Can cryptos change the fortunes of struggling asset management industry?

The outlook for the global asset management industry, plagued in recent years by unmerciful downward pressure on fees, is starting to look brighter. With meme stocks, decentralized finance and non-fungible tokens capturing the headlines, money managers need to keep up with the zeitgeist. A new report suggests that the cryptocurrency markets offer a great opportunity for fund managers and wealth management firms to tap a new client base and seize a source of fresh revenue. Color me skeptical.

The Bank for International Settlements just put crypto assets in the highest risk category, suggesting banks will need to hold a dollar in capital for each dollar’s worth of Bitcoin on their books. Risks abound, including regulatory uncertainty, crypto’s role in money laundering, the seeming vulnerability of wallets to getting stolen and backlash against the environmental costs of mining digital currencies. Not to mention the volatility that’s seen Bitcoin trade in a 130 per cent range this year, leaving it currently about 40 per cent off its April high.

Nevertheless, the potential growth for an asset class that’s exploded in recent years means the fund management community needs to be poised to meet client demand, according to a study just published by investment bank Morgan Stanley and consultancy firm Oliver Wyman.

If Bitcoin really is digital gold, then the bullion market provides a guide to its potential. Gold market capitalization has traditionally been between 5 per cent and 15 per cent of global gross domestic product, with about 50 per cent of demand coming from its use as a store of value rather than a commodity. On that basis, the report argues that Bitcoin’s market cap could reach $6 trillion by 2025.

The real El Dorado could materialize if the Securities and Exchange Commission finally approves an exchange-traded fund that can buy Bitcoin in the U.S. The report’s most bullish scenario sees Bitcoin growing to $9 trillion in market cap, spawning $450 billion of higher-fee ETFs with potential annual revenues of $4.5 billion. No asset manager in the hugely competitive passive space will want to miss out on such a potential goldmine.

There are other opportunities for the investment industry to expand revenues in the coming five years, the report’s authors say. In private wealth, total assets could almost double by 2025 to $13 trillion. The chunky fees still available from assets including private equity, venture capital and real estate make that a $21 billion-a-year revenue rainmaker.

Another hot spot is in the environmental, social and governance space. A shift to “more mature” ESG strategies, including impact investing, will grow the market to $6.5 trillion from about $2 trillion. And in wealth management, the report says advances in technology will make it cheaper for firms to produce customized portfolios for a wider range of wealthy customers, even those with less than $10 million.

But it’s in the crypto arena where investment firms face the hardest choice. “There are likely significant benefits from being an early mover,” the report says. There are also significant risks, both reputational and financial. That will probably inhibit the widespread introduction of portfolio tools based on virtual currencies, especially while regulators remain wary of being seen to legitimize the asset class.

All of which makes the SEC’s delayed decision on approving a Bitcoin ETF a key moment. If it says yes, then there’ll be a devil-take-the-hindmost rush to create a universe of investment products tied to digital currencies. Until and unless it does, crypto is likely to remain just that bit too racy for most of the mainstream financial community.



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