The fast-growing cryptocurrency market has attracted a lot of public attention recently which applies also to executives in family offices. The surge in the public interest in BTC and all other altcoins has led to rising demand for cryptocurrencies around the world. However, the cryptocurrency market is volatile with high price fluctuation and regular crashes in this market might also lead investors to face significant losses in a short duration. In addition, investing in digital assets has incomparable risks such as executing private key(s), crypto products and networks and irreversible crypto transactions.
Besides investing in existing cryptocurrencies in the market, many investors and family offices are also looking for potential Initial Coin Offerings (ICOs) to invest in. However, it has become mounting difficult for new investors to distinguish a legitimate ICO from an unfavourable one. As there is yet a limited amount of regulation on ICOs, there is a greater chance of fraud when investing in ICOs than in financial stocks, bonds or even alternative investment Venture Capital (VC) funds. For that reason, due diligence is one of the most important steps when ones consider investing in both existing cryptocurrencies and ICOs. The main aspects of the due diligence process for investors to consider are advised mainly in five steps: (1) Evaluate the ICO project and progress reporting (i.e. white paper), (2) check the background of the development team, (3) take a close look at the funding resources of ICO, (4) detect public interest and finally (5) determine the investment exit and trading potentials.
The main question is how to navigate among those tech terminologies and find customer-centric support to invest in digital assets for family offices. The private banks try to find the best way to support investors to participate in digital assets while struggling with several regulations that are implied by Financial Market Supervisory Authorities. Some regulations, such as KYC, AML and terrorism financing, are limiting the accessibility to digital assets services. The main concerns are asset traceability and the initial source of wealth confirmation when an investor purchased a digital asset in the first place.
The digital asset-related services private banks can provide
Private banks offer professional market participants to have regulated access to digital assets such as cryptocurrencies, tokens/Tokenisation or NFT (non-fungible token) assets. However, it is important to classify private banks that are active in digital assets which also defines the bank offerings when providing access to a newly developing asset class.
Private banks can be classified as (1) traditional/conventional, (2) technology agile (mobile trade banking) or (3) recently established FinTech (Financial Technology) originated ones in which fundamentally all those financial institutions are having a banking license by the supervisory authorities. The institutional (e.g. family offices and financial intermediaries) and professional accredited investors should select custodian private banks that offer digital asset services by their banking licence existence. It is important from a compliance point of view and regardless to mention the trustworthiness of those institutions will provide a safety net for professionals.
As an example in Switzerland, Bank Julius Bär & Co. AG (1890), Banque Lombard Odier & Cie SA (1796) and Bank Pictet & Cie SA (1805) can be considered traditional private banks that are announced to offer more services in digital assets and blockchain technology. The other technology agile mobile banks such as Dukascopy Bank SA (2004) and Swissquote Bank SA (2000) specialized in exchange securities and asset management business and also offer digital asset services through their websites. The most interesting rising stars in digital asset services are the FinTech (Financial Technology) originated banks which acquired a licence from FINMA (Swiss Financial Market Supervisory Authority). For instance, SEBA Bank AG (2018) which is financially supported by Julius Bär, and Sygnum Bank AG (2017) are probably some of the earliest disruptive technology-originated banks that nowadays offer a wide range of services in digital asset banking for institutional clients.
FINMA in Switzerland licenced over two hundred banks and Liechtenstein-based banks are looking for innovative ways to fulfil the client’s requests regarding digital assets. But what are the services that can help professional investors or what services should be expected during selecting the custodian private bank for digital assets?
What services do private banks offer?
One of the important criteria to consider for digital asset investment is that it is a long-term investment instrument and welcomes the high volatility risk during the investment period. That said, the impact of a diversified allocation to cryptocurrencies, such as a basket of leading coins, improves the risk-adjusted performance in an investment portfolio. This reflects the risk premium and complicates the asset managers’ annual target in the portfolio. On the other hand, the private banks have scrutiny and complicated processes to provide digital assets services due to compliance requirements. Institutional investors (e.g. family offices) should be ready to provide relevant documents concerning the purchasing certificates of digital assets and the well-documented sources of wealth from digital assets. This step is a mandatory compliance process for opening a digital asset-based bank account. The private bank should also support in implementing and optimising KYC and AML processes of the client.
For investors, looking to obtain digital assets for the sake of portfolio diversification, they can opt for various stablecoins, along with Bitcoin and Ethereum. In addition to stablecoins are Central Bank Digital Currencies (CBDCs) which is the digital form of a country’s fiat currency that is also a claim on the central bank. CBDCs facilitate institutional investors to allocate digital assets to the investment portfolio, bring value stability and minimise the hedging risk. Private banks looking to offer services for digital assets should be technologically ready to offer CBDCs to their clients. This is also an acceptable prospect for private bank clients to fulfil future payment requests for the Web 3.0 platform which all future transactions will be performed via such digital currencies (either cryptocurrency or CBDCs).