Virtual Asset Evolution: Navigating Opportunities and Challenges for Individual Investors

by Elliot Refson of Jersey Finance, 5/30/24

Nearly half of the global assets under management, totaling $275 trillion, are held by private clients and high-net-worth investors, yet only 16% of this is currently allocated to alternatives. ¹ Given the amount of capital they control, there has been a noticeable surge in the creation of institutional-style products/access to alternatives for individual investors, resulting in a democratizing effect. One of these emerging strategies is the tokenization of real assets, a market which continues to evolve, alongside associated challenges. As more private wealth clients, family offices, and individual investors approach the space, it will become increasingly important for market participants to partner with jurisdictions capable of adapting to and addressing market uncertainties.

Digitization in the asset management sector continues to evolve, with expectations that up to 5% to 10% of all assets will be digital by 2030, according to a joint report by Northern Trust and HSBC from 2023.² Tokenized assets issue digital tokens on distributed ledgers, which are decentralized databases of transactions, managed across shared networks, allowing investors to see their holdings in real time. The benefits of this digital transformation encompass better distribution opportunities, improved automation of the investing process, better liquidity, greater transparency, and faster transaction speeds. In addition, the democratization of the tokenized asset market is clear and there is demand to support it with almost two-thirds of high-net-worth (HNW) investors planning to invest in tokenized assets by the end of 2024, according to a survey by EY-Parthenon, in May 2023.³

Research exploring the evolution of virtual assets, conducted by IFI Global and published in partnership with Jersey Finance, found that family offices and high-net-worth investors are currently perceived to have the highest likelihood of interest in tokenized options. This research was supported by interview and survey responses from 72 respondents, primarily comprising individual investors and advisors (39%), followed by fund directors (32%), asset managers (17%), exchanges and platforms (6%), and service providers (6%). Major drivers of interest in tokenized products include increased diversification for managers with direct access to a new investor segment, the ability for alternative managers to bypass the institutional investor market, and increased accessibility for the individual investor. For these HNW and individual investors, digitization offers the potential for higher returns and access to a new market, thereby diversifying their portfolio.

Many HNW and individual investors have already begun investing in digitized assets, with 42% of EY-Parthenon’s 329 survey respondents from August 2023 already investing or actively planning to invest, and a further 55% intending to allocate funds to these assets within the next two years.³ There’s an expectation that by 2026, HNW investors will allocate 8.6% of their portfolio to tokenized assets, further cementing the position of this cohort at the forefront of virtual asset adoption.

While the availability of these products for HNW and individual investors has a democratizing effect on the space in terms of access to virtual asset products, as with any nascent asset class, digitization also presents certain barriers to entry, notably navigating the uncertain regulatory environment surrounding the space.

This uncertainty presents an opportunity for jurisdictions to develop frameworks, as some are already doing, and collaborate with regulators to create legislation that supports the transformation of this burgeoning asset class. We’ve seen a convergence of regulations impacting the digital market and digitized products, and while some expect that the largest nations will lead in providing regulatory clarity, the progress made by smaller and more nimble jurisdictions could potentially outpace the former. Partnering with jurisdictions that have regulatory experience in emerging asset classes is crucial, especially considering the challenges inherent in entering this early stage of virtual asset management.

To ensure stability and proper governance surrounding investments within a nascent stage market, individual investors should partner with a jurisdiction that has shown focused attention to the space, combined with flexibility and a sound regulatory backdrop capable of adapting to evolving legislation. As opportunities continue to transform and expand, finding a jurisdiction which provides familiar frameworks and offers stability without compromising continued innovation will be paramount.

¹ Bain & Company, Why Private Equity is Targeting Individual Investors, October 20, 2023

² Northern Trust, HSBC, Beyond Asset Tokenisation, 2023

³ EY Parthenon, How tokenization in asset management is driving meaningful opportunity, August 18, 2023

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Virtual Asset Evolution: Navigating Opportunities and Challenges for Individual Investors

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