Wealth Management

Cryptocurrencies in the Family office and Investment Migration Spheres

Cryptocurrency, McKay Research, The Golden Quarter Show

April 3, 2021

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The Golden Quarter Show is a 15 minute conversation with leading experts in the private wealth and investment migration industries. Recently, we had a conversation with James McKay – an independent research consultant in technology and investment. He is the founder of McKayResearch and provides strategic research services to global market intelligence firms and a growing portfolio of law firms and investment firms. His analyses have been widely published by tech and business publications, including the Financial Times. If you want to hear the audio file click below and remember to subscribe on Spotify/Anchor/Google Podcasts to The Golden Quarter Show.

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Some of the key takeaways from our conversation with James McKay recorded on our podcast the Golden Quarter Show were:

Cryptofication defined
Golden Visas and Citizenship by Investment will inevitably need to adapt as crypto adoption rises
Blockchain to vet the crypto payments and to vet the investor’s KYC
Family Offices believe Blockchain is transforming investment strategies

Digital currency generally has been soaring, I understand that the overall value of this market is currently over a trillion US Dollars. Demand for bitcoin specifically has been growing exponentially and its been gaining mainstream backing. So James, is bitcoin here to stay?

James McKay: Yes, demand for bitcoin in particular and cryptocurrencies, in general, has continued to grow exponentially in 2021. To think that the price of bitcoin broke US$60K in March when the price was still below US$30K at the beginning of the year shows just how much energy there currently is in this market.

Is it here to stay?

Well, I think that perhaps in 2016/17 or earlier, there still could have been a case to be made – and one that was indeed made by bitcoin’s detractors – that it was just a passing fad that would disappear after it returned to its intrinsic value of zero.

But this hasn’t come to pass.

And on the contrary, the 100%+ price surge that we have seen in the first quarter of this year has come about as a result of multiple waves of institutional investment into the space – which is something that has really been building since 2013 after the launch of the Grayscale Bitcoin Trust.

So now we have JP Morgan, Goldman Sachs, BNY Mellon, and other members of the old financial guard entering the space en masse, as well as PayPal, Visa and Mastercard stepping in to offer crypto payments, it looks very very likely to me that 2021 will be the year that finally puts that question to bed on whether crypto is here to stay or not.

I should also add to that that these shifts are really happening at the same time we’re witnessing one of the most important trends in many years in this space, and that is what I call the ‘cryptofiction’ of major corporates – which is the basically the trend of major corporations drawing down dollar-denominated cash balances in favour of holding bitcoin as a reserve asset. So here they see the investment potential behind it and they’re also trying to secure their cash positions due to the increasing uncertainty of the (US) dollar.

More inflation will inevitably creep into the wider economy now as more handouts are disbursed to businesses and individuals during Covid-19, and a whole host of other factors as well.

So how has bitcoin gained so much momentum and appeal if we still cant use it as a means of exchange and what economic factors have led to its much more popular adoption now.

James McKay: To address your other point about why it has managed to gain such a broad appeal despite its perceived failure to achieve broad adoption as a means of payment – there are really several reasons for this.

It is important to remember that bitcoin’s emergence in 2009 coincided with the aftermath of the global economic crisis, and hardwired into its digital DNA are protocols designed to mimic hard monetary assets such as gold (and that’s something that it is been increasingly been compared to), and this is to ostensibly mitigate against the excesses of the financial sector which rightly shouldered much of the blame for the economic unravelling in 2007/8.

Many of these structural issues persist and so do the associated economic distortions in the market place as result of these structural deficits, ultra-low interest rates, asset price inflation, competitive currency devaluations, and more. So, these macro factors have of course compelled many investors to reduce reliance on investments based on a (failing) traditional financial system and towards inclusive portfolio diversification that support digital asset investments.

To a large degree, bitcoin is like a mirror that, at once reflects this continued economic malaise, while also embodying the current zeitgeist of digital transformation of business, industry and finance.

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That’s great metaphor to explain how bitcoin technically reflects the structural issues with our economies today. Let’s talk about risks. Cryptocurrency investments are widely unregulated, volatile and obviously come with great risks – so should family offices be exposing themselves to these risks?

James McKay: Yes there is no question, bitcoin volatility and the relative lack of formal regulatory frameworks compared with equities and other markets has been a major sticking point for the industry.

The regulatory equation is a fascinating one and it pertains not only to the world of crypto investment in terms of asset classification and investor protections. It is also a major focus in blockchain technology as it relates to industrial use cases, such as for IP protection, liability, data protection and so on.

So for example, the ‘immutability of records’ principle means that data contained on the blocks are virtually impossible to modify or delete, making it fundamentally at odds with data protection regulations such as GDPR, with its requirements of retaining data only for a necessary limited period.

But sticking with the topic of investment and wealth management in the context of family offices, there is no question that bitcoin’s extreme volatility can be a headache for wealth managers who certainly have a fiduciary responsibility to advise their clients on the relative merits of bitcoin as an investment.

One recent study showed that over a 10-year period from 2010, a 1% bitcoin allocation to a traditional equities / fixed-income portfolio resulted in a 79% increase in annualised volatility.

So despite being the best-performing asset class as of late, volatility concerns have not subsided, but developments such as the hotly anticipated introduction of a US-based, SEC-regulated bitcoin ETF could go some way to alleviating some of these concerns.

On the other hand, it is important to point out that while much of the attention in the crypto space is very much focused on the activities of large investment banks and investment houses, a significant number of family offices have been investing in digital assets for some time.

The UBS Family Office report from 2020 showed that 57% of family offices believe blockchain will transform investing strategies and behaviours, a sentiment echoed in the Fidelity Investment survey from 2019 that revealed that 72% of institutional investors – of which family offices are significant – reported that they had no issues with buying crypto asset-based investment products.

To some degree, this reflects the fact that many family offices are typically more entrepreneurial in terms of what they do and tend to favour and invest in innovative technologies ahead of their larger institutional counterparts.

But it is also an indication that family offices have substantially more freedom to engage in a range of cross-sector investments, and with a greater variability of growth perspectives and risk profiles compared with institutional funds that are highly restricted and regulated.

So yes, integrating crypto assets into a traditional multi-asset portfolio is difficult and presents challenges, but many family offices have already established a foothold in the digital assets space, even despite the fact that there are those that are, of course, still sitting on the side-lines.

As a side note, in my experience, there is certainly also a correlation between the more crypto-enthused family offices and those actively exploring how blockchain technology could be leveraged to reduce costs and increase efficiency in their own operations.

Thank you James for all your insight on this.

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Finally, taking the cryptocurrency conversation to the investment migration world. What hurdles do you anticipate governments will need to tackle if currently volatile cryptocurrencies become a widely acceptable and viable mode of investment in their golden visa or second citizenship programmes?

James McKay: This is a great question and one that needs to be seen in the broader context of government adoption of cryptocurrencies and blockchain technology.

Firstly, it should be noted that bitcoin’s qualities also make it well-suited to the newly emergent class of young, globally mobile, and digitally savvy HNWIs, and it is unsurprising that several bitcoin advocates have extolled the virtues of securing a second citizenship.

But unsurprisingly, governments have been much slower to embrace cryptocurrencies and blockchain technology compared with the private sector, largely due to the costs and innovation risk associated with developing unproven systems.

For governments, the issues around accepting bitcoin as a means of payment for Citizenship by Investment or Golden Visa programmes really pertain to the difficulties around price volatility, and the ongoing challenges of applying established advanced AML / KYC procedures governing fiat currencies to crypto-payments.

In terms of the volatility, the concerns are obvious: What is the best way to price an investment product using a unit of account still undergoing a series of price discovery corrections?

This remains a major challenge and deploying Central Bank Digital Currencies and/or stablecoins as part of a network of digital currency transactions may offer some solutions.

What security concerns do you foresee?

Further to the issue around security, AML/KYC has become a foundational pillar for the citizenship by Investment industry, and here, there is a lack of regulatory maturity with respect to transacting in crypto for products of considerable cost such citizenship by investment(CBI) and golden visa(GV) programmes.

Now of course, this will to a large degree be at the discretion of the state but the perceived need to regulate bitcoin despite its ability to achieve privacy and data security can’t be denied.

Countries offering CBI/GV programmes should have to make sure that both individuals and exchanges provide detailed personal information for transactions in a standardised way in the manner that is currently being proposed by the Financial Crimes Enforcement Network (FinCEN) in the US, for example.

So fortunately, we have a real-life example of bitcoin being accepted as a form of payment in the CBI space with Vanuatu, and we have seen how they have been able to leverage this and turn it into a competitive advantage, as it puts them on the forefront of tech adoption in the industry.

Even though there have been some critical due diligence failures, Vanuatu’s programe is now accounted for nearly half of government revenue and part of this success must in part be attributed to their acceptance of bitcoin.

So there are definitely challenges to crypto adoption for CBI/GV schemes but the inexorable rise of crypto means that this switch is likely to happen, and the early adopters will be at an advantage over those that pursue a wait-and-see approach.

Finally, I would say the CBI industry is also rapidly recognising the benefits of blockchain solutions for improving KYC and optimising workflows. So in a sense, blockchain adoption to broadly improve industry KYC/AML vetting and crypto payments would occupy both sides of the same technological coin and is further evidence that the digital transformation of the industry is an inevitability.

James thank you for joining in on the conversation, before we wrap up where can we find you in the online space.

Easiest place to find me is on my website www.mckayresearch.com Im also on linkedin and my twitter handle is @mckayresearch

Its been great having you on today and hearing your insight on all things bitcoin, wealth and investment migration.

If you’d like to participate on one of our next episodes where we cover all things that impact High Net Worth Individuals – then please reach out to us on editorial@civitaspost.com!

Thanks again James, thanks for joining us.

#crytpoassets #bitcoin #goldenvisas #citizenshipbyinvestment #alternativeinvestments #mckayresearch #civitaspost #thegoldenquartershow #joininontheconversation

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