Wealth Management in the Age of Digital Assets and Tokenisation: To the Moon?

Jakub Smolinski, Associate Partner of Synpulse spoke at the Hubbis Digital Assets Forum in Singapore in late November. He asked three key questions. How are Asian high-net-worth individuals responding to the adoption of cryptocurrencies, and what is the scale of crypto wealth that bypasses traditional wealth management? Why is there an urgent need for traditional wealth management to incorporate digital assets, and what role should private banks and external asset managers (EAMs) play in this adoption? What potential benefits and opportunities does the emergence of tokenization offer to investors, markets, and wealth managers? This is a snapshot of his answers, which all add up to an appeal to the wealth management community to delve deeper into this evolving universe as the proper infrastructure and governance are emerging fast.

Synpulse’s commitment to the digital assets journey

Jakub leads the digital assets practice across Asia for Synpulse, which he explained is a Swiss-based management consultancy that is helping financial institutions transform their business.  With more than 1400 consultants globally and a strong presence in Asia, he said their mission is to help leading private banks and wealth managers across the region evolve their offerings.

He quickly provided an overview of the evolution of digital assets in wealth management, highlighting key developments and offering some predictions. The journey began a decade ago with the rapid growth of cryptocurrencies, especially Bitcoin, followed by innovations in decentralised finance (DeFi) and non-fungible tokens (NFTs). Initially, the market was unregulated and the overall value peaked at USD3 trillion, as enthusiasm scaled ever-greater heights and more and more investors (many of them pure speculators) joined in.

Becoming more institutional

He said the digital asset space is now in its second phase, characterised by the entry of respected financial institutions. Notable developments include HSBC's plan to introduce a digital assets custody service in 2024, Standard Chartered's announcement for the MENA market, BlackRock's push for an Ether Spot ETF, and Schroders exploration of tokenised securities. He said these moves signify the increasing institutional interest in leveraging tokenisation and institutional DeFi to build the financial infrastructure of the future.

Dramatic growth ahead

Looking ahead, he enthused that some estimate that by the end of this decade, the market could be worth around USD40 trillion. Following this, mainstream adoption is expected to accelerate. And with the majority of asset classes migrating to blockchain technology, the total market value could potentially reach USD300 trillion.

Turning his gaze on the current state and future potential of digital assets in the context of wealth management, he highlighted several key trends. HNWIs are increasingly investing in cryptocurrencies outside their primary financial intermediary/advisor relationships. Over 90% of current digital asset transactions are occurring outside of traditional financial channels.

Here comes the tokenisation tsunami

Cryptocurrencies currently represent more than 90% of the wealth stored in digital assets. And while tokenisation accounts for only 2% of the total market value now, it is projected to grow to USD30 trillion by the end of the decade, representing about three-quarters of the total USD40 trillion market value at that time.

He said that tokenisation can be defined as the process of converting financial assets into tokens using blockchain technology. These tokens can then be used in open and decentralised financial markets. He observed that institutional DeFi (Decentralised Finance) is emerging as a new, more robust, faster, and better version of traditional market infrastructure, signalling a strong impetus or shift towards a more decentralised financial system.

Are you ready?

Wealth managers should position themselves to capture some of this remarkable market growth and insulate themselves from losing out in various ways as these dramatic changes take a grip. “Why is this so important?” he pondered. “Well, consider your current existing linear value chain between your clients and global markets, and what will happen once digital assets and tokenisation are here to stay. You need to find a role in the new chain and work out how you can earn income from it. These are the issues and questions that you should be addressing today.

Blockchain’s inexorable rise

Jakub said he would not go into all the benefits, but briefly detailed advantages emerging in the form of low(er) transaction fees, more transparency, access to illiquid asset classes, and improved portfolio diversification and performance. He gave delegates two key data points that they could use in their conversation with your clients to prove to them that these products and these services are superior.

He highlighted a study from the Bank of International Settlements, analysing more than 5000 asset-backed securities across multiple years in one of the most blockchain enabled markets of the world, which is China. What did they find? They found significant performance improvement across different asset classes, from residential mortgage-backed securities to account receivables and consumer loans

“The study proves that there is a significant improvement from rolling out products based on blockchain technology,” he stated. “And this is even more evident for products that are less standardised.”

From CEX to DEX

Jakub then presents a case study from the DeFi (Decentralised Finance) market, focusing on the comparison between centralized exchanges (CEX) and decentralized exchanges (DEX).

He said centralised exchanges (CEXs), like Binance and Coinbase, are different from decentralised exchanges (DEXs), which operate as automated marketplaces governed by smart contracts instead of traditional human oversight and paper processes. Looking at historical data, he concluded that in good and bad market conditions, the DEX ecosystem is clearly winning out over the past several years, having risen from a mere 2% of market activity to almost 40%.

“We can interpret these trends as evidence of the superiority of decentralised infrastructure over the centralised proposition in the context of the digital asset market,” he concluded. “This shift indicates a growing preference for, and trust in, decentralised systems, due to their inherent benefits like transparency, security, and reduced reliance on central authorities.”