Embracing Digital Assets — What the European Asset & Wealth Management Industry Needs to Know
Unless you've been hiding under a rock for the past few years, cryptocurrencies and tokenised assets have captured the imagination of retail and institutional investors by storm.
Look no further than EY-Parthenon's recent survey of more than 1,000 retail investors, of which, 64% already invest in digital assets or related products, whilst another survey has shown that 51% of institutional investors plan to invest in mutual funds/ETFs tied to crypto in 2–3 years.
This interest is hardly surprising given Bitcoin's impressive performance this year, and the wealth of exciting new developments, including the approval and release of Bitcoin/Ethereum ETFs, and the introduction of real world assets (RWAs); to name a few examples.
This has opened up a wealth of possibilities for the asset and wealth management industry, and having the ability to advise on and manage cryptocurrency portfolios could give a competitive edge to traditional financial advisors and asset managers.
For this reason, we have decided to provide a short yet informative guide on what the European asset and wealth industry needs to know, and how to best get involved.
We’ll present:
- Why Digital Assets Are Transforming Wealth Management
- Regulatory Landscape — Navigating MiCA
- Institutional Infrastructure — Custody, Liquidity, and Security
- The Appeal of Tokenisation and Decentralised Finance (DeFi)
- Environmental Concerns and Obligations
- How Crypto Asset Management Software Can Support Asset and Wealth Managers
Let's dive right in!
Why Digital Assets Are Transforming Wealth Management
For decades, the bread and butter of asset and wealth management firms has been providing investment advice (and management services) revolving around financial assets like equities, bonds, real estate and commodities; to name a few examples.
But as cryptocurrencies and other blockchain-based assets have seen a surge in interest, client expectations and financial opportunities have evolved, and the ability to adapt to these shifts is quickly becoming a competitive differentiator for wealth managers.
The question that must be asked, is why the surge in interest?
Diversification and big growth potential
One of the most compelling reasons for investing in digital assets is how this opens up an opportunity for diversification, and the potential to hedge against traditional market risks.
Unlike stocks or bonds, digital assets have at times shown independence from traditional markets in years gone by, which in "theory" can help mitigate portfolio risk if digital assets are included in a diversified portfolio. However, although there have been some demonstrable independence from traditional markets in the past, it's important to note that Bitcoin has also recently shown increased correlation with the performance of the stock market. That being said, crypto proponents believe that any current market correlation is only temporary, and will be lessened as time goes on.
But perhaps the most enticing reason for investing in cryptocurrencies are their ability to yield larger gains compared to more traditional assets. This is due to a combination of a much smaller market cap/trading volume compared to the stock market, and sophisticated tokenomic models and yield-generating mechanisms underpinning many digital assets.
Changing client expectations
As can be seen, due to the attractiveness of cryptocurrencies, clients are now demanding innovative investment solutions to cater for these digital assets.
As highlighted by a survey from CoreData back in late 2021, a significant portion of UK wealth advisers have been approached by clients seeking crypto exposure. Furthermore, this trend is not confined to younger, tech-savvy investors, but high-net-worth individuals and family offices are also showing interest. Therefore, asset and wealth managers have no choice but to acknowledge that their clients' needs are changing, and the need to leverage strategies and software that incorporate digital assets effectively.
Part of meeting these needs is ensuring that any digital asset investment activities are in line with regulatory demands.
Regulatory Landscape — Navigating MiCA
As the appetite for cryptocurrencies has increased, so have the efforts of global regulators, who over the past few years, have worked diligently to address concerns over market volatility, consumer protection, and potential financial crimes. Off the back of this, many jurisdictions now have regulatory guidelines in place, or are close to implementation.
In Europe, the Markets in Crypto-Assets (MiCA) regulation is poised to become a game-changer, providing a unified legal framework for crypto investments across the EU, so it is essential that asset and wealth managers
Understanding MiCA’s impact on asset and wealth management
Although there have been some criticisms from the more libertarian side of the crypto community, for asset and wealth managers, MiCA represents a significant step toward regulatory clarity. With its implementation deadline set for 30 December 2024, asset and wealth management services will soon be offered to European investors in a much more secure and transparent environment; instilling clients with greater confidence in the process.
For one, MiCA’s focus on transparency and consumer protection will be crucial for asset managers. The regulation requires crypto asset service providers (CASPs) to adhere to strict operational guidelines, including the maintenance of reserves for stablecoins, and comprehensive disclosure obligations for token issuers. Wealth managers must also align their crypto strategies with MiCA’s stringent anti-money laundering (AML) standards, offering an additional layer of trust for clients.
But perhaps the best news for asset and wealth managers, is MiCA's uniform regulatory framework for all EU member states, meaning they'll be able to operate seamlessly across EU borders without facing the fragmented regulations that previously plagued the European crypto market.
Institutional Infrastructure — Custody, Liquidity, and Security
For asset and wealth managers who are looking to enter into the world of crypto financial services, robust institutional infrastructure is critical to ensuring security, liquidity, and the smooth operation of client portfolios.
Securing digital assets with custodial solutions
One of the most pressing concerns for asset and wealth managers is the secure storage of digital assets like Bitcoin, Ethereum, and any other cryptocurrencies. MiCA, as part of its regulatory framework, mandates the use of regulated custodians to safeguard crypto assets, ensuring consumer protection and compliance.
Asset and wealth managers are therefore faced with whether to opt for self-custody, which offers direct control but comes with heightened risks, or third-party custodianship, which provides enhanced security through institutional-grade solutions; but involves placing trust in external providers.
In most cases, using accredited third-party custodians offers a more secure, compliant path forward in today’s regulatory environment.
Liquidity concerns in digital asset markets
Liquidity remains another major challenge in digital asset markets. Ensuring that clients can enter or exit positions without excessive slippage is vital for portfolio management.
MiCA addresses liquidity concerns by mandating that issuers of asset-referenced and e-money tokens maintain sufficient liquid reserves, ensuring that these tokens remain redeemable and stable. Wealth managers must also utilise a combination of regulated exchanges, over-the-counter (OTC) desks, and liquidity providers to navigate the sometimes volatile and fragmented crypto markets.
By ensuring compliance with MiCA’s liquidity requirements, managers can protect clients from potential liquidity shortages.
Protecting clients with the best security practices
Cybersecurity breaches are also a significant risk in the crypto space, making it crucial for wealth managers to assess the security practices of the platforms they use.
Selecting platforms with stringent security protocols, including multi-signature wallets, cold storage solutions, and robust encryption measures, is essential to safeguarding client funds and avoiding high-profile breaches. Failure to use software platforms with strong cybersecurity frameworks can potentially damage a wealth manager’s reputation.
The Appeal of Tokenisation and Decentralised Finance (DeFi)
When it comes to trends that have exploded in 2024, asset and wealth managers should keep a close eye on the tokenisation of real-world assets (RWAs), and Decentralised Finance (DeFi). Both offer compelling avenues for portfolio diversification, and enhanced client offerings.
Tokenisation of Traditional Assets (RWAs)
When it comes to tokenisation, this process involves converting traditional real-world assets (RWAs), such as real estate, fine art, or commodities, into digital tokens on the blockchain. This tokenisation makes these assets more accessible and liquid, allowing wealth managers to offer fractional ownership to clients. By doing so, they can enhance portfolio flexibility and reach, offering exposure to high-value, illiquid assets in a more accessible form.
One prime example is Injective Protocol powering the first tokenised index for BlackRock’s BUIDL Fund; currently the largest of its kind with almost $500 million invested.
DeFi’s growing role in portfolio diversification
Decentralised Finance (DeFi) is another very appealing part of the crypto industry, and is revolutionising the way financial services generate value for their clients.
Through DeFi protocols, clients can access yield-generating opportunities such as staking, lending, and liquidity mining without the need for intermediaries. These solutions allow wealth managers to provide diversified income streams to clients, often with lower transaction costs, and enhanced transparency.
However, it's important to be aware that DeFi also has a steep learning curve, and requires asset and wealth managers to either have a solid understanding of DeFi, or have access to DeFi software platforms that are ideal for beginners.
Environmental Concerns and Obligations
As Environmental, Social, and Governance (ESG) principles have grown in importance amongst investors and regulators, the environmental impact of crypto (especially in terms of energy consumption and mining practices) has come under more scrutiny.
As a result, asset and wealth managers must now factor in these considerations to align with corporate social responsibility and ESG standards.
Sustainability and environmental concerns
Some crypto-assets, particularly those using proof-of-work (PoW) mechanisms like Bitcoin, are notorious for their large carbon footprint, with energy consumption levels comparable to entire countries. This creates a dilemma for wealth managers focused on sustainability.
So to meet ESG objectives, many are shifting towards less energy-intensive alternatives like proof-of-stake (PoS) assets, which significantly reduce energy consumption; or using staking as opposed to mining for the same reason. Understanding these differences is critical in guiding clients toward more environmentally friendly digital assets, especially as regulations around climate transition, such as MiCA, evolve.
By selecting eco-conscious digital assets, wealth managers can ensure compliance while meeting the rising expectations of socially responsible clients.
How Crypto Asset Management Software Can Support Asset and Wealth Managers
Last but not least, asset and wealth managers need the right tools to navigate this evolving space.
The good news is that crypto asset management software provides the automation, data analytics, and security necessary to simplify digital asset management, and this enables wealth managers to efficiently manage their clients' crypto exposure; while maintaining compliance with regulations like MiCA.
Streamlining crypto management with software solutions
The main benefit of using crypto asset management software platforms is how they streamline and optimise crypto investments and operations on behalf of clients.
These platforms provide a centralised dashboard, connecting to multiple exchanges and wallets, enabling seamless portfolio management across various blockchain networks. They also offer automated rebalancing features, allowing wealth managers to set predefined strategies and have portfolios automatically adjusted to align with client objectives.
Additionally, many platforms offer real-time and historical data tracking, providing wealth managers with the insights needed to make informed decisions and respond quickly to market shifts. By automating many of the manual tasks involved in crypto asset management (such as trade execution, risk management, and regulatory compliance), these platforms allow wealth managers to focus on broader investment strategies and client relationships.
ICONOMI Wealth role in the European crypto market
ICONOMI Wealth is arguably the leading turn-key assets management platform for the European crypto space, and greatly enhances the ability of asset and wealth managers to effectively navigate crypto investing on behalf of their clients.
ICONOMI facilitates this by automating trading strategies, allowing for the seamless creation of diversified crypto portfolios, and providing secure custody solutions; ensuring managers can offer clients a seamless and transparent investment experience.
One of ICONOMI's main selling points is its Crypto Strategies, which allow wealth managers to easily create, manage, and share diversified crypto portfolios with clients. These strategies can be automated and adjusted based on predefined parameters, making it easier to manage risk while maximising potential returns. Additionally, ICONOMI’s smart trading engine connects to over 10 global exchanges, offering wealth managers the best price execution and liquidity for each trade.
All of this operates under a strict regulatory environment, as ICONOMI is fully regulated under the FCA (Financial Conduct Authority) and Dutch Central Bank (DNB), and the platform is well positioned to meet the upcoming MiCA deadline.
Conclusion
For asset and wealth managers looking to gain an extra edge over competitors, the rapid rise of crypto and blockchain technology has provided a new exciting avenue to capitalise on.
But even for wealth managers who are still a little hesitant to branch out, the combination of client demand, regulatory advancements, and the potential for significant portfolio diversification means that failing to embrace this new asset class can result in hesitant asset managers being left behind.
What's more, there is little excuse to be deterred by the complexities of managing crypto portfolios, as powerful tools like ICONOMI offer a regulated and encompassing crypto asset management solution that is designed to cater for novices, and provide them with everything they need to thrive.
So now is the time for asset and wealth managers to get involved, and with just a few simple steps, you can do this by signing up to ICONOMI Wealth!
If you enjoyed this article, you may be interested in our other titles:
Best Crypto AI Trading Bots — Review [2024]
Is Injective Protocol a Good Investment? Price Prediction 2024,2025
4 Best Crypto-Friendly Banks in the UK [2024]
Ready to start your journey with us?
Trusted by over 100,000 users from around the world.
