Survey says wealthy individuals are interested in digital assets and cryptocurrencies, but wealth managers don’t appear to offer much in the way of access. But are advisors wrong to act cautiously, given the volatility?
While wealth managers have feasted on the wonders of cryptocurrencies (like bitcoin) and digital assets like tokens in recent years, it appears much of the industry is not getting the message, a recent survey shows.
The question is whether corporate timidity is a concern or whether wealth managers have developed a healthy skepticism about this area.
According to a AvaloqAccording to an October survey, 86% of Brits who don’t own cryptocurrencies would get started if their traditional financial provider offered crypto asset services. The numbers are rising: Avaloq’s study of 3,000 high net worth individuals across six markets (Germany, Switzerland, UK, Hong Kong, Japan and Singapore) found that 29% of UK investors hold assets cryptographic, an increase. up from 22% in 2022. Germany saw similar increases, with the number of investors holding crypto assets increasing by six percentage points, from 34% in 2022 to 40% in 2023.
When asked about these figures, Avaloq found that of the 71% of UK investors who do not already own crypto assets, the main reasons for not doing so are concerns about volatility (35%), a lack of confidence in cryptocurrencies. exchanges (31 percent) and not knowing where to start (28 percent). It is quite possible that in the United States, for example, the figures show that the public is also interested in cryptos, creating a wealth management opportunity. A June 2022 report indicated that 46.5 million Americans who had never purchased cryptocurrency before said they would likely invest in crypto for the first time in 2023 (source: The Ascent, a Motley Fool service .)
So, given all this enthusiasm, why is the industry so timid? Well, the conviction a few days ago of Sam Bankman-Fried for a massive fraud that led to the collapse of his FTX exchange, as well as the implosion of some so-called “stablecoins” and the volatility of bitcoin and other entities, may have given wealth managers pause. Consider the UK case of peer-to-peer platform reconstructionsociety.com, which was blocked in October by the UK regulator from approving financial promotions for Binance and other crypto asset companies. Or let’s look at the case of Switzerland: the regulator wants to tighten regulations on the practice of “staking”, which could alienate certain players. “Staking” refers to the deposit of a certain amount of cryptocurrency to support the operation of a proof of stake – a consensus mechanism.) The European Union recently implemented regulations for the sector. There is no global regulatory consensus yet (which is perhaps not a bad thing) on what this market should look like. When it comes to the SEC in the United States, there still appears to be a lack of clarity.
It’s possible that wealth managers are hoping that these issues have already been resolved and are starting to lose patience. Cryptocurrencies and other entities have been around for over a decade. And yet these problems, coupled with a confusing patchwork of regulations across the world, remain.
This news service decided to ask Avaloq why there is a disconnect between the noise around digital assets and cryptos, on the one hand, and the lack – so far – of wealth offerings, on the one hand. ‘somewhere else.
“Wealth managers share the same concerns regarding crypto assets as other traditional financial market participants. These typically relate to the complexity of blockchain technology, regulatory compliance, business and operational risks and secure custody,” said Nils Bulling, Head of Strategic Innovation, Ecosystem and Digital Assets at Avaloq. “Additionally, given that we are still in a fairly early adoption phase, introducing digital assets may present a difficult business case in the short term. »
“This attitude is reinforced by the value proposition of wealth managers: they focus more on providing clear and reliable advice than on executing mandates. Here, training is of the utmost importance, both for clients and advisors. Right now, many companies are lagging behind in terms of crypto advisor certification and holistic expertise on this multi-faceted topic,” Bulling said.
The stakes are high for a wealth management industry that knows the risk of recession and inflationary pressures can hit margins, meaning it’s wise to seek new channels for clients. According to Statista, which forecasts that revenue in the digital assets market (covering entities such as tokens, smart contracts, etc.) is expected to reach over $56 billion this year, with revenue expected to achieve solid annual growth. composed of 16.2%. rate this year until 2027.
Setting up the infrastructure at wealth managers costs money.
“Offering digital asset services requires investment, either in internal digital asset infrastructure or in partnerships with crypto companies,” Bulling said. “While these may have advantages in terms of initial investment requirements, these outsourced solutions are generally less integrated and less automated. They also carry additional counterparty risk and involve ceding control of the company’s roadmap.
“Perhaps more importantly, sub-custody solutions do not fully leverage the company’s key value proposition: trust. All of this translates into a major challenge for wealth managers: when and how to start? Simply avoiding the topic is becoming an increasingly risky option as investor demand for digital assets is here to stay,” he added.
Bulling said education is an important starting point, meaning managers and advisors must be fully trained to offer digital assets. Managers must understand the different customer demands and the different instruments available to respond to these demands. Wealth managers can ease concerns about digital assets by engaging with regulatory consulting firms, Bulling said. (This, of course, will be a boon for these companies.)
Bulling believes that over time, acceptance of digital assets by wealth managers will increase based on investor demand and as clients demand secure access to new investments. To support this statement, Bulling gives the example of Ferrari’s recent announcement that it is now accepting crypto as payment for its luxury sports cars in the United States, with plans to expand the practice to Europe in due time.
There may be more that wealth managers will do to meet this demand, but given the ever-changing compliance concerns, I doubt there will be a rush. As I noted in passing in my editorial two weeks ago on the tense geopolitical situationbanks and other financial players will likely face even greater scrutiny over the use/abuse of cryptocurrencies and associated entities, and businesses won’t want to get it wrong.
Let’s also not forget that the price of bitcoin has been extraordinary – reaching $61,837 in October 2021, before falling last year as tech stocks were slammed by rising interest rates. He has since partially recovered. Regardless, bitcoin behaves more like a tech stock than a currency with inflation-protecting qualities comparable to gold. (Remember that much of the initial hype around bitcoin and other similar cryptocurrencies was that they were a sort of digital equivalent of “hard money.” How does that work?) Wealth managers can see the graphs for themselves, and perhaps they have concluded that they want longer calm behavior before getting more involved. I can’t say I’d blame them if that’s the case.
It is probably true that with greater awareness and a growing generation of younger, more tech-savvy wealthy clients and advisors, the wealth management menu will ensure that crypto/digital assets are not just a dish. accompaniment, but a main part of the meal. There is benefits of diversification, maybe. But given the shenanigans and struggles of recent years, it is perhaps understandable that, so far, there has been no rush.
