GET CRYPTO-RICH OR DIE TRYING?

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By Elizabeth Adeoye and Ruohan Wang in London

Historically, society has made several major changes to how it perceives ‘currency’ – gold replaced bartering, paper money replaced gold, and today, some believe crypto assets, such as bitcoin, will replace paper money.

Each new type of currency aims to solve problems of the prior currency’s generation, and crypto assets are believed to be the answer to a more resilient and accountable global financial system because they promise to add trust and transparency to complex or sometimes misunderstood markets (read our previous article on this here).

Growing interest in, and wealth generated by this yet to be regulated asset therefore means that wealth managers need to decide whether they act now to take advantage of the opportunities being created by this asset, or to play it safe and wait…

Crypto assets are a new kind of payment system that enables people to make purchases and transactions with anonymity. However, in spite of the lucrative return rates and wealth creation generated (at its peak, one unit of bitcoin was estimated to be worth $19,386.80), crypto assets are yet to impress big Wall Street players because many still view them as an opaque, highly volatile and esoteric instruments.

It’s like going to the casinos. If you are lucky, you can certainly win a million dollars, but it’s pure luck,” says Kiran Ganesh, Head of Investment Advice Solutions at UBS Wealth Management. According to Mr. Ganesh, buying crypto assets such as bitcoins is more akin to a gamble than an investment: “You are betting on the fact that some people will have more confidence in bitcoins and will keep buying it.” But similar arguments could have been made against paper money and other assets, around which today we have built a consensus of value and trust.

Regardless of these teething trust issues, cryptocurrencies are surging in popularity – in the process creating fortunes and crypto-millionaires overnight. Interestingly, 58% of bitcoin buyers are aged under 35, an increasingly important demographic for wealth managers; and for many of them money is low on their list of motivations. Collectively, the crypto-movement has a more humble cause and belief in blockchain’s broader ability to solve important human problems such as economic freedom, privacy and individual empowerment.

Among these individuals is a 25 year old self-made crypto-millionaire Jeremy Gardner, who created his fortune when bitcoin, bought for him by a friend, exploded in value doubling his net worth. Since then, Gardner has immersed himself in the cryptocurrency world by launching his own market forecasting tool, Augur, which runs on blockchain technology; and co-founding the Blockchain Education Network (BEN), which is on a mission to promote technological literacy with decentralised technologies across the world.

Another example is Erik Finman who in 2012 (at the age of 12) repurposed a $1,000 gift from his grandmother for a university fund to buy 100 bitcoins at roughly $10 each. Several years later, after a dramatic escalation in price, he dropped out of school to trade cryptocurrencies, start a business and become a crypto-millionaire by the time he turned 18.

According to Finman: “Cryptocurrency represents the largest transfer of wealth our generation has ever seen.” “Never before have young people been able to change economic classes so quickly,” he says – adding that today he spends his time investing, travelling the world and working on a project with Nasa to launch a mini-satellite that will catalogue modern culture for future. “It’s definitely a 21st-century millennial, Generation Z kind of story.”

The fact that crypto assets remain a largely untested territory, with little to no existing regulation, is an unsettling issue for traditional wealth managers. G20 leaders however, are taking action to demystify their stance. The UK government, for example, is establishing a crypto assets ‘task force’ (which includes Her Majesty’s Treasury, The Bank of England and the Financial Conduct Authority) to explore the underlying technology’s potential, including how it can partner with organisations (such as Gardner’s BEN) to help the wider financial sector. Similarly, the European Securities and Markets Authority (ESMA) is reviewing the EU bloc’s regulatory framework towards crypto assets, in a bid to bring greater transparency and understanding across member states.

Such moves are translating into tangible proposition developments across the wealth space. Falcon Private Bank, for example, became the first Swiss private bank to offer bitcoin to their clients through an alliance with currency exchange Bitsuisse. The bank says it applies required due diligence to analyse the transaction history on the blockchain to ensure full compliance with anti-money laundering and know your client laws. Under the arrangement, approved by Switzerland’s regulatory body Finma, clients can exchange and hold bitcoins via Falcon using their cash holdings.

Similarly, deVere Group, a Swiss bank is citing soaring global demand for developing a cryptocurrency app to add to its product offering. This is the firm’s second major fintech offering in less than a year that will allow users to store, transfer and exchange five major crypto assets – and help it bank affluent younger clients.

The use and popularity of crypto assets is unlikely to abate any time soon but whether players in the wealth space mobilise to take first mover advantage is up for debate. The regulatory issues, while still a challenge, are actively being addressed by industry and policy makers alike. The underlying structural challenges, such as establishing a credible audit trail, are a little more difficult but not impossible to resolve.

With this in mind, the wealth managers need to recognise that while crypto assets are a relatively nascent development, the space is quickly evolving.  And with challenges come opportunities to differentiate, innovate, and attract new clients. Wealth managers therefore need to start thinking about their existing and future clients, and how to best address their potentially increasingly crypto-related needs.

 

News from the world of wealth:

UBS Wealth Management Reshuffle – Finews

The Rarefield World of Asia Private Banking, Where Women Rule – Bloomberg

Recruitment to regulation: What’s on wealth managers’ minds – Citywire

NY Wealth Manager to issue loans against Bitcoin – Coindesk

Thought of the week:

Without change there is no innovation, creativity, or incentive for improvement. Those who initiate change will have a better opportunity to manage the change that is inevitable.” – William Pollard

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