In February 2022, BNY Mellon published a report titled ‘Insights into how family offices are responding to rapid economic and social change’, which presents the results of a global survey of family offices and amongst other things, explored the appetite of family offices globally to consider cryptoassets seriously in their investment strategies. In the months after the publication of this report, cryptoasset prices plummeted, with Bitcoin at its lowest value since December 2020 and other cryptoassets collapsing entirely. Some estimates suggest that the crash has wiped $2trn from the market, with several prominent crypto funds being forced to restrict customer withdrawals and some entering into liquidation. While the effects of the crash on family offices’ behaviour towards investment in crypto and related projects are yet to be directly acknowledged, we consider how family offices may respond to this turbulence in light of BNY Mellon’s research.
To recap briefly the rocky history of cryptoassets: ever since their arrival into the mainstream discourse surrounding investment strategies, cryptoassets have divided opinion. While advocates of crypto claim that their decentralised nature will usurp the established order of global financial markets and banking, others point to its volatility, links to financial crime and complex infrastructure and argue that this is neither desirable nor without legal, regulatory and technological challenges. In a few short years, crypto has expanded well beyond its early beginnings to encompass an enormous ecosystem that takes in decentralised finance (DeFi), NFTs, Web 3.0, the metaverse and more, with some investors generating extraordinary levels of wealth through savvy (or very lucky, depending on your point of view) bets on this new economy. Central banks across the world are harnessing blockchain technology to create central bank digital currencies, and despite the recent “crypto winter”, institutional investors and crypto-native businesses alike are continuing to make significant investments into crypto and blockchain initiatives.
Family office participation and engagement with the world of cryptoassets could provide a potentially rich pool of investors for those creating opportunities in the burgeoning crypto space. Family offices have become increasingly popular over the past decades and current estimates suggest that total family office holdings are now larger than those of private entities. Generally, family offices are corporate entities established by high-net worth individuals or families to directly or indirectly manage their investments, to further their philanthropic goals and for succession planning purposes.
According to the BNY Mellon report, even prior to the crypto winter, family offices were proceeding with caution in the crypto space. The report noted that three in four family offices surveyed were either actively investing in cryptoassets or were exploring the possibility of doing so (with 20% actively investing and 57% having limited exposure or exploring investment in cryptoassets) but that only 11% of family offices surveyed considered cryptoassets to be extremely important to their investment strategy. The key motivation identified in the report as to family offices’ increased interest and participation in cryptoassets was the desire to keep on top of investment trends. A majority of family offices surveyed in the report were also concerned with cryptoassets’ volatility, a lack of a regulation and risks of hacking and cybercrime.
However, of those surveyed who said they were more likely to invest in cryptoassets, 86% were next generation family office successors versus 14% of current generation leaders, suggesting that the appetite to invest in this space could remain strong as the next generation come into their own.
In addition, one might have expected the environmental challenges associated with cryptoassets that use the proof-of-work consensus mechanism (like Bitcoin and, for now, Ethereum) to be an obstacle for family offices who tend to be keen to invest ethically. Perhaps surprisingly, the report showed that only one in four family offices considered the energy-intensive crypto mining process to be a challenge they are dealing with. The majority took an optimistic tone as they considered that mining will become more environmentally friendly in the future.
Jon Cunliffe of the Bank of England, in comments made at the Point Zero Forum in Zurich in June 2022, has drawn direct comparisons between the crypto winter and the dotcom boom where the survivors ended up becoming the dominant players in their fields. What remains to be seen is whether family offices will look past the negative headlines and continue to invest in the decentralised economy – albeit perhaps with extra caution and with appropriate advice and due diligence – or whether the downturn and the wider economic climate will cause many to beat a retreat to lower risk investments for the foreseeable future. It will be interesting to see whether family offices can be trailblazers in the next iteration of the digital economy.
Should you have any questions on this topic, please email your usual Withers contact, or either of the authors of this article.