As cryptos rally, we’re continuing our mini series exploring some of their various dimensions, such as long-term prospects, privacy and security. In this week’s article, Peter Macfarlane uses his decades of experience in Private Banking to provide unique insights into how the space can benefit crypto investors.
What do offshore private banks and crypto have in common? A lot more than you might expect. These two businesses can help each other out. Now is the perfect time for those with a large portion of their wealth tied up in crypto to seek offshore diversification for the medium to long term.
Private banking might have a stuffy old-fashioned image, while blockchain is cutting edge… but opposites attract! Private banks are actually very compatible with crypto, argues Peter Macfarlane.
Crypto is cutting edge – a tool for individuals to break free of the banking system. How can it be compatible with Private Banking? The latter conjures up images of oak-panelled boardrooms, a gentlemen’s club into which only the privileged few are allowed. But crypto millionaires, present or future – and any millionaires for that matter – are very welcome to join the club.
I’ve been working with private banks in a professional capacity for more than thirty years, starting in my days back in the UK where names like Coutts, Child, Hoares and even the Rothschilds popped up. Later I started banking on behalf of offshore trusts in places like Switzerland, Singapore, Andorra and Monaco. More recently I have been working with offshore clients moving their assets Stateside, even to Canada and the Caribbean.
The world is full of ironies. You would think fintech banks, neo-banks or challenger banks – call them what you will – would actually be the perfect banking partners for crypto investors, businesses or miners. But nothing could be further from the truth. Newer banks like Revolut and N26 in Europe, or Novo and the recently-defunct Azlo in the States, all have aggressive anti-crypto policies in place. Offshore private banks do not.
In an ideal world, the blockchain community would avoid dealing with banks altogether. But frankly we are not there yet. Interaction with the banking system is still required.
Private banks can help crypto investors with cashing out to fiat, with traditional banking services like wires and credit cards, and – most excitingly – with diversifying into other asset classes utilising such services as portfolio or lombard loans.
The entire banking business has had to reinvent itself in recent years – and the private banking sector is no exception. Traditionally, private banks relied on generations of family clients who could be charged high fees and would leave discretionary investment mandates with their bankers.
Although capital in private banks has always been very safe, this system, frankly speaking, led to numerous abuses where clients were gouged, churned or simply overcharged. With the internet, there are very few clients for such services these days. It is much easier for anyone to simply go online and trade themselves for a fraction of the price.
While private banking is still associated with high fees, modern private banks are forced to provide modern-day value to justify these fees. This is where it starts to get interesting for the blockchain community.
Crypto investors are typically OK with relatively high fees, and with higher risk, higher reward diversification strategies – accustomed as they are to market volatility and to being sidelined by mainstream banks.
The appeal of private banks is that they can do things normal banks can’t. The hub of a private banking relationship is the private banker himself or herself. He or she is used to taking calls from clients even outside business hours, often late at night or early in the morning, to suit the client’s busy schedule. Private bankers have to answer emails quickly if they want to keep clients happy.
Members of the crypto community are often computer geeks, but I have introduced a number of them to the world of private banking and their eyes opened wide once they begin to understand all the possibilities. I find the successful ones really appreciate that direct, person-to-person relationship. Why? They can put a face to the bank… a real person they can reach on Telegram or Signal. Actually being able to pick up the phone and talk serious business to the bank and get things done is a real boon to them.
The private banker is someone who is inside the bank, but fully on the side of the client. Private banks have open hierarchies, and bankers have a lot of freedom, as long as they make money for the bank. The bankers talk to the compliance department and senior management – sometimes even to the owners of the bank – on a daily basis. This means they know how to push through deals that would never make it beyond the first level in a more rigid mainstream bank. They are incentivized to push deals through because their salaries and bonuses literally depend on it. Compliance departments, meanwhile, are accustomed to thinking outside the box. Higher fees mean they can spend more time actually understanding what is presented to them, rather than applying a cookie cutter approach.
These days, the private banker doesn’t actually have to be a bank employee. Many of the more successful ones have left to become external asset managers (EAMs). These people are effectively freelance private bankers. They have worked inside banks before and based on their contracts, they can talk to the middle or back office directly and get things done. Because the bank is not paying them a salary and doesn’t have to deal with the relationship management aspect, the bank provides its services as an investment and technology platform at a lower rate.
A key advantage of working with freelance private bankers is that they often work with two or three banks instead of just one. That means they can shop deals around to get even better terms for their clients. In some cases clients can manage multiple bank accounts through just the one point of contact.
Don’t I need to deposit a huge sum to benefit from Private Banking?
One of the first questions clients ask about private banking is, “what is the minimum deposit to open an account?”
Recently I’ve come across a few US clients who seem to think, erroneously, that they should choose the banks that publish the lowest minimum opening deposit. This is a big mistake – because it limits the range of banks available to you. Therefore if you are a wealthy client, please do not get hung up on minimum deposits!
Offshore private banks are notoriously fickle when it comes to answering the minimum deposit question. The truth is, while they want to keep up the image of serving the super-rich, there is no minimum opening deposit. Private banking is all about tailored deals: if the bank sees a way it can make money, it will open the account. Whilst it’s not typical, I have seen private banking accounts opened even with a $5,000 deposit, on the basis that more will come in later (for example if someone is about to have a liquidity event like an IPO, ICO, an inheritance or a divorce settlement).
If I had to quote a number, a reasonable figure at which the business relationship makes sense for both sides is probably around half a million dollars or euros as a bare minimum. Some big name banks, such as UBS, Credit Suisse or Citibank, do have much higher fixed minimum entry amounts – but I would not recommend them anyway. In my view the whole raison d’etre of private banking disappears when you start dealing with a mammoth global company. Your private banker at UBS certainly won’t have the CEO on WhatsApp.
Many private banks welcome clients that have their wealth ‘tied up’. These clients may be wealthy but cash-poor individuals. They could be entrepreneurs who have 99% of their wealth tied up in their businesses, highly leveraged property investors, and – as is increasingly the case nowadays – people who have their wealth tied up in crypto tokens but who are looking for ways to diversify.
Crypto as an Asset You Can Borrow Against?
Asset backed loans or back-to-back loans are a private banking speciality. The easiest thing to finance is a portfolio of marketable securities: you can benefit from your assets while avoiding selling off your portfolio and triggering taxes, for example. This way you can avoid disrupting a long-term investment strategy. You can simply reinvest the borrowed money in other assets or currencies that offer higher returns, and/or take advantage of short term investment opportunities that come up. This way you really end up super-charging returns on your investment portfolio in a way that would never be possible in a traditional, mainstream bank nor in a challenger neo-bank.
Do banks loan against crypto? It is early days. Not many banks yet loan fiat money against crypto, but some do – especially the more mainstream tokens like BTC and ETH. Gold, including physical gold, is another biggie that is easy to borrow against – that way you can have the advantages of keeping your long term savings in physical gold, but borrow against it to do more exciting, speculative things in the markets. You could for example keep a portfolio of physical gold and silver and then use it to trade crypto with leverage.
Some of the other targets of private banks are individuals with alternative investments: art, wine, tequila, private planes, classic cars and yachts are just some of the things I have seen private banks loan money against during my career.
With interest rates so low at the moment (and even negative rates on the Euro and Swiss Franc) there has really never been a better time to take advantage of asset backed loans.
Offshore Private Banking for Families and Trusts
Private banks also specialise in families. A family’s wealth is usually intertwined and if the parents or grand-parents open an account, it makes excellent business sense for the bank to open smaller accounts for the younger family members, even kids, who will eventually inherit the funds and develop their own highly-lucrative businesses or careers. Family members are often based in different countries so a central wealth-management hub that can board clients from all over the world makes sense.
Needless to say, offshore asset protection trusts are also very much in the group of target clients for most private banks. Offshore trusts and companies can open accounts at private banks and may even be allowed to carry out commercial transactions if the overall relationship value makes the extra compliance work worthwhile for the bank.
Financing Citizenship and Residence by Investment
Residence and citizenship planning is something that all crypto investors, and successful people generally, should be taking a very serious look at – sooner rather than later. This is also an area where private banking could also come in handy in order to make your assets work harder for you.
Let’s say you want to get Citizenship by Investment in St Lucia. During 2021, St Lucia is running a very attractive offer whereby you invest $250,000 in a zero coupon government bond and you will qualify for citizenship and passport in a few months. You get the investment back in full after 5-7 years. A number of my clients have already gone for this.
So how can your private banker help out here? Let’s say you have $500,000 in your investment portfolio at your private bank. At the time of writing the Fed’s base rate is 0.25% With your portfolio as security, therefore, it’s a no-brainer to borrow $250,000 at let’s say 1% interest. The cost of this money to you is therefore $2,500 per year or $12,500 in total over the five year holding period.
You buy the St Lucia bond with the loan proceeds. Source of funds is quite clear and easy to prove on the Caribbean end which helps the due diligence process – you took a loan from a respectable bank. Your St Lucia citizenship ends up costing you only $12,500 (there will be some other fees involved, but let’s keep things simple here for illustrative purposes).
Your investment portfolio with the private bank, in the meantime, remains untouched and continues – if everything goes according to plan – to yield regular returns and capital growth. You successfully avoided tying up your funds in a zero interest bond, and your bank is happy with you because they typically look at the total relationship value as both assets under management PLUS loans.
Conclusion: Profitable Synergies
The main point of this article was to point out synergies that may not be immediately obvious. Crypto investors may not understand the benefits of offshore private banking, and vice versa. But with the right connections and introductions, good win-win business can be done. With recent record-breaking crypto prices, now might be the time for those who have money in crypto to look into alternative investments including gold, residence and passports – all topics that we at Q Wealth report cover in our special briefings for members.
Of course, private banking services can be useful and lucrative for many types of offshore investors and PTs, not just crypto folks. But these same services can also end up being an expensive drain on resources if you don’t negotiate fees and services properly. As in any business, there are excellent private bankers but also some bad apples. Over decades I have dealt with dozens if not hundreds of private bankers. It pays to seek out recommendations. Very soon, we will be launching a new report on Offshore Private Banking in the Members’ Area. Watch this space!
Like what you’ve read and want more tips on private banking opportunities? Then stay tuned for our upcoming Private Banking Report for our paid members, still available at the discount offer of US$5 per year.