wealth distribution

Crypto Assets, Distributed Finance And Wealth Managers’ Menus

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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.

Asia and others
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 for listing security tokens on
regulated secondary markets. The report said that more than half
of the Swiss banks apparently plan to offer digital assets
services over the next few years. To take just one example of
what is going on, in late February, Swiss digital assets platform
SEBA Bank secured
a
regulatory green light
from Abu Dhabi. This also highlights
how Gulf jurisdictions, seeking to remain relevant beyond
hydrocarbons, are getting into the act. 

In the UK, as the country’s financial sector seeks new fields to
conquer after Brexit, digital assets are an important part of a
wider fintech story. TheCityUK – the umbrella body speaking for
much of the London financial sector – said that around 9.8
million people in the UK, equivalent to 19 per cent of the
population, owned crypto assets in 2021.

Turning to the US, the market size is expected to grow from $1.6
billion in 2021 to $2.2 billion by 2026, at a compound annual
growth rate of 7.1 per cent. It is certainly a good way for
California’s Silicon Valley, and other tech clusters such as
Boston or Austin to stay on the front foot.

The digital assets space is becoming more mainstream. A 2021
Goldman Sachs
survey found that nearly half the family offices it conducts
business with want to add digital currencies to their stable of
investments, with the closely held firms seeing crypto as a
possible hedge for higher inflation and prolonged low interest
rates. Almost half of respondents to
that Goldman Sachs report
said that they are thinking of
moving into digital assets such as bitcoin, although most are not
currently in this space. Their main reason for caution is that
they are sceptical of whether cryptocurrencies are a store of
value. (Goldman Sachs polled more than 150 family offices.)

Major institutions, including JP Morgan, Morgan Stanley, Julius
Baer, Guggenheim Partners, and others, are involved. SC Ventures,
Standard Chartered’s innovation and ventures unit,
partnered
with Northern Trust to launch Zodia, a
cryptocurrency custodian for institutional investors, which was
registered with the UK’s Financial Conduct Authority in July last
year.

Terms 
Let’s nail down some terms, such as non-fungible tokens (NFTs).
Unlike cryptocurrencies such as bitcoin, which are identical
units that can be exchanged and are therefore fungible, NFTs are
not interchangeable. Each NFT is a unique token on a blockchain
which stores information about provenance that can be traced back
to the original issuer; therefore it provides collectors with the
opportunity of building a digital collection. For this reason,
NFTs are popular in applications which require unique digital
items, including crypto art, digital collectables and online
gaming, where some guarantee of authenticity and ownership
history adds value.

The trading volume…

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