The FTX scandal threatened the future of practically every project and organisation operating in the digital asset and blockchain space. But opportunities remain – if you know where to look, according to an expert panel at this year’s Spear’s 500 Live.
In a session called After FTX: What’s next for digital assets? presented in association with Archax, four experts in the digital assets space weighed in on how HNWs and family offices should approach these assets in 2023 and beyond.
James Brockhurst, partner at Forsters LLP; Anatoly Crachilov, CEO and founding partner of Nickel Digital Asset Management; Richard Shade, COO of Archax; and Chris Cox, VP of GSR Capital addressed advisers and service providers from a variety of interrelated fields who gathered at the Savoy on 28 June.
The collapse of cryptocurrency exchange FTX late last year – which resulted in its own bankruptcy, that of 100 affiliates, and the loss of $8.9 billion in customer funds – may have stunted the adoption of crypto as a mainstream asset class. But the panellists at the event argued that the capabilities at the heart of crypto and blockchain still have massive potential.
FTX’s failure wasn’t a failure of technology; it was failure of leadership and of management, said Crachilov, whose firm is the UK’s first FCA-regulated investment manager to specialise in digital assets.
‘FTX was the most concentrated financial entity ever created, which is against the very ethos of digital assets and crypto – which is all about decentralisation, Crachilov said. ‘This has been the biggest lesson learned in a post-FTX world: segregation must be enforced.’
And while the market may have developed in a ‘chaotic manner’, professionalisation and institutional-grade solutions now exist. In 2018, Fidelity launched its cryptocurrency custody service. BlackRock made crypto available to institutional investors in 2022 and is now eyeing a spot bitcoin exchange-traded fund with Coinbase as custodian.
Changing the investment landscape
It’s not just about cryptoassets. Blockchain technology is also changing the way investors look at traditional investments.
‘Equities, funds, bonds and beyond, as well as things like buildings, artwork, classic cars and racehorses – all of these things can be tokenised,’ said Shade, whose firm is the UK’s first FCA regulated digital securities exchange, broker and custodian. ‘You can create equity in them, and create a market for them. And this creates opportunities for people to invest where previously it was more difficult.’
In a hunt for operational efficiencies, global reach and round-the-clock transactions, banks are all exploring how to use the blockchain to their advantage, Shade added, so ‘it’s not a question of if, it’s when’ securities become tokenised.
But, as FTX has taught us, going with the right type of institution is essential.
Crachilov emphasised the importance of independent custodians and independent settlement agents, a market that is developing quickly – creating a more structured system.
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Digital assets: where we are now
Cox, a former fund manager and analyst whose current firm is a crypto market maker and liquidity provider, noted that HNWs are already involved in the space – initially hedge fund managers and increasingly private family offices – on the venture and hedge fund side. But there is a lot of catching up to do on the retail side.
‘A lot of the systems and the technology is new, and you need to dedicate time to properly learn and educate yourself. The custody solutions are very different to the traditional world. That should be the first point of call.
‘But this is an industry that’s not going away… We need to be ready to make that move [to digital assets], because the big money is going there.’
Similarly, for Brockhurst, one of the first lawyers to develop an expertise in cryptoassets, and the author of Cryptoassets for Private Clients, there is also catching up to do from a legal perspective, with many firms still ‘grappling with the nature of blockchain’.
For HNWs with assets over a certain threshold, a trust or foundation would be a natural solution, he says. But when it comes to digital assets, it’s a ‘mixed bag’ as to whether trusts are willing to take on these assets and the associated counterparty risk.
Clients themselves also can present a challenge. ‘A lot of the early adopters of digital assets are hostile to the idea of having a trustee: ‘Why should I hand over my assets to you?’ To that I would say, there are solutions – you can structure things through a foundation or a private trust company where you can sit on the board, so you do have that level of control.’
What the future might look like
Looking to the future, the UK government has indicated that it plans to establish regulations for digital assets to provide clarity for consumers and businesses – though so far there have been no specifics.
For Crachilov, regulations are a good thing: ‘It gives you access to capital.’ Similarly, Brockhurst believes that legislation would solidify the UK as a major player, though it needs to ‘hurry up’.
‘If you look at what’s been happening in the Cayman Islands, British Virgin Islands, the UAE – they’ve got pretty solid regulations around virtual asset sales. The UK are slipping behind, which means we could end up like the funds industry, where a lot of activity is done offshore.’
Shade noted that Archax has been working with the government to make the regulatory process easier, and believes that the UK still has significant economic and social capital: ‘There are still people here with good knowledge, and the more regulation that we have will help the digital asset classes bleed in to a mainstream asset class.’
‘I’m glad we’re not looking backwards in the way the States are,’ Cox concluded. ‘This is very much a global industry, so if the US do carry on pushing it out of the US, almost every other region in the world are very much embracing it.’
Watch the full panel ‘After FTX: What’s next for digital assets?’
Held at The Savoy in central London, Spear’s 500 Live 2023 was sponsored by Archax, the Charities Aid Foundation, HCA Healthcare UK, Henley & Partners, St. James’s Place Private Clients, and Unica Capital.
