By David Wood, managing director of Luma’s International Business
Crypto as an asset class has been thrust into the spotlight over the last 12 months.
Whilst bitcoin and other crypto-assets have been on the lips of just about every retail investor of late, for a variety of reasons, interest has not been confined to this cohort exclusively.
Increasingly, clients in the wealth management and family office spaces are interested in some of the diversification benefits alternative assets such as crypto can bring to a portfolio. When firms such as Goldman Sachs and JP Morgan are moving into the asset class, with the former allowing wealth management clients to hold crypto and the latter looking at launching a bitcoin fund, it is clear the asset class is here to stay.
While many wealth managers are still in ‘education mode’ when it comes to crypto, demand will continue to grow as investors increasingly consider it as part of the wider bucket of alternatives.
Accessible for the masses, but professional investors face roadblocks.
Despite mounting interest, wealth managers, advisers and family offices may struggle to gain exposure to the asset class. Where retail investors have a plethora of options available to them, the complexity of some of the crypto investment products available, and the regulatory demands that go with them, mean that some professional investors could find that direct crypto exposure is not worth the work.
Registration with a range of crypto-asset exchanges, extensive know your customer (KYC) protocols, anti-money laundering (AML) and wider due diligence mean that gaining exposure to crypto as a large investor can be hugely time consuming.
In addition, it can be incredibly tough to meet requirements as demanded by regulators, where regulations vary between countries and supervising authorities, and where the legal status of a crypto-asset can be different from country to country.
Both the EU and the OECD recognise the importance and lack of regulatory clarity in this area, with the former proposing the ‘Markets in Crypto-Assets Regulation’ (MiCA) to bring together handling of cryptocurrencies and regulate crypto-asset services, and the latter highlighting the lack of comprehensive guidance and framework for the tax rules surrounding these assets. Adding to this lack of clarity is the issue that how a country defines cryptoassets (for example as a currency or a security) will have an impact on what regulatory hoops need to be jumped through.
As a result of these hurdles, exposure for professional investors is typically either through an ETN or an investment company such as Grayscale’s Bitcoin Trust, with the latter being fundamentally marketed to institutional investors.
If current demand continues or increases, however, then investors are going to need to consider new ways to gain exposure to crypto-assets without generating demanding or unmanageable workloads.
Structured products can be a port in the non-bankable asset storm.
In Europe there is already a mature structured product sector that gives investors the ability to gain exposure to crypto-assets and other non-bankable assets, with a whole raft of added benefits that make the lives of family offices, advisers and wealth managers easier, whether they are responding to clients’ individual needs and demands or simply interested in the asset class.Providers such as Marex, GenTwo and Dynamic Capital Group are already paving the way for these new types of products, which can track either single crypto-assets such as bitcoin, or a basket of crypto-assets such as bitcoin, Ethereum and Cardano. This offers significant benefits as it is extremely complex to build baskets of non-bankable assets outside the structured product format, which provides both ease of access and control.
Additionally, these products offer a level of transparency that would not be possible if investors gained exposure to the assets directly. With extensive ways of tracking the products’ performance, as well as a simple and digestible breakdown of costs and fees that sits alongside clients’ portfolios, structured products can enable access in a straightforward and manageable way. And, crucially, exposure can be fully tailored to individual and specific client views, at a cost that cannot be matched by traditional funds which need large amounts of assets to get going, can be slow to launch and hard to manage.
Moreover, bespoke products can be adjusted with minimal effort, providing a standardisation, such as ISIN codes, that is not possible to get through direct exposure. In addition, the lack of regulatory clarity is solved through the use of the structured products vehicle, as similar regulation is applied to crypto-asset structured products as it is to those with more traditional underlyings, such as the FTSE 100 or a basket of technology stocks.
Generational transfer of wealth will speed up demand for new asset classes
An enormous generational transfer of wealth coming, with CNBC reporting that $30 trillion is expected to be transferred from baby boomers to younger generations.
Retail trading activity shows the recipients of this wealth are more interested in alternative assets than their forebears and investors need to be cognisant of the kind of investments they will need to facilitate in the future.
Firms that are unable to respond to client demand for alternative asset classes may therefore find themselves behind the curve. There is now, partly through the platform technology that facilitates access and provides product management tools, an opportunity for advisers and asset owners to gain exposure to assets such as crypto in a way that removes many of the barriers that have historically impeded non-retail participation. And because exposure can be gained through structured products, investors can also enjoy the benefits, like downside protection, that are the hallmark of the format.
