A lot of people have lost a lot of money on cryptocurrencies. But don't write off tokens, decentralised finance and non-fiat nest eggs just yet.
Dateline: Wellington, 25th July 2022.
I suppose, like most people, the most important financial decisions that I make (and the ones that I least understand) are with respect to retirement savings. Therefore I try to stay abreast of developments in the sector and noted with interest that one of the serious players in this space, Fidelity (the largest retirement plan provider in the U.S.), are launching a 401(k) cryptocurrency product. Roughly 23,000 companies use Fidelity to administer their retirement plans, and it has more than $11 trillion in assets under administration (AUA). The company says that they are responding to customer demand by offering a product that allows workers to allocate up to a maximum of a fifth of their savings to Bitcoin.
Since I don't really understand how pensions work, my decisions are delegated to a financial advisor. I generally do what my financial advisor tells me (normally something along the lines of "the tax taper reverse flange cut means you should invert the cash holding”) and go about my business. Were my financial advisor to suggest getting out of US bonds and into cryptocurrency, however, I might raise an eyebrow since, as the Financial Times notes, while Bitcoin still "enjoys a reputation" among some investors as a hedge, it has still lost more than half its value from its high point in November last year.
The recent collapse of companies such as Celsius has delivered what the Wall Street Journal called a “hard lesson” in financial market dynamics: High yield means high risk. A great many consumers, it seems to me, were prepared to gamble their life savings with enterprises that they imagined to be regulated financial institutions of one form or another, when the cryptocurrency market is little more than a casino, lacking regulatory oversight and legal protections (actually, I suspect that casinos are far more strongly regulated than cryptocurrency markets are.)
Long Term Views
It appears that the U.S. Department of Labor (DoL) have a similar position on long-term savings. In March they expressed concern about cryptocurrencies being made available to 401(k) plan participants and urged fiduciaries to proceed with "extreme care" before giving people the option of adding such speculative assets to the investment menu.
In response to this, Senator Tommy Tuberville (R-Alabama) introduced The Financial Freedom Act, to prohibit the Department from issuing a regulation or guidance that limits the type of investments that self-directed 401(k) account investors can choose and ForUsAll, a 401(k) provider that is working with Coinbase Global, has filed a lawsuit against the DoL to allow their plan holders to allocate up to 5% of their contributions to cryptocurrencies.
(Founded in 2012, ForUsAll plans to launch such a product shortly. The start-up has raised more than $43 million in funding.)
The UK regulator also favours a cautious approach, at least for the foreseeable future. Their view that “while pension schemes are permitted to invest in a wide range of instruments, they should always be appropriate to the long term nature of pension obligations" resonates with me, for sure, and based on what I've read about those comments, it seems pretty unlikely that any UK pension funds will be investing in cryptocurrencies or cryptoassets any time soon.
Maybe I should have diversified?
Whether people should convert their retirement plans into Dogecoin or pictures of chimpanzees with sunglasses on or not, I couldn’t say, but I do wonder if it is perhaps too soon to be looking into the direction of cryptoassets when considering prudent retirement strategies.
In fact, anything I say about cryptocurrency or cryptoassets is for entertainment purposes only and should not be misconstrued as financial advice nor a solicitation to purchase any particular asset class, and no sane person would listen to me for financial advice anyway.
(Clearly, some investment professionals think it is not too soon though. The Caisse de dépôt et placement du Québec manages several public pension funds in Québec, Canada. In October 2021, they put US$150 million of its members' pension funds into the Celsius Network, one of the dozens of unregulated lenders that have emerged in recent years promising high returns to investors willing to lend their crypto assets. Celsius crashed in June of this year.)
Cryptocurrencies, then, may not be the right asset class for my pension fund now (or, indeed, ever). When it comes to tokens and decentralised finance, though, I think that's a different story. Once the digital asset market is properly regulated, and funds are able to make well-informed choices about tokens that are backed by assets of varying classes (eg, commodities, real estate, the future income of pop stars and who knows what else) then they may well decide to store tokens of various kinds in addition to traditional holdings.
This does makes me wonder what pension funds and retirement accounts might look like in a tokenised future. Maybe people will switch some of their savings from assets that they intend to sell in the future in order to obtain money so that they can buy electricity or water or food into tokenised versions of the electricity or the water or the food itself. Instead of putting shares for the electricity company into your retirement account, put the electricity in it instead. Buy tokens that are kilowatt-hours and stash them for future use!
If that sounds an unusual approach to retirement, take a look at Nhaka Life Assurance in Zimbabwe. They are selling inflation-proof pensions denominated in cows. You can see the logic of this bovine alternative to savings accounts: the government cannot print cows on demand. The plan works like this: Savers, typically wage-earners such as teachers, pay in cash which the company turns into cattle. When a policy matures, clients can demand payment in cows or the cash equivalent.
I'll spare you the obvious jokes about a bull market, but it's definitely food for thought.
New and Better
At Money 20/20 Asia in 2019, I interviewed Jonathan Larsen (chief innovation officer of Ping An Group and head of the Ping An Global Voyager Fund) on stage. He told me that tokenisation is “a really massive trend… a much bigger story that cryptocurrencies, initial coin offerings (ICOs), and even blockchain" and confirmed my suspicion that long-term planning in the financial services sector must include some radically different scenarios.
Jonathan isn’t a rose-tinted future-addled techno-hype merchant like me, but a serious and experienced financial services power player. He spoke eloquently about the characteristics of the new asset class (including fractionalisation, which fascinates me) and went on to talk about the key characteristics of a digital asset platform that can fundamentally change the way the world of finance works, including "transparency and universal access and the ability to reduce frictional costs".
I see tokenised dollars, electricity and cows as parts of a new financial machine, more efficient than existing markets. A couple of years ago, Banque de France first deputy governor Denis Beau gave a speech in which he reflected on the inefficiencies in the sector and said that tokenisation could be a way to “answer the market's demands”.
Mr. Beau has forgotten more about financial markets than I’ll ever learn so I take his view (and Jonathan’s) very seriously. I may be sceptical about cryptocurrency for my pension plan, but I’m pretty sure that asset-backed tokens — that are the core of a new financial sector that serves wider society more effectively and attacks the stubbornly high cost of financial intermediation in a modern economy — will be in it fairly soon.