Culture and Crypto Collide in Asian Family Offices

In the later part of the 19th century, the Rockefeller family pioneered the idea of the family office. Separating the family from finance, the family office would take a portion of the family’s wealth and professionally manage it to ensure wealth preservation for generations to come.

As the 20th century progressed the cutoff point for what categorized the minimum investment for a family office decreased dramatically, and rapidly industrializing East Asia was fostering its own generation of tycoons.

Today, the current count of high net worth individuals (HNWIs) in Asia comes in at approximately 6.5 million, with the majority of the wealth generated in the last 40 years and clustered in banking hubs like Taipei, and Hong Kong and Singapore, which are both governed by common law judiciaries.

While family offices in the US and Europe have been adding bitcoin to their balance sheets as a hedge against cash, these three Asian banking hubs tell different stories of the regions’ family offices and their investment strategies in digital assets.  

Hong Kong’s digital gold

Hong Kong is where the action begins for many investors looking to deploy capital into China or North East Asia. The territory’s rule of law, courts, and regulatory oversight are considered some of the region’s cleanest making it a magnet of the region’s capital. In fact, it boasts 170,000 HNWIs according to KPMG along with a billionaire headcount just behind New York City.

Predictably, well over half of Asia’s family offices call Hong Kong home with the city actively soliciting the industry to set up shop. 

Martin Baumann, co-founder of CMCC Global, one of Asia’s first blockchain-focused venture capital funds, said that the first blockchain infrastructure fund his firm launched in 2016 was the “hardest $1 million he had ever raised.” But as he and his co-founder were fascinated by the ecosystem and blockchain’s disruptive potential for the Internet, they persisted.  

Baumann declines to name the family offices invested through his company, though he says a client list includes some of Hong Kong’s and Asia’s most recognizable billionaires and tycoons.

With the launch of the Liberty Bitcoin Fund in mid-2019, interest from family offices continued as they chased what he calls a digital version of gold. CMCC doesn’t disclose their assets under management for the digital assets funds, or the Liberty Bitcoin Fund, but a December report said it doubled its AUM during the month of December, while increasing its number of investors by 75%. The fund says this was driven by bitcoin investments from corporations, family offices and hedge fund managers.

All of this is only possible because the infrastructure Hong Kong’s Securities and Futures commission has created virtual asset provider laws allowing for licensed custodians and asset managers. Exchange-listed OSL provides custody and brokerage services for CMCC’s funds, and the fact that it’s a publicly traded company with Fidelity as a shareholder gives it “a lot of credit,” Baumann said. 

As for the rise in interest in bitcoin as an alternative asset class for Hong Kongers, this wasn’t addressed when Baumann spoke with Blockworks. But it’s been widely reported that Hong Kongers aren’t expressing a lot of confidence in the future of the semi-autonomous territory under its new National Security Law, and have been turning to digital assets including bitcoin amid mass protests and arrests of politicians.

Part of the law requires clients to be screened for political ties, and certain high-profile wealthy pro-democracy figures have had their accounts frozen. 

With some of Hong Kong’s most notable tycoons turning from friend of Beijing to foe, it wouldn’t be surprising if they have doubled down on their bitcoin holdings — even if they might have already first invested years ago. 

“China’s overreach is causing tectonic shifts in the fundamental agreements that govern the economic relationships between the United States, United Kingdom, and Hong Kong,” Kyle Bass of Hayman Capital wrote in a 2019 report on the situation. “Investors, Hong Kong depositors, and policy makers need to pay strict attention to the outcome of this legislative dance between China and Hong Kong.”

Taiwan’s bitcoin doldrums

On the other side of the Taiwan Strait, the situation is a total contrast from Hong Kong. While there are no shortage of wealthy people in Taiwan, the island nation of 24 million counts 40 billionaires in its ranks, according to a PwC and Swiss bank UBS.

Regulatory challenges, a high taxation rate and an illiquid currency means the family office industry isn’t as mature as it should be, explained Chris Cottorone who sits on the American Chamber of Commerce in Taiwan’s Private Equity and Capital Markets committee.

Cottorone, who has nearly two decades of banking experience in-country, said that while there are a lot of wealthy families investing, many don’t have a local family office legal structure. 

“Taiwan is a pretty-limited market in some ways, in terms of investment products to begin with,” he said, adding that local investors are quite conservative, and prefer a combination of equities and real estate in their portfolio. 

Nick Chang, who heads up Operations at Maicoin, a Taiwanese digital assets exchange, told Blockworks he has not seen traditional institutional investors jumping into cryptocurrency directly. But, some banks and holding companies have exposure to adjacent industries, such as semiconductor designers, mining equipment, and startups such as crypto exchanges and other blockchain applications.

Chang points to a lack of legal status around bitcoin and many altcoins as a deterrent for institutional investors.

“There is nothing that is preventing institutional investors from investing in bitcoin directly, but institutional investors usually take a very conservative approach towards new investment vehicles,” he said. “Institutional investors wouldn’t want to risk it before a framework is introduced by the regulator.”

Taiwan’s financial regulator isn’t opposed to making laws about digital assets. It was actually one of the first out of the gate for Security Token Regulation (STO) rules in Asia. But, the end product was so restrictive that it has yet to be used for a fundraise, according to Eddie Hsiung, a Taipei-based securities lawyer with Lee and Li Attorneys-at-Law.

Hsiung sees some interest in the local market as he’s had a number of clients inquire about the possibility of including bitcoin or other cryptocurrency in their portfolio and setting up dedicated funds. But he points to unclear rules regarding taxation of digital assets as market inhibitors.

Singapore’s bitcoin sling

Singapore, is a rival to Hong Kong in many ways. Both are common law jurisdictions with competitive tax rates and securities laws that act as magnets for regional capital.

According to Fundcomb, Singapore family offices have approximately $31 billion in assets under management. Favorable regulation by Singapore’s monetary authorities mean that the digital assets industry clusters in the city. 

However, with political stability at the bedrock of the nation, there’s not the same urgency to invest in bitcoin as there is in Hong Kong. Instead, institutional investors see it as an interesting asset class with disruptive potential and are still in the wait-and-see mode before making any serious investments, explained Joseph Phua, a fund manager and founder of Turn Capital.

“Institutional investors in Singapore are still relatively conservative and are waiting to see how the industry will play out. It still remains a fact that cryptocurrency is highly volatile and the digital asset ecosystem is still not as mature or developed,” he said. “If you take a look at the recent surge of interest in NFTs, even though NFT platforms are experiencing a boom, there is still the potential risk that NFTs could become invalid and point to blank pages if the company that issued it goes out of business.”

Different regions, different reasons

Although family offices’ interest in digital assets is more muted than the overall retail sector, the family office sector, as a whole, is the most conservative of all investors.

While Taiwan is a much more conservative and restricted overall investment environment than Singapore, family offices in the Lion City have taken a similar approach to their Taiwanese counterparts. In Hong Kong, fear of the future under a stronger grasp of Beijing dictates some interest in bitcoin, but so does the bona-fide interest in a new asset class. 

Ultimately, family offices are designed to guard a financial legacy from one generation to the next. As an investment vehicle they are naturally conservative. It’s not to say that they will never invest in digital assets, just not quite yet — especially in some parts of East Asia.