BlogMainAsset and Wealth Management Industry Continues to Embrace Digital Assets: Key Insights for Asset ManagersDespite fluctuations in the cryptocurrency market, the asset and wealth management (AWM) industry remains committed to exploring opportunities in digital assets, albeit with a more cautious approach. Increasingly, AWM firms are engaging with digital assets through direct crypto holdings, investments in funds, and equity stakes in digital-native asset firms. The interest in digital assets also extends to investments in blockchain technology, as AWM firms explore tokenization’s potential to streamline operations and expand their market offerings. In parallel, service providers are supporting these efforts with services like custody, trading, and infrastructure support, helping to secure the emerging digital asset ecosystem.Asset and Wealth Management Industry Continues to Embrace Digital Assets: Key Insights for Asset Managers

However, the road to digital asset integration is not without its obstacles. Trust in digital assets has been fractured due to market instability, and while enhanced regulation may help, firms must also take proactive measures. Effective governance, risk management, vendor due diligence, and incident response planning are essential to managing the complexities of the digital asset market.

For asset managers, transforming governance, risk management, compliance, and technology strategies is imperative to remain competitive. Below are key trends shaping the digital asset landscape and actionable steps firms can take to turn today’s challenges into tomorrow’s opportunities.

Regulation Moves to the Forefront

The recent instability in cryptocurrency markets has fueled calls from policymakers and industry leaders for stricter regulations around digital assets. In the coming years, we anticipate progress on several regulatory fronts, particularly in defining digital assets as commodities or securities and establishing stablecoin regulations. Policymakers in the U.S. and globally are likely to set guidelines on disclosures, tax reporting, and possibly limiting higher-risk lending practices, such as collateralized loans.

In the U.S., digital assets are increasingly viewed as a bipartisan issue, with updates expected on disclosures and tax guidance. Regulatory developments are also underway in the European Union and OECD countries, driven by the cross-border nature of digital assets. While a global regulatory framework would enable asset managers to operate more seamlessly across markets, the current lack of such a structure means that firms must navigate complex and varied regulations.

Tax policies for digital assets are also likely to evolve alongside regulatory frameworks. While the U.S. has some guidance on digital asset income, we can expect expanded reporting standards and tax incentives as digital assets become more integrated into financial markets. Firms should remain aware of the local tax regulations in each jurisdiction where they operate to ensure compliance with cryptocurrency and digital asset tax obligations.

Global Policy Focus on Digital Assets

The Biden administration’s recent framework aims to harness digital assets' potential while mitigating associated risks. This framework encourages U.S. agencies to ramp up enforcement and issue new guidelines for cryptocurrencies, including controls on financial institutions' exposure to digital asset risks.

Across the Atlantic, the European Union is finalizing the Markets in Crypto Assets (MiCA) regulation, which will set standards for investor safeguards, capital requirements, and corporate governance in the crypto market. These efforts highlight a global movement to bring digital assets under the regulatory umbrella of financial services.

Such initiatives underscore a collective recognition of the potential for digital assets to reshape global markets. Yet, until a universally accepted framework is in place, firms must navigate an evolving regulatory environment by actively monitoring each jurisdiction's requirements.

The Importance of Custody

Growing interest in digital assets has led many AWM firms to reassess their control environments, particularly with respect to custody solutions. Safeguarding digital assets can be achieved through several approaches: platform-based custody at an exchange, third-party digital asset custodians, or self-custody. Regardless of the approach, robust controls are crucial to ensure asset security and compliance with regulatory requirements.

For AWM firms, securing digital assets with a qualified custodian under the U.S. 40 Act, which includes the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) measures, is essential. Custodians must also provide protections in the event of bankruptcy, along with robust transaction monitoring, fraud prevention, and capital adequacy measures.

Given the pace of regulatory evolution, AWM firms should adopt a modern compliance strategy that ensures they stay current with new regulations, regardless of whether they opt for self-custody or third-party custody.

Tokenization Set to Reshape the Industry

Tokenization, the process of digitally representing real-world assets on a blockchain, holds the promise of unlocking new markets and trillions in value. Tokenization can transform traditional assets, including cash, securities, and identities, by modernizing investment protocols, increasing liquidity, and streamlining transactions.

The benefits of tokenization for AWM firms include enhanced liquidity options, broadened market access, secondary trading capabilities, and the ability to reinvest unlocked capital. For example, tokenized assets can facilitate fractional ownership, enabling investors to buy and sell fractions of traditionally illiquid assets like real estate or private equity. However, launching tokenized funds requires careful planning to address operational, interoperability, data, and compliance challenges.

Although the AWM industry is still in the early stages of tokenization adoption, the potential to replace existing fund structures with blockchain technology is promising. To succeed, firms must thoroughly analyze the business case, develop a regulatory strategy, and integrate tokenized assets with internal and external systems.

Key Steps to Building Trust in Digital Assets

As the AWM industry advances into digital assets, a sound governance strategy is paramount. Establishing policies and procedures to monitor risk factors—such as vendor diligence and trading platform reliability—will be instrumental in building a sustainable digital asset strategy.

To foster trust in digital assets, AWM firms should focus on risk management at every level, from internal processes to third-party vendors and counterparties. Proper due diligence on vendors is essential to ensure compliance with tax and investor reporting obligations. Understanding vendor services and reporting capabilities is crucial for ensuring alignment with regulatory requirements.

Success in the digital asset market will favor firms that proactively build trust by understanding and mitigating risks. By doing so, asset and wealth managers can position themselves to leverage the growing opportunities in the digital asset space effectively.