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Family offices are turning to digital assets

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This is part of our December 2020 report into:

The Unstoppable Rise of Digital Assets

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Interview with Trent Barnes, Principal at Zerocap

Tokenization brings new models for raising capital, as well as institutional-grade opportunities


Forkast.News: How does a digital asset become “institutional-grade”? What sort of criteria are institutional-level traders looking for?

TB: The criteria would include clear guidelines and regulatory frameworks as to how digital assets are treated, deepening pools of liquidity for trade executions, counterparty protections with insurance, wallet, storage and custody security, regulated derivatives and new access vehicles to digital asset credit markets. 

Regardless, the strength and robustness of a digital asset is determined by the reach and depth of its network. Bitcoin’s growth of users, not only by quantity but also by the breadth of its participants, has created deeper intrinsic value to the network. A part of this has been driven by institutional infrastructure and, recently, increasing institutional adoption due to macro-economic factors that have shone a light on the investment case for digital assets—primarily, Bitcoin being regarded as a safe haven asset and inflation hedge, much like gold.

FN: Why do we want to tokenize assets? What’s the advantage of digital assets?

TB: Blockchain technology has modernized the financial system for the digital age. Just like if we were to invent money today, we wouldn’t necessarily invent paper money, coins and credit cards, we’d probably invent Bitcoin. In financial markets, I’d like to think we’d be smart enough to create a digital ecosystem of assets that allows us to tokenize anything of value in the real world—which is happening now. A digital age requires digital assets. 

The reasons for the move toward the tokenization of assets are around liquidity, opportunities in fractional ownership, which also allows for a new model raising capital, transferability, accessibility, programmable trust via the blockchain, and authenticating the asset.

FN: What’s your take on the explosive growth of stablecoins during 2020? Are you seeing demand for non-USD denominated stablecoins?

TB: The growth of USD-backed stablecoins is evidence that people are looking for a safe, non-volatile store of value. Whether it’s to provide protection from the volatility in the crypto market, being used as a gateway currency into trading, or solving remittance challenges in cross-border payments. They’re faster, they remove the need for an intermediary, and they come with all the benefits of a decentralized blockchain: speed, transparency and security. 

The demand for non-USD stablecoins is still in its early stages. The primary assets across our client base are Bitcoin, Ethereum and USDC, as well as Tether (USDT). For non-USD stablecoins, gold-backed ones are the most interesting for us—the benefits of gold without the drawbacks of holding the physical asset. There are obvious advantages to having gold tokenized on the blockchain, such as instant transaction speeds, liquidity, accessibility, transferability, portability and smaller minimum purchases.

We aren’t seeing a huge demand for these at the moment, and we put it down to a chicken-or-egg-type basket in regards to the liquidity available—is there low liquidity because of demand or because of the supply available? 

FN: What are some of the barriers right now in the digital asset market? Is it regulation? Education? Infrastructure?

TB: Definitely all three of these. Brokerages in the traditional finance sector could lose key parts of their business and margins. It’s a money-making machine and no one wants their cash cow taken away from them. However, you would also still need a centralized entity to hold these securities and tokenize them on the blockchain. Trust is important when persuading people to use new products, particularly where there is counterparty risk. Crypto and digital assets don’t have a long history and have been plagued by scams and plenty of adverse media.

In order to develop the infrastructure surrounding digital assets and their use cases, we need more thoughtful participation and investment, as well as an increase in regulatory support. From what we can see, some regulators are actively participating in the conversation around digital asset adoption and are providing clear guidelines where they can. 

FN: How has the custody market for digital assets evolved in the last year?

TB: From a traditional adoption perspective, one of the notable events in the US from earlier this year was the US Treasury/OCC (Office of the Comptroller of the Currency) giving the greenlight to banks to provide digital asset custody services for their customers. Though banks were never restricted in providing these services, having clarity from the OCC provides an official green light.

It will be interesting to see which US banking institutions take it up, as European and even Asian banks (particularly in South Korea) have and are already moving forward with it from a global perspective. One of the key drivers behind this, particularly for innovative banks, is preparing for a robust digital asset management and tokenized assets ecosystem, which is now on the horizon. A digital age requires native digital assets, and the banks that don’t keep up will be left behind.

FN: How has the explosion of DeFi shifted your strategy? DeFi isn’t really a tokenized commodity, but it can build liquidity in the tokenized asset market. What’s your take on this relationship? Is DeFi the missing link to build liquidity?

TB: Whilst DeFi is not a tokenized commodity – yet – it is already making huge waves in the liquidity space. DeFi essentially aligns incentives for all participants in the chain of a transaction.

The securitization of tokens has been challenged by shallow liquidity. DeFi structures in this space would incentivize deeper levels of “maker” liquidity and engagement, while lowering fee structures for those “taking” liquidity. DeFi offers huge benefits in 24/7 liquidity, yield and speed. DeFi is in its infancy. The natural next step would be to offer a vast array of tokenized commodities and assets.

Zerocap is a digital asset firm that provides bespoke financial solutions to family offices, HNWIs and emergent wealth globally, including bitcoin and digital asset trading, insured custody, and yield products.