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Crypto Assets, Distributed Finance And Wealth Managers' Menus

Tom Burroughes

7 March 2022

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 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: 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 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.

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 of NFTs surpassed $13 billion last year, compared with $33 million in 2020 (Source: The Block Research). NFTs are proving a hit with younger wealthy individuals, a fact not lost on art galleries and creators. Arguably, where NFTs grab the interest of investors and commentators most is in the form of crypto art. A recent example includes musician Grimes selling $6 million worth of digital artworks via auction on Nifty Gateway, a marketplace which allows users to buy, sell, display and create a collection of "Nifties." One short video, ‘Death of the Old’ sold for nearly $390,000. However, most of the $6 million in sales came from two pieces – "Earth" and "Mars" – with almost 700 copies being sold.

A famous NFT sale was that of Beeple’s “First 5000 Days” artwork for £50 million at the first digital-only art auction by Christie’s in March 2021. Following the sale, Beeple is now one of most valuable living artists and has taken NFTs from a niche area of the crypto world, to a mainstream phenomenon.

The term “DEFI” applies to distributed finance. DEFI uses emerging technology to remove third parties in financial transactions. Components to remember are stablecoins, software, and hardware that enable the development of applications. “Smart contracts” are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements exist across the blockchain network. The code controls the execution, and transactions are trackable and irreversible. Another term used a great deal is “tokenization.” Crypto tokens are a type of cryptocurrency that represents an asset, such as a private equity investment, or publicly listed stock in a company. Tokens can be used for investment purposes, to store value, or to make purchases. 

Tokenization is often spoken about in the alternative assets space as a way to widen access to investors who aren’t ultra-wealthy or large institutions. Tokenization is an important trend and comes in two main forms – tokenization of established assets such as private equity or venture capital, and for “non-bankable assets” such as fine art, Avaloq’s Dr Bulling said. “Generally, banks talk about it but haven’t yet offered it , said. (The firm provides digital asset data, fundamentals, technicals and crypto research and analysis.)

“Bitcoin sits at the heart of exchanging value between machines, and I am certain that machines will exchange substantially more value ten years from now than they do today. Things are definitely looking up for bitcoin – governments are keen to embrace central bank digital currencies, not just in China, but seemingly everywhere,” he said. “Some for good, and others for bad. Both Russia and Ukraine are contemplating an increasing role for bitcoin in the official payments sector for completely different reasons. Russia wants to work around sanctions, whereas Ukraine wants to liberate its citizens. These should not be disregarded as isolated cases, because the world is becoming a more complex place. Even in Canada, where the truck drivers are expressing their legitimate right to protest, they are being denied access to the banking system. This demonstrates that law-abiding people should protect themselves from involuntary state sanctions,” Morris added.

A question remains about trust – that precious quality in finance. And to that end, an important priority for banks and wealth managers of all kinds is being able to safely store, exchange and validate the crypto assets they own or seek to acquire. That is going to require not just infrastructure, but clearly defined and enforced rules. 

(Editor's note: We continue to track how the crypto world influences wealth mangement, both as a business and what clients invest in, and are grateful for insights. Email