We are only a few months into 2021, but the financial world is staking an early claim for word of the year. Whether you read the business pages, participate in the art market, or just follow the latest celebrity gossip, everyone’s talking about NFTs, or nonfungible tokens. They are digital assets that are validated by blockchain technology and purchased with cryptocurrencies.
Some pundits have dismissed NFTs as a fad, but the world’s stewards of capital should not be so hasty. NFTs have provoked plenty of irrational exuberance, but there is no denying one aspect of their nature: Their authenticity. The influx of hundreds of millions of genuine assets into the capital markets arena should make wealth managers feel like the proverbial kid in a candy store, but the average wealth manager usually doesn’t have a clear strategy for digital assets. That needs to change – and fast.
Nobody predicted just quite how quickly NFTs would go mainstream. In December 2020, I wrote that capital markets would need a robust strategy for digital assets that went well beyond decentralized blockchain currencies such as Bitcoin and Ethereum. Interest in the concept grew in early February, around the time that actress Lindsay Lohan sold some artwork of herself as an NFT, and spiked in early March, when the artist Beeple sold an NFT at Christie’s for over $60 million. That put Beeple in the same pricing bracket as Warhol, Picasso and van Gogh.
Whatever you may think of the artists’ output, these NFTs are all bona fide assets. The tokens are a set of virtual deeds backed by distributed ledger technology (DLT) that don’t just convey individual ownership: They also attest to a digital asset’s authenticity. If that sounds like a complicated concept, imagine Leonardo da Vinci dividing up shares in the Mona Lisa between Florentines, and then hanging both the painting and those certificates in the city’s main square. It is irrelevant if a rival then paints a perfect replica of the work: all of Florence has already contractually established the authenticity of the original La Gioconda.
The same goes for NFTs. The assets themselves, whether they are art, audio or video files, might be infinitely reproducible and divisible, but they are backed by inviolable digital passports: The virtual deeds. Before blockchain and DLT came along, the financial market simply could not establish complete trust and authenticity in either a physical or virtual asset among multiple parties. This is why wealth managers cannot afford to dismiss NFTs as hype.
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Whether the wealth management industry is truly prepared to capitalize on the rise of digital assets is up for debate. Nearly four in five wealth managers (78%) in Europe and Asia said last year that they aren’t planning significant changes to their traditional business models. Many are hesitant to move forward with bold strategies for business model transformation that capitalize on emerging technologies.
But there’s a tremendous opportunity that exists for wealth managers in the world’s non-bankable assets, which includes private assets such as direct equity, residential and commercial real estate, family businesses, art and passion assets. This asset class represents a nearly $78 trillion growth opportunity for wealth managers.
And blockchain could change the game by bringing these assets into the bankable environment and creating a mechanism for their valuation, storage, authenticity, and calibration. The market for these non-bankable assets is likely poised to explode and wealth managers should move quickly to develop strategies to harness them in the digital realm. In addition to being a tremendous opportunity for wealth managers, it could serve as a tremendous source for good overall by reducing fraud.
A small, but growing number of advisors want to incorporate digital assets into their practices — 9.4% are allocating part of client portfolios to crypto in 2021, up from 6.3% last year. The issue, though, is that there isn’t much infrastructure in place to help financial planners give advice on digital assets, rather than just invest in crypto products.
This suggests that wealth managers may be flat-footed as the world moves towards being a cashless society, and central banks roll out their own digital currencies (CBDCs) that are underpinned by distributed ledger technology.
There are also trillions more digital assets floating around in the cloud that could be tokenized and traded: Think of all those unused air miles, unredeemed loyalty points and unclaimed rewards from the billions of annual flights, hotel stays, and clothing and coffee purchases.
Capturing the maximum opportunity from the proliferation of digital assets and ensuring a high level of client engagement will require significant investments in talent and technology. A strategy for digital assets might begin with building digital wallets to allow clients to easily purchase and store Ethereum, investing in user-friendly platforms for transacting in NFTs, or educating managers about CBDCs, but one thing is certain: Wealth managers need to act now.