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Unfurling The Crypto Portfolio: Are Wealth Managers Ready?

Jonathan David

16 August 2019

As the disruptive crypto market begins to mature and blockchain in particular opens up avenues for banks and wealth managers, many are still grasping what these new technologies, processes and providers have to offer. Optimistic that the market is evolving and gaining acceptance, Jonathan David, UK managing director for Swiss-owned financial services group looks at the sector wholesale, including where managers can outsource or fully integrate crypto-asset services into their planning tool box. While the asset class has its detractors, David suggests that there is too much upside at this point for managers to sit on the sidelines. As ever, the editors of this publication are pleased to receive, but do not necessarily endorse comments, and invite readers to respond. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com.

The volatility and complexity of crypto assets has led many institutions and investors to be wary of them. But the crypto sector has matured significantly and many stakeholders - even the sceptics – have begun to look at ways to securely offer clients cryptocurrency management services. They expect solutions that will allow them not only to hold, invest in and manage crypto portfolios, but also integrate these seamlessly into traditional platforms offering fund and share dealing and mainstream wealth management services.

The rapid maturation of the crypto market is creating an opportunity that banks and wealth managers can optimise if they can grasp it quickly. Offering crypto-key management services is therefore becoming important for many banks and wealth managers. However, although crypto’s disruptive influence presents opportunities, many banks and wealth managers struggle to navigate this new market, which is quickly bringing together new technologies, processes and players.

Grasping opportunity
For banks and wealth managers, investing in crypto provides an opportunity to offset investor risk by providing the trusted key management function and critically maintaining control over clients’ assets and cash flows. The risk for a bank or wealth manager of being disintermediated is high if customer keys are not under their control.  

Quarterly Bitcoin exchange volume (1)

 

(Despite traded volumes not reaching the levels achieved during the rally of late 2017, they have increased significantly versus those in early 2017. As seen above, interest in cryptocurrencies remains high.)

It is increasingly acknowledged that crypto assets have the potential to provide an anti-inflationary store of value whilst having serious growth potential, and they offer diversification benefits.

Consequently, it is no surprise that some analysts are viewing the crypto-bubble explosion as a sign of growing maturity rather than its decline. Research amongst institutional investors in this area anticipates that digital assets will be regularly traded and invested in by 2021. A further 28 per cent believe that this will happen in four- or five-years’ time, and 21 per cent anticipate it happening between six and ten years’ time. (2)

There is always the possibility of sitting back and monitoring this new business area to see how it develops before investing resources. However, such reticence may result in missing current opportunities as blockchain technologies grow rapidly. For cryptos, the advancement of blockchain has been a strong propelling force. Once these technologies become mainstream, catching up with the market will be a difficult task.

One way for banks and wealth managers to seize the opportunity, ensure a competitive edge and maintain client relationships, is to outsource parts of the crypto value chain to specialised providers. Sourcing such a product from an asset manager or a hedge fund and offering it to customers is an easy way to enter the crypto market, while avoiding much of the burden.

Another alternative is to provide access to direct crypto investing through third-party custodians and trading venues. Crypto-custodians provide services for so-called “cold” wallets that hold the assets securely off-line. Combined with brokers trading on multiple crypto exchanges, clients can also benefit from improved market liquidity across these OTC crypto-markets.

A third option now exists of integrating the whole crypto asset process and becoming the custodian of digital assets for clients. By taking up this option, the value that incumbent banks and wealth managers could bring is to provide a seamless integration of crypto assets within the full investment process for their clients. Crypto assets should be made available like any other asset within the client’s investment portfolio. The option to invest and trade in crypto should be provided through their web and mobile apps like any other traded asset. The reporting of positions, performance and risk should also be comprehensive, and analysed within the context of the client’s complete investment portfolio.

With blockchain’s potential to reshuffle the industry cards, some traditional players will no longer remain in their positions. In particular, settlements should become much easier as blockchain acts as an asset repository used by every actor along the value chain.

Our approach is to focus on unifying all positions under one umbrella and ensuring state of the art security within one industrial process, which is crucial. The goal is to leverage the existing setup banks or wealth managers have in place to provide crypto investment opportunities for their clients. Instead of creating a separate offering, the whole banking platform must become crypto aware and all existing processes adjusted accordingly so that banks or wealth managers can benefit from the new asset class.

Security is another essential issue we aim to tackle as banks and wealth managers cannot compromise on this and cannot afford to lose control of their private keys or their clients’ private keys. At the same time, banks need a solution that ensures assets are easily accessible. Banks cannot afford to manually sign each transaction. This is where the ability to support an industrial and automated process securely is essential.

By taking full advantage of the opportunities in this market, banks and wealth managers can combine the strength of their traditional investment offering, with the benefits of the crypto asset world. In doing so, they will have to compete head-to-head with many pure-play crypto firms but will ultimately bring greater value to their clients.

 1. Coindesk, 2018, State of blockchain: Bitcoin Exchange Volume
 2.  The views of institutional investors from around the world who were interviewed by the market research company PollRight during December 2018 and January 2019.