How should the fiduciary sector forge a relationship with digital assets? This guest piece from the management at Guernsey-based Oak Group examines the risks and rewards of cryptocurrencies in wider use.

In the following commentary, Christian Cowley (pictured), operations director at Oak Group, suggests where the stars need to align for digital assets to become a trusted fixture of the well-regulated fiduciary sector. The offshore services and fund administrator, based in Guernsey, manages around £20 billion ($27.9 billion) for clients in the Channel Islands, the Isle of Man, Luxembourg, Malta and Mauritius. The editors of this news service are pleased to share these views, where the usual editorial disclaimers apply. For readers who want to add comments, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Just over a year ago the value of bitcoin had dropped sharply, but since March 2020 the digital asset began to rise and during the past 12 months it has surged more than 10-fold, pushing over $64,000 before weakening over the past few days.

During this time, Elon Musk’s electric car company Tesla bought $1.5 billion in bitcoin and announced it would start accepting BTC within sales. Even more recently, a bizarre art event saw a digital-only piece bought for a whopping $69.3 million by a cryptocurrency entrepreneur.

Whether you are a sceptic of digital assets – and there are certainly plenty of those – or a budding investor, cryptocurrency continues to dominate the headlines. It is a vision that the world simply can’t look away from. With this in mind, it seems almost inevitable that the fiduciary sector will at some point have to adapt to the world of cryptocurrency in order to attract future clients and maintain current relationships.

What could the relationship between the fiduciary sector and crypto look like?
What is impossible to ignore, is the knowledge that institutions are increasingly taking an interest in incorporating cryptocurrency onto their platforms. Mastercard, for example, recently acknowledged the influence of digital assets by bringing crypto onto their network. What’s more, at the start of 2021, asset manager BlackRock also set about opening two funds to potential bitcoin contracts, meaning that there is certainly interest from within their client circle about crypto trading.

While crypto appears to somewhat encompass a "lone trader" mentality, growing interest in the sector can be seen as beneficial for the fiduciary sector. Should traditional clients choose to enter into crypto trading, there is a need for us to be ready. What’s more important, is the ability to draw in a new generation of clients and future wealth and for these investors to see a benefit in what we can bring to the table.

There are, of course, benefits that the fiduciary sector can easily consider from forging a closer relationship with digital assets. Crypto is multi-currency which will be seen as a plus for the multi-jurisdictional nature of the sector and our clients. In addition, cryptocurrencies enable faster transactions and are not restricted by bank fees and authorisations – so far.

The next steps?
While there is a buzz around crypto, earlier this month the European Securities and Markets Authority (ESMA) issued a reminder that crypto-assets are ‘highly risky and speculative.’ For the fiduciary sector, there still remains little in the way of identification when it comes to crypto traders because of the anonymised and aggregate nature of digital currencies. So the need to satisfy our compliance around, for example, the source of wealth is still a red flag. While compliance sounds tricky, the open-source nature of cryptocurrency paper trails also means that there is potential for the development of new frameworks that are specifically designed and geared for digital assets.

Another question centres on the valuation of services – and the margins that we might have to pay – in a volatile market that could easily lose value. While the implementation of future regulatory oversight might then allow us to iron out some of these red flags, this may also lead to higher costs.  

It’s also not unknown for digital asset exchanges to face technical glitches which sometimes mean that pricing cryptocurrencies might not even be available. The risk involved with these types of  investments, fuelled by concerns about market fraud, cannot be ignored.

Is crypto here to stay?
There is no doubt that digital funds are part of an evolving sector that, to a great extent, is hard to evaluate. Some analysts are anticipating another, more severe, crash and that isn’t entirely unreasonable. However, it is unrealistic to imagine that crypto will fade completely. In the meantime, there will need to be substantial work carried out  to configure how to legitimately transact using digital assets within the well-regulated fiduciary sector.

In order to attract a new type of client, we need to invest in this as a sector and start to embrace new ways to accept and make payments which may initially make us uncomfortable. Provided we have the right controls in place to ensure we fulfil our regulatory requirements, we should be ready to go.

What is Oak doing about crypto?
When we have the necessary confidence in a regulatory framework, which is currently unclear and are comfortable with the potential fraud and compliance risks as well as its volatility, we would expect to include crypto as a medium of exchange. It should allow us the ability to transact for and on behalf of our clients without some of the barriers currently put in place by the banking sector. Currency differences and the occasional arbitrary approach of the mainstream banks in their treatment of different jurisdictions, will no longer be relevant. Transactions are affected immediately and so-called “banking hours” will be consigned to the history books.