After a severe bout of volatility and a string of several spectacular failures in crypto earlier this year, some voices of the traditional financial industry were quick to pronounce these assets dead—but people in the crypto and blockchain business say advisor interest in digital assets is higher than ever.

“Every time a drawdown occurs, we see the demand for education increase, and in crypto every time it exposes a lack of supply in quality education and information,” says Jahon Jamali, co-founder of Sarson Funds, a crypto asset manager and education provider for financial advisors.

Despite prominent naysayers like economist Nassim Taleb and legendary investor Warren Buffett, cryptocurrencies may already have a strong foothold.

For example, they are already being used to provide essential services to underserved and non-banked communities, says Ben Richmond, founder of CUBE, an AI-powered regulation and compliance research firm. “Crypto in and of itself is becoming something that is not yet systemic but is very important within mainstream financial markets as well,” Richmond says. “As the space matures, we are seeing the rises and the falls, the good and the bad in that world.”

Rough Times
Over the past six months, there have been more falls than rises, more bad than good. In May, Terra, a stablecoin associated with the Luna cryptocurrency, failed, causing a $60 billion washout. In subsequent weeks, crypto hedge fund Three Arrows Capital collapsed, causing Celsius Network, a crypto lender, and Voyager Digital, a crypto exchange, to collapse.

“That’s part of what got us into the 2008 financial crisis—who could have ever thought that all of those things could have gone wrong? Everyone was doing it, everyone was assuring each other that they were solvent,” says James Niosi, CEO of InvestDEFY, a Canadian firm specializing in digital asset structured products. “The same thing is happening in crypto.”

Not only did the headlines cosmetically look like the early stages of a potential financial crisis, Niosi says, but a lot of investors were left holding the bag as these projects failed.

But instead of causing a flood of people exiting the digital assets space, the turmoil may simply have led investors to different crypto intermediaries instead. While cryptocurrency was first adopted by self-directed investors who often distrusted traditional finance, its recent performance has brought in a broader swath of the public, and newcomers are seeking out regulated solutions to accessing digital assets, says Gene Grant, CEO of LevelField Financial.

“People are already asking about how to integrate digital assets into their portfolio,” he says. “Regardless of their wealth stature, people want to get involved. Right now, large firms are not providing the ability for wealth managers to provide that advice that clients desperately want.”

LevelField is seeking to become a comprehensive financial services firm encompassing digital asset services as well as traditional finance. The company is in the process of acquiring a full-service chartered bank. It already owns a small investment bank and broker-dealer, and it will spin off a wealth management firm and RIA in the near future.

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.