Investment strategies, ETFs, and sustainability — Interview with Kenneth Kumor

As financial markets transform, tokenized exchange-traded funds (ETFs) are set to become the next big thing in investment strategy. The recent approval of Ethereum ETFs by the United States Securities and Exchange Commission (SEC) and regulators in Hong Kong has made the news.

However, the real game-changer will be bringing ETFs onchain, according to Kenneth Kumor, as it opens up global access to blue-chip assets like S&P 500 index funds through existing blockchain infrastructure.

“We have already seen the successful debut of money market funds and short-dated financial instruments like U.S. Treasury bills by projects such as OpenEden, as well as a pilot for tokenized gold by HSBC, one of the world’s largest financial institutions,” Kenneth Kumor told Cointelegraph, adding:

“The European Central Bank (ECB) has cut interest rates by 25 basis points at its recent meeting, the first time since 2019. As interest rates decline, we anticipate a significant inflow of capital into ETFs, equities, and digital assets.”

Kenneth Kumor leads the product team at DLTPAY, focusing on payment systems and asset management while trying out new ideas and approaches to user experience in financial services. With close to a decade of experience at the intersection of finance and technology, Kenneth has acquired his expertise through roles at institutions such as central banks, and his work has been recognized by the European Commission, Mastercard, and the startup investor Techstars, which has a portfolio worth over $119 billion in cumulative market capitalization.

In this interview, Kenneth looks at the state of onchain ETFs, investing in digital assets, and how he sees the market’s future.

Cointelegraph: What are the recent trends and innovations shaping the ETF market?

Kenneth Kumor: One of the most profound innovations is the democratization of investment opportunities. This is already happening to some extent, with more retail investors participating in ETF investing through various fintech platforms.

Recent developments also reveal a clear trend toward the integration of ETFs and decentralized finance (DeFi) with the tokenization of ETFs and other securities on blockchain platforms. This innovation, combined with the possibility of automating strategies, such as dollar-cost averaging (DCA) or currency hedging using smart contracts, creates new opportunities for institutional and retail investors.

Additionally, the rise of thematic ETFs that focus on specific sectors or trends, such as technology, green energy, digital assets, and artificial intelligence, has captured the interest of retail investors. These investors, particularly from Gen Z and millennial groups, are increasingly looking for opportunities that align with their personal values and interests, and thematic ETFs provide a way to invest in these areas without needing to pick individual stocks.

CT: Can you explain what role ETFs play in modern investment strategies?

KK: ETFs are essential in modern investment strategies due to their low costs, ease of trading, and instant diversification. They support both passive and active approaches and can break down geographical, financial, and regulatory barriers, allowing a diverse group of investors to participate in global markets.

ETFs are excellent for managing risk, diversification, and achieving consistent long-term returns. Most investors are better off holding passively managed funds that track indexes with a history of producing annualized returns of 8-15%, such as the MSCI World Index, the S&P 500, or the Nasdaq 100.

Broad U.S. equity index funds $SPY, $VOO, and $QQQ attracted the majority of inflows from investors seeking value in the current ETF market, according to research by @MorningstarInc pic.twitter.com/Jad0aJVYx8

— Kenneth Kumor (@KennethKumor) June 11, 2024

Economic growth is uneven globally, so it makes sense for investors and policymakers in wealthier countries to seek exposure to high-growth assets. For example, Norway's $1.6 trillion sovereign wealth fund is heavily invested in innovative companies like Microsoft, Nvidia, and Tesla, which have driven significant market returns.

CT: Why is the financial industry exploring the possibility of moving regulated ETFs onto public blockchain technology?

KK: Tokenized ETFs on public blockchains like Ethereum offer reduced friction compared to traditional brokers and the benefits of decentralized finance, such as 24/7 order settlement through decentralized exchanges (DEXs) like Uniswap or 1inch.

Bringing ETFs onchain enhances liquidity, reduces trade settlement times, and broadens the pool of liquidity, aiding in price discovery and resource allocation. This logical evolution of ETFs can democratize investment opportunities, allowing a more diverse group of investors to participate in global markets.

By providing more investment opportunities, especially for underrepresented groups such as women in developing countries, tokenized ETFs can help lift millions from poverty and integrate individuals into the global economy in an unprecedented way.

CT: What role do you see stablecoins playing in the future of asset management, especially in the context of tokenized ETFs?

KK: Stablecoins are set to significantly impact asset management and tokenized ETFs by providing reliable and stable transaction and settlement methods. Circle’s USD Coin (USDC), backed 1:1 by the U.S. dollar, demonstrates this reliability and has gained credibility through various stress tests. PayPal’s launch of PayPal USD (PYUSD) further signals the mainstream adoption of stablecoins.

Having multiple reliable stablecoins ensures the liquidity and stability needed for successful tokenized ETFs. Circle’s introduction of Euro Coin (EURC) also indicates that more currencies will come into play, enhancing the versatility of stablecoins.

Stablecoins, managed by private sector entities like Circle and PayPal, can offer better and faster digital dollars compared to central banks, suggesting a limited adoption of central bank digital currencies (CBDCs) by major economies. The free market’s efficiency and innovation in currency issuance will likely drive the future of asset management.

CT: How does DLTPAY approach the challenge of balancing innovation in digital assets with regulatory compliance and security concerns?

KK: Regulation is crucial for keeping bad actors at bay and can drive industry growth by establishing clear guidelines. We’re excited about the upcoming Markets in Crypto-assets (MiCA) regulation in the EU, which will bring much-needed clarity and investor protection.

Currently, we’re seeing a new regulatory environment in Europe and broad access to technologies like low-fee layer-2 networks such as Coinbase's Base. This is set to become a key platform for institutions trading digital and real-world assets (RWAs).

We are likely to see the first onchain ETF product from one of the leading investment management firms, like BlackRock or VanEck, both of which have shown optimism about the space in the near future. This will bring top-shelf investment products to over a billion potential new customers through mobile non-custodial wallet applications. Those apps are quickly gaining popularity, especially in emerging markets with high levels of inflation where there is a demand to conduct business and hold savings in a stronger foreign currency like the U.S. dollar, euro, or British pound.

We're excited to join the growing list of applications now supporting @base — Coinbase's low-cost and builder-friendly Layer 2 network! pic.twitter.com/KzoZnwlYYA

— DLTPAY (@dltpay) February 20, 2024

At DLTPAY, we maintain a non-custodial core, ensuring users control their funds while we provide the front-end interface. If we offer custodial services, we will comply with regulatory standards by obtaining necessary licenses or partnering with licensed entities.

We've teamed up with Hedman Legal and BDO Estonia to ensure the highest level of compliance. DLTPAY currently features assets like USDC, EURC and PAX Gold, and we plan to add tokenized ETFs, stocks, bonds, and other RWAs in the future.

CT: How can tokenized ETFs contribute to sustainable initiatives like the transition to renewable energy?

KK: Tokenized ETFs focused on sustainability can redirect capital to high-impact initiatives such as renewable energy. Despite recent outflows, the transition to electric vehicles is crucial for reducing carbon emissions as mandated by the Paris Agreement.

To attract more investment in ESG ETFs, policymakers could offer tax incentives to offset lower short-term returns. ESG ETFs provide a unique opportunity for investors to support groundbreaking technologies like solar energy, CRISPR, and AI, which can address critical societal challenges and improve quality of life. Effective allocation of resources is key to achieving a greener and brighter future.