The recent news that Coinbase and Blackrock – the largest asset manager in the world – are setting up a partnership that will allow institutional clients easier access to crypto investing is the latest sign of a fundamental shift in the cryptoasset sector. Put simply, as crypto continues to mature, expand, and develop more comprehensive solutions, it seems increasingly likely that institutions – and not necessarily individuals – will play the leading role during this crypto winter. Controversial as that may seem to some crypto purists, or bitcoin maximalists, market evidence continues to point in that direction, and not just due to this recent announcement.
Stablecoins, a leading subset of cryptoassets that have rapidly evolved from a cryptoasset that some considered boring or mundane, tend to have two distinct characteristics. Firstly, the vast majority of stablecoin transactions are taking place using a handful of coins issued by centralized market participants. These include both USDC USDC , and the much-maligned USDT USDT , and even for coins that have had significant issues in the past there has been significant progress made toward better reporting and attestation of reserve assets. Secondly, these same coins are almost universally pegged to the USD, a somewhat paradoxical development given the origin of bitcoin and crypto at large.
With larger incumbent payment processors and financial institutions of all kinds, and all over the world, using stablecoins as an on-ramp to better integrate crypto within their operations – not to mention the growing research and investment into central bank digital currencies (CBDCs), there are going to be numerous opportunities for advisors over the coming year. Let’s take a look at a few of the topics that advisors should be bringing up with clients if/when they begin/continue to integrate crypto into operations.
What type of crypto. Crypto is a broad term that has only become broader over the last several years as the proliferation of crypto products has continued to expand rapidly. One of the most important considerations to discuss, both internally and in an advisory capacity, is what specific crypto will be part of the organizational strategy going forward? Will it simply be bitcoin, or will stablecoins play a role? Building on that, what steps will be enacted to ensure that these crypto payments are able to interoperate with existing finance and treasury software?
Every cryptoasset is different, runs on a different underlying protocol, and comes with an array of risks and opportunities that are unique to that specific cryptoasset. In the excitement and (potential) rush to get more involved with crypto, one aspect that can be overlooked is a thorough analysis of what kind of crypto works best with the strategy of the firm.
Crypto is a tool, not a cure-all for poor performance, and should be treated as such in the organizational planning process.
How will crypto be integrated. Once the type of crypto has been determined the next step is to figure out the specifics of how this crypto will be leveraged within the firm. Options include, but are not limited to 1) simply processing crypto transactions received from external customers, 2) holding crypto in reserve to assist customers in a kind of market-maker function, or 3) actively allocating assets into crypto as a diversification or hedging strategy. Each of these options carries with it considerations that easily be overlooked, but are critical to successful onboarding of crypto within the organization.
For example, if the entity is simply processing payments on behalf of customers there needs to be a defined (and followed) process to conduct due diligence over potential third party partners. If instead the organization is seeking a more active role for crypto the options for custody over the cryptoassets need tot be assessed. Will the entity self-custody, enter into a joint venture with a crypto native organization, or outsource the entire process? Each of those also brings with it pros and cons in terms of cost and operational complexity.
Starting to accept bitcoin and crypto from customers, on the front-end, is relatively easy part; back-end security and integration are where slip ups can – and do – occur.
Insurance and control updates. Discussing insurance and internal control updates might seem to be the complete opposite of the excitement that cryptoasset tend to generate, but are equally as important to the successful integration of crypto within an organization. One specific point that can be overlooked is how the integration of cryptoassets within the organization will alter the risk profile of the organization in question. Given the continued regulatory uncertainty surrounding crypto at large, and especially with the deluge of proposed legislation that has been put forward in 2022 alone, this is not an idle concern.
Additionally, and as with any new technology or application, there are going to be changes necessary to existing workflows and processes within the organization. As these processes change, however, it is also going to be necessary to update the internal controls that are present at the organization. Simply hoping for a plug-and-play solution, or that integrating crypto will not fundamentally alter every process it touches is not a viable strategy.
Having conversations about controls and insurance up-front are perhaps the most often overlooked, yet important part of crypto integration.
With institutions of all sizes and types continuing to onboard cryptoassets at an accelerating rate, there are real opportunities for advisors to play a strategic role in the success of continuing crypto adoption. Crypto winters tend to lead to a refocusing of efforts around enterprise adoption, and the building out new applications; this crypto winter is proving to be no exception to this trend. As this adoption occurs, however, it is important for advisors to closely communicate with clients about both the opportunities and risks, both of which provide an opportunity for proactive and motivated advisors.