Family office demand for digital assets such as cryptocurrencies and tokenised assets has intensified, particularly as high-profile investment activity around Bitcoin continues, and with many traditional and alternative assets looking pricey.
“Considering the price action that’s happened since last November, people have been asking: 'How do I get my hands on some Bitcoin, how do I trade it?'” Timothy Tsui, chief investment officer of Arbutus, a Hong Kong-based single-family office, told AsianInvestor.
The Bitcoin price ballooned from $10,000 in October to a peak of $58,000 on February 21; it stood at $50,368 as of March 3.
“A lot of people missed this rally," Tsui said. "Those who were lucky to get in on it are a small minority, even among people I know.”
Tsui admits that cryptocurrency is a risky asset class, but family offices like his are looking to reinvest profits made last year into avenues with more promising returns. He also manages risks by keeping allocations low.
“Assuming you made some money in the stock market in the past year, for example, if you invested in Tesla, you now want to know where to invest your profits. A lot of traditional avenues are no longer attractive,” Tsui said.
“You could take 1% to 3% of your total assets and consider putting it into Bitcoin. So even if it goes to zero, it won’t kill you.”
Kelvin Fu, a director at Indonesian family office Gunung Capital, said one area his organisation was spending more time on was digital assets, but declined to elaborate further.
But cryptocurrencies also attract much scepticism.
Peter Schiff, chief executive of investment advisory firm Euro Pacific Capital, has been particularly vocal, saying on TV last week that Bitcoin has “no intrinsic value”. And executives from respected asset owners such as Canada Pension Plan Investment Board have voiced similar concerns, even before last month's peak.
Tsui does not disagree with such assessments.
“It’s very difficult to create intrinsic value, except for the technology and the community of crypto miners and the integrity of the blockchain – that’s the intrinsic value," he said. "You can’t really value it properly. And knowing that, why would you put more than 2% to 3% of your assets in it?”
NOT JUST CRYPTO
Family offices have been looking at digital assets – and particularly tokenised assets – more favourably, said Samson Lee, a director at digital investment firm Coinstreet Partners.
Tokenisation is the digital securitisation of an underlying asset class, which can include institutional-type investments such as infrastructure, or initial public offerings (IPOs). Tokenised IPOs, known as securitised token offerings (STOs), have been growing in popularity, Lee said.
“One of the advantages of asset tokenisation is to bring fractional ownership to large-scale assets,” he said.
The possibilities are extensive, agreed Tsui. “Anything can be tokenised – farmland in New Zealand, for example; anything that produces an income”.
Hong Kong’s Securities and Futures Commission (SFC) issued its first STO licence in December and the Monetary Authority of Singapore (MAS) has issued two. Elsewhere, the US has issued six licences and the UK one.
“We are seeing the [STO] market coming on fairly rapidly and completing the whole ecosystem of secondary trading and providing liquidity," Lee said. "It will be interesting to see how this develops in 2021."
Closed-end funds are also potential channels for such products. A general partner may decide to create a tokenised unit that can be traded on an STO exchange.
The concept is similar to the real estate investment trust (Reit) market. But because of the cost-efficiency of the blockchain, tokenisation allows for much greater flexibility and accessibility for private investors, argue its proponents.
Tsui explained: “With this idea, you are typically taking earlier-stage risk than with a Reit. The property is being built and they just want further development funds.
“The seller may be a family or a private fund that wants to do a partial or complete exit," he added. "A family developer might not want to put all their eggs in one basket, so they’re willing to carve it up for other strategic investors.”
Tokenisation is a relatively new concept and regulators in Asia, particularly in Hong Kong and Singapore, say they are keen to work with potential market makers.
In a consultation launched in November 2020, the Hong Kong government proposed a new legislative framework whereby the SFC would be able to regulate all centralised virtual asset exchanges, including those that only trade types of virtual assets that fall outside the regulator's jurisdiction. The rules currently apply only to institutions.
Singapore is making a concerted effort to be a digital finance hub. A spokesperson for the Monetary Authority of Singapore told AsianInvestor that any approved exchange or recognised market operator (RMO) can use their existing license to launch digital securities tokens. Currently, there are three RMOs that offer securities based on tokenised assets, and these RMOs are only allowed to access non-retail investors.
MAS has issued its own guidance on tokens. In practice, the Singapore regulations seek to address the main risks posed by the different types of products, digital or otherwise. The MAS spokesperson said the regulator would continue to monitor closely the risks and scale of digital tokens as they continue to evolve in design.