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January 15, 2018updated 18 Jan 2018 5:38pm

The cryptocurrency race is on for wealth managers

By Saloni Sardana

As the price of cryptocurrencies soar to new highs and increasingly receive interest from clients, the wealth management industry, which is typically steeped in tradition, is taking a multi-track approach with some players speeding ahead in the fast lane while others avoiding the hype and sticking to their strategies. Saloni Sardana explains

While wealth managers and private banks have reacted to cryptomania in various different ways, there is consensus that blockchain technology enables the existence of cryptocurrencies and could revolutionise the wealth management sector.

In terms of those players in the fast lane, when it comes to cryptocurrencies, Swiss private banking giant Falcon stands out.

Falcon has become the first Swiss private bank to offer blockchain asset management solutions for its clients. But is this a one-off attempt for private banks and wealth managers to venture into cryptocurrencies, or will it spark a precedent for the private banking world?

At the time of writing on 11 January 2018, Bitcoin- the bellwether cryptocurrency- plummeted to $13,864 after news emerged that South Korea, one of the world’s biggest cryptomarkets would ban cryptocurrency trading on its exchanges, according to industry website coinmarket cap.

But this comes after a period of much volatility and a surge in the value of cryptocurrencies.

Blockchain

Blockchain is the distributed ledger technology behind cryptocurrencies. It allows market participants to keep track of digital currency transactions. This is different from traditional databases, as distributed ledgers do not have a central data store.

Falcon currently offers its clients the possibility to invest in the following cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum and Litecoin.

Falcon Bank’s chief investment officer Stefan Bollhalder says: “We take the view that blockchain assets will probably remain volatile and therefore continue to be a speculative investment.”

He adds: “The biggest advantage [of offering cryptocurrency investments] is that our clients get an additional portfolio diversification possibility.”

He also notes there has been less paperwork for Falcon’s clients following the provision of blockchain investment opportunities.

Nael Shahbaz, wealth manager at Swiss robo-advice firm SAMT AG Asset and Wealth Management says: “With the cryptography [behind blockchain] banking operations will run much smoother and efficiently. There is still a lot of paperwork involved in [private] banking operations. Cryptography will replace all of that and hopefully it will also reduce fraud since the open ledger style of operations bring more transparency.”

He expects blockchain to continue to being implemented in the private banking sector, citing a remittance partnership between Thailand’s Siam Commercial Bank and Japan’s SBI Remit.

In August 2017, both Asian banks partnered with each other to launch its first Ripple Blockchain powered payment with Japan and Thailand.

But not all private banks are bullish on using blockchain technology to provide cryptocurrency trading opportunities. RBC Wealth Management says while they have had several of their advisory clients enquire about cryptocurrencies, they do not see themselves offering services anytime in the near future.

Despite “trading benefits such as anonymity and low costs,” RBC sees more risk in using cryptocurrencies in private banking.

“We cannot take the unhackability of blockchain for granted,” says Frédérique Carrier, managing director and head of investment strategy at RBC Wealth Management.

“The biggest advantage [of blockchain] is that it will eradicate the middle man,” Shahbaz says.

In early January this year, Falcon extended its cryptocurrency opportunity programme so that its clients can place their wealth originating from crypto assets and convert them into a fiat currency with Falcon.

Given blockchain technology makes the user anonymous, Falcon says it addresses this problem by using specific tools to interpret the history and to ensure the bank is complying with know your client (KYC) and anti money laundering (AML) laws.

SAMT AG Asset and Wealth Management allows its clients the possibility to invest in Bitcoin futures in terms of both Chicago-based Cboe Futures Exchange and the Chicago Mercantile Exchange.

Bitcoin Futures began trading on the Cboe exchange on 10 December and on 18 December 2017 on the CME exchange.

Client interest

While several advisory firms are getting interest in cryptocurrencies from clients, some firms say participation in cryptocurrency investments still remains relatively low.

Neil Moles, managing director of UK-based Progeny group, which focuses on legal and wealth management services, says: “Clients are always talking about it, but very few of them have actually participated.”

In fact, he says many of them are likely to have made the investments a long time ago and have already sold it.

“From a risk perspective we deem it extremely high risk for the majority of our clients. The minority are mainly the younger generation,” he says.

Carrier says that while they are getting interest from their advisory clients, RBC is advising against it due to a “lack of legal recourse,” surrounding cryptocurrencies.

Nigel Green from deVere, an international financial consultancy, says: “Most of our clients who are typically, savvy internationally-minded investors and expatriates, are also increasingly seeking advice and information [in cryptocurrencies].

“They are aware that cryptocurrencies, whether that is the current crop, such as Bitcoin or not, are here to stay and that the phenomenon is only set to increase and grow in momentum in coming months and years.”

Although Green acknowledges concerns such as fraud and misuse related to the use of cryptocurrencies he says: “such possible threats simply means that more and better regulation and enforcement is required and that is on its way”.

Correction

Given that the price of Bitcoin has increased about 1500% since the beginning of last year, but fallen approximately 20% since last month, experts who spoke to Private Banker International expect a market correction in the cryptocurrencies, but they are divided as to what its impact would be.

Carrier says: “Very few asset prices have gone up in a straight line, without a correction. So I think it is unlikely that it continues to have a [straight] trajectory without a pullback of some sort.”

She adds:  “[But] we do not consider Bitcoin and a correction in Bitcoin as being a systematic risk at the moment.”

Shahbaz thinks the boom is unsustainable. He further highlights that any market correction will “help weed out the bad cryptocurrencies, then the technology [blockchain] will survive”.

While Green also agrees that cryptocurrencies will correct downwards, he thinks existing cryptocurrencies, as well as new ones set to flood the market, will continue to gain market share throughout 2018.

Cryptomania is also posing dilemmas for financial regulators across the globe with each of them reacting differently. For example, Ravi Menon, managing director of the Monetary Authority of Singapore, is reportedly against the creation of a digital currency.

Meanwhile, Sweden is reportedly considering the possibility of issuing a digital currency.

Moles says rather than the cryptocurrencies, it is blockchain that will revolutionise the wealth management industry.

“[Blockchain] is not a new technology but the uses of it are becoming more widespread.”

He attributes this to the fact that the direction of cryptocurrencies is unreliable, but the technology has not been used to full potential.

“I am yet to be convinced that Bitcoin [or any] cryptocurrency is here for longer term in terms of an investment proposition.

Shahbaz echoes this view. “Just like with the dot-com boom, fundamentally weak companies vanished, but the internet remained.”

He believes that blockchain will also survive in the industry despite any collapse of cryptocurrencies.

While many financial institutions serving HNWIs may be treading with caution when it comes to providing cryptocurrency-trading opportunities, they cannot ignore blockchain technology.

Many of them do indeed understand the widespread uses of the technology; the partnership between Thailand’s Siam Commercial Bank and Japan’s SBI Remit is a good example of this.

It remains to be seen when cryptocurrencies correct downwards. Meanwhile, wealth managers have nothing to lose by providing the trading opportunity for its clients.

Whether cryptocurrencies survive or not even offering them in the short-term will require an understanding and implementation of blockchain technology, which can still be used to optimise firms’ data processes.

Blockchain’s full potential has yet to be exhausted in wealth management.

 

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