre-existing relationships with the SEC, which offer them insights into the regulatory body’s thinking, something many crypto organizations lack.
