The current investment environment of high-interest rates and market volatility means that, as a rule, investors are looking primarily for good investment opportunities that will provide growth. And that often means looking outside traditional markets to pursue attractive long-term opportunities and to diversify their holdings. This is to the benefit of crypto assets, and is helping them to become more mainstream and better accepted by investors. This, particularly, means younger investors who tend to be more au fait with all things digital and, thus, open to everything that crypto has to offer - namely, something that offers a solid growth opportunity with a low correlation to traditional assets.

Crypto assets may be held in an alternative financial system that is not dependent on a single bank or other financial entity. For those comfortable with that alternative financial system, this represents further diversification. However, as this requires some technical knowledge for self-custody or accepting issues relating to centralised exchanges pooling all client assets, when dealing in crypto, there is a trend emerging to work with regulated banks because they hold client assets completely off balance sheet, and assets are, therefore, safe in a case of insolvency.

However, crypto assets are still at a relatively early stage of maturity and market adoption. Just as it took time for other technologies to be widely understood and accepted, crypto assets must too, evolve.

Stefan Edelmann, Head of Asset Management Business Development at Sygnum Bank, comments: “One of the things central to greater acceptance of crypto assets is understanding exactly what they entail. More or less every asset is already digital, but when we say crypto, we mean something that is cryptographically secured and stored on a distributed ledger. There are many different parts to this: new assets like native protocol tokens, application layer tokens or non-fungible tokens (NFTs), and then traditional existing assets that are brought onto the Blockchain, such as stablecoin assets, or tokenised assets like real estate, or artworks."

There is a step change from some investors who have historically been looking to invest in cryptocurrencies and are largely speculative in their approach. Indeed, replacing this speculation, the broader market is now starting to see the emergence of a mega trend where crypto investments can be about the infrastructure itself, the underlying protocols and the efficiency solutions that sit on top of the infrastructure - but also extend to new use cases built on Blockchain technology.

Edelmann comments: “The whole application layer, with existing and new business models that have been rebuilt in a decentralised way to make things cheaper and more efficient, has also now come into focus. Investors have plenty to choose from in this investment universe.”

Access
But no matter what the logic behind investments in crypto assets, one of the obstacles to investing lies in accessibility. Happily, this, too is changing as wealth managers of all descriptions react to client demand and seek to make crypto assets a part of their standard offering.

Edelmann comments: “In the past, access was complicated and not always reliable. But things are changing. Today access is getting easier for investors in two ways: investing in crypto assets is possible with traditional products structured for various investment strategies, and regulated providers have introduced direct access to crypto assets.”

In addition, increasing regulation is helping investors find counterparties that give access to crypto assets in a fully regulated way. This also means that clients have to undergo the same procedures in onboarding as with traditional banks but can also expect the same service (e.g. direct contact to a relationship manager, asset- and tax statements).

Partnerships
Traditional banks and wealth managers are now partnering with specialist entities to ensure clients have access to crypto assets.

Edelmann: “We have relationships with over 15 banks globally for B2B services, including Postfinance, one of the biggest retail banks in Switzerland, and Zuger Kantonalbank. That two relevant banks like these feel the need to offer crypto assets to their clients tells you a lot - namely that crypto assets are here to stay and it’s a client need.”

But there is still a large part of the banks who today do not offer those services to their clients.

Edelmann comments: “The bank needs the technology to consolidate crypto assets into a client’s overall asset statement in case crypto assets are held outside of the bank. I think this is improving, and the quality and formatting of the data are also improving- thus making it more easily integrated into other systems and processes. The more providers can take the available data and use it alongside other data sets to reach a single reporting mechanism, the better.”

This is important given the current demand for aggregated reporting from clients who like to hold their assets with multiple wealth managers or EAMs but still want an overview of their entire wallet. Indeed, the ability to deliver on this is a value add for wealth managers and also an opportunity for WealthTechs that can deliver the technological functionality to achieve a meaningful aggregated view.

The expectation is that acceptance of, and interest in, crypto assets will continue to evolve. The fact that large institutions are now entering the fray with a range of activities is also significant, as it means that everything crypto and digital has become mainstream every day.

For example, in the US, PayPal allows payment using Bitcoin, and German airline Lufthansa offers a NFT-powered loyalty program. BlackRock, amongst others, just launched a spot Bitcoin ETF and JP Morgan. Meanwhile, JPMorgan opened a presence in the Metaverse on Decentraland - there are multiple examples of institutional adoption happening.

Edelmann comments: “This sort of general use-case activity sends a strong signal to investors and wealth managers alike about the direction of travel. But of course, it is still a relatively young technology and is still evolving. However, a critical mass is now being reached that will enable the next stage of broad acceptance.”

Decentralised use cases do have the opportunity to spread across many parts of our life: financial services, file storage, social media, gaming, music streaming etc.

"If something could be offered with Blockchain technology that is less expensive, secure, and more efficient, it will be considered. I believe it will soon be entirely normal to have apps on your phone that use Blockchain technology because it happens to be the better option for that app and its functionality and needs,” he says.

Edelmann concludes: “In some parts of this sector, you need more regulation, and optimal operating models must also come to the fore. But there is no reason why such a technology and such an investment opportunity should not become part of our traditional portfolios.”

Interested in reading the full report? You can read this edition of the Swiss WealthTech Landscape Report 2024 online here.