As investors scramble to assess the fallout from the bankruptcy of cryptocurrency exchange FTX and the general price collapse of bitcoin and other digital currencies, a public pension fund is standing by its hefty commitment to crypto-related holdings.
The Fairfax County Police Officers Retirement System, a defined-benefit pension plan covering law-enforcement officers in the sprawling northern Virginia county, has over 7% of assets invested in crypto-related holdings, according to a person familiar with the fund, spread across venture capital and hedge fund holdings as well as “yield farming” through funds that provide short-term loans to crypto-related firms.
“I’ve been really happy about how we’ve thought about it and how we’ve approached” crypto-related investments, Katherine Molnar, the fund’s chief investment officer, said during a panel discussion hosted by blockchain advocacy group Chamber of Digital Commerce just a few days after FTX filed for bankruptcy.
As for the FTX debacle, “the washing out of weak players or potentially inappropriate actors–while causing volatility and is admittedly stressful–is ultimately a healthy thing,” Molnar wrote in a mid-November email, reviewed by MarketWatch, to a consultant who had inquired about the pension fund’s crypto exposure. “Our underlying investment thesis–that the innovation around blockchain technology is a high growth area going forward–has not changed,” Molnar wrote.
Molnar oversees a fund that managed $1.8 billion in assets for the benefit of more than 2,700 active and retired participants in the middle of 2021, according to the fund’s most recent annual report. It had no direct exposure to FTX, Molnar wrote in the email, outside of market volatility.
Some investment professionals and regulatory compliance experts are less sanguine about the idea of public pensions delving into the crypto ecosystem. John Reed Stark, the consultant who questioned Molnar about the Fairfax police pension’s crypto-related holdings, is a crypto critic and former head of the Securities and Exchange Commission’s Office of Internet Enforcement. “To me, this is perhaps the most reckless investment” made by a public fund in decades, Stark wrote in a LinkedIn post after his email exchange with Molnar. “The contagion of FTX has only begun to spread,” Stark told MarketWatch. His interpretation of Molnar’s position, he said, is that “you’re standing inside a burning building and thinking everything’s going to be okay.”
Concerns about digital-asset contagion climbed Monday as crypto lender BlockFi filed for bankruptcy protection. Bitcoin
the most widely traded digital currency, has plunged more than 70% from its all-time high a year ago.
In addition to the Fairfax police fund, other public pension funds have invested in crypto-related holdings, although their allocations are generally small. A sister fund of the Fairfax police pension fund, Fairfax County Employees Retirement System, holds similar crypto-related investments. The Houston Firefighters’ Relief and Retirement Fund, meanwhile, announced late last year that it was investing in bitcoin and ether.
Defined benefit pensions “are too critically important to the participants to use precious resources to engage in these risky strategies,” Russell Kamp, managing director at investment management firm Ryan ALM, told MarketWatch. “We need to get back to basics and focus on the promise” that has been made to participants in these plans, he said.
Like the police pension fund, the Fairfax County Employees fund has no direct exposure to FTX, chief investment officer Andrew Spellar said at the Chamber of Digital Commerce event. “We understand it’s controversial,” he said, adding that recent events “don’t help, obviously. But it doesn’t change the underlying investment thesis for us.” The Houston fund did not respond to requests for comment.
Earlier this year, the U.S. Department of Labor warned that 401(k) plans should “exercise extreme care” before considering adding cryptocurrency options to their investment menus. Public pension plans, however, are largely regulated under state and local laws.
The crypto upheaval’s impact on public pension funds may not be fully known for some time, experts say, because the funds often invest through private vehicles with holdings that are difficult to value.
The Fairfax police pension fund first got involved in crypto-related investments about 4.5 years ago, Molnar said at the Chamber of Digital Commerce event,noting that the pension system is underfundedand seemed unlikely to hit its return targets in traditional stocks and bonds.Some trustees were skeptical of the move, she said. “I manage money for police officers, and there were definitely concerns about ‘is this money laundering?’” she said, adding that the vote to approve the investment “wasn’t unanimous.”But the fund’s thesis is based primarily on the long-term promise of blockchain technology, she said, adding that over time, “virtually everything will be digitized,” from bonds and mortgages to drivers’ licenses and medical records.
The fund’s target weighting for digital assets is 4.75%, but the allocation has grown to over 7% because of strong early performance, according to the person familiar with the fund. “Undoubtedly there will be ripple effects” from FTX, this person said, but the collapse may also speed up regulation in the area, which would ultimately be positive for the industry.
The fund has made nine crypto-related investments so far and has had to assess some red flags along the way, Molnar said during the panel discussion. “The whole ecosystem is new,” she said. “The auditor of a fund you’re looking at–you may have never heard of that auditor before.” In any other area, she said,“you probably wouldn’t invest with a manager who had an auditor that you’d never heard of before.” She added, “We all need to be open-minded.”