Written evidence submitted by the Alternative Investment Management Association

About AIMA

The Alternative Investment Management Association (AIMA) is the global representative of the alternative investment industry. Our fund manager members collectively manage more than US$2.5 trillion in hedge fund and private credit assets. AIMA works to grow the alternative investment industry to benefit the world’s economy, savers and investors. To achieve this, we strengthen the links between fund managers, investors, regulators and industry service providers. Our 32-year heritage means we understand our members’ priorities, who access our resources to grow their businesses, create lasting connections using our events and benefit from the effect our advocacy work has on the environment in which they must operate. Since our formation the industry has grown by 60 times. AIMA’s capacity to deliver local support across the globe has made us connected, knowledgeable and influential, and means our 2,100 members are now based in over 60 countries. We are committed to developing skills and education standards and are a co-founder of the Chartered Alternative Investment Analyst designation (CAIA)[1] – the first and only specialised educational standard for alternative investment specialists.

General Remarks on AIMA’s work on digital assets

As the global representative of the alternative investment industry, AIMA’s involvement with digital assets reflects the growing interest of our fund manager members in entering, or at least learning more about, this evolving asset class. An increasing number of AIMA member firms are currently considering, or are already active in, various digital asset markets or making use of products using Distributed Ledger Technology (DLT). These AIMA member firms include:

• crypto hedge funds employing alternative active strategies in digital assets;
• established alternative investment fund managers looking to diversify their existing portfolios through either active or passive investments in digital assets; and
• various other fund managers and platforms using technology to offer innovative services to investors, leveraging upon the potential benefits of DLT.

In 2017, AIMA set up a Digital Assets and Blockchain Group which went on to merge with another industry group to become the association’s Digital Assets Working Group (“AIMA DAWG”). The group had 14 members in its first year and has now grown to more than 330 members globally representing a cross-section of senior industry experts including fund managers, investors, custodians, exchanges, lawyers, consultants and other digital asset service providers.

AIMA DAWG is focused specifically on the intersection of digital assets and institutional buy-side asset management. The group is tasked with steering AIMA’s regulatory engagement, thought-leadership initiatives, education and operational guidance in the area of digital assets and the association has also set up digital asset sub-groups on regulation and tax, operational due diligence, and cybersecurity. AIMA is also setting up an exclusive fund manager digital assets advisory committee, as well as a new Asia-Pacific digital assets sub-group, in response to increasing demand from its members. This year we are hosting conferences in New York and Zürich for interested audiences across the legacy alternative investments and digital assets industries to focus on ‘the how’ of allocating to digital assets.

Through these industry group formations and events, AIMA seeks to create avenues for valuable peer-to-peer discussions and mutual learnings in a neutral environment to enhance understanding of the digital assets ecosystem as it develops and evolves.

AIMA DAWG has also been the driving force behind the publication of several insightful industry guides and research pieces that provide further operational guidance and transparency to the digital asset markets for institutional investors. These include a recent AIMA Industry Guide on Digital Asset Custody[2], and work has begun on a new AIMA Industry Guide on Digital Asset Trading and a due diligence questionnaire for digital asset investment strategies.

AIMA has twice contributed a chapter to the Annual Global Crypto Hedge Fund Report[3], which provides an overview of the global crypto hedge fund market and examines the extent to which ‘traditional’ hedge funds are entering the digital assets market. The latest report, published in June 2022, revealed that approximately one in three of hedge funds surveyed are currently investing in digital assets, compared to one in five when we surveyed last year. The average allocation to digital assets by these funds is 4%, a slight increase from 3% last year. Regulatory and tax uncertainty continues to be the greatest barrier to investing (cited by 83% of respondents). 45% of respondents stated that the removal of barriers would still probably not impact their current approach as either investing in digital assets remains outside their mandate or they would continue to remain sceptical.

The picture this data paints is one of the alternative investment industry cautiously exploring the digital assets market to identify ways to capture returns for their investors, while also respecting the fact the market has some way to go in terms of greater regulatory clarity and market infrastructure improvements. AIMA, for its part, will continue in its role to facilitate knowledge-sharing across the alternative investment industry and support our members involved with this new asset class.

Remarks on the regulatory environment for digital assets

AIMA fully supports the UK government’s objectives to promote innovation and remain a world-leader in financial technology (FinTech), while continuing to maintain the highest regulatory standards. We therefore read with interest the speech by the Economic Secretary to the Treasury setting out the UK’s vision for being a global hub for cryptoasset technology and investment.[4]

Digital assets and DLT are at the forefront of the minds of many policymakers, regulators and central banks globally seeking to better understand the benefits and risks of the assets and the opportunities presented by the technology. We should state that AIMA has not proposed a concrete definition of a “digital asset”, nor do we endorse any specific digital asset. We, nonetheless, welcome the development of any new investable assets that present opportunities for fund managers managing money on behalf of institutional investors to access new return drivers and risk premia, generate returns and manage risks on behalf of investors.

In 2018, AIMA produced a Position Paper[5] setting out the global alternative investment industry’s positions for policymakers, legislators and regulators in relation to the regulatory treatment of digital assets. It also elaborated upon AIMA’s position with regard to the operational opportunities presented by DLT. Some of the key points in the paper include:

• digital assets require similar regulatory questions to be asked to other assets;
• digital assets’ characteristics are driven by their purpose, underlying technology and coding;
• flexibility is vital for the regulation of digital assets to meet relevant regulatory objectives in as efficient a way as possible, sometimes using existing classifications;
• as a largely bearer asset stored in digital form, digital assets present unique safe-keeping and compliance requirements which are still evolving;
• all intermediaries and gatekeepers to digital assets markets should be subject to proportionate regulation, including fund managers and digital asset service providers;
• regulatory clarity is necessary on various issues, including custody and anti-money laundering controls to attract institutional service providers;
• the tokenisation of private assets through DLT could broaden access to capital markets financing for small to medium-sized businesses and create new opportunities for investment and risk management by institutional investment managers;
• DLT presents opportunities beyond digital assets and research and development into its potential uses in asset management and capital markets more broadly should be encouraged; and
• DLT has fostered global trade in digital assets, creating jurisdictional challenges when a single asset is traded or listed in multiple, non-harmonized regulatory regimes.

In 2021, AIMA subsequently responded to HM Treasury’s consultation and call for evidence[6] on the UK regulatory approach to cryptoassets and stablecoins. In the response, we note that digital assets should be viewed as an extension of existing financial and non-financial assets and be subject to similar overarching regulatory considerations, considering their purpose, characteristics and degree of fit within existing regulatory categories. We suggest that regulation impacting digital assets should be sufficiently flexible to allow for innovation and developments alongside that of underlying technologies. We also state that greater international coordination would help prevent regulatory arbitrage and maintain the integrity and stability of financial markets.

Specifically, in the submission, we highlight some key points:

• we believe that the UK should adopt a risk-based approach to cryptoassets regulation that prioritises bringing digital assets with increasing investment interest into the regulatory perimeter, to provide regulatory certainty to market participants and support institutional investment activity;
• we support an approach to cryptoassets regulation where independent regulators design and implement rules within a framework of objectives and broader principles are set by HM Treasury and the Parliament. However, as greater rule-making powers are granted to independent regulators, we believe that they should be subject to enhanced scrutiny requirements to ensure that appropriate accountability is provided when setting requirements;
• we encourage alignment with other jurisdictions and the priorities and principles of supranational entities in respect of cryptoassets regulation is important given the inherently international nature of digital assets and DLT. However, we believe that the UK should, at the same time, look to the nascency of the UK market and regulate accordingly to increase its competitiveness as a key location for digital asset management; and
• we believe that the adoption of DLT by FMIs could bring significant benefits to investors and market participants, through facilitating enhanced liquidity and increased efficiencies in trading, clearing and settlement for private listed securities, derivatives and real assets.

Remarks on tax issues related to digital assets

We have also established a Digital Assets Tax Working Group to discuss ways to enhance the competitiveness of tax systems to encourage further development of the digital asset market. In general, we believe that the UK should ensure that it promotes an approach to the taxation of transactions, capital gains and income derived from digital assets that aligns with OECD guidelines, particularly as regards value at acquisition, beneficial ownership and tax jurisdiction. We support the UK in playing a leading role in negotiations on the new OECD Crypto-Asset Reporting Framework, ensuring enhanced tax transparency and investor confidence in the sector, and enabling a level playing field in tax reporting globally.

Expanding the Investment Transactions List for the Investment Management Exemption

The Group has also for some time been raising with HM Revenue & Customs (HMRC) tax issues directly impacting our members such as amending the Investment Manager Exemption (IME) to remove disincentives to UK fund managers including cryptoassets in their portfolios. We were therefore pleased to respond to the recent HMRC consultation on the inclusion of cryptoassets in the Investment Transactions List (ITL) of asset types used for the purposes of the IME and certain fund tax regimes.

In our response, AIMA considers that extending the ITL for the purposes of the IME is important for the growing cryptoassets sector of the UK asset management industry and would be consistent with the current regulatory position. It would confirm to investment managers and the non-residents for whom they carry out transactions in relevant cryptoassets that profits (should they be considered to arise from being carried on as a trade) would not be assessed to income tax or corporation tax on the non-resident or on the investment manager as the agent of the non-resident. In the absence of this confirmation, this business will be gained by the asset management industry in other jurisdictions where the tax position is clear.

Taxation of Decentralised Finance (DeFi) involving the lending and staking of cryptoassets

We also responded to the recent HMRC call for evidence[7] concerning the taxation of individuals or other persons who may be subject to tax on chargeable gains arising from transactions involving the lending and staking of cryptoassets which are undertaken otherwise than in a trade within the charge to income tax or corporation tax.

AIMA members directly involved in such transactions as parties or as arrangers in the course of an asset management business would likely not be within the charge to tax with which the call for evidence is concerned. However, participants across the sector benefit from the contribution to market liquidity provided by the lending or staking activity. AIMA considers that it is important that the tax treatment to which some participants would be subject does not hinder this.

AIMA agrees with the analysis set out in the call for evidence and approves the objectives and principles identified by HMRC: (i) there should be tax neutrality between economically equivalent activities; (ii) the tax system ought to reflect the economic substance of the activity in question; (iii) the tax system should be efficient and perceived as fair and predictable; and (iv) the administrative burden required to comply with tax rules should be minimised.

We have examined the policy options set out in the call for evidence in the light of those principles and conclude that a separate but essentially identical regime would permit the tax treatment for lending and staking transactions to be modified as the market develops without having to consider any impact on repos and stock lending.

Final remarks

As outlined in the remarks above, we believe that the UK has the potential to become a global hub for cryptoasset technology and investment, and the Government has a critical role to play. We believe that as the global representative of the alternative investment industry, headquartered in London and with offices in 10 jurisdictions worldwide, AIMA can provide a crucial perspective on how to increase the UK’s competitiveness as a key location for digital asset management and investment. To that end, we would be pleased to propose a senior individual from the alternative investment industry or the association’s staff to give further feedback as part of the Committee’s inquiry.

September 2022

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