In today’s issue, <a href="https://www.linkedin.com/in/djwindle/" target="_blank">DJ Windle</a> from Windle Wealth looks at the risks advisors face when they can't or won't help clients who want exposure to digital assets.
Then, <a href="https://www.linkedin.com/in/hongzhesun/" target="_blank">Hong Sun</a> from Core DAO talks about custody and DeFi in Ask an Expert.
Thank you to our sponsor of this week's newsletter, L1 Advisors.
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Houston, Advisors Have a Problem
Financial advisors have largely ignored cryptocurrency for years, dismissing it as a speculative bubble or outright scam. Meanwhile, the financial landscape has shifted dramatically. Major players like BlackRock, Visa, Mastercard, Venmo, and many others are integrating blockchain technology and cryptocurrency into their operations. The crypto ecosystem is no longer a backwater - it’s becoming a part of the mainstream economy.
The disconnect between client interest and advisor readiness presents a stark choice for the advisory industry: adapt or risk losing clients, particularly high-net-worth clients, to more forward-thinking competitors.
The Two Crypto Scenarios
When clients approach their advisors about cryptocurrency, they typically encounter one of two scenarios:
1. Dismissal and Dismissiveness
Advisors brush off client inquiries with the same tired refrain: “Crypto is a scam,” “It’s just like tulip bulbs,” or “It’s too risky and has no inherent value.” While advisors may feel this stance is prudent, clients often interpret it as out-of-touch or condescending.
2. Inexperience and Inaction
Sometimes, advisors are willing to listen but lack the knowledge or tools to act. They haven’t taken the time to educate themselves about cryptocurrency, and their compliance departments won’t allow them to offer guidance. These advisors are left unable to help their clients purchase or manage crypto assets, leaving significant gaps in their service offerings and in their clients' portfolios.
Both scenarios lead to the same result: frustrated clients who feel their advisors are unprepared for the future.
Clients Notice
Let me illustrate this disconnect with a real-life example from my practice. A client with a net worth exceeding $10 million approached their advisor about investing $50,000 in cryptocurrency. The advisor dismissed the idea, calling crypto a scam and urging the client to steer clear. The client, unconvinced and having spent a lot of time researching it, reached out to their estate planning attorney for other options, who in turn contacted me because they didn’t know anyone else advising on cryptocurrency.
We opened an account for the client, walked them through the basics of this new asset class, and provided the education they needed to make informed decisions. Within a few weeks, this client transferred all of their assets to us, citing a lack of confidence in their previous advisor. Their parting words? “Why would I leave my money with an advisor who doesn’t understand the future?”
This story is not unique. I’ve received countless calls from individuals looking for help because their advisors aren’t willing, from advisors themselves asking me to manage cryptocurrency investments for their clients - and even from advisors requesting help with their personal portfolios. The irony is glaring: advisors who dismissed crypto as irrelevant are finding themselves out of their depth and, in many cases, out of a client.
The Perfect Storm for Crypto Adoption
We’re at a pivotal moment for cryptocurrency. Several factors have aligned to create a favorable environment for adoption:
1. Institutional Legitimacy
BlackRock, Fidelity, and other institutional giants are launching crypto-related funds and digitizing real-world assets like real estate, art, and others, signaling that crypto is no longer a fringe asset but a legitimate part of the investment landscape.
2. Regulatory Shifts
The anticipated replacement of Gary Gensler as SEC Chair marks a potential shift toward a more supportive regulatory framework. This could lower barriers for advisors and investors alike.
3. Increased Integration
Companies like Visa, Mastercard, and Venmo are incorporating blockchain technology into their operations, making cryptocurrency more accessible and practical for everyday use.
4. Client Demand
Perhaps most importantly, clients are driving this change. Distrust in the government and the barge of positive crypto news has put crypto at the forefront, and clients are starting to do their research and wonder why they’ve been left out of this asset class.
This moment represents a once-in-a-generation opportunity for advisors to position themselves as leaders in a rapidly evolving financial landscape and prove to the public that they aren’t just doing the same old thing their predecessors have.
The Bottom Line
The financial advisory industry is at a crossroads. Cryptocurrency is no longer a speculative fringe asset; it’s becoming a cornerstone of the modern economy. Advisors who dismiss or ignore it risk alienating their clients who are looking for forward-thinking guidance.
The question isn’t whether cryptocurrency will play a role in the future of finance—it already does. The real question is whether advisors will adapt in time to meet their clients’ evolving needs. Those who embrace this challenge will position themselves as trusted partners in a changing world. Those who don’t may find themselves left behind.
Q. How do you see the evolution of custody models for institutional players?
While self-custody aligns with the core ethos of crypto, it’s not always practical for institutions. Entities involving multiple stakeholders often require custodial solutions due to regulatory, compliance, and operational complexities.
Institutional players prioritize regulatory compliance, technology risks, security, operational efficiency, reputation, trust, and market liquidity. Their approach balances embracing digital assets’ potential and mitigating associated risks. Familiarity with custodianship in traditional finance also makes this model more appealing to institutions.
By supporting both self-custody and third-party custodial models, the crypto industry can attract a broader range of participants. This flexibility enables institutions to engage with digital assets in ways that align with their operational and security requirements while fostering adoption and adhering to crypto's fundamental principles.
Q. How will custody models enable a shift toward decentralized products?
Custody, whether delegated or DIY, centers on secure ownership. Blockchain technology offers a scalable asset control solution, benefiting individuals and institutions. Digital assets like bitcoin build trust in immutable code, enabling users to decide whom to trust with storage.
For decentralized finance (DeFi) adoption, self-custody isn't a strict requirement. Institutions can engage with decentralized applications while hiring custodians to safeguard assets. This flexibility allows institutions to explore DeFi products without overhauling custody models, fostering broader participation and innovation in the decentralized ecosystem.
Q. With bitcoin, DeFi, and staking gaining traction, what needs to happen for institutional adoption?
For institutions, key adoption drivers include safety, sustainability, and scalability. Institutions require assurances to maintain full control over their assets while avoiding risks like slashing or vulnerabilities from external smart contracts. They also seek transparency in yield sources, preferring sustainable activities within a Bitcoin DeFi ecosystem.
Scalability is critical as institutions must efficiently deploy substantial capital and ensure the system can handle it. Models that offer flexible options tailored to diverse user needs are best positioned to support institutional involvement at scale.
The same principles apply to Bitcoin DeFi (BTCfi). Clear value propositions, secure smart contracts, and deep liquidity pools are essential for adoption. As these elements mature, institutions will likely find BTCfi appealing, not just for access to bitcoin ETFs but for more flexible derivative products that support sophisticated financial strategies.
Bitcoin reached a <a href="https://www.cnbc.com/2024/11/21/crypto-market.html" target="_blank">new all-time high</a> just shy of the $100,000 mark on November 22.
BlackRock <a href="https://www.cnbc.com/2024/11/21/crypto-market.html" target="_blank">bitcoin options ETF</a> saw $1.9 billion traded on the first day.
Ripple announced its entry into the <a href="https://news.bitcoin.com/ripple-unveils-first-tokenized-money-market-fund-on-xrp-ledger/" target="_blank">tokenized money market</a> space.
