Family offices urged to understand risks before investing in DeFi and cryptocurrencies

Regulations have stabilised the industry and it is becoming an attractive investment for companies representing HNWIs, experts say

Wai-Lum Kwok, senior executive director at the Financial Services Regulatory Authority of Abu Dhabi Global Market; Benjamin Ampen, managing director for Mena at Kraken Crypto Exchange; and Ryan LemandShow more

Family offices need to understand the risks before investing in decentralised finance and cryptocurrencies, DeFi industry leaders told the Wealth Today Summit in Dubai on Tuesday.

DeFi, which experts say is a more secure way of managing financial transactions as it relies on blockchain, is a viable alternative as the world quickly moves towards a digital world that requires safeguarding investor assets and portfolios, they said.

“From the financial institutions’ perspective, the challenge is to adopt DeFi in a way that keeps to their regulatory obligations to customers,” Wai-Lum Kwok, senior executive director for authorisation and FinTech at the Financial Services Regulatory Authority of Abu Dhabi Global Market, told The National.

“From the customers’ standpoint, they need to understand the risks before investing in the DeFi space.”

Family offices are private wealth management advisory firms that cater to ultra-high net worth individuals. They are distinct from traditional wealth management companies as they offer more holistic solutions, including insurance, tax services, wealth transfer and charitable giving.

More than 200 of the world's single largest family offices cover a total net worth of around $493 billion, with individual families’ net worth averaging about $2.2bn, Swiss bank UBS said in a 2022 report on the sector.

However, family offices are not immune to the current economic environment. Soaring inflation and central banks' moves to increase interest rates are forcing them to reconsider their strategies and asset allocations, UBS said.

They are reducing fixed-income allocations and sacrificing liquidity for returns, as they increase investments in private equity, real estate and private debt, it said.

“The risk of a further sell-off cannot be ruled out as tighter Federal Reserve expectations, the global sell-off in risk assets and the fact that the massive outflows in cryptocurrencies started showing some cracks in the freshly born crypto industry make cryptocurrencies increasingly less appetising,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, wrote in a note on Tuesday.

The Wealth Today Summit panel also acknowledged the risks in investing in digital assets, such as cryptocurrencies, but sought to allay fears by emphasising the importance of being educated and assuring investors that regulators oversee market activity.

“It’s extremely safe, especially if you know the kind of product, platform and protocol you’re using — especially with a heavily regulated exchange — and when the custody of your forms is being taken care of by the regulator,” said Benjamin Ampen, managing director for the Middle East and North Africa at Kraken Crypto Exchange.

“You can have a real advantage if you are in the know. The more you research, the more advantage you will have.”

Technologies influenced by blockchain are running at a fast pace, forcing investors, regulators and companies to keep pace, said Bijan Alizadeh Fard, co-founder and partner at Dubai-based venture capital firm Cypher Capital.

“As technology starts evolving, we started to see that the industry was shifting and going at a very fast pace. We have seen three cycles already,” Mr Alizadeh Fard said, referring to the three major crashes the cryptocurrency sector has experienced to date.

“A couple of times we thought it was finished, but then realised there's nothing to worry about as it’s just a cycle.”

Bitcoin, the world's first and largest cryptocurrency, crashed below the key $20,000 psychological level on Saturday as investors continued to shy away from riskier assets amid concerns of rising interest rates as central banks try to rein in inflation.

The digital token has since pared back its losses and was trading at $21,069.91 as of 5pm UAE time on Tuesday, according to CoinDesk. Still, it is down more than two thirds from its peak of almost $68,000 last November.

“Traditional investors would only invest in asset classes that are regulated, but there's clearer guidance on how to conduct business today,” said Stefan Kimmel, chief commercial and operating officer for Mena at Kraken Crypto Exchange.

Investors should not deal with unregulated companies, which are risky and major sources of unproven digital assets that can potentially ruin asset portfolios, Mr Kimmel said.

The sector is also grappling with threats to the digital asset ecosystem, with money laundering, market manipulation and online theft the biggest threats globally to DeFi, blockchain data platform Chainalysis said in a recent study.

The spectre of the so-called “crypto winter” — a prolonged period in which prices stay low for an extended period of time — is apparently settling in, with the panel uncertain how long it would last given the uncertainty of market conditions and perceptions to the cryptocurrency industry.

The latest crash, however, “needed to happen” because the market was “overleveraged and filled with overhyped products”, said Karim AbdelMawla, a research associate at Swiss crypto platform 21 Shares.

The crypto winter “could last anywhere from a year to two years, or more than that”, he said.

“Crypto has not experienced an extremely aggressive micro-environment as we have not been dabbling with the fear of recession and inflation,” Mr AbdelMawla said.

“In order to have a clear vision of how long this will last, we need to know the rules and how to protect assets.”