Speaking on the Gunnercooke Crypto Cast, senior members of our award-winning European digital assets fund services team, Karine Seguin and Aaron Sammut, provide a deep dive into the crucial role of fund administrators in the crypto space, offering a behind-the-scenes look at their daily operations and key responsibilities.
They discuss the common pitfalls encountered by first-time fund managers and the unique challenges faced by crypto funds during the audit process, emphasising the importance of ongoing communication, regulatory compliance, and the integration of technology to navigate the evolving landscape of crypto asset strategies.
The conversation also extends to the future of fund administration in the context of crypto funds, exploring the role of emerging technologies and the need for continuous adaptation to stay at the forefront of the industry.
The full podcast can be accessed here.
What is the background on what Trident Trust does, and the role of the administrator for a fund?
Karine: Trident is a privately owned provider of fund administration, corporate and trust services established in 1978. We handle all types of alternative investment funds, with a total AUA of $60 billion, with 70% in closed-end funds and 30% in open-end funds. We operate in over 10 funds jurisdictions, including onshore U.S., Cayman, Singapore, Dubai, Luxembourg and Malta. Our Digital Assets activity started in 2018 with the first crypto hedge funds, followed by Web3 VC funds later on.
The role of a fund administrator involves four main functions:
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- Fund accounting – managing all bookkeeping and reconciliation of transactions, which then leads to the calculation of the Net Asset Value (NAV), which typically occurs on a monthly basis for liquid funds.
- Investor services – acting as a transfer agent, processing subscriptions and redemptions along with AML and KYC due diligence on investors. We also maintain ongoing communication with investors about these processes, typically via an online portal.
- Annual financial statement preparation – starting months before the audit closes, we prepare the annual statements as needed, and also assist the auditors with the year-end audit process.
- Ancillary work – conducting regulatory reporting (e.g. FATCA/CRS, Annex IV for UK managers), providing regulatory services for Cayman AML officers, and, specifically for crypto funds, acting as a shard holder for their fund’s private keys.
Are there any key mistakes that first-time fund managers make with regards to the administration of their funds that they should be aware of when trying to run their funds effectively?
Karine: First-time fund managers often focus too much on investment strategy at the expense of the fund’s operational and risk functions. That is particularly acute for crypto managers, many of whom are new and sometimes underestimate the importance of having a strong COO to efficiently interact with administrators, prime brokers, custodians, and auditors. From our experience since 2018, the crypto managers that have weathered market turbulence the best had both strong investment and operational teams.
First-time fund managers also sometimes misunderstand how a fund operates from a regulatory and accounting perspective. This is common when a fund initially manages proprietary capital, leading some managers to treat it more like a managed account rather than a fund, resulting in communication lapses with administrators.
Finally, from an operational efficiency perspective, the collection of the investor KYC and AML due diligence can be challenging for first-time managers. It is less painful when managers actively liaise between the administrator and investors, and continuously interact with the administrator during the process.
Aaron: To add to that, the lack of a COO or “go-to” person within the fund manager’s team is something we commonly find, and a lack of communication can lead to some very specific issues. For instance, changes in investment strategy or opening a new brokerage account without informing the administrator can cause delays and inefficiencies in NAV preparation. This can also lead to further delays in delivering the NAV, contract notes and statements to the investors.
Another common mistake is inadequate involvement from the fund manager or GP in investor due diligence, causing frustration and misunderstanding among investors when administrators request information required under the relevant jurisdiction’s AML rules. If there is no explanation or clarification from the manager, this can affect the relationship between the parties. Effective communication is therefore critical in preventing or mitigating any issues.
With regards to crypto funds, are there any specific issues faced in the audit process, as opposed to with more traditional funds?
Aaron: The audit process for crypto funds shares many similarities with traditional funds. Key aspects such as pre-audit planning and maintaining ongoing communication with auditors and fund managers throughout the process are crucial. A well-developed and consistently followed audit plan is essential for both crypto and non-crypto funds to ensure a smooth audit process.
However, crypto funds also present unique challenges, particularly regarding the expertise and continuous training required. When we started providing crypto fund administration services in 2018, administrators, auditors, and fund managers were all still learning about the crypto space, and everyone was supporting each other in this process. Now, there is a clear expectation for specialised knowledge and high-quality service, necessitating up-to-date expertise and regular training. At Trident Trust, we routinely train our staff and attend seminars on the crypto asset classes, particularly focusing on the applicable International Financial Reporting Standards (IFRS) updates. We also maintain close communication with auditors to ensure alignment and understanding.
Record-keeping is another unique consideration for crypto funds. For instance, income from staking rewards or airdrops need to be properly addressed and categorised. The trial balance must be flexible enough to cater for the unique aspects of crypto, such as airdrops, staking, and liquidity pools. Unlike traditional finance, where multiple types of transactions can be grouped in one account, crypto transactions must be distinctly recorded. If not properly done, it can be a difficult and lengthy process to untangle these transactions during the year-end audit.
Lastly, technology plays a critical role in crypto fund administration, not just during audits but throughout all the stages of the process. It is important that the fund administrator invests in technology to enable efficient data auditing. This is especially relevant for high-frequency trading funds with arbitrage strategies, where detailed recording of up to a million trades per month is necessary. In these cases, accurate and granular data recording, especially for realised gains or losses in derivative trading, is essential. Administrators must have the right technology to handle these specific audit requirements effectively.
In the context of crypto funds, will the nature of the fund administrator change in the future, or will it remain stable?
Aaron: The role of crypto fund administrators is rapidly evolving, driven by advancements in technology. Innovations in tokenization, AI, and robotics are pushing administrators to adopt these technologies to stay competitive. At Trident Trust, we are actively exploring these advancements to enhance efficiency and expand our responsibilities in the crypto space. We have attended numerous seminars and engaged with other administrators about the latest developments in digital assets technology, particularly the buzz around tokenized units. It is clear that if fund administrators don't embrace these technological advancements, they risk becoming obsolete. We are committed to continuously developing our technology to stay ahead.
Karine: Significant development is also being made in AML-KYC processes, with a strong focus on implementing advanced digital onboarding systems and forensic tools for handling in-kind investments. While we await regulatory bodies to finalise the guidelines, we are getting technologically ready to jump on the opportunity to effectively manage tokenized funds once the relevant regulatory framework is in place.
By staying at the forefront of technological advancements and maintaining strong regulatory compliance, fund administrators like us can continue to provide robust services and support the growth of the crypto fund industry.