As digital asset options continue to gain attention and acceptance from investors, traditional financial institutions may be considering adding digital assets to their offerings and/or portfolios. As with any other industry, “standing still” isn’t an option in the financial sector, and tapping into the potential of digital assets can help TradFi organizations tap into an enthusiastic and growing new customer base. Further, adding digital assets can diversify a traditional portfolio, offering a hedge against market downturns.
However, any upside achieved from being viewed as an innovative early adopter can quickly be erased if a TradFi institution isn’t thoroughly prepared for the unique opportunities, challenges and risks that come with digital assets. Below, 11 members of Cryptox Innovation Circle share essential things any TradFi organization must be prepared to do if it’s considering digital assets and why these steps shouldn’t be skipped.
Focus on robust risk management
One essential thing to remember is the need for robust risk management. Given the high volatility and unique regulatory environment of digital assets, TradFi institutions should have comprehensive risk assessment and management strategies in place. This includes understanding the technology behind these assets, their market behavior and potential legal implications. – Tomer Warschauer Nuni, Kryptomon
Understand how verification and approval works on the blockchain
With the possible exception of real world assets — like expensive watches, jewelry and other items that are attached to digital ownership tokens to verify ownership and its transfer — the concept of verification and approval is different with blockchains. In terms of record-keeping, the blockchain itself is the constantly updated and verified record. Every transaction is checked and recorded on the chain. – Zain Jaffer, Zain Ventures
Implement thorough cybersecurity protocols
Custody is an important factor to consider. The events of the last year prove that “not your keys, not your coins” is as relevant as ever. Since insured institutional crypto custodians can be costly (and defeat the purpose of the aforementioned mantra), an institution needs to do its due diligence on its own staff and have robust cybersecurity protocols in place, including firewalls, two-factor authentication, multisignature, phishing training and so on. – Timothy Enneking, Digital Capital Management
Adapt to crypto norms and principles
Digital assets must address “cultural liquidity” for TradFi institutions. It’s essential to understand and follow the crypto community’s principles, practices and expectations. Decentralization and transparency underpin digital asset markets. To maximize digital asset potential, institutions must adapt to these norms, which may differ greatly from those of traditional finance. – Arvin Khamseh, SOLDOUT NFTs
Create accessible educational content
Education is the name of the game when it comes to digital assets. Much of a TradFi institution’s audience will likely be skeptical of or unfamiliar with digital assets like cryptocurrency. Beginner-friendly promotions, educational blogs, onsite explainers and videos couched in language the audience understands can make a world of difference. – Sheraz Ahmed, STORM Partners
Choose partners and technology carefully
For traditional businesses seeking to extend their services into the digital economy, it’s worth considering that, unlike people, not all entry points to the ecosystem are created equal. First-time retailers want a guide who knows the terrain and has time-tested experience delivering trusted solutions. As banks and crypto continue to co-evolve, partners and technology should be chosen carefully. – Oleksandr Lutskevych, CEX.IO
Keep capital preservation top of mind
The most important thing traditional finance institutions should keep in mind when approaching digital assets is the concept of capital preservation, or ensuring that there are no losses resulting from avoidable situations. Even if a manager wants to invest in risky assets like crypto, they should do it with profits that were generated earlier, not with original capital. – Abhishek Singh, Acknoledger
Clearly identify the asset class(es) you’re working with
Institutions should be steadfast in clearly identifying the asset classes they are working with, as “digital asset” can be vague. As various digital assets shape this emerging market, it will be paramount to educate your audience as well. There are many digital asset sectors that need to be understood, such as real world assets, cryptocurrencies, tokens, nonfungible tokens and many more. – Megan Nyvold, BingX
Be prepared for volatility
Digital assets, especially cryptocurrencies, are known for their price volatility. TradFi institutions interested in adding digital assets to their offerings should be prepared for the inherent risks associated with this volatility, which can lead to significant fluctuations in asset values. Rigorous risk management practices are essential. – Anthony Georgiades, Pastel Network
Consider hybrid portfolios
TradFi institutions should consider hybrid portfolios. When integrating digital assets, they should blend traditional and emerging holdings. This caters to evolving client preferences, requires rigorous risk assessment and compliance and leverages institutional expertise. This approach empowers institutions to tap into the potential of digital assets while meeting modern investment demands. – Vinita Rathi, Systango
Prioritize compliance
Web3 regulations around the world are evolving far more rapidly than their counterparts in traditional finance. TradFi institutions should work with blockchain compliance experts to not just stay on top of current legal requirements, but also to prepare for any upcoming changes. – Wolfgang Rückerl, ENT Technologies AG
This article was published through Cryptox Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cryptox.
