A lack of regulation and research, as well as the wild fluctuation in price, has seen International Adviser steer away from reporting too much on cryptoasset investing.
Striped down to its basics – a digital asset is an asset class that sits on a blockchain ledger. Blockchain records the movement of assets from A to B and records it on an distributed ledger.
Digital assets fall into a few main categories:
- Cryptocurrency – a digital asset used as a method of payment;
- Utility token – a non-backed asset class, does not represent any form of ownership;
- Digital securities – a digital asset that is pegged to equity or debt in a company and is a form of raising capital for the company’s development;
- Stable coins – a method of payment that is pegged to something like the US dollar or gold; and
- Non-fungible tokens (NFTs) – a digital asset that can be used to prove original ownership of an asset like a painting or work of art. There may only be one original of something but multiple people can own a part of the original through a token issuance.
The rise in demand and interest from investors globally has started a discussion about whether retail investors should have them as part of their portfolio.
Recently, Holborn Assets published a survey of over 1,000 UAE residents, which found 26% view cryptoassets as offering “exciting investment opportunities”, and 45% want to seek more education about the asset class before they invest.
IA has spoken to GSB Capital, DeVere Group and Globaleye about cryptoassets and retail investors.
Demand
The UAE is not the only region which has seen a crypto boom – El Salvador became the first country in the world to adopt bitcoin as legal tender after its congress approved president Nayib Bukele’s proposal to embrace the cryptocurrency in an effort to promote financial inclusion, investment and economic development.
So, why is there so much demand for cryptoassets?
James Spence, Globaleye assistant vice president, said: “We see a growing number of stories about people becoming millionaires with a small amount of initial capital; the stories of wealth creation in a very short space of time without having to do any work for it.
“These storied grabbed the attention of the 95% of the world’s population that don’t have wealth and everyone wants a little bit of it. The crypto space is a bit like the dot-com boom of the late 90s. Crypto/digital asset space is developing in a similar way to how the internet was 1997 and we all know what happened since then.”
Nigel Green, chief executive of DeVere Group, said: “There is growing retail and institutional demand for cryptocurrencies because it is becoming increasingly clear that the shift towards borderless, global digital currencies is inevitable.
“Understandably, investors don’t want to miss out.”
Good investment opportunity?
The rapid rise of crypto means that there is not much information about it.
But this does not necessarily mean that it cannot be a good investment opportunity for some investors.
Ross Whatnall, chief executive and founding partner at GSB Capital, said: “I think it’s far too early to say. There’s still so little historical data to work from and a lot of research to be done to determine if crypto is the latest asset class to be considered in an investment portfolio alongside more traditional assets like bonds and equities.
“There is an argument that due to the lack of correlation; crypto, when allocated to a portfolio in small percentages, can, in fact, de-risk a portfolio.”
Spence added: “Blockchain is a good investment, as it solves one thing that the financial space has practically lost – trust. As to which digital asset, well, that’s like trying to say which website was best to invest in the 1990s, it is a technology still in its infancy and there are multiple companies working to improve what was originally started in the whitepaper of Satoshi Nakamoto.
“You want to make sure the digital asset you purchase is set up in a compliant way, that there is an actual company there and it is solving a real problem in the world that need a blockchain solution rather than just a simple spreadsheet.
“The challenge is when you really look through most of the digital assets in this space, there are very few assets that have been through a process where a regulator has given oversight and deemed an asset a digital asset prior to allowing it to raise capital.”
Client conversation
The rise in media attention of cryptoassets has moved the conversation from social media to the adviser/client.
There is a number of approaches UAE advisers could take once a client asks about using cryptoassets as part of their portfolio.
Whatnall said: “I have some more speculative clients who have recently ventured into crypto and allocated small percentages of their portfolios. Up to now, my advice has been to only invest what you can afford to lose.”
Globaleye’s Spence added: “I explain to them the risks and complexities and that 90% of the projects available today the digital asset space will probably not be around in five years. I explain that each asset purchased needs to be researched in terms of the people behind the digital asset and to make sure there is a viable business prior to making any purchase.
“In the high net worth space, many of my clients are concerned about the wealth protection in estate planning. Digital assets raise an interesting question over how they should be held, are they held through platforms, hot or cold wallets, are there trust structures available to site these assets out of someone’s estate, how will they be taxed upon gains and what it the IHT liability on digital assets?
“There are a lot of questions that need to be covered with clients and as the industry catches up with the complexities of the digital asset share classes, not all of the answers are there yet.”
DeVere’s Green said: “If a client says they want to invest I would address this on a personal basis as every client has unique circumstances. That said, I find it baffling that some advisers have decided to refute the legitimacy of cryptocurrencies.
“Of course, cryptocurrencies are not for every client – but neither is any investment. Therefore, a refusal of one particular asset class seems somewhat peculiar.”
Regulation
One of the key problems with crypto is that very few regulators around the world have started to look into the asset class with any real depth.
This means there are a lot of scams involving cryptoassets. Before it becomes too widespread among retail investors, regulators in the UAE need to be involved more.
GSB Capital’s Whatnall said: “As we know, regulation across the financial services sector in this region is poor at best. This opens up investments to be abused, something we’ve seen time and time again. Without strong regulation, unscrupulous companies and individuals will find a way to exploit peoples’ desire to hop into the latest trend.
Green said: “Regulation is inevitable as the market grows and matures and this will drive retail investors’ positive outlook towards cryptocurrencies as investments.
“Proportionate regulation should be championed. It would help protect investors, shore-up the market, tackle criminality, and reduce the potential possibility of disrupting global financial stability, as well as offering a potential long-term economic boost to those countries that introduce it.”
Spence said: “Pretty much anyone can open an account and invest from as little as $25 into their favourite digital asset. The question raised is; how well regulated, if at all, are the exchanges that are allowing retail investors to invest in this space and what will regulators do to these exchanges in future.
“The UAE government as a whole is very supportive of the blockchain technology and its adoption, and the UAE is quickly becoming the blockchain centre of the world, as entrepreneurs flock to the UAE to establish entities through the likes of DMCC, DIFC and ADGM as all have supportive blockchain regulatory frameworks.
“Now we just need central bank and SCA to release regulatory guidelines supporting digital assets, as the financial free zones have been the leaders in digital assets regulatory frameworks.”
Future
There is an array of crystal ball predictions about what the future holds for crypto.
Whatnall said: “I think it’s highly likely blockchain, the technology behind crypto, is here to stay; it’s innovative and disruptive.
“I also think cryptocurrencies are here to stay. However, the majority of the currencies we see today will likely fall by the wayside, similar to many tech companies of the early 2000s.”
Spence added: “As regulators categorise more digital assets, those assets will be grouped into more traditional structures like ETFs. It is only matter of time.
“More and more companies will choose to adopt a digitalisation of its shares on blockchain, even if it is just for some simple reasons like managing its cap-table on blockchain for transparency of ownership.”
