In the long run, tokenisation is going to change everything.
I suppose, like most people, the most important financial decisions that I make are with respect to retirement savings. Therefore I try to stay abreast of developments in the sector. Hence I note 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 fifth of their savings to Bitcoin
Since I don’t really understand how pensions work, my decisions are delegated to a financial advisor. I like to think of myself as the pilot of my financial affairs while he is my navigator… I generally do what my navigator advises me (normally something along the lines of the “the tax taper reverse flange cut means you should invert the cash holding”) and carry on trying to keep the kite flying.
Maverick’s advisor.
Were my navigator to suggest steering away from things like US bonds and towards 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.
It appears that the U.S. Department of Labor (“DOL”) has 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.
The UK regulator favours a more 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.
New Asset Classes
I am not sure that they will be investing in crypto ever, frankly. When it comes to tokens and decentralised finance, though, I think that may well be 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. Whether people should convert their retirement plans into Dogecoin
Personally, I do wonder if it is perhaps too soon to be looking into the direction of cryptoassets when considering prudent retirement strategies although I do note that some investment professionals take a different view. The Caisse de dépôt et placement du Québec is an example. It manages several public pension funds in Québec and in October last year they put US$150 million of their members’ pension funds into the Celsius Network
(I am not a professional, and 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.)
This does make me wonder, however, 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.
A Better Financial Sector
I’m heading over to Amsterdam for Money 20/20 Europe tomorrow, which reminds me that 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: “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”. He’s 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 tokens will be the core of a financial sector that serves wider society more effectively and attacks the high cost of financial intermediation in a modern economy.
