We live in an age of digital disruption that has accelerated over the last year. Central banks are unleashing record levels of monetary stimulus, while technology continues to rapidly reshape our global economy. It has shown us that conventional thinking will not bring the answers to what lies ahead. In the midst of this change, crypto assets are emerging as a ‘safe-haven’ asset for institutional investors looking for alternative stores of value for their investment portfolios.
A new asset class is emerging – crypto assets. It is an asset class designed for the new digital age we are now entering. Bitcoin and other crypto assets have attracted retail investors and now the attention of institutional investors, who are drawn to the independence these assets enjoy from the policies of central banks and governments, and the blockchain technology shaping the future of finance.
Crypto asset strategies for banks
Banks will need to both create the infrastructure for crypto assets and respond as trusted advisors to clients who are interested in investing in this asset class. This creates a challenging duality: the current financial system remains, and this new digital asset finance sector emerges. Securing the expertise of a specialised partner for trading and investing in crypto assets, and developing a digital asset strategy, is an efficient way to meet this need for innovation, in incremental steps.
Increasing regulatory clarity on crypto assets
With a new DLT law addressing crypto assets effective in February 2021, Switzerland is one of the few countries with this regulatory clarity. The securities house licence granted by FINMA to Crypto Broker AG – the brokerage firm of Crypto Finance Group – is one more step in making secure, reliable access to crypto assets possible for the finance sector.
A vision of the future from the Crypto Finance Group Brokerage CEO Rupertus Rothenhäuser (RR)
Why do you think every bank needs a crypto asset strategy?
RR: Without a strategy for crypto assets, banks will be unable to serve their clients’ needs in the future. Distributed ledger technology – or blockchain – is only just emerging within the banking industry. However, this is a technology that will eventually establish itself at the heart of banking. Without it, banks will miss out on opportunities for efficiency and access at a time when we are entering a new digital and technologically driven age.
Banks will need to build the infrastructure to support crypto assets. The other challenge is creating access to the market.
Subsequently, the banking industry has not been idle. Banks are taking this new technology very seriously despite the formidable challenges they face. Their focus will be on how they can maintain their competitive edge in an increasingly technologically driven market. If they are unable to allow their clients to bank with crypto assets in the long run, then their clients would eventually switch to a bank that offers these services.
What are the challenges banks face?
RR: As crypto assets become more established, there will be an exponential increase in the number of transactions with crypto assets. As this happens, banks will also face many challenges. They will need to build the infrastructure to support crypto assets. This will require expertise to do this efficiently.
This means addressing the cost pressures as they will need to run their existing banking systems in parallel with this new technology for many years to come. By partnering with us, banks can quickly access the infrastructure that we already have built in trading and storing crypto assets, plus we can work with them to grow their expertise over the long run.
The other challenge banks face is creating access to the market. They will need products and solutions that allow their clients to invest in them. Whether they are interested in directly trading and transacting, or in asset management with white label products, banks will need an offering for various clients who want to invest in crypto assets. A further step will be expertise in tokenising assets that their clients wish to make bankable and tradable, or as a means to raise finance.
New technologies mean multi-year long projects for banks. That is why it is essential that banks have a strategy for making digital assets bankable in the future.
Finally, there is regulatory clarity. Switzerland is one of the few countries that is creating this environment for crypto assets. By working with licenced counterparties, like the Crypto Finance Group and their brokerage business Crypto Broker AG, banks receive a viable and efficient path to offering crypto asset services to their clients. Moreover, our brokerage business will be able to offer liquidity as the markets evolve for those banks whose clients decide to tokenise assets.
With partners like the Crypto Finance Group, banks can start growing their expertise today and benefit as early entrants in this market.
How difficult will it be for banks to implement digital ledger technology?
RR: Integrating crypto assets as part of the banking services on offer will be challenging, as we have already discussed. You cannot plug-and-play distributed ledger technology within a bank. These are large complex organisations. They handle a huge number of financial transactions, which allow our global economy to function.
Our crypto brokerage is one of the very few globally that is regulated.
Every time banks adopt new technology, it usually means a large, multi-year long project with costs running into the hundreds of millions. The emergence of distributed ledger technology for crypto assets is no different. This innovation can be accelerated with experts that know both the blockchain and banking environments and can provide tailored services, such as those on offer at the Crypto Finance Group. Many different parts of the bank will be affected during a project like this. There is the automation of payments, reporting, custody, and settlement to mention just a few. Updates to a complex web of legacy IT systems that have evolved and the impact this has on the rest of the bank needs to be considered. That is why it is essential that banks have a group-wide strategy for making digital assets bankable in the future. Without this type of coordination, it could be an extremely lengthy and even more costly process.
Now that the brokerage business has been awarded a securities house licence, what benefits open up for clients of Crypto Finance?
RR: It means our clients can access a full range of services, whether these are large banks, private banks, family offices, endowment funds, or pension funds.
First, there is our asset management business. They manage a systematic distributed ledger technology fund, which is an active strategy that uses automated trading algorithms in its approach. This is targeted at institutional investors who are increasingly using crypto assets as a ‘safe haven’ in their portfolios. Typically, these investors have a time horizon of more than ten years and want exposure to this emerging asset class using an investment vehicle.
Then there is our storage infrastructure and tokenisation team. The storage infrastructure they provide offers both security and flexibility. They can help build the crypto asset infrastructure that banks need, with trials that can be developed for the long-term. Plus, they have expertise to help banks explore the tokenisation of assets to make them bankable and tradable in the future.
Crypto assets are increasingly being embraced by institutional investors!
Finally, there is our brokerage business, which I lead. With it, we can offer our clients a holistic crypto asset service from the Crypto Finance Group. As a broker, we ensure liquidity, plus secure and efficient access across multiple exchanges with our algorithmic trading system for bitcoin and a wide range of altcoins and stablecoins. This offering is growing as these markets evolve. We will eventually offer this service for security tokens – newly tokenised digital assets.
Our crypto brokerage is also one of the very few globally that is regulated, after being granted the securities house licence from Swiss financial regulator FINMA. This means that clients can find a balance between innovating in digital assets and the regulatory framework that they operate in. I do not think there are any crypto specialist firms out there that can offer the range of services that Crypto Finance Group offers.
What is your outlook for crypto assets?
RR: I think it is important to explain how we got where we are today. The speculative nature of crypto assets in the past, such as bitcoin, has faded quite a lot. Crypto assets are increasingly being embraced by institutional investors as a store of value, a form of digital gold and even as a new safe haven during this period of unprecedented monetary policy stimulus. It’s worth noting also that this is a market that is no longer poorly regulated. The days of ICO exuberance are over and we are now entering a new era of well-regulated and securitised asset tokenisation.
I believe we are in the midst of a crypto asset bull run that is being driven by institutional investors, corporations and financial institutions. Crypto assets have, therefore, emerged as a legitimate and important asset class that cannot be ignored.
In the years to come, every bank and regulated financial institution will have a crypto asset strategy. It will be important for their survival and their ability to maintain their competitiveness in an increasingly digital world. It is an exciting time and one that could see the complete transformation of our global banking system. I am proud to be part of it.
Rupertus Rothenhaeuser, CEO of Crypto Broker AG
Rupertus Rothenhaeuser is the CEO of Crypto Broker AG in the Crypto Finance Group. Rupertus has a multi-decade background in the financial markets, forged at EUREX as an options and futures market maker. He drove early adoption in the rising global retail structured product market in Europe and Asia with BNP Paribas; and he led the setup of Boerse Stuttgart cats GmbH, the world’s leading OTC platform for retail structured products. He brings experience from previous roles in London, Paris, Hong Kong, and Germany. Having helped to build the start-up SIX Digital Exchange (SDX) as the first regulated exchange and CSD for digital assets, Rupertus will champion innovative digital asset services for the Crypto Finance Group’s diverse banking clients.
Crypto Finance Group’s brokerage
The Crypto Finance Group’s brokerage services allow banks and institutional investors to participate in this emerging digital asset class with secure, liquid, and transparent trading. The brokerage offers investors professional 24/7 access and liquidity provision for the crypto asset markets via CAT, its algorithmic Crypto Asset Trader, as well as through REST and FIX APIs.
Crypto Finance Group
The Crypto Finance Group provides institutional and professional investors with products and services with a level of quality, reliability, and security that is unique in the digital asset space today. The group provides FINMA-regulated asset management and brokerage services, and crypto asset storage infrastructure and tokenisation solutions. Since its founding in 2017, the group has been recognised several times, including as a Crypto Valley Top 50 blockchain company, Top 100 Swiss Start-up, and 2019 Swiss FinTech Award winner.