Back to all insights

Integrating digital assets into your wealth management value proposition

In 2008, an unknown developer under the pseudonym “Satoshi Nakamoto” published a Bitcoin whitepaper. It was essentially a summary of the pioneering network and a new digital currency that would go on to change the world.

Since Bitcoin launched in 2009, the cryptocurrency market has seen some dizzying highs and devastating lows. At Fidelity Clearing Canada ULC (FCC), we refer to this market as the “digital asset market,” which includes Bitcoin and Ethereum. For the past five years, digital asset trading volumes have grown at triple-digit compound annual growth rates.

Into the mainstream

A handful of tech-savvy individuals drove the initial investment in digital assets. Participation expanded steadily to include the broader retail universe and institutions. One of the reasons for the rapid build-out of the blockchain infrastructure and mainstream adoption of digital assets is that, unlike past financial innovations that were developed in isolated geographies and took years to expand, digital asset infrastructure was built with a global mindset from the very start.

According to annual research1 undertaken by Fidelity Digital Assets, more than 8 in 10 institutional investors view digital assets as having a role in investment portfolios. Surveyed investors identified the most appealing features of digital assets as a high potential upside, innovative tech plays, and decentralization. In addition, traditional assets such as stocks and bonds have become more volatile and less trustworthy in recent years, prompting investors to seek investing alternatives.

Intensifying interest and customer demand are critical drivers for wealth managers to embed crypto offerings in portfolio construction.  A study by the Ontario Securities Commission (OSC)2 reported that while only 13% of Canadians currently own digital assets or digital funds, almost half of Canadians (49%) believe that digital assets will end up playing a key role in the future’s financial landscape. And according to the report, almost a third (31%) of Canadians surveyed stated that they plan to buy digital assets within the next 12 months. Clearly, many Canadians are interested in this asset class, but what underlies their reluctance?

Enter digital asset trading platforms

As interest in digital assets steadily grew, investors saw the emergence of digital asset trading platforms—online markets where users can buy, sell, and exchange digital assets. These platforms are quick, efficient, and transparent, making them more appealing to investors and traders than traditional trading systems.

Over the last few years, digital asset regulatory frameworks have started to take shape, slowly easing the uncertainty that initially held back institutional participation. However, there is still some reluctance on the part of institutional investors regarding security and compliance.

Security and compliance conundrums

The research3 conducted by Fidelity Digital Assets reveals that concerns around security (35%) and market manipulation (35%) and concerns around the regulatory classification of certain coins as unregistered securities (33%) are among the top-ranked obstacles to investing in digital assets for institutional investors.

These are legitimate concerns, as digital assets have proven vulnerable to security breaches and dishonest trading practices. In the US, the SEC and DOJ are currently aggressively investigating4 cases of digital assets being used as a medium for insider trading or market manipulation. During the 2022 fiscal year alone, the SEC managed more than two dozen cases involving digital assets. It also formed a Special Unit within its Trial Unit in the Enforcement Division to prosecute digital asset cases.

Custody is king  

If a digital asset is misplaced, misused, misappropriated, or stolen, there’s little recourse. For this reason, firms must evaluate their control environments, including vendor selection and oversight, specifically around custody controls.

Currently, custody options include securing assets on an exchange platform, using a qualified third-party digital asset custodian, or self-custody. No matter which option is used, having the appropriate, robust controls in place to safeguard funds and confirm that books and records match third parties and the respective blockchain is imperative.

Digital asset trading platforms operating in Canada must comply with Canadian law requirements, including registering5 with securities regulators. Unfortunately, there are unregistered digital asset trading platforms accessible by Canadians where essential safeguards that protect investors’ assets from loss, theft, or misuse may not be in place. The Canadian Securities Administrators (CSA) recommends that Canadians considering buying or selling digital assets use platforms registered by CSA members6.

No time to lose

Today, every institutional investment firm should be incorporating digital assets into their broader strategy and when crafting balanced customer investment portfolios. Most experts agree that digital assets should have an allocation in a diversified portfolio. Fidelity Canada even added a small allocation to its all-in-one balanced and growth funds, which are structured to be globally-diversified portfolios of stocks and bonds7.

Those who position themselves to participate in the digital asset ecosystem with a registered digital trading and custody platform provider at their side will be well-placed to capitalize on the next wave of opportunities created by this trading revolution. And with 31% of Canadians surveyed indicating that they plan to buy digital assets within the next 12 months8, the opportunities are at hand.

FCC is the first regulated CIRO dealer to offer a digital currency trading and custody solution dedicated to institutional investors in Canada. Learn more about how we can help you carve out a space in the expansive and steadily growing digital asset ecosystem for less chaos and more control.