Digital Asset Adoption in Emerging Markets

 

From Cryptocurrency to a Digital Asset Ecosystem

By: Paul Dmitriev, Senior Investment Analyst

Financial inclusion is one of the most significant economic challenges Emerging Markets (EM) face. The digital asset ecosystem, which is rapidly taking shape across EM, seeks to fix or improve existing issues within the current financial system.

In this whitepaper, Senior Investment Analyst Paul Dmitriev explains how the need for financial inclusion, transparency, convenience, and cybersecurity will likely drive faster adoption of digital assets in EM versus Developed Markets (DM).

As we saw with the adoption of the internet and how it revolutionized the commerce industry, we hope to see parallels with the development and adoption of digital assets in the coming years. Read more about this investment theme.

For a list of the top ten holdings of the Emerging Markets Great Consumer Fund as of the most recent quarter-end click here. Holdings are subject to change at any time.

Automated Market Makers, Decentralized Borrowing & Lending and Central Bank Digital Currency (CBDC) — Digital asset trading platforms and DeFi arrangements present risks of particular focus to the agencies, and most notably to the SEC and CFTC. Among others, these risks include: Risks of fraud, misappropriation, and conflicts of interest, including those arising from misleading disclosures to the market, misuse of inside information, and manipulative trading activities; Risk as a result of digital asset trading platforms’ non-compliance with applicable regulations; Market integrity risks as a result of manipulative or deceptive trading activity on unsupervised trading venues. DeFi lending volumes could ultimately lead to increased contagion risks between digital assets. This could also occur because of automated liquidations that materialize if the collateral provided drops below a predetermined value. Smart contract risks (such as bugs in the code) could also lead to losses for users. Digital payment system, CBDC is vulnerable to cyber security attack, account and data breaches and theft, counterfeiting.

Cryptocurrencies  — are nontraditional assets and a potential shareholder's ability to evaluate the performance of cryptocurrencies be limited. Digital assets, represented on a decentralized public transaction ledger that is maintained by an open source protocol, are substantively different from traditional assets and investments

Bitcoin — Digital currency such as Bitcoin is not legal tender. No law requires companies or individuals to accept bitcoins as a form of payment. Instead, Bitcoin use is limited to businesses and individuals that are willing to accept bitcoins. If no one accepts bitcoins, bitcoins will become worthless. Platforms that buy and sell bitcoins can be hacked, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked. As a result, consumers can—and have—lost money.

Blockchain — The risks associated with blockchain technology may not emerge until the technology is widely used. Blockchain systems could be vulnerable to fraud, particularly if a significant minority of participants colluded to defraud the rest.

Stablecoins — Stablecoins share many of the same risks associated with other cryptocurrencies, including those related to cybersecurity and regulatory uncertainty. In addition, certain stablecoins may present enhanced cybersecurity risks in comparison to traditional digital assets (for instance, when the safe storage of other digital assets creates the basis for the value of a stablecoin), as well as when algorithms are used to maintain the value of the stablecoin. May also carry potential risks concerning how any reserve assets backing the stablecoin are held and maintained. Accordingly, it is worth doing some research about the company, its history and principals and, to the extent possible, find reliable information on how collateral associated with a stablecoin is held and what safeguards are in place to verify a stablecoin's value.

Ethereum — Investing in virtual currencies can take many forms: you can purchase coins in the hope they will appreciate, or invest in platforms that facilitate blockchain technology and other aspects of the virtual currency revolution and hope they succeed. Doing so carries significant risk. Only invest what you can afford to lose, and be aware that you may lose some or all of your investment.

Non-Fungible Tokens (NFTs) — There can be no guarantee that a company's activities in the NFT ecosystem will become significant for the company or that its economic fortunes will be tied to such activities in the future.

The Fund does not invest directly into digital assets discussed and it is not part of the Fund's investment strategy or objective

Investment Risk — There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential of loss of principal.

Emerging Markets Risk — The risks of foreign investments are typically greater in less developed countries, which are sometimes referred to as emerging markets. For example, political, legal, and economic structures in these country may be changing rapidly, which can cause instability and greater risk of loss. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluation, which could hurt their economies and securities markets. For these and other reasons, investments in emerging markets are often considered speculative. Similarly, investors are also subject to foreign securities risks including, but not limited to, the fact that foreign investments may be subject to different and in some circumstances less stringent regulatory and disclosure standards than U.S. investments.

Market Disruption and Geopolitical Risk —  Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, natural and environmental disasters, systemic market dislocations, public health crises, and related geopolitical events have led, and in the future may lead, to increased market volatility, which may disrupt U.S. and world economies and markets and may have significant adverse direct or indirect effects on the value of a Fund and its investments.

Market Turbulence Resulting from Covid-19 — The outbreak of Covid-19 has negatively affected the worldwide economy, individual countries, individual companies, and the market in general. The future impact of Covid-19 is currently unknown, and it may exacerbate other risks that apply to a Fund.