feature | cryptocurrency
cryptocurrency:
the race is on for wealth managers Prices of cryptocurrencies have been reaching new highs, at the time of publication, and increasingly attracting client interest. he wealth management industry – typically steeped in tradition – is taking a multi-track approach, with some players speeding ahead while others avoid the hype and stick to their strategies, writes Saloni Sardana
W
ealth managers and private banks have reacted to ‘cryptomania’ in diferent ways, but there is consensus that blockchain technology, which drives cryptocurrencies, 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 irst Swiss private bank to ofer blockchain asset management solutions for its clients. But is this a oneof attempt for private banks and wealth managers to venture into cryptocurrencies, or will it spark a precedent for the private banking world?
BITCOIN AND BLOCKCHAIN 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 largest cryptomarkets, was planning to ban cryptocurrency trading on its exchanges, according to industry website coinmarketcap. com. However, this comes after a period of much volatility and a surge in the value of cryptocurrencies.
Blockchain is the distributed ledger technology behind cryptocurrencies, allowing market participants to keep track of digital currency transactions. his is diferent from traditional databases, as distributed ledgers do not have a central data store. Falcon currently ofers clients the possibility to invest in four cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum and Litecoin. he bank’s chief investment oicer, Stefan Bollhalder, says: “We take the view that blockchain assets will probably remain volatile and therefore continue to be a speculative investment.” He adds: “he biggest advantage [of ofering cryptocurrency investments] is that our clients get an additional portfolio diversiication possibility.” He also notes there has been less paperwork for Falcon clients following the provision of blockchain investment opportunities.
BANKS USING BLOCKCHAIN BASED SOLUTIONS bank
Country
Date
Siam Commercial Bank Thailand
June 2017
SBI Remit
Japan
June 2017
Falcon Private Bank
Switzerland
August 2017
Source: Private Banker Internaional
Vertragsmuster zur Begutachtung
10 | January 2018 | Private Banker International
Nael Shahbaz, wealth manager at Swiss robo-advice irm SAMT AG Asset and Wealth Management, says: “With the cryptography [behind blockchain], banking operations will run much smoother and eiciently. here 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 brings more transparency.” He expects the implementation of blockchain in the private banking sector to continue, citing a remittance partnership between hailand’s Siam Commercial Bank and Japan’s SBI Remit. In August 2017, the Asian banks partnered with each other to launch its irst Ripple blockchain-powered payment with Japan and hailand. But not all private banks are bullish on using blockchain technology to provide cryptocurrency trading opportunities. RBC Wealth Management says that while several of its advisory clients have enquired about cryptocurrencies, it does not see itself ofering the services any time in the near future. Despite “trading beneits 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
feature | cryptocurrency
bitcoin growth
Carrier, MD and head of investment strategy at RBC Wealth Management. Shahbaz, however, notes: “he biggest advantage [of blockchain] is that it will eradicate the middle man.” In early January this year, Falcon extended its cryptocurrency opportunity programme so clients can place wealth originating from crypto-assets and convert them into a iat currency with Falcon. Given that blockchain technology makes the user anonymous, Falcon says it addresses this problem by using speciic tools to interpret the history and to ensure the bank is complying with know-your-client and antimoney-laundering laws. SAMT ofers clients the possibility to invest in Bitcoin futures in terms of both the Chicago-based Cboe Futures Exchange, and the Chicago Mercantile Exchange (CME). Bitcoin Futures began trading on the Cboe exchange on 10 December 2017, and on the CME exchange on 18 December 2017.
threats simply mean that more and better regulation and enforcement is required, and that is on its way.”
CLIENT INTEREST
CORRECTION
While several advisory irms are receiving client interest in cryptocurrencies, some say that participation in cryptocurrency investments remains relatively low. Neil Moles, MD 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 already sold them on. “We deem it extremely high-risk for the majority of our clients. he minority are mainly the younger generation,” he explains. Carrier says that while RBC is noting interest from its advisory clients, it is advising against investment due to a “lack of legal recourse” surrounding cryptocurrencies. Nigel Green, from international inancial consultancy deVere, says: “Most of our clients – who are, typically, savvy internationally minded investors and expatriates – are also increasingly seeking advice and information [on cryptocurrencies]. “hey 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
Given that the price of Bitcoin has increased about 1,500% 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 cryptocurrencies, but 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, but 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 believes that existing cryptocurrencies, as well as the new ones that are set to lood the market, will continue to gain market share throughout 2018. Cryptomania is also posing dilemmas for inancial regulators across the globe, with each reacting diferently. For example, Ravi Menon, MD 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.
Bitcoin trading values in US dollars from January 2017 $ 15,000
12,000
9,000
6,000
Fe b
Ja n
20
17
0
20 17 M ar 20 17 Ap r2 01 7 M ay 20 17 Ju n 20 17 Ju l2 01 7 Au g 20 17 Se p 20 17 O ct 20 17 N ov 20 17 D ec 20 17 Ja n 20 18
3,000
Source: Coinmarketcap
Vertragsmuster zur Begutachtung
Moles believes that rather than cryptocurrencies, it is blockchain technology that will revolutionise the wealth management industry. “[Blockchain] is not a new technology, but the uses of it are becoming more widespread,” he notes, attributing this to the fact that the direction of cryptocurrencies is unreliable, but the technology has not been used to its full potential. “I am yet to be convinced that Bitcoin [or any] cryptocurrency is here for the longer term in terms of an investment proposition. Shahbaz echoes this view: “Just like with the dotcom boom, fundamentally weak companies vanished, but the internet remained,” he says, adding that he believes blockchain will also survive in the industry, despite any collapse of cryptocurrencies. While many inancial institutions serving HNWIs may be treading with caution when it comes to providing cryptocurrencytrading opportunities, they cannot ignore blockchain technology. Many of them do, indeed, understand the widespread uses of the technology; the partnership between hailand’s Siam Commercial Bank and Japan’s SBI Remit is a good example. It remains to be seen when cryptocurrencies will correct downwards. Meanwhile, wealth managers have nothing to lose by providing the trading opportunity for their clients. However, whether cryptocurrencies survive or not, even ofering them in the short term will require an understanding and implementation of blockchain technology, which can still be used to optimise irms’ data processes. Blockchain technology’s potential has yet to be fully utilised in wealth management. <
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