Wealth Managers Need to Take a Side on Crypto-currencies and Security Tokens

Crypto-currencies are already an established asset class in the wealth management industry. A number of adventurous wealth managers and private banks have developed crypto-currency brokerage and custody services for high net worth and ultra-high net worth clients. The decision in November 2020 by Ruffer Investment Management to invest £550 million in Bitcoin as a hedge against unstable monetary conditions marked a further step in the steady march to respectability of leading crypto-currencies. The interest of wealth managers in security tokens, an evolution of the blockchain network technology that underpins crypto-currencies, is now rising sharply. As with hedge funds, wealthier investors are the natural pioneers of innovative investment techniques. They also own illiquid assets, such as real estate, fine art and collectibles, whose value tokenisation can realise – without the owners necessarily losing the pleasure of use. Tokenisation is also well-adapted to investment with predictable cash flows and environmental, social and governance (ESG) credentials, such as renewable energy projects. Private banks and wealth managers can profit from tokenisation by structuring token issues, investing in tokenisation platforms and acting as brokers or lead brokers on them, providing safekeeping and custody services to holders of tokens, managing and administering token investment funds, and selling data for the development of indexed and derivative products. They can generate revenues in all these areas without having to take any principal risk. However, token investing is still at an early stage of its development, and many private banks and wealth managers are reluctant to engage with an asset class they continue to associate with the Dark Web, the ICO bubble of 2017-18, the DeFi bubble of today and the various defalcations that have taken place at crypto-currency exchanges. This Future of Finance webinar, the second in our series exploring the impact of technology on wealth management, will ask whether wealth managers risk missing an opportunity whose the time has come or losing their reputation and possibly their clients’ money as well.

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