Grayscale Investments’ most recent report, “Reimagining the Future of Finance”, defines the digital economy to be “the intersection of finance and technology that’s increasingly being defined by digital spaces and experiences, transactions, and transactions.”
This is why it’s not surprising that financial institutions now offer digital asset access services to clients.
In particular, last year saw an increase in financial institutions that offer crypto-asset custody support. BNY Mellon (Bank of New York Mellon) announced that it will be holding, transferring, and issuing Bitcoin and other cryptocurrency on behalf of clients in February 2021. Michael Demissie from BNY Mellon’s head of digital assets, and advanced solutions, said to Cointelegraph that BNY Mellon has $46.7 trillion of assets under custody or administration, and $2.4 trillion under management as of December 31, 2020.
Banco Bilbao Vizcaya Argentaria (BBVA) followed in the footsteps of BNY Mellon and announced in June 2021 that they would be offering Bitcoin trading and custody services to Switzerland. U.S. Bank, the fifth-largest US retail bank, announced in October last year that it would launch a cryptocurrency custody service for institutional investors.
Ninepoint Digital Asset Group’s managing director Alex Tapscott told Cointelegraph that since 2020, banks in the United States have been trying to establish crypto asset custody. “Crypto assets, a $2 trillion asset type, and crypto-asset custody are a big business,” Tapscott said. He noted that the U.S. Office of the Comptroller of the Currency issued a letter on July 22, 2020 granting federally chartered banks permission to offer custody services for cryptocurrency. Many traditional banks started to offer crypto custody services in 2021.
It is important to note that traditional banks are now working closely with crypto custodians, sub-custodians, and other institutions to provide custody for digital assets.
Ramine Bigdeliazari is the director of product management at Fidelity Digital Assets. He stated that, given customers’ growing interest, exploring crypto solutions through custodial relationships to digital asset service providers was a natural next step for traditional financial institutions. He stated:
There are many ways banks can enter the digital asset marketplace, such as building an end-to–end solution or buying existing providers. However, sub-custodial relationships to existing and trusted service providers could be a better alternative and provide clients with a fast and proven path to market.
Bigdeliazari explained to us that Fidelity digital assets provides sub-custody services for client firms, including banks, who in turn interface with customers. These engagements demonstrate the potential of digital assets sub-custody for institutions to provide customers access to digital assets using the same interface and experience as they use to access other asset types without the need to build any infrastructure.
This is why New York Digital Investment Group (NYDIG), a sub-custodian, has partnered up with U.S. Bank in order to offer its customers “Global Fund Services” a Bitcoin custody solution.
It is important to have a partnership between traditional banks, sub-custodians. Tapscott said that although crypto asset custody offers great potential, banks must be aware of the risks. Securely storing private keys could make the difference between a happy customer and money in the bank. Or it could mean the difference between a lawsuit and handcuffs. He said that banks are naturally more inclined to work with companies that have industry experience.
This is indeed the case. Kelly Brewster is chief marketing officer of NYDIG. She said that U.S. Bank is one of NYDIG’s most well-known banking partners. However, it’s not the only one. She noted that NYDIG has partnered with over 35 banks and credit unions in order to bring Bitcoin to Main Street.
Tapscott stated that sub-custodians help traditional financial institutions to participate in the digital asset ecosystem. However, Coinbase and Gemini are also important crypto custodians. Tapscott stated that traditional banks will choose “white label” solutions if they want to create their own crypto custody products. He explained that banks will eventually claim custody solutions as theirs, and they will be powered by Anchorage, BitGo, Gemini, or another established crypto custodian.
Digital asset infrastructure providers also help bridge the gap between traditional banking and crypto. Fireblocks, for example, has partnered up with BNY Mellon in order to provide its digital asset custody solution. Stephen Richards, vice-president and head of product strategy, business solutions, Fireblocks, said to Cointelegraph that BNY Mellon uses Fireblocks technology stack along with other internal components to allow customers to store digital assets.
Demissie explained that BNY Mellon has been making technology investments in the space to build its own digital assets custody platform. BNY Mellon invested in Fireblocks as a Series C in March 2021.
“Our digital asset custody platform, which is currently in development and testing,” Demissie said. He also stated that BNY Mellon currently provides fund services for digital-linked products, including Grayscale Investments’s digital asset manager. “We also serve 17 of the 18 active cryptocurrency funds in Canada.”
Are big banks threatening crypto’s decentralization
Demissie believes digital assets will be around for the long-term, and that they are becoming more mainstream. He stated that clients are expecting BNY Mellon to expand their core services to the emerging asset class as a trusted service provider. Although incorporating digital assets into traditional finance is a major step in the crypto ecosystem, many may wonder if large banks could threaten the decentralized nature crypto assets.
Tapscott noted that this is an important concern. However, many institutional and retail owners of crypto assets prefer custodians. It doesn’t matter if it is a crypto-native custodian such as Gemini or a large bank. Tapscott said that your keys would be held by another person. However, this doesn’t stop millions of crypto holders from having their own bank and keeping coins in hardware wallets.
Anthony Woolley, ownera’s head of business development, spoke out to Cointelegraph, explaining that regulations require an entity (such as a transfer agent) to keep track of the ownership record for any security. Woolley doesn’t believe digital securities can be decentralized without being compliant with regulatory requirements.
Woolley said that it might be possible to imagine a world in which regulated digital securities can be transacted peer-to–peer, with instant payment, ownership transfer, and settlement. We believe this is the kind of decentralization society and investors need.
Bottom line: Crypto custodians are required to work with banks
Despite concerns, institutional investors are increasingly interested in digital assets. Traditional financial institutions will be able to work hand-in-hand alongside crypto custodians or service providers due to this rising demand.
Matt Zhang, a former trading officer at Citi and the founder of Hivemind Capital Partners, a multi-strategy fund worth $1.5 billion that aims to institutionalize crypto investing, told Cointelegraph that banks face a higher regulatory hurdle when developing new products and services. Crypto custody is the most complicated of all.
“That being said, client demand is there so banks must find ways to partner with sub-custodians in order to package the service in a short term while still figuring out how to develop it in house. While some banks have a clear advantage, others are not as advanced as the rest. However, Wall Street is still playing catch-up when it comes to crypto custody.
Zhang makes a good point. Research from NYDIG’s Bitcoin+ Banking survey last year showed that clients and customers would prefer to use their existing bank’s Bitcoin-related offerings if they are consistent with current standards of quality management and risk management. NYDIG’s findings show that 71% would change their primary bank to offer Bitcoin-related products or services. Brewster stated that banks that don’t prepare to offer these services and products are at risk of being left behind.
Zhang stated that he believes that most major banks will have access to cryptocurrency assets and that this will make the space more competitive. Zhang believes that the most successful financial institutions will offer a vertically integrated product portfolio. Think about trading, lending prime, custody, banking and not just custody.