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“Essentially, blockchain has the potential to change the economics of how we manufacture different securities as we know them. Whether it’s a deposit, or some other structured product and DeFi is one experiment, we will see whether it works or not. Blockchain is allowing us to do all of these things and I see a lot of potential there.”
–Efi Pylarinou, Founder, Efi Pylarinou Advisory
When Efi Pylarinou got her doctorate in finance, her thesis was called A Chaotic Approach to Stock Market Returns. While the markets surely experienced their share of chaos last year, not only traditional markets like equities and commodities, but especially in cryptocurrencies.
I spoke to Efi about whether Bitcoin has reached a tipping point with institutional investors, if this tipping point could become the catalyst for widespread adoption of digital assets, why advisors should treat cryptocurrency like emerging markets in their portfolios, and more on this episode of the WealthTech Today podcast.
Companies Mentioned:
- ARK Invest [05:52]
- Avanti [22:14]
- Bakkt [06:03]
- Betterment [26:30]
- BlockFi [27:02]
- CrescoFin [27:19]
- eToro [17:56]
- FundsDLT [25:21]
- Kraken [22:20]
- MicroStrategy [10:52]
- Revolut [18:05]
- Robinhood [17:58]
- SEBA Bank [22:02]
- Sygnum [22:05]
- Square [10:51]
- Wealthfront [26:28]
- The Wealth Mosaic [03:40]
Topics Mentioned:
- WealthTech Views Report
- Institutional Adoption of Bitcoin in 2020
- Crypto Expands into Retail
- Will Crypto Banks Shake Up Wealth Management?
- Are Crypto Savings Accounts for Real?
Complete Episode Transcript:
Craig: I’m happy to introduce my guest for this episode is Efi Pylarinou. Efi is a global FinTech influencer, a PhD in finance, an old timer, a prolific writer, a traveler, and a true Sagittarius. Efi, welcome to the program.
Efi: Thank you very much, Craig. I really do look forward to meeting you in person, hopefully in 2021, but thank you for bringing me closer to a country that I have lived in, worked in, and I have still a lot of friends and great memories.
Craig: I’m happy to be able to do that. I’m definitely looking forward to meeting you in person sometime either here, either in the US or over in Europe when we’re traveling again and we’re doing all those other normal things again. We did some virtual hugs before we started, but that’s the closest we’re going to get with me here in New Jersey and you calling from Switzerland, yes?
Efi: Yes, exactly. Exactly. But at least we can share virtual backgrounds.
Craig: Yeah, no, mine is a real background. Yours is virtual. Mine is a real background. I can’t afford a virtual background. Let’s jump right in. Can you, can you give us a 30-second elevator pitch about yourself?
Efi: Oh, wow. That’s a tough one. I wasn’t prepared for that one, but let me tell you, I’m a Wall Street old timer, and I’ve become a new age FinTecher, maybe I’m a Millennial, if you like. I’ve been focused in FinTech for the last six, seven years. I very much enjoy being in the midst of this transformation. And I’m based, as you already mentioned, in Switzerland, which maybe is not a top FinTech hub. It is definitely the top wealth management place in the world, and it’s definitely a top crypto blockchain hub.
Craig: There’s quite a lot going on there in fact. I mean, it doesn’t really matter where you are anymore, especially now when everything’s been forced to be virtual, so you can be anywhere. Why not be in Switzerland, what’s the difference? Whether you’re in London, Switzerland, or Nairobi, or in lovely New Jersey where I am, it shouldn’t really matter. We’re all connected.
Efi: One hundred percent, you’re so right, but I’m talking from the previous sort of life, right?
Craig: Of course. The previous life, which hopefully we will get back to. But one of the things I wanted to talk to you about and there’s so many things to talk about. Before we had this conversation, we were going through some topics that you are interested in. There’s so many, you’re so multifaceted, multitalented that I could talk to you about a dozen different topics, but the one we settled on was blockchain’s impact on wealth and asset management, blockchain and cryptocurrency. So let’s just talk about that. You guys put out a report in combination with —
Efi: The Wealth Mosaic.
WealthTech Views Report
Craig: Thank you. I keep getting them their name mixed up. The Wealth Mosaic. You have a report called WealthTech Views Report. Can you talk a little bit about about that report and what people can expect if they downloaded it?
Efi: Well, the aim of the report was to start showcasing what is going on in the market that is going to reshape the asset and wealth management space from the blockchain industry, which includes of course, cryptocurrencies. And my aim there was to start, to get people off the brokerage screens, watching cryptocurrencies prices doing whatever they are doing and understanding really what is going on, why this technology is both an infrastructure that will change capital markets, asset management, and also has already created an asset class. And for those that haven’t noticed, we are up to $1 trillion roughly, give or take. So, you know, for asset managers and financial advisors that want to ignore this asset class, I don’t think that it is a good decision to ignore it. I’d like to highlight the projections that are claiming that this asset class may grow three to four times. And where I get these projections, Craig is from two sources. There’s some great research pieces out of, for example, ARK Invest. But also I’d like to highlight that when I look at the investor pitch decks for example, Bakkt, the digital wallet backed by ICE, has just announced that they will go public through a SPAC. And of course, because of the SPAC structure, they can put out all the marketing material and so on, and it’s already out there and these are the projections. It will be also interesting to see the Coinbase IPO prices, on what kind of projections they will price in the market. So we understand what is the market telling us.
Craig: Those all very interesting and you know, Coinbase, I think is the biggest one, considering their dominance in the crypto space. And that should be I imagine the excitement will be off the charts when their IPO comes, cause people just seem to be so interested, especially with the increase in value, as you mentioned, the total crypto space is now over a trillion. Most of it is dominated by Bitcoin, but. You mentioned that advisors shouldn’t ignore a crypto anymore because of the market share, and some reasons I’ve heard of that, one is that institutional firms are waiting for this, because they’re worried that the market was so thin, they couldn’t put big orders in. Now, once you hit a trillion in order flow or market share that they have more confidence in putting in big orders, is that the main reason why you think, or are there other reasons that hitting a trillion is important?
Efi: You know first of all, I think that the market has matured and it’s not anymore just the Bitcoin dominance. By the way, Bitcoin dominance is around 68% right now, it’s fluctuated. I mean, it used to be close to a 100% four years ago, but now it’s been fluctuating and we consider a 68% dominance level pretty healthy and normal. But what’s happened, Craig is, as the market gets more educated, we are understanding that different cryptocurrencies are really different in their nature. So Bitcoin, for example, right now is being viewed as a scarcity, you we’ve all heard it as the digital gold, but of course we know that it’s not the only potential narrative that it could impersonate. It could take on part of the global settlements network and take a percentage of the remittance market.
It could become an asset that has value because of its self sovereignty and trust, because it protects against seizure and government. Let’s not forget how many countries in our world today are living under dictatorships or hyperinflationary regimes. So a network like Bitcoin that is already over 10 years old, very much trusted has these potential values and narratives. It just happens right now that the dominant one is the digital gold. And of course it’s related to the monetary situation right now into the fact that noteworthy companies have decided to allocate in their treasury Bitcoin. So that’s another narrative that this playing right now in the market and may grow and we expect it to grow in 2021. So right now we have the latest that I was looking at were 29 companies, public companies that have allocations to Bitcoin in their treasury, most of them are in the Bitcoin business, like you know, mining publicly traded companies or Galaxy, asset management companies, but others like Square or MicroStrategy or another one in London in the UK, MOLD, are not related. And I expect to see more of this.
But what I want to add to this is that there are other cryptocurrencies, like Ethereum, or other non fungible tokens that are completely different. It’s not a scarcity play. So, you know, this is becoming a rich asset class a bit like emerging markets, I would say. I like to think of it, if you are, as an asset manager, as a financial advisor, you want to allocate to innovation, because that is the diversifier. That is what will provide resilience to your portfolio. So within the theme of innovation, you definitely have to have an allocation to this industry. And within that allocation, you can go into cryptocurrencies. There’s a rich variety there. Now we have also decentralized finance. So already we have more than one, two, three, four different thematics there. And then we have the rest of the infrastructure plays that I’d really like to talk about and that we address in our report.
Institutional Adoption of Bitcoin in 2020
Craig: So Efi, you said a lot there. Let me break down some of the things, I’m trying to take notes. So yeah, the 68% of the total market cap being Bitcoin, yes, it’s down from a hundred oor close to a hundred. So that’s a sign, as you said of a healthy market that it’s diversifying a bit. I think Ethereum is probably a large percentage of that 32%, but still better than it all being concentrated in one. Yes, there’s more uses for Bitcoin than just digital gold. It remains to be seen if cross border payments can pick up, if the lightening network can reduce costs enough that cross border payments and settlements would be useful, or if Bitcoin itself would be useful for those, or if just a new blockchain would be better.
But one thing you mentioned, the public companies, so that goes to what we were talking about earlier about institutional adoption. And one of the topics I wanted to ask you about was 2020 being the year of institutional adoption of Bitcoin and crypto and what were the signals, and you mentioned one, which was public companies allocating Bitcoin, or using part of their corporate treasury, and allocating it to Bitcoin, as you said, PayPal and Square. But I think one of the biggest ones, at least that I’ve heard was MicroStrategy and Michael Saylor, their CEO, putting in $450 million of their cash into Bitcoin, which turned out to be quite opportune since I think they’ve tripled in value since they bought. Didn’t they buy around $1150 and now it’s at $35k. So that’s quite a, it’s quite a return on which what was supposed to be a very safe and stable investment. So he looks like a genius and now he’s raising more. So can you talk a bit more about that signal and what it means for the future of Bitcoin and crypto?
Efi: Well, there’s a couple of things. First of all, you mentioned PayPal. PayPal was the other signal, but they took another route. They are getting into offering services. I think in the US only for now, you can buy and sell a couple, three or four cryptocurrencies. They didn’t go into the treasury bucket of acceptance yet, or at least publicly because, you know, these are what we know publicly. Maybe there are other companies out there that in smaller locations, but for other reasons, they don’t choose to communicate with the public. So what I see Craig, is companies like Square, Bakkt and PayPal, even if they didn’t put money in their treasuries in Bitcoin specifically, what they’re doing really is they are making sure that there is a large scale adoption of wallets in the world. And this is important because these wallets, the actual digital wallets that can hold assets, that is something that is very different than the Google wallet or other type of payment wallets that we are used to.
So we are preparing to transition into a world where we have wallets that can hold assets. And that to me means that we’re going towards a world where everything will be tokenized and we’ll be able to hold it in our wallets, whether we start our wallets in our handbags, we ladies, or choose to have them in safes guarded by the new custodians. That’s another issue, but we are going into wallets. And that means exchanging value in a much more secure, transparent, cheaper, and more efficient way, and having disintermediation at a very different level. So that is what I see as really happening through these large scale adoption.
Crypto Expands into Retail
Craig: That’s great insight. That should really prepare people for a more widespread adoption of tokenized assets and digitization even more so than we’ve had before. But let me go back to something you said, and thank you for pointing that out, PayPal didn’t buy crypto in their treasury, but they’re offering services to buy and sell crypto, which is very lucrative as you’ve seen Square and PayPal are making tremendous amounts off selling crypto to their customers mostly through the spread. So what do you think of that? Do you see that as something that a lot of other firms will start to do and what will be the impact of more retail investors being able to buy crypto easier through different apps, whether it’s Square or PayPal or any other app that they happen to work with?
Efi: Well, let’s not forget that a lot of the robo advisors or the wealthtechs you know, the social trading platforms like eToro, Robinhood, all those had already used, even Revolut, they, they added to their services crypto. It was a very efficient way to lower the customer acquisition costs. And if you look at when they launched these services, their users really shot up because of that retail interest. So there’s been others before that have done that, and then we will continue to see that. And I think this is a market where it’s not like one winner takes all, it will become basically mainstream and we will see it everywhere. Of course, for now we have to distinguish whether when I’m buying crypto on Revolut or eToro and so on, am I really holding those assets, who owns them and those kinds of questions that are traditional questions in the brokerage and asset management business, but they’re more important in this in this asset class.
Craig: Indeed. That’s an excellent point. In the wealth and asset management world, we long ago, I mean, I’m old enough to remember when we bought a stock, we would get the stock certificate mailed to us if we wanted to hold it ourselves. Now that would be absurd to do nowadays. No one holds their own stock certificates. Even if you give it as a gift, I used to buy stock one share and frame it and give it as gifts to people. No one does that anymore. No one has a physical stock certificate anymore. And again, as an early crypto enthusiast, I’m a very strong proponent of holding your own keys, but isn’t that like holding your own stock certificates and people are already used to not holding their own private keys and allowing PayPal or eToro, or any of these apps to hold the keys for them?
Efi: You know, you’re right. We’re going back to bearer instruments, right, as you said. But this is in digital life, and then we will have the choice, whether we want to be the ones holding the private keys or not. There’s also technologies and wallets and custody providers that are evolving this technology. So we are even going away from private keys and still being able to hold our assets. But the main point is that transacting won’t need so many intermediaries. And also it will be across assets. It will be across borders. It will just be completely different. And I want to go back because we spoke about Bitcoin and 2020 being a year of institutional adoption because of treasury because of the PayPal and others moving into offering these services.
But I also want to add and not forget the regulatory buy-in that happened in 2020, we have at least four licensed crypto banks that were given their licenses. We have two in Switzerland, SEBA Bank, and Sygnum that are regulated by FINMA, and then we have two in America. We have Avanti in Wyoming, and then we have Kraken who got their license also to set up a bank. So this is a very important buy-in from, from the regulatory perspective, plus the latest announcement by the Office of the Controller of Currency, about the banks being able to run nodes. And this is more related to stable coins and the potential of that market.
Will Crypto Banks Shake Up Wealth Management?
Craig: Exactly, and those are our big issues. So how do you see that shaking out in terms of the wealth management space? So now that the OCC is allowing banks to run stable coin nodes, and now that there are a couple of crypto banks that should enable wealth, even a more tighter integration of wealth and banking and lending and putting crypto on there, that you can get everything at the same place, much easier since they’ll be much more fluid with these technologies. Do you see that or did you see other other things shaking up?
Efi: I see that, but we all know from the experience even of the digital transformation at the B2B level of the existing banking system, we’ve seen how difficult it is to replace existing infrastructures and architectures. So, you know, to think of what kind of infrastructure is needed to participate in these new networks that are public chains, open source, and so on, it’s going to take time, but we’re definitely going in the right direction. We are going to be seeing pilots and the market forces will push banks to start participating in these networks. What I do see, and this is also well documented in the report that we produced is we are seeing the use of blockchain infrastructure. Rather, I should be more precise, digital distributed ledger technology being used, for example, in fund administration, which is a very complex and cumbersome procedure in the life cycle of securities especially in, in mutual funds, but this is what is happening.
And it is happening in Europe. One company is FundsDLT out of Luxembourg and they are deploying distributed ledger technology for this purpose. So that is one way of thinking of it. Another initiative and company that I’d like to bring up as an example also featured in our report, is a company that is not using cryptocurrencies, but blockchain infrastructure to offer savings accounts with high interest rates. So 3% on US dollars, 1.5% on Euros, and this is done because of the transparency in their efficiencies and then validations that are possible at the much lower cost on the blockchain.
Are Crypto Savings Accounts for Real? 
Craig: Well, is that really the full reason for why? I mean these high interest savings accounts we’re seeing, it just reminds me of how some of the robo-advisors like Wealthfront and Betterment, were all the rage offering high interest accounts until that all got shut down to try to attract clients. And isn’t this the same thing that they’re looking to attract clients, but these it’s not the efficiency that’s allowing them to pay 3%, is that they’re lending out those stable coins or that Bitcoin to other investors who are paying margin to then invest it or leverage. Isn’t that really where that industry is coming from?
Efi: Well, you’re talking about the crypto landing, companies like BlockFi in the US and others that yes, that is where it’s coming from, but that is lending cryptocurrencies. What I’m talking about, and this is an example of a company here in Switzerland called CrescoFin, it’s got nothing to do with cryptos. It’s all about taking the blockchain infrastructure and recording on the ledger invoices, insuring the invoices, and being able to pay a very high interest rate back back from it’s like an asset backed security and the efficiencies allow for that interest rate. So it’s got nothing to do with cryptocurrencies. Essentially, Craig, for me, blockchain has the potential to change the economics of how we manufacture different securities as we know them, whether it’s a deposit or it is some other structured product and DeFi is one experimentation, whether it works or not, we will see, but that is what it is allowing us to do. And I see a lot of potential there.
Craig: That is quite insightful. So let me just repeat what you just said, blockchain has the potential to change the economics of how we manufacture securities.
Efi: 100%.
Craig: So obviously we’ve seen some of that in limited forms. What’s the tipping point when that happens and how will that change how financial advisors build portfolios? How will that change how investors see retirement when blockchain has changed how we manufacturer securities?
Efi: Well, blockchain when it’s changed how we manufacture securities, it’s a lot of the rappers that we know today, you know, we have mutual funds, we have ETS. I come from the structured products industry, there’s an infinite amount of variations. I’ll call them rappers that they are contracts, right. And then, you know, a certain template if you want to gain traction for good reasons, right? Sometimes it’s tax reasons, sometimes it’s marketing efficiency reasons and so on. And here we are talking about in a much more automated and easy and transparent way of manufacturing these contracts instead of them being so complex, so opaque and so expensive and very difficult to have a primary and a secondary market. This is really what this is all about.
So tokenization that everybody talks about is really about that. And we can unlock value that could not be unlocked before. So we will have a lot of examples going forward. I mean, real estate is the easiest one to understand, but there’s much more out there in the art world, all these non fungible tokens that are presented, you know, their financial martyrs is just doesn’t make sense. And I’m also seeing some very interesting projects coming out in the impact space around environment as we get more data and better metrics. It is very possible to do these things.
Craig: Efi, we’ve talked and talked and I wasn’t watching the time. And now we’re just about out of time. And I had a whole bunch of questions I wanted to ask you. I apologize. But all very interesting, very important. I’m so happy you were able to share these insights with our audience, and I really want to get you back on the program because we have so much more to talk about, but I know you have a hard stop in like a minute, so I want to say goodbye. Thanks so much Efi Pylarinou for being on the WealthTech Today podcast. And I look forward to speaking to you again really soon.
Efi: Thank you so much, Craig, for having me, what a great pleasure.
