Accept nothing less than responsible practices
In yet another blow to trust and consumer confidence, the FTX meltdown blindsided users and left both blockchain believers and skeptics questioning the safety of the digital assets landscape.
At WisdomTree, we believe that blockchain-enabled finance and digital assets can, must, and will feature the same basic guardrails that surround consumers in traditional finance. Every digital asset provider must embrace and demand responsible practices; and consumers must be leery of any company that doesn’t exhibit them. The good news is that critical aspects of responsible blockchain-enabled finance can be easy to spot. It’s visible in a provider’s business model choice, and in the way the provider approaches consumer disclosures. In this blog, we’ll walk you through both. We do, however, need to clarify that there will always be risks with investing and in blockchain-enabled finance. But some risks should be unacceptable and non-starters. So, let’s start revealing some basic business practices you can look for when boiling down digital asset providers for your shortlist.
First, you want to look at a company’s product structure, and how they will be handling the assets you purchase with your hard-earned money. Before placing a single dollar of your funds with any digital asset provider – let alone a chunk of your nest egg – you should ask:
“When I purchase an asset on your platform, will that asset be available to me when I want it back? Or will my asset be used for other purposes, such as loaned to others or for other corporate purposes, impacting my asset availability?”
In too many cases, we’ve observed that customers of certain digital asset platforms appear to have been involved with the latter, while thinking the former applied. If a provider is using your assets to make loans or for other corporate purposes, then the risk rises and, at the very least, merits further diligence from the consumer to better understand the nature of the relationship.
Sound familiar? That’s exactly what we’ve seen with a number of high-profile bankruptcies and business failures. In the past several months, several firms have declared bankruptcy after being unable to meet customer withdrawal requests. Why couldn’t they meet these requests? Because customer assets were loaned or otherwise used for other purposes, and the firms could no longer come up with the expected assets to meet customer withdrawal requests. Customers may have thought they held 1 bitcoin, but really, that bitcoin was not in their account, was otherwise not held in a specific reserve, and/or wasn’t even in possession of the provider.
So, what approach should you look for instead?
The far more stable and secure model, tried and tested in traditional finance, is blockchain-enabled finance’s version of a traditional asset management approach to safeguard assets that are meant to be used to satisfy customer withdrawals. In this model, when you hand over your funds and buy into a product (or token), assets in at least the amount you provided underlie, or otherwise serve as a specific reserve for, that product (or token). This is distinctly different from a provider that treats such assets without reference to their specific reserve purpose and co-mingles them on the company balance sheet. In other words, assets necessary to satisfy customer withdrawals in a timely manner should be reserved and held securely at a custodian.
We believe that this is the model responsible digital asset providers should offer, and the asset-custody model consumers should seek. Every investor-consumer should view this model as being like the basic, standard safety equipment in a car. A minimum price of entry for any company you may be evaluating.
Since 2006, WisdomTree has been operating as a regulated asset manager* in the U.S. We are well acquainted with this reserve model – assets held in separate custody – a model that is now the basis of our digital asset offerings as well. We fully reserve all assets associated with a product in WisdomTree Prime. We also do not lend out your assets.
Two foundational assets in WisdomTree Prime are the WisdomTree Dollar Token and the WisdomTree Gold Token. The WisdomTree Dollar Token has a par value of $1 and WDM (WisdomTree Digital Movement) maintains one or more separate reserve accounts at a U.S. depository institution that consists of U.S. dollars, U.S. treasuries or U.S. government money market funds. The WisdomTree Gold Token represents ownership interest in physical gold bar(s) that sit in a vault managed by a third-party custodian. These gold bars are periodically audited and can be identified down to the serial number. We publish the gold bar list associated with Gold Tokens in WisdomTree Prime. Both of these digital assets demonstrate our approach.
The role of consumer disclosures.
Any company in this space should be making it easier, not harder, for you as a consumer to understand the nature of their products and the potential relationship you’re agreeing to enter. They should not only be demonstrating the responsible business practices we’ve been discussing, but they should also provide clear, simple, and transparent disclosures. And they should do so without being forced by industry guidelines.
So how do you spot responsible disclosure? Go to the provider’s website, for starters. Look at their product information. Risk disclosures. FAQs. User agreements. All of this information for WisdomTree Prime is available right in the app.
If a provider goes to these lengths on their own, agreeing to be held accountable to meet minimum standards should be a given. For consumers using WisdomTree Prime, we see regulation as an opportunity to demonstrate that we’re clearing a bar set by an independent third party – a bar that may be even lower than the one we set for ourselves.
Responsible providers working closely with regulators can achieve innovation. Regulation can help to unleash innovation for the masses. Unregulated markets, particularly when coupled with providers that do not maintain sound business and risk management practices, push away the public who prefer to operate in markets where access is open, transparent, and regulated in a way that protects the consumer. Basic, responsible business practices and regulation are what’s needed to build trust in blockchain-enabled finance. In our view, every provider should be developing their products and serving their customers based upon the ideas we’ve just covered.
You, as informed consumers, must demand and accept nothing less.
* The referenced WisdomTree regulated asset management entities do not make available, issue, or oversee the assets discussed herein. Such assets are issued and overseen by WisdomTree Digital Movement, Inc. (NMLS ID 2372500) (“WDM” or “WisdomTree Digital”).
The information provided herein is not intended as an offer or solicitation for the purchase of, or a recommendation associated with, any security, financial product, digital asset or service, or to provide any security, financial product, digital asset, service or advice in any jurisdiction. Potential products and services, as well as applicable public launch timing and associated fees, are in development and/or are in an early access stage, and may change or may never become available, including due to regulatory considerations. Any information provided and/or plans associated herewith are subject to change without notice and WisdomTree Digital is under no obligation to provide additional information.
The WisdomTree Gold Token (GOLD) is issued by WDM and is a digital token recorded on a blockchain (e.g., the Stellar network) representing an electronic document of title to physical gold. The value of GOLD is directly related to the value of an equivalent investment in gold. The price of gold (and, accordingly, GOLD) does fluctuate and may be affected by numerous factors including supply and demand, the global financial markets and other political, financial, or economic events, which will negatively impact gold prices and the value of GOLD. General movements in local and international markets and factors that affect the investment climate and sentiment could all affect the level of trading and, therefore, the market price of gold and this may lead to a fall in the price of gold which will have an adverse impact on any GOLD holder that purchased GOLD at a higher price.
The WisdomTree Dollar Token (WUSD) is issued by WDM and is a digital token recorded on a blockchain (e.g., the Stellar network) representing the right to receive one (1) U.S. dollar. Although the reserve maintained by WDM in order to satisfy WUSD redemptions consists of assets that are high quality and highly liquid, changes to the financial condition of the reserve assets may cause the value of reserve assets to decline or become illiquid and impair the ability of WDM to pay for redemptions of WUSD at par value or in a timely manner.
Blockchain technology is a relatively new and untested technology which operates as a distributed ledger. The risks associated with blockchain technology may not emerge until the technology is widely used. Blockchain systems could be vulnerable to fraud, particularly if a significant minority of participants colluded to defraud the rest. The WisdomTree Dollar Token and WisdomTree Gold Token may each be susceptible to operational and information security risks, including cyber-attacks, and may experience disruptions that arise from human error, processing and communications errors, counterparty or third-party errors, technology, or systems failures, any of which may have an adverse impact on the value or settlement of the applicable Token.
©2023 WisdomTree Digital Movement, Inc.