So far, the wealth management industry has primarily escaped disruption by blockchain technology. Presumably, challenges in scalability, regulatory uncertainty, and a cautious new technology adoption approach are some reasons.
Traditional wealth managers seem to follow a strategy of "blockchain technology is tremendous, cryptocurrency is bad." However, wealth owners and family offices continue to increase their exposure to digital assets.
Meanwhile, the Crypto Valley, which includes Switzerland and Liechtenstein, has become home to more than 960 blockchain companies with over 5000 employees.
In the Crypto Valley, a vibrant ecosystem accounts for 11 unicorns, with an evaluation of over USD 1 billion, crypto banks, an extensive offering of crypto investments products, and custody services.
What can wealth owners expect from blockchain when it comes to wealth management?
Today we speak with Volkmar Ritter, a Liechtenstein-based digital wealth and asset management innovation consultant and fintech lecturer at the University of Liechtenstein, about blockchain wealth management use cases, tokenization, and digital assets' risks.
Thanks, Volkmar, for taking the time to chat with Centro LAW. What is your field of expertise, and what should wealth owners know about blockchain use cases in wealth management?
I have worked in digital innovation in asset and wealth management for over two decades.
In my experience, a distinction should be made between digital innovations to add automation and efficiency versus added service and product novelty. Your market success will be granted if you can succeed in both dimensions.
But it is not easy to find examples that did that in financial services. On the other hand, there are many good examples of added automation and efficiency.
One might think of challenger banks, robo advisers, or commission-free trading. All of those provide rather old banking products and services like payments, discretionary asset management, or trading, but much more efficient and therefore also cheaper.
An example for added efficiency with some added product novelty might be the ETF (exchange-traded funds), which paved the way for non-institutional investors to get cheap and fast access to passive investing, which was previously impossible.
Nobody will question the immense success of the ETF innovation, but still, the product novelty was not massive, as passive investing existed already before.
So maybe the blockchain and other technical inventions will enable new uses cases that will add efficiency and novelty simultaneously.
Regarding the blockchain, we need again to distinguish between mainly efficiency-driven uses cases like, for example, much faster clearing and settlement in a centralized (non-public) environment where only banks and exchanges can participate.
These are the typical "blockchain technology is tremendous" use cases you mentioned earlier. These projects are no revolution but efficiency-driven evolutions.
The possibility of fractionating certain asset classes via tokens could also make things much easier from a process perspective but is also an evolution, as there are already other structures in place today to achieve the same goal, such as investment funds and certificates.
But when we look at the fundamental blockchain innovation, Bitcoin, there is a more critical aspect to it, the decentralization of trust.
This rather revolutionary approach in finance, where central trust has always been a significant element, brings the opportunity for revolutionary products and services in the financial industry. However, practical examples besides Bitcoin and maybe Ethereum are still rare.
What else can we expect from blockchain when it comes to wealth management? How will financial services and tools look in the future?
As mentioned earlier, blockchain will improve efficiency and transparency (traceability) in financial services as technology advances. Therefore, a large part of the investment universe will eventually be listed and traded as digital assets.
This part of the equation will be comparable to the cloud, enabling remarkable efficiency gains. Therefore, the customer will profit from cheaper and faster financial transactions in general, as we can already see in diverse FinTech offerings.
In a further step, decentralized custody of digital assets will probably be possible for all asset classes if the client wishes. Otherwise, new or old market participants will provide digital custody services.
Hence it will be easier and cheaper to list, lend, trade, and transfer assets in general.
This can finally be done decentralized, as several successful DeFi (decentralized finance) protocols show. These peer-to-peer protocols offer new ways to conduct financial transactions and investments.
Code-driven smart contracts are at the technical heart of these DeFi applications, making innovative use of financial market theory, game theory, and other economic disciplines for their business models. Nevertheless, regulation in this area is still a big question mark and will not be resolved quickly.
Suppose the decentralization aspects remain predominant in the public blockchain environment, not as in the case of the internet, where gigantic and centralized companies became very dominant. In that case, one can also imagine somewhat disruptive disintermediation of the financial service providers, at least as far as the processing of transactions is concerned.
However, blockchain will not replace good and sound investment advice.
But back to the product and service novelties. The current hype around NTFs (non-fungible tokens that can be clearly distinguished from each other) does not automatically generate and transfer usage and ownership rights and the resulting royalty revenues in most cases.
This would be a relatively new service and have a product novelty aspect. I see music as a field for such use cases, but many technical and legal questions remain.
I also see great potential for new ways of organizing a project. The so-called DAO (decentralized autonomous organization) where all stakeholders, not just investors, can participate and define the future of a venture via a token is a rather revolutionary idea.
This brings a whole new set of aspects to building, financing, growing, managing, and controlling an organization. This will also lead to a new way of thinking when evaluating investments.
Where do you see the risk of digital assets and cryptocurrencies? How can wealth managers assist clients?
As always with investments, the higher the return, the higher the risks. The public blockchain sector poses a variety of threats. They include legal, technical, market, and economic risks, and there is also a high rate of exploits and, finally, quite simply, fraud. Not to mention the problem of money laundering.
Therefore, in terms of risk and return, most crypto investments are comparable to high-risk venture capital investments.
Crypto investments still carry additional risks, such as software bugs and corresponding exploits.
If you can make such risky investments but are unwilling to invest the time necessary to understand the field and required procedures, it is advisable to seek professional help.
Wealth managers offering such services must understand the crypto world's legal, technical, and economic aspects. This is no easy task and requires a whole new profile of wealth managers.
That is why most existing crypto wealth management offerings today outsource a significant part of the value chain to specialists. As a wealth manager, you should understand and explain the risks associated with investing in the public crypto space and assess whether the client can bear them, as with other asset classes.
What's your view on the tokenization of physical assets? Are illiquid assets becoming liquid with it?
From an efficiency perspective, the tokenization of physical assets can bring cost savings in the setup and subsequent processes such as asset borrowing and resale.
In the future, there may also be network effects, as is often the case on centralized Internet platforms, which may lead to more liquidity.
However, what will not disappear are all the physical services necessary in the world of tangible assets, such as custody, insurance, expertise, pricing estimates, and the like.
In summary, I think the blockchain services needed to tokenize physical assets will soon be a low-margin business, as they are not complex and can be easily scaled. But the corresponding cost savings will be relatively modest in an overall view.
However, the potential network effects could be significant, but only if some standardized monopolistic (dominant) platforms are established on which sufficient liquidity is created.
Liechtenstein and Switzerland have been at the forefront to regulate blockchain applications. What's the benefit for investors from the clarity of the regulatory framework?
It is beneficial to have legal certainty, especially in use cases where traditional assets, tangible or intangible, are tokenized. This will help establish businesses and services beyond the so-called "wild west" of cryptocurrencies.
In Liechtenstein, we have a comprehensive regulatory and legal framework that market participants welcome. It guarantees consumer protection under the regulator's supervision in the token economy. The law has resonated in the international community, and some foreign countries started to draw inspiration from it to implement similar legislation.
It's still a long way towards global standards. However, this is an essential step in digital innovation for our small country and its financial center. It will attract businesses and entrepreneurs and further grow the vibrant blockchain ecosystem we share with Switzerland.
What advice do you have for wealth owners interested in digital assets?
Try to understand the technical and economic basics of crypto and blockchain. You don't need to understand all the details but the main ideas and mechanisms. This will help you to build your own opinion regarding the different areas of blockchain, cryptocurrencies, and digital assets in general.
Incubators, technology hubs, and universities regularly organize educational events and conferences. These are good opportunities to meet people in the industry and learn more about their projects and use cases.
You will also find frequent publications of associations and market players active in the Crypto Valley that provide a good overview of how the Liechtenstein and Swiss market is developing and its offered digital investments universe.
Finally, you can follow a step-by-step investment approach. Rather than starting with a full range of investments, you can gradually increase allocations to different types of products.
As mentioned above, professional and sound advice is still vital. It will also allow you to invest according to your risk profile and avoid losses that you cannot bear.
About Volkmar Ritter
Volkmar Ritter is the founder and owner of a business and IT consulting boutique in Liechtenstein. He has more than 20 years of digital innovation experience in asset and wealth management.
He helps his clients design the digital customer interface and exploit efficiency and automation potentials along the entire value chain. Ultimately, Volkmar wants to open up business opportunities for his customers that are only possible through digital innovations.
He is also a lecturer for strategy in a digital world, digital innovations, fintech, and blockchain at the University of Liechtenstein.
05-01-2022