What's hot in digital assets?

Video transcript

1. How does a firm build a digital assets strategy?

Defining a digital asset strategy is probably one of the most important questions that financial services institutions globally have ahead of them at the moment. It's something being faced widely across the industry and we're finding that some companies have something very well-defined already and others have absolutely no clue what they're going to be doing with it yet. I think the only thing that they all generally have in common from talking to a wide range of companies is that most of them have an awareness now that this technology is transformative and is definitely coming and being adopted across the industry. There is a general understanding we need to do something, but very often they don't understand much about the technology, and they don't understand why. Now, in terms of therefore how you define a digital asset strategy, very often the most important thing in our recommendation to clients is being to really analyse what is their core business currently, and then to understand how the technology can potentially either enhance or indeed threaten their existing business lines. An example of that will be something like settlement. If you're a settlement firm and you find out that blockchain offers this thing called instant settlement, you've got a problem. You need to actually think through where do we stay relevant? And then conversely, we've got other clients. Their core business is things like custody of assets currently. And we've spoken to one recently who will be bidding for a digital asset platform to implement and integrate into their existing business. And they said to us, the core thing that we're going to do, we don't yet know about. The opportunities about building beyond that is that custody is our core business right now. We want to be super relevant and stay super relevant as a custodian for digital assets too. So we're going to be front and centre making that the centre of our early digital asset strategy, which will continue to evolve as we grow out. And I think that's a very sensible way to approach something like that if you're a larger organization, which is to say, I don't think anybody yet can define a mature digital asset strategy and be sure this is going to be our master plan for the next five years. It's probably sensible to say this is actually going to be our plan for the next 18 months, and then we can really assess the technology in a more advanced stage. We've got some integration; we've tried some proof of concepts and we're seeing this grow out elsewhere. And now we can decide what else we want to do.

2. What are the consequences of not having a digital assets strategy?

The consequences of not having a digital asset strategy really stem from the question of not having a business strategy full stop. There's a number of risks that definitely go hand in hand with this, with regards to whether or not you're going to find as a business that you're being very reactive and potentially losing business to others in a variety of ways. So some examples of that could be that if you're a wealth manager and you're really focused on trying to attract and retain a younger clientele base, maybe under 35, which is usually a high priority for wealth managers generally because you've got the multi-decade of experience, you may find that without a digital asset strategy, you're starting to see disappointing results. And then you could, for example three years down the line, finally do the analysis to understand why and work out that you have a number of rivals that have launched digital asset sides of the business that can offer more innovative products directly to their clients, such as fractionalized real estate, exposure to the carbon markets as an asset class. It could be other things as well, like directly being able to offer Bitcoin exposure for them in a secure way as well. Therefore, the ultimate question that companies have to ask is if you are fairly convinced that this is going to be transformative and disruptive, it's far more of a risk not to think about this and define out a strategy. And whether or not you get it right or wrong in that initial year, almost matters far less than putting some time into it, analysing it and exploring the technology.

3. What asset classes and opportunities are interesting today?

I think if somebody had asked me this question perhaps 18 months, two years ago, I'd have said it's all going to be about tokenization of securities. But that's not what's played out for a variety of reasons. We think that the most interesting digital asset opportunities as asset classes right now are proving to be the ones where there's the greatest macroeconomic drivers behind them, but also the greatest efficiencies that can actually transform them. So that's translating into things like funds, real estate, carbon, and a variety of other types of asset classes like bonds. And the reason for that is the fact that they are not particularly efficient in their existing forms and there's some real opportunities to either add liquidity and transform them or do other things. I mean, maybe I'll give you a really good working example of this, so you get a sense of how this works. We have a client based in Singapore and one of the first things they're going to do with our technology that they're embedding into their existing client facing portfolio and platform is that they're going to actually tokenize a proportion of their fund that they've actually just raved for. Now, you may think to yourself, well, why would you want to do that? And the advantages are that it's not just taking a proportion of that fund and issuing them out as tokens, which can sit in their client accounts. It's the fact that you can deploy a liquid exchange, a private market upon which they can be traded from day one. And what that means is that if you are an investor in that fund, you've got that opportunity to actually sell or increase your stake from day one. Very, very transformative for them for if you're an investor because you've got op options. And it gives, I think, a general sense there of where you can really add debt value from day one with a conventional asset class.

4. How did the market evolve last year? And what's next?

What happened last year with digital assets is really something we saw across the board with regards to most other asset classes in the sense that there was an enormous inflationary monetary bubble that inflated the values of various asset classes. And that leads to quite irrational behaviour by investors as well as by retail. We saw that across the board. Now, where this differs from other asset classes is that there's certainly the de-fi system, the unregulated cryptocurrency exchanging and facing side of the digital asset realm is not really regulated in any meaningful ways. And so there unfortunately what we also saw is some of the worst excesses of human behaviour. You saw scams, you saw greed, you saw different behaviour that is highly undesirable and actually made a fantastic case for why the global financial system over the years has evolved to a set of rules related to how we can present information and how we can trade and so on and so forth. My general assessment of it really is that it's partly been a maturing of the industry. We saw a fallout from various, should we say insalubrious actors, bad actors within the industry and various firms that proved to have over leveraged themselves and went bankrupt and led to contagion across a system without any proper design or controls. And what's nice about that is it's made a very powerful case for why if you're going to embrace digital asset technology, doing it with a licensed provider in a jurisdiction like Singapore where you can operate segregated markets that are very controlled is a great opportunity for the financial services sector to really show why it exists. It can embrace this technology. It can add innovation and efficiencies, and it doesn't have to all just take place in a complete, unregulated free for all that unfortunately leads to particularly retail investors losing out. And so for me, it's actually a net positive despite how it played out. And I think now really one of the big challenges for the wider industry is to make sure that everybody understands that regulated digital assets are not the same as cryptocurrency.

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