In the second in our Blog series building on our Generation Game report and subsequent round table discussion, David Webster and Rebecca Fisher reflect on the rise of the next generation of UHNWIs and the growing interest in digital assets – from cryptocurrency to the metaverse.
When we published “Generation Game: the Great Wealth Transfer and the Outlook for Families in 2021 and Beyond” in March 2021 our primary focus was on the issues about which wealthy families are forced to have difficult conversations: business interests; investments; how wealth is governed and used, and personal, mainly familial, relationships.
The spur for our report was the fact that a so-called ‘great wealth transfer’ is on the horizon. The next generation is set to inherit huge sums over the next few decades (£5.5 trillion according to Barclays).
This has profound implications, presaging the disruption of the wealth management and transfer strategies of more ‘traditional’ families and family offices.
Wealthy Millennials and Gen-Zs bring with them new values, norms and goals: a greater appetite for risk (the Financial Times recently reported on Family Offices now rivalling Venture Capital firms as start-up funders); a demand for wealth creation and responsible impact to be aligned; and growing interest in what might be termed ‘intangible’ value.
This shift manifests itself in different contexts (many of which are considered in our report), but one area which is likely to become particularly relevant is the interaction of this generational shift with the explosion in value, availability and legitimacy of digital assets.
Digital disruption and the NFT craze
You know a market has gone mainstream when it reaches a value of $10.7 billion in the space of just one quarter. That’s what happened to sales of NFTs (non-fungible tokens) in Q3 2021 according to data from market tracker DappRadar.
More or less in parallel with the publication of our Generation Game report, Christies became the first ever major auction house to sell an NFT digital artwork. The record-breaking $69 million sale of “Everydays — The First 5000 Days,” made Beeple one of the most expensive living artists, alongside Jeff Koons and David Hockney.
The incursion of NFTs into the art market is a useful indicator of how the growth of digital assets may influence the strategies of wealthy families and family offices. As Philip Hoffman, CEO of the Fine Art Group, says “Art is on the agenda of every sophisticated family office.” Indeed, according to UBS’ 2021 Family Office report, art and antiques make up an average 1% of family office asset allocations. With an average of around $1 billion assets under management that’s no small figure.
So is an increased interest from wealthy families in NFTs and other digital asset classes such as NFTs as art a logical step once Millennials and Gen-Zs start to take hold of the purse strings? It is difficult to imagine that there will be no effect, but the relationship may not be quite so axiomatic as it might first appear.
Law in a time of change
The challenge with these digital assets – including the now almost ubiquitous cryptocurrency and the emerging class of assets in the ‘metaverse’ – is that as the money is pouring in, law and regulation are still playing catch-up. There are certainly a number of grey areas.
To what extent are intellectual property rights such as copyright transferred when an NFT is purchased? The value of NFTs linked to digital art is puzzling for many because the exclusivity the owner acquires from a purchase is hard to pin down – copyright may or may not transfer but often it will not. An NFT image can generally be reproduced on the internet without the “owner” having any realistic right of recourse. The purchase of physical art doesn’t transfer copyright by default but its very physical nature gives a genuine sense of exclusivity and ownership, and makes it much more difficult to satisfactorily duplicate an original than a digital work.
Turning to the metaverse, with virtual land now being sold for millions to what extent will existing real estate laws and regulatory frameworks written for the physical world, be transferrable to the digital? With virtual assets trading for such huge amounts of money it is difficult to imagine this remaining essentially unregulated indefinitely, but equally as hard to imagine the world of HM Land Registry registration, easements and other concepts being transplanted into the virtual realm.
At a far more practical level, for those looking to invest in or set up companies, in the UK Companies House does not currently provide for share capital to be specified in terms of cryptocurrency, and company accounts still have to be prepared in fiat (regardless of what proportion of a company’s trading activities are conducted other than in hard currency). There is still a gap between how transactions are increasingly effected in everyday business and what our company law framework recognises.
Potential regulators and other government institutions are trying to get a handle on these intangible assets. HMRC, for example, has been vocal on cryptocurrency, encouraging holders of such assets, particularly non-domiciled individuals (who tend to be HNWIs) regarding their potential tax position. It is entirely possible that many of those who hold or trade significant amounts of digital assets are not fully aware of the tax implications of doing so.
Families who may be considering increasing their exposure to digital assets will need to be well advised when they consider how these assets may best be held and passed on to the next generation.
From the tangible to the intangible
The underlying theme across all of these new and emerging types of assets is their inherent (or apparent) intangibility.
This requires a real shift in mindset and an appreciation for what constitutes value for the next generation.
While historically wealthy families may have, for instance, bought luxury items such as gold, jewellery, classic cars, vintage wine or antiques – both for immediate personal pleasure but also with a sense that there was a physical item with a material worth to be passed on – this sense of materiality may increasingly become outdated for younger family members.
This will be a generation, for example, who will have grown up playing games like Roblox and for whom the idea of a virtual currency is not something to be regarded with scepticism, it is the norm. This will be a generation who have seen high end fashion houses launch collections within Fortnite and for whom purchasing ‘luxury’ items for use by their avatars is par for the course. It is more likely to be comfortable about their ownership of an asset being documented, to a greater or lesser extent, by a complex piece of code on the blockchain, than needing the more tangible comfort of being a registered owner of a property listed on HM Land Registry, or listed as a shareholder on a company’s register of members.
A growing trend?
So the ‘digital native’ generations, with their far greater level of comfort and familiarity with intangible assets, are set to inherit the earth. Or, at least, vast wealth. But to what extent will this be transferring into the new asset classes? First they must inherit the wealth from their more risk-averse parents and grandparents who may balk at the idea of family money being poured into conceptual and largely untested asset classes. And if they do, our general experience so far is that these future wealth owners take very seriously the responsibilities that come with that inheritance.
The growing focus on ESG as a driver of wealth curation and an increasing desire across generations to leave some positive legacy suggest that, as our report discussed, a fairly fundamental shift in how wealthy families use their money is already taking place. But equally, this doesn’t necessarily suggest that they are ready to take the further leap into more speculative investments in digital asset classes.
Many wealthy families and family offices come with a history and an awareness that they are temporary custodians only. Our feeling is that, for the moment, even the digital natives are maintaining a relatively conservative approach when it comes to large-scale investment in intangibles. Only time will tell of course but, if nothing else, these issues around risk and reward in the digital sector are increasingly likely to become part of the conversations which families need to have about wealth transfer and management of the family’s assets.
The Generation Game: The Great Wealth Transfer and the Outlook for Families in 2021 and Beyond” is available to read here. For more information or advice about any of these issues, contact our Family Office team.
- Generation Game’ blog series (overview)
- Responsibility writ large: how families are broadening perspectives on philanthropy and ethical investing
- The rise of the digital native
- The inheritance backlash
- Returns and resilience: families’ approach to ESG and values-based strategy
- Breaking up is hard to do: the impact of a family split on shared passions
- The three Rs for family offices: reputation, regulation and real estate