“He will be eating those words,” maintained Edelman about the comments made by Vanguard CEO Tim Buckley. “It’s the dumbest statement I’ve ever heard anybody make.”
Edelman was speaking before thousands of advisors as a participant on a featured keynote panel, “Fintech, Innovation and the Next Generation of Financial Services,” at TD Ameritrade Institutional’s annual conference, LINC 2018, in Orlando, moderated by Dani Fava, TD’s director of product strategy and innovation.
“We see these statements coming out of Wall Street from these 50-year-olds plus, and I’m one of them. Executives on Wall Street are in total denial about cryptocurrencies specifically, and blockchain generally,” Edelman continued.
They are in “denial” because they don’t understand the technology, Edelman said. “I’ve seen people equate Bitcoin to the tulip craze and Beanie Babies, which is really bizarre, and they said it was an insult to the tulips.”
He added advisors need to do more to learn about cryptocurrencies such as Bitcoin and blockchain, an internet system that, in part, promises to create a public digital ledger for all kinds of financial transactions made using cryptocurrencies. Because transactions are transparent, blockchain reduces, if not eliminates, fraud.
“Everyone is hearing about these ridiculously high [cryptocurrency] returns of 2017,” Edelman said, “and we’re getting questions about it, and the typical response from advisors is, ‘It’s a fad. It’s a bubble. It’s a fraud. It’s too risky. Stay away, etcera, etcera.’”
But advisors should not think that these exponential technologies are things we’ve seen before, Edelman said. “We have to recognize that consumers are asking these questions and they want a better answer than ‘I don’t know anymore about it than you do.’ That’s not what an advisor does, and advisors need to understand it, get educated on it, and then be able to make an informed decision as to the appropriateness or not for the benefit of that client, as opposed to simply taking the head-in-the-sand kind of approach because they don’t know any different.”
But Tim Hockey, TD Ameritrade’s president and CEO, said he is seeing a shift, a bigger effort on the part of Wall Street executives to have a fuller understanding of these technologies. For example, 90 percent of SIFMA’s subcommittees are gathering at least some information on cryptos and blockchain, he said.
“It is so much the Wild West to figure this out right now. So I take issue with what Ric said in one context. This is such a broad topic that absolutely there are bubbles and frauds on one end, and then there is completely legitimate transformative technology on the other. And because it’s a new space, people can’t figure out the difference between the two.”
Hockey added that so much froth and energy attracts some bad actors. “Those bad actors might color the entire perspective for people. Why? Because they deal in a world of anecdote. They lock on that anecdote and say it’s bad or it’s good. It’s a range. Like anything else, it will sort itself out over time. It will mature. The winners will come out and the losers will fall by the wayside. But you cannot ignore the transformative nature of the underlying technology.”
Edelman, responding to a question from the audience on what he tells clients about Bitcoin, agreed that the markets for crytocurrencies are like the Wild West. His firm does tell clients that before they invest in the coins, they need to understand them. “It’s not really Bitcoin, it’s cryptocurrency generally. There’s 2,000 digital currencies out there,” he noted.
The second thing his firm tells clients is to treat these investments like lottery tickets. “You shouldn’t have more than 1 percent of your investable assets in it, if that, because like a lottery ticket, you don’t need a lot of it. … There’s an amazing amount of fraud, an amazing amount of scams. There is legitimacy, but there’s almost a complete absence of regulation. The tax implications are crazy at the moment because the IRS treats it as property as opposed to a security. The SEC is not weighing in on it, yet. So be very, very careful about it. But do learn about it, and we believe it is appropriate to have exposure, even if it’s only from an educational perspective.”
Other speakers went into more detail explaining the status and potential of coin investments and blockchain. Adena Friedman, Nasdaq’s president and CEO, said blockchain definitely promises to transform major elements of the financial system, including the efficiency by which trading occurs and the ability to settle trades very quickly.
“It has the promise to rip out a lot of infrastructure that cause friction, which means there’s a lot of capital trapped in the system today that will be freed up with the ability of blockchain to come in and allow for that settlement and that perfect record of ownership,” Friedman said. “The underlying technology has great, great promise.”
She added that there are amazing applications for the underlying technology. “People are using it already to look at inventories of shipments, making sure they can understand and perfectly track shipping across the world across all of the containers they are having to manage,” she noted.
Regarding cryptocurrency, Friedman said she’s met with a lot of different people in the industry who are looking at it and are using it or are custodians for it. “We are in the process of learning as much as we can. … I think that crypto right now has gone from being a currency to being a nascent, tradable asset class, but over time [it] could become a financial layer on the internet. It could become a global ability to transfer goods and make it so it’s a more seamless, frictionless financial system. That’s the potential. Now whether or not it ever reaches that is the question. There’s so much hype around it right now. It’s being used in ways that people weren’t originally anticipating.”
The United States is unlikely to see the earliest, biggest benefits from these technologies, Hockey said. “The U.S. has the most developed economy in the world; therefore there are a lot of entrenched players who are already defending their turf. At its core, blockchain reduces or eliminates the need for a trusted third party,” he said. “So as a result, the adoption rate in the United States and other first-world countries will be slower than in new, emerging economies because you can jump right over the fact that there’s no infrastructure in place.”
For example, Hockey said, in the United States, if you buy property, you register a land title with the government and it holds on to your deed. “You go to places that don’t have a trusted governmental system, their land registry system is weak, if even existing. The best way to create enormous wealth in developing countries is actually to free up the value of the assets that are literally walked upon every day,” Hockey continued. “You can actually have a trusted third-party system with others, without having to trust your government, with this technology. The technology will unleash your ability to say this is my asset, the land that I live on, and all of a sudden you’ve got trillions and trillions of dollars being unlocked overnight. That could not have happened with existing ecosystems under the old regime. That’s the transformative nature.”
Edelman agreed that emerging countries will be able to grow and innovate faster using these technologies than the U.S. “An illustration is the telecom market,” Edelman said. “We’ve wired our country and when you go to other countries, you go from the 1800s to the 2000s. They skipped the 1900s because they didn’t bother wiring the nation. They went right to wireless. So they were able to adapt a lot faster than we can.”
Friedman added that one of the first blockchain projects Nasdaq implemented was with the government of Estonia. “We worked with the government and they basically digitized their entire economy. They put their entire economy into a digital format, including the I.D.s for all of their citizens, and so what they allowed us to do was latch into that system to create a proxy voting capability through the blockchain because of the fact that they had a perfect record of ownership of securities through their I.D. system, which then allowed us to be able to use that system to be able to show whether or not someone had voted for that proxy or not,” she said. “Now we are working with South Africa to do it, so we’re starting to use it in larger and larger economies because of the fact that the digitization of economies is occurring all over the world.”
Friedman added Nasdaq is also working with organizations to use blockchain on the settlement of securities. “We’re working with a lot of companies where its either bilaterial, or a small ecosystem. It’s unregulated so you don’t have to deal with managing the regulatory side of it, but there’s a lot of inefficiency,” Friedman said. “That’s a great way to use and prove out the blockchain that shows its value, and you can bring it into the larger markets over time.”
Panelist Lex Sokolin, director of fintech strategy for Autonomous Research, added blockchain is not just a system for value transfers; it can be used to bring truth and prevent forgery with any object that has attributes of scarcity.
“You can do the same thing for any financial asset, for swords in a video game. You can do the same thing for virtual reality in houses, you can do the same thing for every single tree in a forest that now has it’s own identity … and now all of a sudden you’ve tokenized forests.”
“It’s very difficult to say here’s the end point,” he continued. “But the biggest mistake we can make today is to say, shut it down, it’s a fraud, it’s a scam, and that comes from a severe misunderstanding of what is actually happening in the world.”