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(Kitco News) - In the world of digital assets, institutional adoption and integration with the traditional financial markets is a popular topic of conversation as the nascent asset class slowly gains adoption amid a concerted push by governments to regulate the industry.
At the recent Consensys conference held at the end of April, Kitco Crypto had a conversation with Jason Guthrie, head of digital asset products at WisdomTree, to get more insight into how regulated firms are approaching offering digital assets.
WisdomTree is a traditional asset management firm that has been in the exchange-traded fund (ETF) business for about 15 years, Guthrie said. The company manages roughly $92 billion worth of assets in traditional finance, and more recently, has begun moving into the digital asset arena.
“We created a new division within a company focused on digital assets about two years ago,” Guthrie said. “We did a series of investigatory projects and test cases with the idea of exploring whether this technology is going be disruptive to our business model and came away with the conclusion that not only is it going to be disruptive to business models, it’s going to be disruptive to all financial services.”
Since those initial investigations, WisdomTree has launched five crypto-based exchange-traded products (ETP) in Europe “where the regulatory environment allows for those to be approved and listed.” The total assets under management across the listed products is $250 million, he said.
The firm has also filed to launch a Bitcoin ETF in the U.S., but so far, the Securities and Exchange Commission (SEC) has yet to approve any spot Bitcoin ETFs.
Along with an investment in Securrency, a tokenization and financial logistics provider, WisdomTree has also been building out its own tokenization offering where “we aim to bring traditional exposures into a blockchain native world,” Guthrie said.
There are currently pilots running with dollars, gold, wrapped Bitcoin and Ether. WisdomTree also has nine SEC-approved funds – with more in the pipeline – offering traditional exposures to things like short-term fixed interest, short-term fixed income, longer-duration bond funds and equity funds in a blockchain-native way.
Guthrie said there are three categories of products: One that is direct-to-consumer, one focused on the digital asset ecosystem for distribution, and a third that is for institutional financial logistics.
WisdomTree is focused on direct-to-consumer products, he said. “We’re building out a mobile-first financial services application offering that allows people to be able to hold, send, and spend tokenized exposures and be connected to daily financial services. So give people a bank account number so they can get their salary deposited and debit cards so they can buy stuff. Then everything else is put on public blockchain infrastructure.”
The new service is in beta currently and is expected to go live in the app store at the end of the quarter, barring any unforeseen roadblocks, Guthrie said.
When it comes to the adoption of the ETPs currently available in the European market, Guthrie said the primary user base is institutional clients, and that these types of products still make up a “relatively small portion of people’s portfolio and the education adoption process is a process.”
He went on to note that interest in these products is largely driven by market sentiment. Product development starts to decline at the end of bull markets as there is a drop off in interest, and once things start to rise again, conversations and interest “come back to life. That’s the way investors work.”
How blockchain will disrupt financial services
When asked what WisdomTree found in its investigations that indicated that blockchain and crypto were going to disrupt all financial services, Guthrie highlighted the power of tokenization and “the power of making exposures available in an infrastructure that's ubiquitously available and can achieve great scale.”
This is a similar process that happened with ETFs and the mutual fund industry, he explained. “The big value prop was that when you made it available on a stock exchange in the equities ecosystem, it was then suddenly available to any investor that had a broker account. And not only would they access your product, they would access everyone’s products and every product that would ever exist after the fact.”
This was a sea change in the industry, and blockchain holds the power to have a similar effect moving forward, he said. “When you do something in tokenization, that’s the internet. That is a market of billions and billions of people. So, where we can see the potential for orders of magnitude, more scale, more access, and more competitive business models, blockchain technology enables that.”
WisdomTree was part of a disruptive industry in financial services, he said, and the firm sees blockchain as being just as impactful and “doesn’t want to get disrupted. We’d rather be the guys doing it. We see the benefit is there. It will lead to a better investing experience, a better saving experience, a better banking experience for people every day.
Institutional Interest
On the topic of institutional interest, Guthrie said that there are two main points of interest: Crypto as an asset class and blockchain as a technology for financial services.
“Institutions investing in crypto is absolutely a thing,” he said. “It’s growing. I think it will continue to grow. It is still niche. I will still represent 1% of the idiosyncratic market at the edge of their asset allocation, but that will continue to grow.”
When it comes to blockchain as a technology for financial services, this “is of interest to pretty much everyone.” Guthrie pointed to private tokenization efforts by Goldman Sachs and JP Morgan’s internal chain as prime examples.
“We’ve recently announced that we are involved in an institutional testnet with Avalanche along with T. Rowe Price, Wellington, and a bunch of other big financial institutions looking for how we can make our processes, our sort of intercompany interactions more efficient,” he said. “And we see this technology driving that. We really want to start taking use cases, business models, and put them on-chain in order to do things like help reduce the amount of money that is lost in things like settlement fees, timing, and reconciliations.”
Using ETFs as an example, Guthrie listed off the various parties involved in a purchase including the broker, a market maker, a clearing member, an exchange, a clearing house, and counterparties on the other side including the asset manager and the index provider.
“Everybody gets paid in this system,” he said. “Now you might not see that directly, but no one came to work for free and you are the only one consuming something. That's on the price of the trade that you've got and that will come out of your return at the end of the day.”
Blockchain has the capability of greatly reducing the number of parties involved, he said. “Those efficiencies will go back to the returns in the portfolios, the investments, the cost of spending, the cost of consumption of the end user.”
One specific use case mentioned by Guthrie was the integration of non-fungible tokens (NFTs) in the Know-Your-Customer (KYC) process. “We've got a process in place where you can go through a KYC process, and once verified, we issue an NFT, a soul-bound NFT to your wallet. It signals that this wallet has been approved, and it will then be able to receive and transfer tokenized securities that we’ve made.”
In the future, it's possible that other licensed financial institutions would also recognize the validity of this NFT, which means that the holder would not need to go through additional KYC checks to sign up for other platforms.
These soul-bound NFTs can also prevent the transfer of a registered financial product to wallets that do not contain one of these KYC NFTs, solving a major area of concern for a global financial market. These tokens could also be revoked by the issuer if the holder ever becomes known to be a bad actor.
“Any other financial services provider, be it JP Morgan, Coinbase, Wellington, or whoever wants to recognize it, can join the system. Then you don't need to onboard with them because you're already on board with us,” Guthrie said. “You get the NFT, you get access to all those services. That makes things a lot simpler. You only have to do it once. That's really great for democratizing financial services.”
Moving forward, WisdomTree plans to continue to expand its list of tokenized offerings beyond the 11 currently offered, which “cover the gamut of asset classes including precious metals, bonds, equities and currencies.” Guthrie said there are several things in the works with the SEC currently and to keep an eye out for some announcements in the coming months.
Artificial intelligence
Speaking briefly on the topic of artificial intelligence, Guthrie noted that systems like ChatGPT have so far served as “really good productivity tools,” and hold the ability to help modernize the financial system by revamping the old, outdated tech stacks that many firms operate with.
“I think a lot of the reason that the legacy financial services players are so slow, or just really behind the times when it comes to technology, is that they have a huge, complicated system that has been built up over essentially the last 50 years, just like incrementally adding on top of it,” he said. “This is a moment in time where we have this new technology where we can just flatten that tech stack. Start from scratch with blockchain and build on top of it. And that means that as technologies like [ChatGPT] exist, I think we're gonna be in a position to more nimbly integrate things as they come up.”
MiCA and regulation
Wrapping up the conversation on the topic of regulation and the recent passage of the Markets in Crypto-Assets (MiCA) regulation in Europe, Guthrie said that, in general, “regulatory clarity is a good thing.”
“I think the idea that jurisdictions want to bring crypto under the regulatory umbrella as opposed to trying to ban it, which is what everyone was really worried about like 24 months ago, is a good thing.”
Guthrie did express some concerns that the rules outlined in MiCA may be “a little far-reaching a little too early on” and could stifle innovation and development, but sees the bill as a good starting point for the regulation of the nascent asset class moving forward.
