Investment as a Service: Table Stakes for the Next Crypto Cycle

It’s no longer enough for crypto exchanges to simply facilitate buying and selling cryptocurrency.

AccessTimeIconOct 18, 2023 at 3:45 p.m. UTC

Bear markets are for building. The firms that manage to survive this protracted drawdown will position themselves to take advantage of the next bull run, whenever it may come. Through this process of competitive preparation, features that were cutting-edge in the last cycle become table stakes for the next one.

It’s no longer enough for crypto exchanges to simply facilitate buying and selling cryptocurrency. Exchanges cannot remain mere asset marketplaces, especially considering the rise of decentralized finance, or DeFi. Instead, they will construct portals to an entire financial universe.

The opportunity is enormous as Gen Z comes of age with crypto familiarity and eagerness to put their funds to work. In May, the FINRA Foundation and the CFA Institute released a survey that found 44% of Gen Z investors got their start in investing by purchasing crypto; only 32% started with stocks and 21% with mutual funds.

Furthermore, 65% of Gen Z investors use financial apps, and pay heed to their guidance: "Of those who have received suggestions from an app, 67% said the suggestions influenced them to make a particular investment, trade or purchase."

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Investing app

“Investment as a service” crypto platforms that take cues from the curated experiences offered by TradFi giants like Vanguard will be able to welcome the next generation to a home base for wealth development.

Sandy Kaul of Franklin Templeton recently summarized this vision:

Cash could become spread across a set of central bank digital currencies (CBDCs), cryptocurrencies and stablecoins. Investments could be comprised of tokenized securities, funds and assets. Liabilities could be represented as tokenized obligations, and assets, valuables and collectibles represented as non-fungible tokens (NFTs) with contractual documents such as the title or insurance policy embedded within the token itself.

Unfortunately, early forays into this arena have been stymied by Uncle Sam’s giant wagging finger. U.S. crypto exchanges can no longer offer debt-based yield services like the erstwhile Gemini Earn program or retail-friendly staking services like Kraken’s verboten one or Coinbase’s beleaguered equivalent.

There is, however, a compliant path forward. One that involves proactively playing nice with the Securities and Exchange Commission and relying on robust custody partnerships, including tools like separately managed accounts. Commingling customer funds in large digital asset baskets is a non-starter, as it securitizes the underlying assets. But intelligent and automated direct indexing products, employed by an internet adviser registration, have made inroads with regulators.

These direct indexing platforms are the next step to wide adoption of long-tail digital assets beyond bitcoin (BTC) and Ethereum's ETH. I agree with the leadership of Methodic Capital Management: “Indexes allow for efficient asset allocation, risk management, product development and performance measurement. Without indexes, crypto cannot evolve into an institutional financial market.”

Advisers will play a pivotal role in simplifying Web3, managing client inventory and maximizing yield with the inevitable proliferation of on-chain protocols, products and decentralized apps. Again Methodic Capital Management is on the money when they note: “What is missing in the U.S. is regulatory support and index adoption that captures the more nuanced and differentiating aspects of crypto markets, such as proof-of-stake reward rates.”

We certainly hope U.S. regulators will help us out and make clear guidelines above and beyond a simple spot ETF, but the innovation is going to happen with or without them.

Edited by Nick Baker.


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Colton Dillion

Colton Dillion is the CEO of Hedgehog, a crypto robo-adviser and portfolio manager.