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To Crypto or not to Crypto

1. Disruptive Market Trends

1.1 Bank digital transformation


Hardly any other sector faces such permanent challenges of digitisation as the financial sector. Technology is set to disrupt all areas of the Swiss private banking industry. From investment advice to research and portfolio management, through the middle and back offices, to client engagement and distribution, there will be far-reaching change.


The COVID-19 crisis has given it an enormous boost: many private banks took the opportunity presented by the crisis to make their processes even more digitally oriented. Introduction of digital identification, creation of mobile banking app, intelligent personal assistants, and development of a video communication system – all of these phenomena have been implemented during the pandemic. However, more disruptive innovations and regulatory adjustments are expected to bring further digital changes to the banking landscape.


In the years ahead, automated systems, robot advisors, and chatbots will be made available to provide clients with a faster, more predictable experience. They will provide automated customised investment advice and portfolio management services. Relationship managers can make use of these modern technologies to focus on improving advisory quality and client experience.


Exponential advances in computing power, predictive analytics, machine-learning, and big data will be set to aid every area of investment research. They will monitor and analyze every public company, as well as other financial and non- financial data. Meanwhile, the use of data analytics tools can be used by banks to better identify and mitigate risk. Artificial intelligence (AI) will also drive the development of new applications that can dramatically improve operational efficiency for both the front and back office. For example, powerful models driven by artificial intelligence may be used to predict major events in a client’s life, such as retirement or planning for succession. The so-called RegTech, relying on artificial intelligence, will not only reduce compliance costs and time but also simplify, optimize and automate the regulatory and bureaucratic control processes of private banks.


Looking ahead, Platforms and "Open Banking" will play a crucial role in digital asset banking, which means that standardization and API-Banking will continue to expand, generating new business via mobile apps and the cloud.


In addition, we expect to see an influx of developments in augmented reality (AR) and virtual reality (VR) that will help private banks make managed investments more intuitive for clients, especially Millennials who are seeking digital experiences in all parts of their lives. AR and VR are also useful tools for engaging clients through gamification, which uses elements of game-playing to influence client behavior. In parallel, the mobile and digital client experience will become the new currency of success across the wealth management industry.


Out of all innovations, blockchain has emerged as the greatest potential of this new banking era. Blockchain is a type of distributed ledger technology (DLT) that allows digital transaction data to be recorded simultaneously across multiple sites without a centralised administrator. Blockchain’s capabilities can go far beyond Bitcoin and offer dynamic changes to the organization. For example, most client contracts and regulatory documents could be managed via blockchain solutions, reducing some of the back-office tasks.


Finally, the current tech wave will impact every aspect of private banking and wealth management, although not without human oversight. They will definitely create opportunities for private banks and help them to approach more clients, use social media to build and benefit from networks, increase brand exposure, work more efficiently, implement updates faster and cheaper, and use different platforms to increase expertise among employees.

1.2 Digitisation of assets


Beside acceleration in the digitalization of banks’ business models and processes, another side effect of the coronavirus pandemic has been a translation of physical assets into digital.

Today, blockchain technology allows us to tokenize nearly everything we own. The tokenisation process enables the transfer of real assets in the digital world. This ability to tokenize any item creates entirely new asset classes in the market – namely digital assets. A distinction can be made between different types of digital assets: security tokens (e.g. ownership, right to dividends), utility tokens and cryptocurrencies (as a medium of exchange). These assets are largely unregulated, easily exchangeable, wildly volatile and they will fundamentally shift how people and money interact in the future.

The development of digital currencies; whether it be cryptocurrencies, stablecoins (e.g. Tether) or central bank digital currencies (CBDC) are all trend aspects of the digital asset revolution that could alter the way we look to exchange value.


Crypto currencies, in particular, are a new type of digital currency which uses cryptographic principles to enable worldwide transfers of value securely, without the need for central intermediaries. They are becoming an integral part in the world of professional investment advice and asset management. Especially in the past 12 to 18 months, crypto currencies as asset class have really moved from backstage to mainstage. With total market capitalization nearly quadrupling to USD 1 trillion, cryptocurrencies have been the top performing asset class in 2020 and this will certainly hold true in 2021 with a total market cap reaching USD 3 trillion a few weeks ago. This significant market growth illustrates a growing demand for cryptocurrencies.


Bitcoin (BTC), in particular, which many see as the new "digital gold," due to its ability to hedge against inflation, has recently seen strong institutional adoption as an alternative investment. Payment providers, institutional investors, and even corporates have begun to build and launch their own entries in the ever-maturing crypto ecosystem. Corporations for example have begun to allocate crypto on their balance sheet as a reserve asset. Yesterday, Michael Saylor announced that his company, MicroStrategy, has purchased an additional 7,002 bitcoins, and that as of 29/11/2021, his company owns 121,044 bitcoins. . This has been reinforced by several announcements from well-known financial institutions: JPMorgan, Bank of New York Mellon, Goldman Sachs and BlackRock offer specialized funds to their clients who wish to invest in them, while MasterCard now allows credit card holders to transact in cryptocurrency. Another metric that hints at growing institutional involvement is the number of “whales” that have been formed in the past 10-8 months. They are holding a large amount of the total supply of Bitcoin with USD 26 bn of institutional investments. All of these developments signal that, across the spectrum, the investment community wants to participate in the crypto space.


Beside the ‘crypto gold’, a variety of different ecosystems such as Ripple (XRP) as a payment network or Ethereum as a DAPP and ICO platform has established themselves and exhibit market capitalization worth billions. The three biggest moves in the crypto arena — payments, DeFi, and NFTs — are mostly being built on Ethereum. This is the most actively used blockchain, established to enable the creation and use of smart contracts and decentralized applications.


In parallel, decentralized finance (Defi) is emerging as a rapidly growing new branch of Ethereum-based applications (dApps) that offer financing in the form of smart contracts against crypto-asset collateral. The unprecedent surge of the total value locked in Defi from a few billion in early 2020 to more than 113 billion U.S. dollars today, is a witness to this booming sector within digital assets. With a little more innovation and regulator understanding over the next few years, Defi protocols and projects will probably explode. The spectrum of applications in the DeFi space is endless. Secured lending, decentralized stablecoins, derivatives, decentralized exchanges (DEX) – the choice of applications is very diverse.


Ethereum benefited from the rise of NFTs (“Non-Fungible Tokens”). NFTs have boomed during this crypto market bull run when the importance of digital experiences has become ever more important, especially during the Covid-19 lockdowns. The exclusive arena of NFTs is currently seeing a new breed of investors looking to buy these digital assets to take advantage of the value they accumulate over time, as their value fluctuates with demand. Twitter CEO Jack Dorsey's decision to sell his very first tweet as an NFT only confirmed the endless possibilities offered by this modern digital token. We find the most popular use case for NFTs in digital art on the blockchain, such as CryptoKitties and CryptoPunks.


Certainly, all these aspects are leading to a situation where cryptocurrencies and digital assets more broadly can no longer be ignored. How well private banks embrace these technologies will help to determine which ones will prosper in the years ahead.

November 30 2021, Louis Mouton

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