As regulations and technology evolve to meet investors' needs, firms and advisors are being left behind
Whether they’re looking to future-proof their businesses by engaging with next-generation clients, or taking a futurist perspective by raising their exposure to a new asset class, countless wealth firms are looking to make a grab for the opportunity represented by digital assets. But for many companies entrenched in the hallowed traditions of finance and investments, that may be easier said than done.
“In the financial services industry, it usually takes a long time for new investments to come along,” says Hashim Mitha, co-founder and CEO of MeetAmi Innovations Inc. “Yet in the world of digital assets, it's happening at a far, far more accelerated pace.”
Following the creation of bitcoin in 2009, discussions about blockchain’s use in the world of finance and investing largely remained in the margins. But the past two years have brought about an inflection point. Bitcoin has captured the imagination of both institutional and retail investors, NFTs have breathed new life into the market for collectibles and art, and a trend of tokenization is capturing a wider-than-ever range of assets.
“In our view, the future is in tokenization,” Mitha says. “You’re going to see a democratization of investment products, where the average consumer is able to invest in tokenized real estate or private equity. Fractional shares won’t really take off, because people are already able to buy tokenized shares of Apple, Microsoft, or Tesla if they wanted.”
Globally, Canada has taken a leading position determining how cryptocurrencies can fit within the existing system of securities regulation. Because of the regulators’ willingness to engage, the Great White North has given birth to the world’s first bitcoin mutual fund, the first bitcoin ETF, and the first ether ETF. To help ensure retail investors are protected, regulators have also established a platform of crypto exchange oversight, requiring all exchanges that cater to Canadian investors to be registered as exempt market dealers.
But even with all the regulations and infrastructure laid down for investors to participate in the world of cryptocurrencies, there remain many unanswered questions for wealth firms and advisors who want to step into the space.
“It’s hard for an advisor. They have to figure out which exchanges are regulated, and what’s a qualified custodian,” Mitha says. “How do you trace Bitcoin on the blockchain? How do you ensure all the reporting is being done properly? That’s hard to figure out, and it’s all evolving so quickly.”
Mitha and his colleagues first realized the extent of the problem roughly three years ago. At the time, exchange platforms were being built where retail investors could buy and sell Bitcoin. That was followed by the development of custody solutions, allowing investors at the retail and institutional level to securely store their crypto holdings.
But without the ability for exchanges and custodians to “speak” to each other, having appropriate reporting around crypto transactions and holdings is impossible. Without the right data analytics and tools, it’s also hard to build and maintain a consolidated picture of crypto holdings within a single portfolio.
“An advisor today will want to put 1% to 3% of their client’s money into crypto, so it doesn’t make sense for them to figure this out for themselves,” Mitha says. “It’s far too complex, so we take on the heavy lifting for the firms we work with. Our team focuses on this 24 hours a day, seven days a week.”
Beyond navigating the technical obstacles, Mitha says advisors need to learn and stay updated on the ever-changing world of crypto. That understanding, he says, will help advisors appreciate the importance of not just investing in the price performance of high-quality cryptocurrencies, but also in the companies that are helping to secure and evolve the infrastructure that supports them.
Being educated about crypto investments, Mitha argues, should also fall under portfolio managers’ fiduciary responsibility. Even if they don’t find it suitable for their clients, he says they should have a fundamental understanding of what it is to properly advise clients whether they should engage or stay away from crypto.
“It isn’t everybody who should be doing this. I don't believe that to be true,” he says. “But I do believe all advisors should be able to have an educated conversation with their client, and either get to a qualified yes or a qualified no.”
