Despite us being in the middle of a crypto downturn — known as the crypto winter of 2022 — demand for Bitcoin remains strong, especially among professional investors such as wealth managers and trustees.
Given that Bitcoin’s fundamental investment thesis has not changed one bit, we agree that it’s wise for those with holding power to stay the course.
However, wealth managers and trustees do face some practical challenges when managing their clients’ Bitcoin assets. This is expected with a new asset class like Bitcoin — we’re still waiting for the legal and financial ecosystem to catch up.
Below we’ll outline the 6 key challenges:
1. Fiduciary duty and vulnerabilities to hacking
Most casual investors start their Bitcoin journeys through one of over 1,000 crypto exchanges online, where barriers to entry are practically non-existent. But things aren’t that simple for advisors and wealth managers who have fiduciary responsibilities to their clients.
As crypto exchanges are largely unregulated, it would be very challenging to explain a hacking and insolvency scenario (both of which are rampant) to clients who have lost their funds.
The lack of proper industry standards also means that whenever you buy, sell, or transfer Bitcoin on an exchange, potential discrepancies may arise — and those are difficult to explain to clients, too.
It’s not only exchanges that can lead to complications, though. Even with cold storage wallets, there is the risk of losing or misplacing the recovery key or even hardware failure, which can get advisors into trouble with clients.
To avoid these risks, more trustees and wealth managers are turning to licensed and regulated firms like Fintonia Group to be the custodians of their clients’ digital assets.
2. Legal and practical challenges around bequeathing
Despite its prevalence, Bitcoin is still not recognised as a legal asset in many jurisdictions and is difficult to bequeath to one’s heirs.
Simply transferring it to the beneficiary’s account might not work, since crypto exchanges would require significant legal paperwork to protect themselves.
Meanwhile, converting holdings to fiat is likely to be a red flag to banks. According to anti-money laundering guidelines, banks would require proof of both Source of Wealth and Source of Funds, which can be tricky if the original owner is deceased.
It’s possible to hand over assets in cold storage to one’s heir, but this requires some method of passing on the private key — which may either leave your wallet vulnerable to hacking. Otherwise, there may be no way to recover access.
Should all these bequeathing processes fail, trustees and wealth managers would have failed in a critical estate planning responsibility. This also leaves them open to being sued by their clients’ beneficiaries.
3. Significant differences in prices among the exchanges
Earlier, we mentioned that transacting on crypto exchanges can result in discrepancies. One such discrepancy is the potentially vast differences in price among crypto exchanges.
The crypto market is highly fragmented and inefficient, with hundreds of exchanges each serving different pools of buyers and sellers. The price of one BTC can therefore vary as much as 0.5% to 8% among exchanges on any given day and time.
As trustees and wealth managers have fiduciary responsibilities to their clients and need to justify their financial decisions, they should be aware of this major pitfall of buying Bitcoin through an exchange.
Fintonia Group solves this problem by connecting with multiple market makers and exchanges to obtain the best price at any one time. However, this is not an easy feat for individual wealth managers to accomplish on their own.
4. Undesirable crypto exchange business practices
Another unwelcome effect of the lack of regulation and industry standards around crypto exchanges? Unsavoury business practices.
These include lack of full disclosure to their customers and poor corporate governance practices, which are some of the red flags we found among recently collapsed crypto players Celsius, Voyager and Vauld.
Some exchanges also practise insider trading and market manipulation, which is especially associated with large crypto transactions.
As a regulated financial services firm, Fintonia only works with Tier 1 digital assets players and minimises the risk of exposure to undesirable business practices. In addition, we can also reduce the risks of large transactions by breaking them up across multiple parties.
5. Hidden costs of buying on an exchange
Buying Bitcoin on an exchange appears cheap because exchanges typically advertise low transaction fees. However, without regulations around transparency, crypto exchanges can and do hide extra charges.
Just like fiat money changers, crypto exchanges make money from spreads, i.e. the difference in price depending on whether you’re buying or selling BTC. We found that spreads can range from 0.4% to 4.5% per transaction, depending on the exchange and payment method.
On top of the spread, other hidden fees to look out for are maintenance fees, deposit or withdrawal fees, and extra transaction fees when you convert your fiat to stablecoin tokens (often a requirement before you can buy Bitcoin).
6. Unique accounting treatment of Bitcoin
Unlike more established assets, cryptocurrency is currently classified as an intangible asset by accounting standards.
Trustees should be aware of a peculiarity around Bitcoin’s accounting treatment: when Bitcoin’s price goes down, the loss must be recognised, but when it goes up, the gain cannot be recognised. This can lead to implications on the trustee’s ability to, say, distribute cash out of the company in the form of dividends.
With an institutional-grade fund like Fintonia’s Bitcoin Physical Fund, however, you do not run into such accounting issues.
How wealth managers and trustees can overcome these challenges
With their ease of use and low barriers to entry, crypto exchanges will always remain popular among casual investors. However, professional investors with fiduciary duty obligations will need a better solution for managing their clients’ Bitcoin.
The Fintonia Bitcoin Physical Fund was created to address the very issues faced by wealth managers and trustees.
As an institutional-grade product that is managed by a regulated entity in both Singapore (where we are fully regulated fund manager) and Dubai (where we hold a provisional virtual assets license), we have best-in-class security and regulatory practices in place.
In essence, the Fintonia Bitcoin Physical Fund greatly minimises the many risks that wealth managers and trustees face around investing in Bitcoin directly for their clients.
For additional reassurance, clients can also speak to us directly for advice around fiduciary duties, tapping on our team’s combined decades of experience as digital asset-savvy financial professionals.