Still Not Ready
Advisors who want to help clients with these assets need some more education themselves. While there are investment opportunities here for clients, there is also significant counterparty risk at the custodians. Recent research shows advisors are still woefully unknowledgeable, and only a small group of them are prepared to answer questions about digital assets.
“The comment I always think of is that when the first Model T’s were being sold, people on horseback were afraid of them. Then cars slowly modernized, and now we have people in gas cars who are afraid of electric cars,” says Paul Lally, leader of the wealth and asset management group at Wipfli, a wealth and asset management services provider.
According to Lally, advisors still need to be able to answer a handful of key questions before adopting cryptocurrencies within their practice, and it goes beyond finding a place to educate themselves. They also need to solve the custody question and figure out how to charge on crypto, Lally says, especially as digital assets start to make up larger and larger allocations within client portfolios.
“How much should they allocate? Is it 1% of a portfolio, or greater than 1%? How do they translate the risks associated with crypto into an allocation?” he asks. “Beyond that, how do they get exposure and how do they buy crypto? All of that has to be answered before you figure out where to put it and how to charge on it. Right now, most advisors are just referring their clients to an exchange and sometimes to a self-custody solution, and they’re not charging on it at all. We should be building this into their AUM.”
Advisors also need to be careful about which cryptocurrencies and digital asset projects they work with or recommend to clients. While bitcoin and ether have been specifically named and identified as commodities under the jurisdiction of the Commodities Futures Trading Commission, other tokens may be considered securities that require registration, which could require a modified business plan, policies, procedures and due diligence related to investing in those tokens.
Lally believes these questions can only be answered when there’s more regulatory clarity.
Sometime Soon, Maybe
There might not be a long wait for that clarity, says Jamali.
“We expect additional regulatory clarity to come this fall,” he says. That’s when several federal agencies, ordered by the Biden administration, will complete a six-month coordinated review of cryptocurrencies and digital assets, leading to draft regulations or proposed legislation. “The first domino after there’s regulatory clarity is that a spot bitcoin ETF will be approved, and then we’re going to see a flood of other types of product structures on and off the blockchain.”
That flood will potentially include the eventual “tokenization” of traditional banking and investing products, says Grant. Like many others, he argues that cryptocurrency itself won’t be the defining element of digital assets—there are going to be other impacts in the way people make payments, finance and invest.
For example, in the world of banking, even a country with a robust, modern banking system like the U.S. still appears “old fashioned” when everything happens only on a 9-to-5 basis, only five days a week. “The digital world is 24-7, peer-to-peer and real-time,” says Grant. “That’s a major change of events in terms of what is going to happen in the core banking system, and to the people there is already a cultural change happening as we move away to a digital banking environment. If you want to think further into the future, one, two, five years, the advent of digital tech will radically transform the way treasurers hedge their cash and pay their bills. There is coming a time in the not-too-distant future where companies will finance not on a daily basis, but an hourly basis, because technology already supports hourly movements of money back and forth.”
Regulatory clarity may also lead to some consolidation in the digital assets space toward incumbent traditional finance firms, Richmond says. If one assumes that digital assets will eventually come to be regulated like traditional finance assets, then it makes sense that the companies that have had to navigate layers of regulation in the traditional finance world will be the best positioned to account for regulation in digital assets.