The future of finance: US banks partner with crypto custodians

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2022-02-21 11:58:44

Grayscale Investments’ latest report “Reimagining the Future of Finance” defines the digital economy as “the intersection of technology and finance increasingly defined by the digital space, experience and transaction”.

With this in mind, it is not surprising that many financial institutions have begun to offer services that allow customers to access Bitcoin (BTC) and other digital assets.

Last year in particular, saw a wave of financial institutions incorporate support for crypto-asset custody. For example, Bank of New York Mellon, or BNY Mellon, announced in February 2021 plans to hold, transfer, and issue Bitcoin and other cryptocurrencies as an asset manager on behalf of clients. your goods. Michael Demissie, head of digital assets and advanced solutions at BNY Mellon, told Cointelegraph that BNY Mellon has $46.7 trillion in assets under management and/or management and 2, $4 trillion in assets under management as of December 31, 2021.

Following in the footsteps of BNY Mellon, Banco Bilbao Vizcaya Argentaria (BBVA), announced in June 2021 that it will offer Bitcoin custody and trading services in Switzerland. Then last October, US Bank – the fifth largest retail bank in the US – announced the launch of a crypto custody service for institutional investors.

Alex Tapscott, chief executive officer of Ninepoint Digital Asset Group, told Cointelegraph that US banks have been trying to launch crypto-asset custody services since 2020. “Crypto-assets are assets. $2 trillion in assets and crypto-asset custody is big business.” Tapscott added that last year was a turning point for many financial institutions, noting that on July 22, 2020, the US Office of the Comptroller of the Currency, wrote a letter allowing banks to be Federal charter for the provision of crypto-custodial services. As a result, many traditional banks have started incorporating crypto custody services in 2021.

Next step

While notable, it is important to point out that traditional banks have begun to work closely with crypto custodians and sub custodians to introduce custody for digital assets. number.

Ramine Bigdeliazari, director of product management at Fidelity Digital Assets, told Cointelegraph that with increasing demand from customers, the discovery of crypto solutions through custodial relationships with vendors Digital asset services are the natural next step for traditional financial institutions. He say:

“While there are a number of ways that banks can enter the digital asset market, like building an end-to-end solution or acquiring existing vendors, supervisory relationships Working closely with existing and trusted service providers can provide an out-of-the-box alternative that enables a proven and rapid path to market to meet customer needs. ”

Bigdeliazari explains that Fidelity Digital Assets provides sub-custodial services to client firms, including banks, who communicate with their clients. “These commitments demonstrate the potential of digital asset sub-management to enable organizations to provide their customers with access to digital assets through the same interface and experience. that they use to access other types of assets without having to build any infrastructure.”

To make this clear, the New York Digital Investment Corporation (NYDIG) as a sub-custodian has partnered with Bank of America to provide “Global Fund Services” clients with a Bitcoin custody solution. .

The partnership between traditional banks and sub-custodians is an important one. For example, Tapscott explained that while crypto-asset custody is a huge opportunity, it is not without risks for banks. “Secure storage of private keys can be the difference between a satisfied customer and money in the bank or a class action lawsuit and handcuffs. So naturally, a lot of big banks prefer to partner with companies that already have that industry expertise,” he said.

This has indeed become the case. Kelly Brewster, chief marketing officer at NYDIG, told Cointelegraph that while Bank of America is one of NYDIG’s most prominent banking partners, it is not the only one. “NYDIG has partnered with over 35 banks and credit unions to bring Bitcoin to Main Street,” she commented.

While side custodians are helping traditional financial institutions get into the digital asset ecosystem, Tapscott said that crypto custodians like Gemini and Coinbase also play an important role. For example, Tapscott mentioned that he expects “white label” solutions to be the preferred choice for traditional banks looking to develop their own crypto custody services. “Banks will eventually brand custodial solutions as their own, which will be powered by Gemini, Anchorage, BitGo, or some other established crypto custodian,” he explained.

Furthermore, digital asset infrastructure providers are also helping to bridge the gap between traditional banks and the crypto world. For example, Fireblocks has partnered with BNY Mellon to enable its digital asset custody solution. Stephen Richards, vice president and head of product strategy and business solutions at Fireblocks, told Cointelegraph that BNY Mellon is using Fireblocks technology, along with other internal components, to enable customers hold digital assets.

Demissie further explained that BNY Mellon is building its own digital asset custody platform backed by technology investments the bank has made in the space. For example, BNY Mellon made a Series C investment in Fireblocks in March 2021.

“Our digital asset custody platform is currently under development and testing, and we plan to bring it to market this year pending regulatory approval,” Demissie stated, It also added that BNY Mellon is currently providing fund services for digital asset-linked products including those from Grayscale Investments, the world’s largest digital asset manager. “We also service 17 of the 18 crypto funds operating in Canada.”

Will Big Banks Threaten Cryptocurrency Decentralization?

According to Demissie, digital assets are here to stay, as he believes they are increasingly becoming part of the mainstream. “Our clients expect BNY Mellon, as their trusted service provider, to extend our core offerings to this emerging asset class,” he said. However, while incorporating digital assets in traditional finance could be a huge step forward for the crypto ecosystem, some may wonder if the big banks pose a threat to themselves. decentralized nature of crypto assets or not.

While this is a related concern, Tapscott pointed out that many institutions and retail crypto asset owners prefer to store assets with a custodian. “Whether it is a native cryptocurrency custodian like Gemini or a large bank is irrelevant. Your key will be kept by someone else.” However, Tapscott commented that this stance does not prevent millions of other cryptocurrency holders from becoming their own banks and storing funds in hardware wallets.

Shedding more light on the matter, Anthony Woolley, head of business development for marketplace digitization firm Ownera, told Cointelegraph that regulation always requires an entity, such as a transfer agent. , shall be responsible for the ownership record of any security. As a result, Woolley does not believe that digital securities can be fully decentralized while remaining compliant with regulation.

However, Woolley suggests that it is possible to envision a world where regulated digital securities are traded peer-to-peer with instant settlement, transfer of ownership and settlement. “We believe this is the kind of decentralization that investors and society as a whole need.”

Bottom line: Banks must work with crypto custodians

Beyond the concern, increased demand for digital assets from institutional investors will lead to traditional financial institutions partnering with crypto custodians and service providers. .

Matt Zhang, former chief trading officer at global bank Citi and founder of Hivemind Capital Partners – a $1.5 billion multi-asset fund designed to help “institutionalize crypto investment” – stating that banks have a much higher regulatory bar to thrive when it comes to products and services and crypto custody is one of the products Most complex:

“That said, the needs of customers are so banks need to find ways to cooperate with sub-custodians to package the service in the short term, and at the same time map out a roadmap to develop this service in the country. Certain banks are definitely ahead of others, but as an industry, Wall Street is playing a catch-up game right now in crypto custody. ”

In Zhang’s view, research from NYDIG’s Bitcoin + Banking survey published last year shows that customers and customers who want to access Bitcoin through a service through their existing bank are a good fit. with existing standards for quality and risk management. NYDIG’s findings also show that 71% of Bitcoin holders will switch their primary bank to a bank that offers Bitcoin-related products and services. “Banks that are not prepared to offer these products and services run the risk of falling behind,” says Brewster.

More specifically, Zhang added that overall, he thinks more big banks will provide access to crypto assets, making the space competitive. Therefore, he believes that the leading financial institutions will be the ones that can offer the vertically integrated product. “Think about trading, lending, primary, custodial and banking, rather than just custodial on a stand-alone basis.”

Source: Cointelegraph

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