Crypto Compliance 101 for Financial Advisors

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Compliance is a critical but confusing topic for financial advisors choosing to enter the crypto asset ecosystem. Learning from advisors who are experienced and already engaged in the asset class is an important step to realizing early success.

Before investing in this asset class, consider what it means to step into an area with less regulatory guidance, relative to the traditional markets. Be conscious that this is a rapidly evolving asset class that needs to be approached deliberately – with purpose, caution, and an open mind through your fiduciary duty to clients. You also need to consider what it means to your clients to not invest in this asset class.

If you decide allocating to digital assets is appropriate, start with a basic understanding of blockchain technology. As a financial professional reading this, you likely have personal investments in bitcoin, Ethereum, NFT’s or other digital assets. Use your current knowledge base to build on your understanding of what these things are, how they evolve, how to interact with them and truly feel the price discovery. As a fiduciary to your clients, you will need to dig deeper and be able to answer: What are the benefits of the asset class? What are the risks? How does it fit into a portfolio?

There is a growing list of resources available to curious advisors to help answer these questions:

  • DACFP is the Digital Assets Council of Financial Professionals. DACFP offers a certificate in Blockchain and Digital Assets specifically for financial advisors and other professionals. It began in 2018 and is a leader in education for financial professionals.
  • PlannerDAO is an open-sourced community of like-minded financial professionals and planners looking to harness the power of community through a blockchain native style of governance. PlannerDAO has a certificate as well as education resources.
  • There is also a growing list of online universities offering education specific to Blockchain as a technology and as an investment. Personally, I took the Blockchain for Business class offered by Columbia University to gain a deeper understanding of how blockchains work, the various types of governance structures and the evolving use-cases of digital assets.

Once you are comfortable with the asset class, you will need to update your regulatory disclosures, potentially amend your policy and procedures, speak with your insurance providers and then decide how to invest for your clients.

Since ADV’s are public information, you can view ours here (Arbor ADV Part 2A) to get an understanding of how we view the risks. This is not legal or regulatory advice. We use “speculative” when describing the asset class even though we are firm believers in its disruptive power. Hacks, buggy code, custodial failure are real risks and could lead to total loss of invested funds. You need to understand these and disclose them to your clients.

Policy and procedure updates will be determined by the digital asset investment vehicles used. There are a growing number of digital asset trusts, but no ETFs approved in the US…. Yet.

Direct digital asset exposure is available through partners such as Gemini, Coinbase or even Fidelity. You can partner with Blockchange to facilitate client onboarding as well as create and manage your own models from perhaps a simple bitcoin/Ethereum model to a more diversified digital asset portfolio. You can even outsource your digital asset exposure to an experienced digital asset advisor through Blockchange’s SMA Network.

As the walls between the traditional and digital asset world continue to come down, more products and offerings will become available. DeFi protocols are looking to offer institutional services complete with AML/KYC. Traditional public and private companies are investing in bitcoin and other digital assets including permissioned and permissionless protocols. We like to say to advisors interested in digital assets be aware, get educated, develop a plan and stay disciplined.

Arbor Digital is happy to open-source some of the compliance work we’ve done with other financial professionals. We believe the decentralized, open-access nature of blockchain technology and digital assets and their benefits should be brought to the financial world.

Matthew Kolesky ~ Arbor Digital

Matthew Kolesky

Matthew Kolesky is President and CCO for Arbor Capital Management and Director of Arbor Digital. Matt was an early adopter of Bitcoin starting in 2010. Since then, he has been actively following the advancement of digital assets and their relationship with corporations, governments, and society. In recent years, he studied cryptocurrencies and their relationship with the quickly evolving DeFi space. In 2018 he directed his knowledge and experience with managing digital assets to formulate an investment thesis that positioned Arbor Capital Investment Committee, and their clients, to benefit from the transformative nature of blockchain technology. Today, Arbor Digital offers professionally managed, diversified digital asset portfolios for clients and advisors.

Arbor Digital is a Division of Arbor Capital Management, Inc. Investing in digital assets is speculative and carries a high degree of risk, including total loss of invested funds. Please see our disclosures for more information. Registration as an investment adviser does not imply a certain level of skill or training.