A bridge built on Banking-as-a-Service, encompassing regulatory, technical and operational solutions in one package and eliminating longstanding pain points that are preventing crypto’s mainstream adoption.
If you were to rely solely on Twitter threads and tabloid newspapers, you might think that day traders, crypto bros and meme coin scams were all there was to the crypto industry. While there are a few of these characters and ploys present, what’s much less reported is the wide range of other crypto adopters and use cases, and more importantly, the huge accumulated wealth that’s now held in crypto assets.
PwC estimates that the total assets under management (AuM) of crypto hedge funds globally increased to nearly US$3.8 billion in 2020 from US$2 billion the previous year. Whilst there will still be plenty of fluctuations in what can be a volatile market, the growth of crypto, in terms of AuM and its application, is so great it means only one thing: crypto has become a legitimate store for the world’s wealth.
The next stage for the normalisation of crypto assets will be wealth management. A growing number of people now hold a substantial amount of their personal wealth in crypto. These aren’t just crypto whales who got in early but people with a lot of wealth in the fiat financial system, who have diversified into crypto. In Q4 of 2021, CNBC published data which revealed that the number of money investors allocated to crypto increased by 20%, compared with the previous year. Today, those investing in crypto aren’t just day traders, but people who are investing in crypto long-term, looking to grow their early investments over many years. This shift has seen the typically conservative wealth management sector prioritise digital assets to follow client demand.
To meet customer needs, the likes of JPMorgan Chase & Co., Goldman Sachs and Morgan Stanley all give their wealth management clients the option to access crypto funds in some way or another. And even if the incumbent of choice isn’t offering the customer access to their selected cryptocurrency, there are newer cryptocurrency wealth management providers like SwissBorg that are democratising investment in crypto.
Whether it’s investing directly into cryptocurrency, or indirectly via a crypto ETF, crypto derivatives or a crypto hedge fund, there are multiple ways wealth managers and private investors are investing in the digital asset ecosystem.
However, despite crypto’s rise in wealth management circles, a number of pain points still need to be ironed out. Across the board, the main issue the crypto industry has is the recurring difficulty users have with getting their money in and out of crypto markets, or, to use crypto-ese, accessing fiat on- and off-ramps.
If digital assets are going to achieve mainstream status, then this issue needs to be addressed.
Fortunately, there are some key ingredients that can bridge this gap, the first one being the right fiat financial infrastructure.
If it’s the bridge (or lack thereof) that is going to hold the crypto industry back, then this bridge needs to be built, and built well, to enable greater circulation of crypto and smoother on- and off-ramps.
For institutional investors, working with an infrastructure provider will enable them to buy and sell crypto in real-time. A strategic payments infrastructure partner can grant companies access to multiple payment rails around the world, including SEPA Instant across Europe, and the Faster Payments scheme in the UK.
This will also benefit retail investors as by being able to access these payment rails, end customers gain the ability to make fiat deposits and withdrawals across multiple currencies in real-time. The result is faster, cheaper transactions on crypto platforms.
Then there’s regulation. As the demand for crypto investments in the wealth management sector grows, wealth managers will no longer have a choice but to understand investment opportunities and keep up with any regulatory developments. The challenge here is that the market moves fast, and each regulator has a different view when it comes to crypto.
As a result, it's often hard for these types of businesses to know where to start. Having to deal with the web of regulation can also be distracting, bogging down companies that are trying to innovate in this space.
To reduce this operational burden and protect the time allotted to innovation, it is important for them to work with partners that not only understand the regulatory landscape but also have compliance teams that are au fait with the needs of crypto companies and their users.
We’re already aware of the $1.8 billion increase of AuM held with crypto hedge funds and the predicted rise of alternative assets by 2025. Recent developments such as Ethereum’s transition to proof-of-stake, which requires holders with 32 ETH at minimum to take on the role of validator, will only incentivise people further to buy and hold crypto assets. Businesses in the wealth management sector will need to scale their crypto operations in parallel to the scale of the industry and customer demands.
To help achieve this, Banking-as-a-Service (BaaS) platforms are the natural solution here, and offer companies access to everything they need, tech and licensing-wise, wrapped into a compliant, banking infrastructure. Through API technology, crypto products and services are easier and faster to create and access, enabling offerings to scale across the industry. End-users will see more benefits here too, as additional fiat financial services can be bolted on at speed.
Crypto is well on its way to normalisation and its impact will be felt across a wide range of sectors, including wealth management. For this normalisation to happen at a faster rate, it’s not just a case of ‘building a bridge, we need to build a bridge that’s tailored for crypto. A bridge built on Banking-as-a-Service, encompassing regulatory, technical and operational solutions in one package and eliminating longstanding pain points that are preventing crypto’s mainstream adoption.
Thankfully, this is something we’re able to do. We have the tech, we have the architects. All we have to do is grab the opportunity.
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