Blink and you might have overlooked it. Toward the end of last year, an unnamed UK pension fund took a significant step for the UK pensions sector by allocating 3% of its £50 million assets to Bitcoin. While this amount appears relatively modest, it could signal the beginning of a larger shift towards cryptocurrency investments, representing a bold—and arguably intricate—move for pension funds. Shifting to blockchain-based investments presents technical and market-practice challenges that cannot be resolved immediately. Pension funds have long been encumbered by outdated infrastructure focusing on conventional assets like UK gilts, rather than on Bitcoin. One key issue is that, at present, pension fund managers rely on brokerage firms and custodians in their day-to-day financial operations. These institutions often provide services that offer exposure to cryptocurrencies, like exchange-traded funds (ETFs) and derivatives. Nevertheless, some funds might seek direct exposure to blockchain assets to realize the benefits of disintermediation. A significant concern revolves around custody and the broader post-trading infrastructure. Managing private keys and custodial data, whether via third-party custodians or self-custody, introduces complexities that many pension funds are ill-equipped to handle. Unlike traditional custodianship, losing a private key could lead to unrecoverable financial losses, a risk that trustees are unlikely to accept. As new models develop, these infrastructure risks are expected to lessen, potentially paving the way for wider adoption. Pension funds operate under a heavily regulated framework, necessitating compliance with rigorous requirements for risk management, reporting, and fiduciary duties when shifting to digital assets. Inconsistent regulatory approaches across different jurisdictions can complicate matters further, hindering institutional investors from formulating a cohesive strategy.

Implementing standardized, globally recognized regulations will be crucial for encouraging broader participation of pension funds in digital assets. Security and resilience are further critical issues that require attention. The blockchain space has seen notable security breaches, including exchange hacks and smart contract vulnerabilities, which raise concerns for cautious institutional investors. Since pension funds are responsible for preserving long-term wealth, they cannot risk exposure to systems perceived as unstable. Custodians and infrastructure providers must assure that blockchain-based solutions can meet or exceed the security standards of traditional financial institutions. Liquidity is yet another vital consideration. Traditional pension fund investments generally prioritize stable, long-term growth, while many blockchain assets remain volatile and illiquid. Even tokenized versions of traditional assets need to demonstrate sustained liquidity and efficient settlement abilities. As secondary markets for digital assets mature and institutional trading volumes rise, liquidity issues are expected to improve, enhancing the feasibility of blockchain investments. Ultimately, unlocking the potential of blockchain for pension funds hinges on finding a balance between innovation and caution. The adoption of digital assets will be a gradual process, shaped by regulatory improvements and market infrastructure advancements. Pension funds must systematically assess their strategies, relying on reliable intermediaries and technological progress. For now, market infrastructure firms and custodians must deliver secure, compliant solutions to assist pension funds in incorporating digital assets into their existing portfolios. The opportunities are significant, but the transition requires careful and strategic navigation to bridge the divide between traditional and new infrastructure. Michele Curtoni is the Head of Strategy at Six Digital Exchange.