Evolving Money: Blue Chip Meets Blockchain (Sponsored Content)

0:00Since you're a subscriber to this Bloomberg Podcast, we thought you'd be interested in a sponsored podcast called Evolving Money. Produced by Coinbase and Bloomberg Media Studios, it explains how institutional investors are adopting the world's newest asset class, crypto. Here's a recent episode. It's early days, right? It's only more recently that we're starting to see true institutional adoption start to take hold. That's Amanda Agati, the chief investment officer for PNC's asset management group. And she's right. True institutional adoption of crypto is just starting to take hold. That's what this series is about.

0:44Who are the big players adding digital assets to their offerings? How are they doing it? Are they partnering up or going it alone? And why are they doing it now? Are they trying to get ahead of the crowd or are they reacting to client demand? Well, we're going to answer those questions and more in this season of Evolving Money, a show that explores how institutional investors are adopting the world's newest asset class, crypto.

1:16Hi, I'm Angie Lau. I've been a financial reporter for decades, and the people I'm talking to this season are amongst the highest ranking decision makers in the finance industry. And that starts with today's guest, Amanda Agati. Now, Amanda leads the investment strategy group at PNC Bank. This is a financial services company with roots that go way back to 1845. That's about 180 years ago. Now, between their historical roots and their 215 billion U.S. dollars of assets under management, they are a bedrock financial institution, the epitome of old school. So, So what is an old school titan doing in the crypto space?

2:00Well, it's just sort of the next natural evolution of our investment offering. I mean, we spend a lot of time looking at the multi-asset universe. We're very much capital allocators. We're in some ways generalists. We're looking at public markets, private markets, equities, fixed income, alternatives, commodities, structures of various sorts. And so crypto feels like just the next natural evolution of the multi-asset universe. We're really, I think, paid and expected by our clients and the investors that we serve to understand where the edge is, where the next wave of financial innovation is coming from.

2:44And so, you know, a few years ago, we were kind of kicking the tires on what crypto looks like as an industry. The regulatory environment had shifted in a very unfavorable way. And so it sort of shut the lights off on some of the areas that we were exploring from a crypto perspective. But with a new administration and a very different regulatory environment in play here, it just made a lot of sense for us to pick it back up again. We think it has staying power. And so we're trying to understand where we as a more traditional financial institution show up in the crypto industry, how we show up and how we create access for our clients because our clients are really interested in it.

3:30When you bring it to your institutional level colleagues, okay, and you're having these conversations and you're all discussing, we got to bring crypto to our clients. That must have been some very interesting conversations. What were those conversations like bringing it to PNC? Well, it's fun to look back on it, but at the time they were somewhat challenging conversations. I mean, this is the way the investment business works, right? It's almost never unanimous. There's always Monday morning quarterbacks. There's a million different points of view on one particular investment idea or solution.

4:10And so it took a lot of, I think, conversations and internal debate, particularly as it relates to the regulatory backdrop and some of the uncertainty around what's considered bank permissible or not. As much as we want to lean hard into being at the forefront of innovation and lean hard into new financial technology and that sort of thing, we are a very regulated entity. We are a traditional financial institution. And so this sat at the outer bounds of most people's comfort level, right, when we think about risk, compliance, legal, cybersecurity, et cetera. So it took a lot of conversations and handholding to get everybody on board with the idea of what we were trying to do.

5:00So what got it over the line then? What was the philosophy or the approach that got people on board? This is not do all things and be all things. This is literally creating access through a really strong strategic partnership with Coinbase, right? it made perfect sense to partner with them to connect our clients and create access to this new opportunity set. I think there are a ton of benefits, institutionally speaking, to start heading down this path. We learn how to connect to a completely different trading platform. We're learning how to operate in 24-7 trading environments. We're looking at different types of you know, AML and cyber related guardrails.

5:47We're going to look at and contemplate, you know, other coins beyond Bitcoin. You know, this sort of opens the door to what is possible as it relates to stable coins. It was important for us to take that step so that we can start to learn and interact with this completely new and different asset class. What's driving the demand now in terms of creating new products? Is it coming from the opportunities that you see internally? Does it come from the marketplace or both? So there's a little bit of push-pull in terms of our organization wanting to lean further into this financial innovation, but also to some degree our clients kind of asking for and wishing for advice and guidance and education.

6:33Like, what do we think about this financial innovation? I think what we're hearing and what we're seeing and what we are planning for is that we need multiple avenues to access crypto exposure for clients who are interested in pursuing it. So some will go direct, right? They'll use our solution. They'll interact with the coins. It might be Bitcoin. It might be Ethereum. It might be Solon. It might be something else entirely different. There are others that, you know, want an easier, potentially easier path. And so I think the advent of some of the ETFs that we've seen have made such a difference in terms of ease of institutional adoption.

7:17It's easy to incorporate an ETF directly into an existing multi-asset portfolio. So I think that's an opportunity. One of the areas that we've spent a lot of time on over the last few years, separate and apart from the strategic partnership that we launched with Coinbase and the crypto for clients solution that we developed is really in private markets. Our institutional clients in particular often get asked, and this is like endowment and foundation, nonprofit type of institutional clients, often get asked, can you take a highly appreciated crypto gift? What would you do with it if a donor were to give you a large crypto gift?

8:01What do you do? And today it's hard because they have to go set up an account somewhere to accept it and convert it to fiat and then maybe diversify into other types of exposures. I think that's a natural place for the evolution of this offering to go. So in MVP1, we're not really handling transfers in the way I think our institutional client base would like to see. So that's on the roadmap. You know, to incorporate Ethereum into the offering naturally takes you down a rabbit hole of staking, yield farming. There's a decent number of elements around what it means to incorporate Ethereum. I think our clients are very interested in what staking might look like and how that shows up within our offering.

8:50So that could be on the roadmap for MVP2 and beyond.

9:01When you look at risk return correlations and liquidity, what does the data tell you about adding crypto into any diversified portfolio? So we only know so much at this point, but based on what we have seen so far, it is very much indeed an uncorrelated asset. So there is diversification benefits to that, be had. There's a little bit of a scarcity element to how various blockchains and coins are constructed. So I think that adds over time to potentially the valuation story and the relative attractiveness over time. So we do think that there are definitely benefits and unique attributes of crypto as an asset class that can add value in a multi-asset portfolio context.

9:54The challenge, I think at the moment is this volatility component. What we see is about four times the volatility of public equities. And so it's not for the faint of heart. So when we think about incorporating into portfolios, that's one of the major cons, right? How much is a client or an investor willing to see some whipsawing in terms of portfolios? There are definitely benefits to it, But you have to be able to stomach somewhat of a wild ride at times, too. It's not a straight line hire kind of story. So we're just trying to be thoughtful about what we think the big catalyst and the backdrop for the industry might be and where the path forward lies before we start making a formal recommendation around it.

10:44We really tend to be very long only and buy and hold, again, across the multi-asset universe. So when we take positions in portfolios, they are very high conviction recommendations and they are built over a period of time. So I think that's an important starting place. We're very targeted, very thoughtful. We're not hasty about making decisions. And I think that naturally applies to how we think about the launch of the crypto solution that we created for our clients. That was a very thoughtful and targeted and methodical approach. It wasn't sort of hastily put together. Anytime we find a secular investment opportunity, a secular theme, a trend, AI is a good example of this.

11:27We think crypto potentially is another one of those that has a really long horizon and a really significant but extended innovation cycle. Those are the areas where we want to pick our spots carefully and then continue to build over time.

11:45The discussions within PNC started with questions about investing in this new asset class, but they very quickly expanded into something much larger. So there's all this focus on Bitcoin, Ethereum, etc. But what about the underlying blockchain technology and the use cases and the new business models that are being born off of that? It's really, it feels a little bit like the advent of like Web 2.0. You know, it's hard to remember what it was like when we didn't have Uber or Lyft as an example. Now it's so commonplace. And so we've spent a lot of time over the last few years looking at private market investments, venture capital in particular, that has been primarily where it's been concentrated.

12:33But other elements of the private market or alternative asset classes, you can gain exposure to crypto business models or new companies that are being developed in sort of the crypto industry and landscape. And so for a decent number of years, that was the primary way for our clients to access blockchain technology and crypto oriented exposure. That's fine. But not not all clients are eligible or able or willing to invest in private markets. You lock up capital for an extended period of time. You have to be of a certain size and scope and eligibility to even invest in alternatives. So the things that we have done since then have really been designed to create access and democratize crypto for our clients.

13:26Then I think the big one is how much are we going to learn out of the 24-7 trading environment for crypto? And when does that start to apply to traditional markets? Are we going to get to it? We've talked about it a lot, right? We've talked about the major exchanges extending their trading hours. We obviously have, you know, overnight and futures markets, you know, some level of activity there. But does this ultimately spill over and catalyze a 24-7 trading environment? I don't sleep that much as it is. I definitely won't sleep in a 24-7 trading environment. But I think it does make sense to be thinking about what that looks like in a not-too-distant future state.

14:12So I think there's a lot for traditional public markets to actually learn from the crypto industry. That's how we're thinking about it, right? We're a traditional financial institution. We're learning a lot from the crypto industry. But I think it goes both ways. And I think in the end, there's going to be some really powerful innovations that come out of this. And it's still very early innings. So we're really excited about the future.

14:46Adoption by institutions like PNC is clear evidence that the crypto evolution is taking hold in the largest and most influential financial companies in the world. But the road isn't always so smooth. Amanda was pretty clear about the challenges she faced trying to earn internal support. And that's going to happen any time a big organization tries to evolve their processes and their offerings. So what's coming next? To get an answer to that, I asked Amanda for her wishlist moving forward. It's less about me creating a wishlist for new innovations and new products and all of that as it relates to crypto and much more about bringing within the walls of PNC a lot of the capabilities and exposures that exist today.

15:41I don't need a long-term wish list of ideas to keep me busy. I have so many things that are sitting right in front of me to kind of lean further into in terms of getting our clients access to and getting sort of up the learning curve around all things crypto that, you know, it's going to keep us busy for, you know, the next year or two. It doesn't mean that we aren't forward looking. Of course we are. But I think there's a lot to chew on, certainly in the new year, as it relates to just some of the existing capabilities. We just need to lean further into adoption and exposure and some of the capabilities that have been developed today.

16:32I'm Angie Lau on behalf of Coinbase and Bloomberg Media Studios. Thanks for listening. There are a lot of other illuminating conversations in our feed, so be sure to follow Evolving Money on Spotify or Apple Podcasts.