New investment considerations
Opportunities have also arisen to trade crypto securities on a peer-to-peer basis rather than through exchanges such as Coinbase, Kraken or Binance. “There are still centralized crypto exchanges because of the need for coin custody,” Rinaldi points out. However, he suggests “DeFi will work around this and still allow excellent coin custody as a separate function.”
Another lure for those becoming comfortable in the digital space is gaining founder level access to Initial Coin Offerings (ICOs). These virtual offerings grant investors a stake in companies issuing new cryptocurrencies and the prospect of matching other lucrative coin offerings such as Ripple or Tether. “This is where families can really come into their own and where DeFi represents venture capital at its best,” Rinaldi suggested. “As most crypto companies are registered LLCs or C corps, a family would invest in these vehicles just as they would a normal private securities investment.”
Regulation of digital assets
US regulation of cryptocurrencies is well underway for family offices dipping their toes in or looking to increase exposure. The market sense is that the SEC is trying to put these new digital asset classes into existing boxes, such as IPO issuances, private placements, brokers/dealers, investment managers, banks and lenders,” Rinaldi said of current Fed thinking, and their desire to put a lid on the exuberance and stay in control.
More concerning for family offices deepening allocations is whether lawmakers will regulate the bigger family offices in the wake of the Archegos fallout. Rinaldi believes they will.
Is a US dollar coin on Its way?
Developing a digital equivalent of the US dollar should allow the Federal Reserve to replace physical currency and improve the transparency and control of central accounting, and potentially introduce taxation at source, with implications for everyone.
The upside for investors is that fungibility and liquidity alongside fractionalized ownership should improve their ability to exchange assets and make them more liquid and available.
"Equally, family offices, known for their patient capitalism, should have a smoother ride holding valuable illiquid assets on longer time horizons. Direct investment holdings are also on course to be digitized and therefore easier to exchange,” Rinaldi said.
Valuation and reporting of digital assets
Investors can still apply classic valuation techniques to determine the value of digital assets, Rinaldi points out. Market supply and demand dynamics still largely determine the price of bitcoin and other cryptocurrencies, for example, and scarcity, value and global macroeconomics will continue to play their part.
The overall message for the family office is that while digital assets do present compelling use cases, investors will have to update their thinking – and technological capabilities – just as rapidly as they are changing their asset allocation strategies.
About PKF O’Connor Davies Family Office
PKF O’Connor Davies Family Office, a division of PKF O’Connor Davies LLP (PKFOD), has one of the most unique offerings in the industry, specifically meeting the needs of Ultra High Net Worth families and family offices. We are recognized as a modern multi-family office alternative to the traditional MFO models and our innovative, multi-disciplinary team approach leverages the full resources of PKFOD and PKF International, delivering integrated, objective, conflict-free advice and the broadest set of services.
For any questions, please contact Marc Rinaldi, CPA, Partner at firstname.lastname@example.org.