Big private banks are trying to provide their wealthy customers with information about crypto-currencies and initial coin offerings, but they are a long way from actually being able to advise clients on investments.
Markus Mueller, global head of the chief investment office at Deutsche Bank Wealth Management, said, “It is difficult to see [crypto-currency] as a serious sub-asset class.”
Mueller, who is based in Frankfurt, outlined to DigFin what is holding banks back – even if they believe that crypto and its attendant blockchain technology will have a huge impact on financial services.
“We do believe these things will be disruptive, including in capital markets, but we hesitate to develop a dedicated portfolio, or to advise clients to invest [in crypto],” he said.
According to Mueller, the hurdles include:
- Lack of regulation. This is the number-one problem for financial institutions. Whereas stocks, bonds, real estate and other instruments are legal contracts – ones that spell out rights, protections and obligations for both investors and the bankers servicing them – there is no such framework of protection for investors in tokens.
- Lack of a clear definition of the value of crypto-currencies. Although it is also hard to put a valuation on traditional securities, they operate with long histories that provide data to profile their risk and return characteristics.
- Banks can’t book crypto trades. Aside from the new Bitcoin futures launched by the Chicago Mercantile Exchange and the Cboe, which in theory can fit into banks’ accounting and reporting frameworks, they have no way to transact in crypto on behalf of clients. Bitcoin and other crypto-assets sit in the e-wallet of someone’s smartphone.
- Crypto doesn’t fit into traditional risk classes. Partly for regulatory reasons, banks classify assets into buckets that are as much about product suitability as they are to help investors understand their overall positioning. These are traditionally defined by the underlying exposure to a revenue stream, which tokens lack.
- As a corollary, private banks tend to view fiat currencies as an additional risk factor against an underlying asset, rather than as asset class by itself. If Bitcoin and the other 1,300 tokens are ‘currencies’, then private banks wouldn’t treat them as an investment until themselves.
Mueller says regulation will create trust, which in turn will drive value. “This is the inevitable topic that must be solved before we start to think about how to advise clients,” he said. For Deutsche Bank, that includes bitcoin futures.
Aside from these legal and technical issues, Mueller believes the crypto universe is in a late-stage bubble. He likens it to the market for silver, which in 1979 spiked sharply in response to moves by powerful speculators – only to collapse once regulators moved in.
Banks recognize that, among the 1,300 tokens now available, there exist some linked to compelling startups. In an environment of low interest rates, low volatility and stretched valuations for securities markets, crypto has a powerful appeal.
However, Deutsche Bank is not in a position to advise on any of them – although it can share its research with its wealth clients. “There are some really interesting business models, but until there is a direct investment with a bank as an intermediary, this must remain for our clients a speculative hobby,” he said.
Big banks are also unlikely to put clients into illiquid venture funds or other indirect exposures; liquidity has become a priority in the wake of the 2008 market crash. The closest Deutsche can offer a play on crypto is through an overweight to Asian equities.
“Both blockchain and Asian economic growth are in line with recent developments,” Mueller said. “Technology in Asia is appealing for mid- to long-term investors.”