Grayscale Investments’ latest report, “Reimagining the Future of Finance,” describes the digital economy as “the intersection of technology and finance that is increasingly defined by digital spaces, experiences and transactions.”
With this in mind, it should come as no surprise that many financial institutions have started offering services that allow customers to access Bitcoin ( BTC ) and other digital assets.
Last year, in particular, saw an influx of financial institutions adding support for custody of crypto assets . 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 its clients. Michael Demissie, head of digital assets and advanced solutions at BNY Mellon, told Cointelegraph that BNY Mellon had $46.7 trillion in assets under custody and/or administration 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), declared in June 2021 that it would offer Bitcoin trading and custody services in Switzerland. Then, in October of last year, US Bank, the fifth largest retail bank in the United States, announced the launch of its crypto custody service for institutional investors.
Alex Tapscott, managing director of Ninepoint Digital Asset Group, told Cointelegraph that US banks have been struggling to launch crypto asset custody since 2020 . “Crypto assets are a $2 trillion asset class and crypto asset custody is big business.” Tapscott added that the past year was a turning point for many financial institutions, noting that on July 22, 2020, the U.S. Office of the Comptroller of the Currency wrote a letter granting government-chartered banks permission to federal to provide cryptocurrency custody services . As a result, many traditional banks started adding crypto custody services in 2021.
Next steps
While notable, it is also important to note that traditional banks have begun to work closely with cryptocurrency custodians and sub-custodians to introduce custody of digital assets.
Ramine Bigdeliazari, director of product management at Fidelity Digital Assets, told Cointelegraph that given growing customer demand, exploring crypto solutions through custody relationships with digital asset service providers is a natural next step for traditional financial institutions. He said:
“While there are several ways that banks could enter the digital assets market, such as building an end-to-end solution or acquiring existing providers, sub-custody relationships with existing and trusted service providers could provide a superior alternative that enables a fast and proven path to market to meet customer needs.”
Bigdeliazari explained that Fidelity Digital Assets provides sub-custody services to client companies, including banks that, in turn, interact with their clients. “These commitments show the potential for digital asset sub-custody to enable institutions to provide their clients with access to digital assets through the same interface and experience they use to access other asset classes without having to build any infrastructure. ”
To put this in perspective, New York Digital Investment Group (NYDIG) is a sub-custodian that has partnered with US Bank to offer its Global Fund Services clients a Bitcoin custody solution.
The partnership between traditional banks and sub-custodians is important. For example, Tapscott explained that while crypto asset custody is a great opportunity, it is not without risks for banks. “Securely storing private keys can be the difference between a satisfied customer and money in the bank or a class action lawsuit and convictions. So naturally, many large banks prefer to partner with companies that already have that experience in the industry.” “, said.
And so it has been. Kelly Brewster, director of marketing for NYDIG, told Cointelegraph that while US Bank is among NYDIG’s most prominent banking partners, it is far from the only one. “NYDIG has already partnered with over 35 banks and credit unions to bring Bitcoin to the mainstream world ,” she noted.
Although sub-custodians are helping traditional financial institutions participate in 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 option for traditional banks looking to develop their own crypto custody offerings. “Banks will end up branding custody solutions as their own, which will be powered by Gemini, Anchorage, BitGo or some other established crypto custodian,” she explained.
Furthermore, digital asset infrastructure providers are also helping to bridge the gap between traditional banks and the world of cryptocurrencies. For example, Fireblocks has partnered with BNY Mellon to enable their 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 the Fireblocks technology stack, along with other internal components, to enable clients to hold digital assets.
Demissie explained that BNY Mellon is building its own digital asset custody platform thanks to the technological investments that the bank has made in this area. 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 approvals,” Demissie stated, adding that BNY Mellon is currently providing fund services for bond-linked products. digital assets, including those of Grayscale Investments, the world’s largest digital asset manager. “We also service 17 of the 18 active cryptocurrency funds in Canada.”
Will Big Banks Threaten Cryptocurrency Decentralization?
According to Demissie, digital assets are here to stay, as he believes they are becoming more and more a part of everyday life. “Our clients look to BNY Mellon, as their trusted service provider, to extend our core services to this emerging asset class,” she said. However, while the incorporation of digital assets within traditional finance may be a big step forward for the crypto ecosystem, some may wonder if big banks will threaten the decentralized nature of crypto assets .
Although this is a relevant concern, Tapscott noted that many institutional and retail holders of crypto assets prefer to store the assets with custodians. “Whether it’s a crypto-native custodian like Gemini or a big bank is irrelevant. Your keys will be held by someone else . ” However, Tapscott stressed that this notion does not prevent millions of other cryptocurrency holders from being their own bank and storing coins in hardware wallets.
Shedding more light on the matter, Anthony Woolley, head of business development at marketplace digitization firm Ownera, told Cointelegraph that regulation invariably requires that an entity, such as a transfer agent, be responsible for the registration of ownership of any value. For this reason, Woolley does not believe that digital assets can ever be fully decentralized and, at the same time, comply with regulations.
However, Woolley suggested that it may be possible to conceive of a world in which regulated digital securities are traded peer-to-peer with instant payment, transfer of ownership, and settlement. “We think this is the kind of decentralization that investors and society as a whole need.”
Conclusion: Banks should work with cryptocurrency custodians
Concerns aside, the growing demand for digital assets from institutional investors will result in traditional financial institutions working hand in hand with crypto custodians and service providers.
Matt Zhang, a former business executive at global bank Citi and founder of Hivemind Capital Partners, a $1.5 billion multi-strategy fund designed to help “institutionalize crypto investing ,” told Cointelegraph that banks have a much higher regulatory bar to develop when these are new products and services, and crypto custody is one of the most complex of all:
“That said, customer demand is there, so banks need to find ways to partner with sub-custodians to package the service in the short term while they figure out the roadmap to build it in-house. Certain banks are definitely ahead of the others, but, as an industry, Wall Street is playing a recovery game right now by going into crypto custody.”
To Zhang’s point, research from NYDIG’s Bitcoin + Banking survey published last year found that customers would prefer to access Bitcoin through an offering through their current bank that is consistent with existing quality and asset management standards. risks. The NYDIG findings also show that 71% of Bitcoin holders would switch their primary bank to one that offers Bitcoin-related products and services. “Banks that are not preparing to offer these products and services are at risk of being left behind,” Brewster said.
Specifically, Zhang added that in general, he believes that many major banks will offer access to crypto assets, making the space competitive. As such, he believes that the leading financial institutions will be those that can offer a vertically integrated product offering. He “Think about trading, lending, premium, custody and banking, rather than just custody independently.”