Ben Strack

A new offering seeks to give financial advisers and their clients more flexibility when it comes to crypto custody — an area that has historically presented challenges for certain institutions.&nbsp;



Standard Custody &amp; Trust Company has joined forces with on-chain wealth management platform L1 Advisors to launch a product that seeks to blend the security of qualified custody with the control of self-custody, the companies told Blockworks.&nbsp;



Built for registered investment advisors (RIAs), wealth managers and family offices, financial advisers can now monitor assets in qualified custody or in clients&#8217; self-custodied wallets through the L1 platform.



The advisers can then create custom custody setups for each client based on risk profile, goals and other criteria, according to L1 Advisors CEO Miguel Kudry.



“A client who believes in self-sovereignty and wants exposure to DeFi can be both self-custodied and leverage qualified custody for tax advantaged account types,” Kudry told Blockworks in an email. “At the same time, clients who seek a more balanced risk profile can benefit from the security of qualified custody and only use self-custody as a pass-through to DeFi protocols and products.”



Based on compliance needs of each adviser, some may choose to have discretion over assets in qualified custody, he added. Others might defer all discretion to their clients.



Nick Rygiel, owner and financial adviser at Ironclad Financial, said his firm began its digital asset advisory offering by working with clients who were self-custodied through the L1 platform.&nbsp;



Those with growing assets under advisement needed a way to add assets into client estate plans, he noted. The new product from Standard Custody and L1 Advisors enables Ironclad to expand to working with digital assets in trusts and other tax-advantaged structures.



“The values of a qualified custodian along with Standard Custody’s access to best execution via escrow allows Ironclad to compliantly check all the boxes for different client appetites,” Rygiel said.&nbsp;



<h2 class="wp-block-heading">Crypto custody challenges</h2>



A main problem for digital asset custody for RIAs and other wealth managers in the US is that there is not a clear definition of “qualified custody,” according to Adam Blumberg, co-founder of Interaxis.&nbsp;



“RIAs use custodians to hold assets, and then exercise discretion — basically a Limited Power of Attorney — to affect trades within client accounts on assets held with those custodians,” he told Blockworks.&nbsp;&nbsp;&nbsp;



The SEC proposed amendments to the so-called “Safeguarding Advisory Client Assets” rule in February — which <a href="https://blockworks.co/news/sec-commissioner-opposes-agency-again">gained criticism from SEC Commissioner Hester Peirce</a>, a long-time advocate for crypto.



<a href="https://blockworks.co/news/blockchain-association-sec-custody-rule">The Blockchain Association argued in a May letter</a> that the requirements would discourage crypto-native custodians from continuing to provide such services.



Read more: <a href="https://blockworks.co/news/5-firms-bashing-sec-proposed-custody-rule">Bain Capital Crypto Among 5 Firms Bashing SEC’s Proposed Custody Rule</a>



Crypto custodians also don’t necessarily sync well with traditional custodians, Blumberg said. As an RIA managing client assets, or as a family office, it isn’t seamless to move assets from dollars or equities straight to crypto at a custodian, he noted.&nbsp;&nbsp;



“There is a conversion to fiat, a wire transfer — which can take a while — and then a purchase of crypto,” Blumberg explained. “Fee-heavy, time intensive and risks along the way.”



Blockchain infrastructure provider PolySign, the parent company of Standard Custody and Trust Company, <a href="https://blockworks.co/news/polysign-closes-53m-series-c-round">raised $53 million last year</a>. PolySign CEO Jack McDonald told Blockworks at the time that “a better platform for custody and fund administration” was necessary for institutional investors.



Though a January survey found that a majority of financial advisers <a href="https://blockworks.co/news/financial-advisers-unfazed-by-crypto-volatility">plan to maintain or increase their clients’ exposure to crypto</a>, one by Goldman Sachs in May found <a href="https://blockworks.co/news/family-office-crypto-interest-plummets">family offices were not as interested in the asset class</a>.



Digital assets adoption is being driven by the end client and a regulatory focus on safeguarding of assets, according to Matt Wahl, PolySign’s director of business development.



“Each of these clients require a customized approach that only a hybrid of qualified and self-custody can deliver,” he told Blockworks in an email. “This partnership allows advisers to finally deliver a solution for the digital asset client, and it couldn&#8217;t be more timely with the largest generational wealth transfer approaching.&#8221;



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Standard Custody debuts crypto custody tools via link-up with wealth management platform

A majority of financial advisers plan to maintain or increase their clients’ exposure to crypto despite the extreme market volatility seen last year.&nbsp;



About 15% of advisers said they allocated to crypto in client accounts in 2022, according to a survey by Bitwise Investments — down from 16% in 2021.&nbsp;



But nearly 80% of advisers who currently have a crypto allocation in client accounts plan to keep or boost those in 2023. Still, allocations remain small, as 95% of advisers with crypto exposure weight 5% or less to the segment.



Those who aren’t invested in the space don’t show much willingness to get involved. More than half of advisers named regulatory uncertainty, volatility and failures of centralized institutions as barriers to greater adoption.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="621" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg" alt="" class="wp-image-44696" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=424 424w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=430 430w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=361 361w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2023/01/Bitwise-Survey-Chart-1024x621.jpg?w=1734 1734w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption class="wp-element-caption">Chart by Bitwise</figcaption></figure>



The survey collected the responses of 491 advisers, including registered investment advisers (RIAs), broker-dealers, financial planners, wire house representatives and institutional investors.&nbsp;



Responses were gathered from Nov. 25 — two weeks after crypto exchange FTX <a href="https://blockworks.co/news/whats-next-for-ftx-and-its-customers-after-bankruptcy-filing">filed for bankruptcy</a> — to Jan. 6.



Christopher King, the CEO of crypto-focused separately managed account platform Eaglebrook Advisors, previously told Blockworks “<a href="https://blockworks.co/news/eaglebrook-ceo-advisors-the-lowest-hanging-fruit-for-crypto-market">the lowest-hanging fruit</a>” for crypto is the $30 trillion wealth management market.&nbsp;



Bitwise Chief Investment Officer Matt Hougan said in a statement that the latest survey findings show crypto is “one of the best business development opportunities in the financial advisor market.”



&#8220;Ninety percent of advisors report fielding questions from clients, and a majority say they have clients who invest in crypto outside the advisory relationship,” Hougan said. “2023 is the year to bring those investments in-house.”



Advisers’ willingness to continue allocating to the segment comes despite a bearish short-term view on crypto’s asset, as 63% of respondents believe the price of bitcoin will fall this year. Six in 10 advisers, however, think bitcoin’s price will be higher in five years, according to the survey.



<a href="https://blockworks.co/price/btc">Bitcoin</a>’s price was about $22,580 at 1:00 pm ET Wednesday, up nearly 7% in the past week. 



As for how surveyed advisers plan to offer exposure to the space to clients in 2023, the top choice is utilizing crypto equity ETFs.&nbsp;



Such investment products have become more prevalent, industry participants have said, in part because the SEC has not yet approved ETFs in the US that invest directly in bitcoin.&nbsp;



While <a href="https://blockworks.co/news/crypto-etfs-sank-in-2022">performance</a> for such ETFs was all over the map, all saw negative returns in 2022 as several segment-altering events rocked the crypto industry.



The largest blockchain ETF in the US is Amplify Investments’ Transformational Data ETF <a href="https://amplifyetfs.com/blok/?creative=614224715737&amp;keyword=blok&amp;matchtype=p&amp;network=g&amp;device=c&amp;campaignid=14388327036&amp;adgroupid=124949756063&amp;adid=614224715737&amp;gclid=Cj0KCQiAw8OeBhCeARIsAGxWtUxdcxUvwYIVM1aFp8xrETETmvGKO7VLcFYZpj9XrU7n--643QRX1sQaAkeYEALw_wcB" target="_blank" rel="noreferrer noopener">(BLOK)</a>, which has roughly $430 million in assets. Its top holdings include MicroStrategy — the largest public holder of bitcoin — Coinbase, Accenture, IBM, GMO Internet Group and SBI Holdings. 



BLOK is down about 42% in the past year, but is up 22% so far in 2023. Bitcoin meanwhile is down 39% from a year ago, but has gone up 36% year to date.



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Financial Advisers Mostly Unfazed by Crypto’s 2022 Volatility

<div id="highlights-block_61e9dd4f589c2" class="highlights">
 <ul>
 <li>A report by Bitwise Asset Management and ETF Trends found that 94% of financial advisors fielded crypto questions from clients in 2021 </li>
 <li>There was a roughly even split between advisers considering an investment in crypto equities versus direct crypto investments this year</li>
 </ul>
 
</div>



Financial advisors increasingly included crypto in client portfolios last year, according to <a href="https://static.bitwiseinvestments.com/Research/Bitwise-ETF-Trends-2022-Benchmark-Survey.pdf">a recent survey</a> — and even more money managers plan to deploy capital in the space this year.



The findings, released by Bitwise Asset Management and ETF Trends on Thursday, indicate that the percentage of financial professionals investing client funds in crypto rose from 9% to 15% over the past year. Most holdings, for now, are small, with 80% of respondents capping digital assets to 5% of a given portfolio.&nbsp;



<div class="wp-block-image"><figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1024" height="708" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg" alt="" class="wp-image-15807" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=372 372w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=378 378w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=317 317w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-2-1024x708.jpg?w=1470 1470w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure></div>



“Crypto has gone from a tulip craze-style fad to a real, lasting phenomenon,” ETF Trends Managing Editor Lara Crigger told Blockworks. “Advisors can&#8217;t just ignore the questions anymore. They must be proactive about crypto education, not just for their clients but for themselves.”



The survey included 619 responses from independent registered investment advisors, broker-dealer representatives and financial planners in the US.&nbsp;



<h3 class="wp-block-heading">Allocations to the space grow</h3>



To go along with the 15% of advisors that invested in crypto last year, an additional 14% said they will “probably” or “definitely” have crypto holdings this year.&nbsp;



The expected increase comes as 94% of advisors reported receiving questions from clients about crypto in 2021, up from 81% the year before



Crigger said she expects advisors adding crypto to their clients’ investment mix to rise sharply, noting that 47% of advisors said they have personal crypto holdings — a near-doubling from the year before.&nbsp;



“Seems like an odd mismatch, perhaps, but I think advisors aren&#8217;t willing to put their clients in something that they haven&#8217;t experienced for themselves,” she said. “Right now, they&#8217;re conducting hands-on research, using their own accounts. If it makes sense, they&#8217;ll apply that knowledge to their clients&#8217; portfolios.”&nbsp;



More advisors than now, however, are remaining on the sidelines, citing volatility concerns, plus a lack of regulatory clarity.&nbsp;



<div class="wp-block-image"><figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg" alt="" class="wp-image-15808" width="553" height="768" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=737 737w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=216 216w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=185 185w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=188 188w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=158 158w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=58 58w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=36 36w, https://blockworks-co.imgix.net/wp-content/uploads/2022/01/Advisor-Crypto-Survey-Chart-737x1024.jpg?w=944 944w" sizes="(max-width: 553px) 100vw, 553px" /></figure></div>



Though more than half of respondents said they’re concerned about volatility, the same number believe that bitcoin will top $100,000 within five year. Just 15% last year estimated the cryptocurrency would rise that high over the same period.&nbsp;



Bitcoin traded around $42,600 at 4 p.m. ET on Thursday, up 1.8% over the last 24 hours.



<h3 class="wp-block-heading">Ways to invest in crypto</h3>



Though the US Securities and Exchange (SEC) approved <a href="https://cms.blockworks.co/what-does-demand-for-bitcoin-futures-etfs-look-like-in-2022/">bitcoin futures-based ETFs</a> to hit the market in October, the agency <a href="https://cms.blockworks.co/when-will-the-sec-approve-a-spot-bitcoin-etf/">has not yet approved</a> an ETF that would invest in bitcoin directly.&nbsp;



The SEC on Thursday denied a bitcoin ETF proposed by First Trust and SkyBridge Capital, according to a<a href="https://www.sec.gov/rules/sro/nysearca/2022/34-94006.pdf"> filing</a>.



The survey found that 82% of advisors said they’d prefer investing in a spot bitcoin ETF versus a futures-based alternative&nbsp; — which could be a long ways off in the U.S.&nbsp;



Meanwhile other advisors are focused on investing in the stocks of companies with exposure to digital assets. About 46% were bullish on buying crypto-related equities, compared to 45% interested in buying crypto outright.&nbsp;



The outlook on blue-chip crypto stocks such as Coinbase has become more rosey lately as companies look to diversify their revenue streams. Bank of America Research Analyst Jason Kupferberg said in a research note earlier this month that he’s upgraded Coinbase to a buy rating as the company plans to add products this year.&nbsp;



<meta charset="utf-8"><a href="https://cms.blockworks.co/ark-invest-coinbase-is-an-attractive-long-term-play/">Research professionals at Ark Invest have said</a> that Coinbase’s position as a crypto on-ramp and its additional planned launches make it an attractive long-term play. The firm bought about 200,000 shares of Coinbase across three of its ETFs over a two-day span earlier this month.



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Survey: Financial Advisors Increasingly Allocating to Crypto

<div id="highlights-block_61aa518a8cdd9" class="highlights">
 <ul>
 <li>The RWM WisdomTree Crypto Index will allow financial advisors to execute this strategy through a packaged direct indexing solution</li>
 <li>Direct ownership of crypto assets through the index is a superior way to get exposure compared to yet-to-be-approved spot bitcoin ETFs, Onramp Invest founder says</li>
 </ul>
 
</div>



WisdomTree and Ritholtz Wealth Management have created an index designed to offer retail investors exposure to the crypto market through a financial advisor.



WisdomTree is an ETF issuer and asset manager managing roughly $76 billion assets globally, and Ritholtz Wealth Management is a New York City-based RIA that offers financial planning and asset management services to high-net-worth households, corporate retirement plans, endowments and charitable foundations.



The RWM WisdomTree Crypto Index is currently made up of 36% bitcoin (BTC), 20% Ethereum (ETH) and 4% each of 11 other crypto assets, which include payment systems, smart contract platforms, layer-2 protocols, oracle networks, crypto indexing services, decentralized finance and the metaverse.&nbsp;



Aside from BTC and ETH, the other coins <a href="https://www.wisdomtree.com/-/media/us-media-files/documents/resource-library/crypto-assets/rwm-wisdomtree-crypto-index-factsheet.pdf" target="_blank" rel="noreferrer noopener">within the index</a> are Fantom, Terra, Polygon, Uniswap, Aave, Sushi Swap, Yearn.finance, Decentraland, Enjin, Chainlink and The Graph.



“As wealth managers, we have a responsibility to adapt our portfolios to this burgeoning opportunity,” Michael Batnick, Ritholtz’s director of research, said in a statement. “As fiduciaries, we have an obligation to do so in a sensible way while harnessing the benefits of increased diversification.”



<h3 class="wp-block-heading">Offering advisors access to crypto</h3>



The index has been licensed to <a href="https://onrampinvest.com" target="_blank" rel="noreferrer noopener">Onramp Invest</a>, an integration platform that provides access to crypto assets for registered investment advisors (RIAs). It is available to financial advisors using its technology platform to manage separate accounts of clients.



Onramp Invest will supply the SMA architecture, rebalancing technology and customer support for financial advisors. <a href="https://www.gemini.com" target="_blank" rel="noreferrer noopener">Gemini</a>’s custody infrastructure and crypto-native exchange will drive the index’s creation, according to the firms.



The RWM WisdomTree Crypto Index is the best assembled structure and diversified crypto asset exposure currently available to US investors, and particularly the RIA community, argued WisdomTree Chief Investment Officer Jeremy Schwartz.



“Advisors have had a tough time getting access to crypto,” he told Blockworks, noting that there are not yet spot crypto ETFs in the US that they can buy through their brokerage accounts. “Retail is very much to direct, but it’s hard for advisors to manage that the way they manage their practice.”



The lack of crypto access for advisors was a key reason WisdomTree invested in Onramp Invest, Schwartz added. WisdomTree <a href="https://www.globenewswire.com/news-release/2021/05/25/2235508/18051/en/WisdomTree-Announces-Crypto-Model-Portfolios-for-Advisors-in-Collaboration-with-Onramp-Invest-which-features-Gemini-Integration.html" target="_blank" rel="noreferrer noopener">introduced crypto model portfolios</a> for advisors in May, which it noted at the time were available through Onramp Invest and with integration into Gemini.



Eric Ervin, co-founder and CIO at Onramp Invest, said there is $90 trillion of assets in the hands of RIAs and only a small percentage of them have gotten involved in crypto.&nbsp;



“Now we’re kind of opening that door so financial advisors can actually say yes when the client says, ‘Do you offer crypto asset exposure?’” he told Blockworks.



Ervin founded Reality Shares, an asset management firm, ETF issuer and index provider. The company <a href="https://medium.com/blockforce-capital/an-introduction-to-blockforce-capital-2062118c5821" target="_blank" rel="noreferrer noopener">became Blockforce Capital</a> in 2018.



“I literally sold my ETF company because the thought of creating another ETF that owned bitcoin was silly to me,” he explained. “It was like putting training wheels on a Ferrari when really what people need is the exposure in direct form and taking self-custody.”



Gemini allows that direct ownership of crypto assets, Ervin explained. The company became a qualified custodian chartered by the New York State Department of Financial Services (NYDFS) under Section 100 of the New York Banking Law. Gemini <a href="https://www.gemini.com/blog/gemini-crypto-under-custody" target="_blank" rel="noreferrer noopener">hit $30 billion in crypto under custody</a> in May.



“It’s not wrapping everything up in an ETF and hoping that it will get approved, but actually buying assets directly with a qualified custodian,” Ervin said. “We want to give [advisors] the education that [they] need because there’s still a lot of confusion about what is a qualified custodian.”



<h3 class="wp-block-heading">WisdomTree’s crypto-focused approach</h3>



WisdomTree has been focused on how blockchain can change the financial world, Will Peck, the firm’s head of digital assets, <a href="https://cms.blockworks.co/wisdomtree-plans-to-launch-more-crypto-offerings-in-2022/">told Blockworks last month</a>, noting that the firm is looking to bring more crypto products to investors in 2022.



WisdomTree CEO Jonathan Steinberg said during the company’s third quarter earnings call in October that he sees a big opportunity for advisors to give their clients crypto exposure through models and separately managed accounts in the US. He noted that the latter vehicle may be financial intermediaries’ preference amid regulatory uncertainty around crypto ETFs.



Though WisdomTree has filed to launch a spot bitcoin ETF in the US, the Securities and Exchange Commission (SEC) has not yet approved ETFs that would invest in crypto assets directly. <a href="https://cms.blockworks.co/sec-rejects-vanecks-proposed-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">The agency last month rejected</a> fund manager VanEck’s proposed bitcoin ETF as its 240-day review period of the planned offering was set to expire.



WisdomTree has physically backed bitcoin and ether exchange-traded products (ETPs) available in Europe and <a href="https://cms.blockworks.co/wisdomtree-plans-to-launch-more-crypto-offerings-in-2022/" target="_blank" rel="noreferrer noopener">added</a> three spot crypto ETPs to its lineup of offerings in the region last week.



The trio of new ETPs track three different indexes. The Crypto Mega Cap Equal Weight index invests exclusively in bitcoin and ether while WisdomTree’s Crypto Market index exposes investors to a diversified basket of crypto assets representing about 70% of the cryptocurrency market capitalization, including BTC and ETH. The firm’s Crypto Altcoins offering excludes bitcoin and ether, as its index comprises assets such as cardano, bitcoin cash, litecoin, polkadot and solana.



The firm could look to expand its index offerings in the US beyond the RWM WisdomTree Crypto Index as the space continues to mature.



“There are all sorts of strategies you can do, but partly you don’t want to confuse the market and have too many choices,” Schwartz said. “As sectors evolve within crypto … those are all candidates of themes.”



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