Family offices, private banks and wealth managers are considering using the infrastructure of digital assets to run their businesses, or investing in them to make money.
It is hard to avoid the world of cryptocurrencies and other digital assets today. The air is abuzz with talk about bitcoin, smart contracts, non-fungible tokens, tokenisation and decentralised finance. And wealth management as an industry, and as a guardian of client wealth, is being affected by all of these areas in a variety of ways.
Family offices, private banks and wealth managers are considering using the infrastructure of digital assets to run their businesses, or investing in them to make money. Turmoil in established monetary systems – most dramatically with Western powers’ removal of Russia from the SWIFT banking network – puts alternative financial systems under a new, not always comfortable, spotlight. A focus on know-your-client (KYC) background checks and a need for greater compliance rigour, means that the audit trail which peer-to-peer networks are supposed to have has considerable potential. Beyond all this, there’s the hoped-for speed and efficiency of P2P platforms such as blockchain in a world where back-office reconciliation and settlement can still take days.
A nagging question, however, is whether some of these new tech areas are “solutions in search of a problem”. Other matters often hinge on how liberal or restrictive national regulators are. Switzerland and Singapore, both important wealth hubs, appear on the more open side, while the UK and the US are somewhere in the middle, and mainland China appears highly restrictive, banning the “mining” of bitcoin. (China went from controlling up to two-thirds of all bitcoin mining in the world in April to not contributing to the industry at all as of July 2021, according to data compiled by the University of Cambridge’s Centre for Alternative Finance.)
Overall, however, the tone is one of enthusiasm, tempered with a few question marks.
“In the last six months there has been increasing [wealth industry] interest in cryptos. For example people ask about NFTs, tokenisation and how they can offer digital assets to clients,” Dr Nils Bulling, head of strategic innovation and ecosystem at Avaloq , told this publication. Dr Bulling said conversations about the impact of this category of tech started about three or four years ago. “In the last six months there has been increasing [wealth industry] interest in cryptos. For example people ask about NFTs, tokenisation and how they can offer digital assets to clients.”
There is little doubt that the wealth sector is showing lots of interest in the space. A survey of family offices around the world by BNY Mellon Wealth Management , published last week, found that 77 per cent of them have some interest or involvement in cryptocurrencies. Knight Frank , in its annual wealth report, also published last week, noted that 60 per cent of respondents to its survey cited blockchain technology as an increasing opportunity. It found that clients ask for 1 to 5 per cent of their portfolios to be in cryptos. The report’s authors noted that “we are seeing a shift within the banking industry to accepting and managing crypto assets, allowing them to be used as collateral and converting crypto into fiat. It is not a widely marketed service, but banks recognise that the younger generation is going to be using crypto as a currency.”
And there, perhaps, is the key to wealth managers’ thinking. Whatever the scepticism may be among ageing Boomers and some of the Gen X client cohorts, firms need to attract younger clients who appear to accept these new technologies as normal and even exciting. To stay relevant, cryptos have to be on the menu.
It is arguable that one way in which Asia is now setting the pace for innovation – once held by Silicon Valley – is in cryptos. A study by KPMG said that investment in the cryptocurrency and blockchain sector in Singapore jumped more than 10 times in 2021 to a record, with 82 deals worth a combined $1.48 billion, rising from $110 million in 2020 (source: Bloomberg , 7 February, 2022). In Switzerland, the “crypto valley” of Zug is a European powerhouse, as the author was reminded during last week’s visit to Zurich for the annual WealthBriefing External Asset Management awards event.
There were about 1,128 blockchain companies in Switzerland and the neighbouring principality of Liechtenstein at the end of last year (up by 18 per cent (source: swissinfo.ch ). The Swiss government implemented the legal basis for distributed ledger technology in 2021 and […]
source Crypto Assets, Distributed Finance And Wealth Managers’ Menus
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