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Bankchain Briefing: Behind Betterment’s automated crypto investment offering

  • This week, we hear from Jesse Proudman, vice president of crypto investing at Betterment, about why the firm decided to move into crypto.
  • We also explore what the introduction of a CBDC in the US would mean for the country’s existing financial infrastructure.

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Bankchain Briefing: Behind Betterment’s automated crypto investment offering

Betterment, a robo-advisor managing over $30 billion in assets for 730,000 customers, recently debuted its cryptocurrency offering.

Crypto Investing by Betterment offers four different types of crypto portfolios for retail customers and financial advisors, allowing them to invest in curated selections of digital assets. Each portfolio includes around 25 different cryptocurrencies, categorized as follows:

  • Universe: Offers broad exposure across the crypto landscape, including established coins like Bitcoin and Ethereum;
  • Sustainable: Includes cryptocurrencies that transact sustainably, such as the newly transitioned proof-of-stake Ethereum, and other PoS chains like Solana and Tezos;
  • Metaverse: Focuses on crypto projects involved with immersive digital experiences, including virtual real estate, gaming, entertainment, and more;
  • Decentralized Finance: Includes tokens using blockchain to offer financial services without the need for centralized institutions like banks.

The offering includes a feature that recommends users to limit their crypto exposure to 5% of their investable assets as a guardrail.

Betterment marked its entry into crypto in February when it acquired Makara, a startup that was among the first crypto robo-advisors to get registered with the SEC. This laid the foundation for the launch of Betterment’s new crypto offering.

Last month, Betterment announced that it was partnering with crypto exchange Gemini, which would help the robo-advisor to launch its crypto service by acting as the custodian for its digital assets.

The launch of Betterment’s crypto portfolios came just a week after investing app Stash rolled out its own crypto offering for its 2 million users.

But why now? We seem to be in the midst of a long and particularly cold crypto winter, with many of the top players in the space shedding jobs and struggling to stay afloat. Why do firms like Betterment and Stash feel like this is a good time to launch crypto investment offerings?

I spoke with Jesse Proudman – who co-founded Makara, and is currently vice president of crypto investing at Betterment – to get some more insight on the firm's crypto portfolios and what they aim to achieve.

Why did Betterment launch four different crypto portfolios? And on what basis were these particular themes chosen?

We’re always looking for opportunities to offer our customers more investment choice on the Betterment platform, evident by our other launched lines of Socially Responsible Investing (SRI), an Innovative Technology Portfolio, and now crypto.

Our four crypto portfolios allow our investors to curate their selections of assets based on their personal interests, but don’t limit their access to coins. The four baskets enable our clients to allocate their dollars into different areas of the asset class that more closely align with their personal preferences, whether that includes more sustainable coins, DeFi or the metaverse.

Betterment recommends that customers limit their crypto investments to 5% of their investable assets. Why is that important?

Using the Black-Litterman model, our investing experts calculated our maximum recommended crypto allocation to no more than 5% of investable assets by taking into account two important questions: How much, by percent, will crypto outperform stocks per year? And in terms of probability, how confident are you that crypto will outperform stocks?

This is our recommendation, as we understand this is a risky asset class that may not be suitable for all of our customers.

What role did the recent Makara acquisition play in the launch of this offering?

In February, Betterment acquired Makara, one of the first investment advisors to offer only automated cryptocurrency portfolios. This brought Makara’s team of crypto experts, many of whom have been involved in the digital asset space since 2016, to Betterment. With over 30 years of combined crypto, blockchain and engineering experience, this team then helped shape our diversified crypto portfolio options today.

Considering the current “crypto winter”, is this a good time to launch a crypto investment offering? Is the demand there at the moment?

Crypto has become a mainstream asset class, and many of our customers expressed interest in gaining exposure to crypto as part of their long-term investment strategy.

Today’s US investors are largely on their own when it comes to engaging with digital assets — with our new offering, you’ll be able to invest in managed crypto portfolios that provide index-like exposure.

Our team of investing analysts and engineers understand that crypto is a volatile and uncertain asset class — and as such, we believe diversification is critical.

Beyond crypto portfolios, we will also provide retail investors and financial advisors with important information on the asset class — including an educational resource center, a bi-weekly crypto newsletter, and regular commentary from our experts.

Could a US CBDC undermine the existing financial infrastructure?

The Federal Reserve is preparing to launch a US CBDC system that could bring major changes to America’s financial ecosystem. There seems to be a lack of consensus on how long it would take to implement, and how it would impact the current financial infrastructure.

FIs are concerned that CBDCs will undermine the existing financial infrastructure, while the crypto community claims the government is gunning for totalitarianism. In short, there is a lot of chatter, so Tearsheet spoke to a few experts to get some clarity on the matter.

“For the US dollar to remain the global reserve currency, it’s important that we take the steps necessary to make sure that we’re a leader in this space,” said Jonathan McCollum, the Chair of Federal Government Relations for Davidoff Hutcher & Citron.

In essence, a US CBDC is a digital version of the US dollar, and is a liability of the Federal Reserve in the same way that cash is today. What sets it apart from cryptocurrencies and stablecoins is that it is issued by the central bank of a country rather than a private company.

In January 2022, the Biden administration published a paper examining the pros and cons of a potential US CBDC and invited comments from the public. Perhaps out of natural resistance to change, or a distrust in banks and government in general, the public’s comments were not enthusiastic about the initiative.

Some scathing comments from the financial and technology sector emerged as well. “The Federal Reserve rightly recognizes that a CBDC could present serious risks to financial stability and…could undermine the commercial banking system in the United States,” wrote the Banking Policy Institute.  

“Many of the benefits of a CBDC are already being met by private-sector innovations, like USDC, through blockchain-based payment systems,” responded Circle, the issuer of the USDC stablecoin. “CBDCs and centralized payment system innovations…pose serious potential breaches of public trust.” 

Last month, the Biden administration released a comprehensive framework for the responsible development of digital assets, and developed policy objectives for the US CBDC system. 

The policy objectives address the public and private sector’s concerns in broad brush strokes. However, the government seems resolved to pursue the creation of a US CBDC — and if implemented, promises to respect human rights and promote economic growth, but admits that more research is needed before the implementation.

McCollum maintains that the US government is at least 3 to 5 years away from full implementation of CBDCs on a large scale. He points to the time-consuming process of passing legislation – given the evenly divided Congress – and adds that nothing is guaranteed. 

“I think first Congress needs to pass legislation that gives authority to the Federal Reserve and the Department of Treasury to start the process. And as we know, passing legislation can often take quite some time in the US, and it has to go through both chambers,” he said. 

Maybe when contemplating the imminence of CBDCs, a helpful perspective is to reflect on how the US Postal Service manages to coexist alongside emails and instant messaging apps. 

Highlights from our recent coverage

The ups and downs of Circle’s USDC stablecoin

Circle recently announced a partnership with Robinhood, and will be onboarding more users as Robinhood leverages its payment infrastructure to power its Web3 products. However, the Fed’s investigation into stablecoins and exploration of CBDCs threatens Circle’s progress towards becoming a national digital currency bank.

‘Just because the crypto application is badly designed doesn’t mean you throw out the blockchain’ – Paystand’s Gary Malhotra

While many crypto firms shed jobs and struggle to stay afloat in the current crypto winter, one blockchain company, Paystand, claims to be on a fast growth and hiring trajectory. Gary Malhotra, Paystand’s vice president of corporate and product marketing, says it’s important not to paint blockchain with the doom and gloom of the crypto brush. He shares why he believes that the crypto winter doesn’t negatively impact the outlook for blockchain as a whole.

What we're reading

  • Marqeta, partner up on Visa card (Crowdfund Insider)
  • Fireblocks launches digital asset payments engine (Finextra)
  • Fidelity ups digital asset hiring as crypto firms struggle (PYMNTS)
  • N26 launches N26 Crypto, an in-app cryptocurrency trading tool (Finovate)
  • Former Celsius exec joins JPMorgan as director of crypto regulatory policy (Reuters)
  • Nubank preps its own digital currency, Nucoin (Finextra)
  • Reddit users open 2.5 million crypto wallets after launch of NFT marketplace (CoinDesk)
  • IRS expands key US tax language to include NFTs (CoinDesk)
  • US prosecutors subpoenaed Celsius days after it blocked withdrawals (FT)

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