As we continue to explore how digital assets such as bitcoin and blockchain will affect and shape wealth management, banking and wider finance, we have a conversation with EY.

If digital assets really are to become a wealth manager’s darling and attract far more investment, establishing high levels of trust will be essential, EY, the global consultancy and accountancy firm, says.

Entities such as bitcoin, non-fungible tokens, tokens and distributed ledger technology affect the wealth sector in various ways, as illustrated here. A word that keeps coming up in conversations about it is trust. If confidence in provenance and whereabouts of cryptos is weak, it hits growth potential. 

“There is a considerable question mark about trust in this space,” Mark Wightman, Asia-Pacific wealth and asset management consulting leader at EY, told this news service. He referred to losses that some investors have sustained, worries about hacking attacks, loss of crypto keys, and other issues affecting particularly unregulated assets like NFTs. “The challenge is when something goes wrong here, who picks up the can?” he said.

One way that firms are trying to build trust is through audits with Big Four accounting firms and through service organisation control (SOC) reports that are issued by independent third parties, Wightman continued. 

Lurid media stories can spread alarm. For example, a report in the New York Times last year noted how Stefan Thomas, a German-born programmer living in San Francisco, had two guesses left to figure out a password for digital assets worth – about $220 million as of the time of going to press last January. A story in the BBC last August said that hackers stole $600 million. It is unlikely to be the last such move. 

“The trust element is critical and it’s where we’re spending quite a lot of our time with clients in the space,” Wightman said.

And even aside from losing a crypto key or falling victim to thieving, there are concerns about hype in some areas, such as non-fungible tokens, or lack of discipline and understanding of this fast-moving area. Handled wisely, however, there is potential for the wealth management sector to tap into these areas profitably, Wightman said. 

“We now have far more institutional players [in the digital assets space]…not just service providers, but exchanges and technology providers, many of them have market caps of hundreds of millions, if not billions of dollars. We have seen a dramatic change and increasing interest in the whole token ecosystem,” he said.

A variety of banks are offering custody and related services, all hopefully adding to confidence. Examples include Switzerland’s Vontobel, which in early 2019 offered financial intermediaries such as banks, asset and wealth managers a custody solution for crypto-assets – its Digital Asset Vault. DBS Digital Custody, part of Singapore-based DBS, offers an institutional-grade solution for safekeeping digital assets. In the US, US Bank has a custody service for bitcoin. (In July 2020, the US Office of the Comptroller of the Currency (OCC) announced that it would let all chartered banks in the USA custody digital assets.)

The rise of tokens – giving users the ability to hold underlying assets in certain ways – is an important growth area. 

Regulators are trying to find means of building confidence in the sector, Wightman said. Singapore has issued guidelines for “payment tokens” and implemented different rules to regulate parts of the industry. Some 180 companies applied for licences to operate crypto-related business in the country, though recently Singapore has tightened rules for advertising to retail investors.

All aboard the blockchain?
This publication asked Wightman if distributed ledger technology, most commonly called blockchain, will be used by wealth managers and others to handle middle and back-office functions, exchange information in new and faster ways, and solve other bugs associated with current technology. Wightman, while not dismissive, said that banks need to ask what the real need for blockchain is, or if there is a need for it at all. “It is still pretty nascent,” he said. “In wealth management, it is hard to say there’s a killer solution [for blockchain] at the moment.”

Quite how all these digital assets and related technologies will influence wealth management in future is not easy to tell, but that there will be some effect is undeniable. Again, a great deal depends on establishing trust and confidence in the system, Wightman said. 

“There is demand, [for digital assets] therefore we’re seeing more supply being made available. You have got to be clear [about] whom you are working with, which goes back to the trust element. If I’m working with a service provider, I really want to know that they’ve got the cyber protection in place, they’ve got the controls, they’ve got the governance, are regulated etc,” he added.