Key Takeaways
- • Limited partners—including pensions, endowments, and institutional investors—are imposing stricter compliance and security standards on crypto venture funds in response to market volatility and security risks, despite continued capital deployment into the sector.
- • Crypto and blockchain venture funds raised $35.9 billion globally in the first half of 2022, nearly double the $18 billion raised in all of 2021, demonstrating sustained institutional appetite despite a broader market downturn in digital assets.
- • LPs are now requiring crypto venture funds to implement enhanced audit functions and employ compliant custodians as baseline requirements for new fund commitments, addressing concerns about asset custody vulnerabilities and operational transparency.
- • Bitcoin and other publicly traded digital tokens have declined more than 50% year-to-date in 2022, yet venture capital deployment into blockchain, Web3, and crypto infrastructure startups continues across finance, digital goods, and software sectors.
- • Institutional investors remain cautiously bullish on crypto opportunities but are employing heightened due diligence and governance measures, reflecting a "more skittish" stance even as capital continues flowing into the ecosystem.
Summary
Institutional limited partners backing crypto venture funds are tightening operational and compliance requirements as a condition of capital commitments, according to reporting from the Wall Street Journal on August 29, 2022. Pensions, endowments, and other sophisticated institutional investors are imposing stricter standards around custody arrangements and audit functions to mitigate risks associated with the volatile and nascent crypto sector.
The shift toward enhanced governance reflects a bifurcated market dynamic: despite significant headwinds in public cryptocurrency markets—where bitcoin and other digital tokens have fallen more than 50% year-to-date—venture capital deployment into blockchain and Web3 startups remains robust. According to Dove Metrics, a unit of market-research firm Messari Inc., more than 150 crypto-focused funds globally raised $35.9 billion in the first half of 2022, nearly doubling the $18 billion raised across all of 2021. This capital continues flowing into a diversified range of startups spanning decentralized finance, digital goods, and software infrastructure.
Byron Dailey, chair of the private investment funds practice at Fenwick & West LLP, characterizes institutional LPs as simultaneously committed to blockchain opportunities and "more skittish about it"—a tension that is materializing in concrete operational demands. Volt Capital co-founder Soona Amhaz noted that LPs required the firm's recent fund to hire an independent auditor and utilize a compliant custodian, representing baseline governance requirements now expected from asset managers in the space.
The LP requirement for custodial and audit standards addresses a fundamental vulnerability in crypto venture investing: the susceptibility of digital asset holdings to operational and security breaches. By mandating third-party custody arrangements and regular audit functions, institutional investors are seeking to reduce counterparty risk and ensure transparent asset management practices—critical safeguards as capital commitments to the sector remain substantial despite near-term market turbulence.
The shift toward enhanced governance reflects a bifurcated market dynamic: despite significant headwinds in public cryptocurrency markets—where bitcoin and other digital tokens have fallen more than 50% year-to-date—venture capital deployment into blockchain and Web3 startups remains robust. According to Dove Metrics, a unit of market-research firm Messari Inc., more than 150 crypto-focused funds globally raised $35.9 billion in the first half of 2022, nearly doubling the $18 billion raised across all of 2021. This capital continues flowing into a diversified range of startups spanning decentralized finance, digital goods, and software infrastructure.
Byron Dailey, chair of the private investment funds practice at Fenwick & West LLP, characterizes institutional LPs as simultaneously committed to blockchain opportunities and "more skittish about it"—a tension that is materializing in concrete operational demands. Volt Capital co-founder Soona Amhaz noted that LPs required the firm's recent fund to hire an independent auditor and utilize a compliant custodian, representing baseline governance requirements now expected from asset managers in the space.
The LP requirement for custodial and audit standards addresses a fundamental vulnerability in crypto venture investing: the susceptibility of digital asset holdings to operational and security breaches. By mandating third-party custody arrangements and regular audit functions, institutional investors are seeking to reduce counterparty risk and ensure transparent asset management practices—critical safeguards as capital commitments to the sector remain substantial despite near-term market turbulence.
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