Wealth Manager’s Guide to Digital Asset Allocation
A Look Beyond the BTC ETF
“Not all offerings and access to digital assets are created equal”- Anyone that invested in FTX
As fiduciaries, it is your paramount duty to act in the best interests of your client’s financial well-being, which includes navigating the evolving landscape of digital assets. This article aims to elucidate three distinct avenues for enhancing your clients' access to digital assets.
The recent focus has been on the Bitcoin (BTC) spot Exchange-Traded Fund (ETF), heralded for its innovative "in-kind redemption prepay" feature. This mechanism allows major financial institutions, such as JPMorgan and Goldman Sachs, to participate as authorized participants (APs) without the direct holding of Bitcoin or other digital currencies, circumventing existing regulatory constraints. Instead, these institutions can gain Bitcoin exposure through the ETF. In this model, APs deposit fiat currency with a broker-dealer, who then acquires Bitcoin on their behalf. Coinbase and Fidelity are anticipated to serve as the principal broker-dealers. The Bitcoin thus procured is safeguarded by the ETF's custodial service provider, redistributing risk away from the APs towards the market makers. It is imperative to recognize that individual ETF shareholders do not obtain direct Bitcoin ownership, a critical consideration for investors.
The second option involves directing clients towards a centralized exchange, such as Coinbase. This route may offer your clients similar digital asset exposure with potentially lower fees and reduced tax implications, especially if they opt for self-custody or later transfer their assets. However, this approach places greater responsibility on the clients to manage their digital assets and may diminish the need for your advisory services.
For those seeking a simpler or more direct method, an on-chain custodial solution utilizing smart contracts presents a viable alternative. This approach grants access not only to Bitcoin but also to a wider array of digital assets, leveraging the inherent security, transparency, and efficiency of blockchain technology. Unlike traditional investment models, this blockchain-native solution relies on the tangible security provided by smart contracts, ensuring that clients have true ownership of their investments. As the blockchain ecosystem continues to evolve, incorporating real-world assets (RWAs), the significance of on-chain investment becomes increasingly pronounced.
Furthermore, it is crucial to consider the tax implications and strategies related to the acquisition, transfer, and sale of digital assets. On-chain asset ownership offers advantages over ETF shares, including the ability to disburse investments in their native form, rapid transfers to third parties, and the flexibility to convert into other digital asset forms.
In conclusion, the essence of fiduciary responsibility lies in safeguarding investors' interests. In the realm of digital assets, the most robust form of protection is provided by on-chain custodial solutions. While digital assets ETF shares represent one investment avenue, they are not the sole option. The ability to verify and secure assets on-chain offers a more transparent and secure investment pathway, underscoring the importance of considering blockchain-native solutions for your clients' digital asset portfolios.
