Fintech on Friday: Should wealth managers cash in on crypto currency craze?

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

Each new type of currency aims to solve the 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. 

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

Crypto assets are a new kind of payment system which 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,” says Kiran Ganesh, head of Investment Advice Solutions at UBS Wealth Management. “If you are lucky, you can certainly win a million dollars, but it’s pure luck.” 

Regardless of these teething trust issues, crypto currencies are surging in popularity – in the process creating fortunes and crypto-millionaires overnight. Interestingly, 58 per cent of bitcoin buyers are aged under 35, an increasingly important demographic for wealth managers.

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. 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 crypto currencies, start a business and become a crypto-millionaire by the time he turned 18. 

 “Cryptocurrency represents the largest transfer of wealth our generation has ever seen,” says Mr Finman. “Never before have young people been able to change economic classes so quickly.” 

The fact 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’ to explore the underlying technology’s potential. Similarly, the European Securities and Markets Authority is reviewing the EU bloc’s regulatory framework towards crypto assets.

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, Swiss bank deVere Group is citing soaring global demand for developing a crypto currency app to add to its product offering. This is the firm’s second major fintech offering in less than a year, one which 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 policymakers 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, 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.  

Elizabeth Adeoye  is an analyst and Ruohan Wang  a senior analyst at wealth management think-tank Scorpio Partnership