Crypto has become a $1 trillion market over the past few years, making them an important alternative asset for investors. In addition to their high return potential, crypto investments can deliver diversification from conventional asset classes and even high-yield opportunities through decentralized finance (DeFi) platforms.
This article explores why family offices need crypto services, what those services look like, and how to evaluate different providers.
Why Family Offices Need Crypto Services
Over the past decade, the surge in crypto asset values has minted an entire generation of new millionaires. While many individual investors are chasing volatility, family offices may be more interested in the potential diversification benefits. The combination of volatility and diversification could help improve portfolio-level risk-adjusted returns.
However, the crypto space is notorious for its risk and complexity. As a result, many family offices lean on experts to provide specialized access and guidance to the nascent asset class. These experts may include institutional platforms offering deep access to crypto assets or investment firms acting as full-service sub-advisors.
Essential Crypto Services for Family Offices
Depending on their specific requirements, many different types of crypto services are available to family offices.
Crypto Asset Management
Family offices may directly manage crypto assets or outsource asset management to a sub-advisor.
Many crypto exchanges offer institutional platforms to facilitate market access. For example, Coinbase Prime offers institutional investors – including family offices – access to unique capabilities like optimizing orders based on trade execution goals, accessing detailed trade execution reports, and handling controls and permissions.
At the same time, many investment firms, investment funds, and consultancies specialize in managing cryptocurrency investments on behalf of their clients. These firms may act as sub-advisor of crypto-focused assets within a family office, providing more fine-tuned portfolio construction, risk management, and active strategies.
Security & Custodial Services
Family offices need secure access to the right crypto assets while being mindful of the industry’s security concerns.
Crypto platforms (e.g., custodians) offer varying access to crypto assets and capabilities. For example, some platforms may support more tokens than others or provide deeper access to DeFi, NFTs, or ICOs. Depending on the importance of these capabilities to the family office and their clients, the choice of platform may be limited.
Regarding security, Coinbase Prime and other institutional-focused exchanges typically offer access to segregated cold storage for various crypto assets. Storing tokens in offline wallets makes it much more difficult to compromise. And by segregating wallets, family offices can limit risk exposure when maintaining large client portfolios.
Finally, family offices should seek exchanges with compliance measures (e.g., SOC 1 and 2) and insurance policies. In addition, the best crypto service providers regularly audit their security systems and processes to identify potential faults from protocol changes or wallet software.
Compliance & Regulatory Support
Crypto regulations vary globally and continuously evolve, making compliance essential to avoid potential legal risks.
Regulatory support services can help guide family offices through the complex legal landscape, ensuring their investments are profitable and compliant. These service providers may offer expertise in corporate finance (e.g., assessing initial coin offerings for securities-related risks) or tax-related risks (e.g., the classification of certain transactions).
For example, ZenLedger offers a robust tax platform that aggregates crypto transactions across wallets and exchanges, computes an overall capital gain or loss, and generates tax documents and regulatory paperwork. The platform also provides a complete audit trail and grand unified accounting to expose data for complex tax planning.
Choosing the Right Crypto Partner
The crypto industry is relatively new and far less regulated than conventional financial assets.
The collapse of FTX and other sizable crypto asset managers underscores the importance of choosing the right partner. Often, the best way to minimize risk is to choose platforms that have been around for a long time and try to comply with regulations. And, of course, Coinbase Prime is perhaps the best example in today’s market.
For example, Binance is an extensive exchange but doesn’t provide comprehensive visibility into its books, whereas Coinbase is a publicly-traded company subject to regular audits. While Binance may offer unique capabilities or lower fees, risk-averse family offices may want to stick with Coinbase Prime, given its transparency and compliance with U.S. regulators.
When outsourcing asset management to a sub-advisor, family offices should also ask questions to assess risks. For instance, the crypto service providers these asset managers use could influence risk, as became apparent with the collapse of several prominent exchanges. And their asset allocation strategies can also affect overall risk.
Finally, family offices should keep up with the crypto industry and continue asking questions over time. The fast-moving nature of the asset class means that opportunities and risks are constantly shifting, and they aren’t always evident to those in the mix.
The Bottom Line
Crypto is quickly becoming an asset class that family offices cannot ignore. While known for its volatility and complexity, the right crypto partners can help bring clarity and expertise to these alternative assets, helping clients improve risk-adjusted returns. But choosing the right crypto partner can be challenging.
If you trade crypto assets, ZenLedger can help aggregate transactions across exchanges and wallets, compute capital gains or losses, and populate the tax documents necessary each year. In addition, the platform provides tax loss harvesting and other capabilities to maximize tax savings and streamline tax season.
This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.