Grayscale Investments' latest report, "Reimagining the Future of Finance," defines the digital economy as "the intersection of technology and finance increasingly defined by digital spaces, experiences, and transactions." point."
With this in mind, it's no surprise that many financial institutions are starting to offer services that allow clients to acquire Bitcoin and other digital assets.
Especially in the last year, a large number of financial institutions have added support for encrypted asset custody. For example, BNY Mellon announced in February 2021 that it plans to hold, transfer and issue bitcoin and other cryptocurrencies on behalf of clients as an asset manager. Michael Demissie, head of digital assets and advanced solutions at BNY Mellon, told Cointelegraph that as of Dec. 31, 2021, BNY Mellon had $46.7 trillion in custody and $2.4 trillion in assets under management.
Following BNY Mellon, Bilbao-Bizcay Bank (BBVA) said in June 2021 that it would offer bitcoin trading and custody services in Switzerland. Then in October last year, U.S. Bank, the fifth largest retail bank in the United States, announced the launch of its cryptocurrency custody service for institutional investors.
Alex Tapscott, managing director of Ninepoint Digital Asset Group, told Cointelegraph that since 2020, U.S. banks have been scrambling to launch crypto asset custody. “Cryptoassets are a $2 trillion asset class, and cryptoasset custody is big business.” Tapscott added that for many financial institutions, last year was a turning point. He pointed out that on July 22, 2020, the U.S. Office of the Comptroller of the Currency issued an open letter allowing federally chartered banks to provide cryptocurrency custody services. As a result, many traditional banks are starting to offer crypto custody services in 2021.
next steps
While notable, it is important to point out that traditional banks have begun working closely with crypto custodians and sub-custodians to introduce digital asset custody.
Ramine Bigdeliazari, director of product management at Fidelity Digital Assets, told Cointelegraph that exploring crypto solutions through custodial relationships with digital asset service providers is a natural next move for traditional financial institutions given the growing demand from clients. He said:
“While banks can enter the digital asset market through a handful of methods, such as building an end-to-end solution or acquiring an existing provider, establishing a sub-custodial relationship with an existing and trusted service provider could provide a better alternative, Allowing a fast and reliable path to market to meet customer needs."
Bigdeliazari explained that Fidelity Digital Assets provides subcustodial services to client companies, including banks, which in turn interface with clients. “These collaborations demonstrate the potential of digital asset sub-custodial, allowing institutions to offer clients access to digital assets through the same interface and experience they use to access other asset classes without having to build any infrastructure.”
To look at it another way, New York Digital Investment Group (NYDIG) is a sub-custodian that has partnered with U.S. Bank to provide Bitcoin custody solutions for its Global Fund Services clients.
Collaboration between traditional bank sub-custodians is an important partnership. For example, Tapscott explained that while crypto asset custody is a huge opportunity, it is not without risk for banks. “Secure storage of private keys can be the difference between a happy customer and money inside the bank, or a class action lawsuit and handcuffs,” he said. “So naturally, many of the big banks prefer to work with companies that already have expertise in this industry.”
And it is. NYDIG Chief Marketing Officer Kelly Brewster told Cointelegraph that while U.S. Bank 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 the masses,” she said.
While sub-custodians are helping traditional financial institutions participate in the digital asset ecosystem, crypto custodians like Gemini and Coinbase also play an important role, Tapscott said. For example, Tapscott mentioned that he expects “white label” solutions to become the first choice for traditional banks looking to develop their own crypto custody products. “Banks will eventually brand the custody solution themselves and it will be powered by Gemini, Anchorage, BitGo or some other established crypto custodian,” he explained.
Additionally, digital asset infrastructure providers are also helping to bridge the gap between traditional banking and the crypto world. For example, Fireblocks has partnered with BNY Mellon for 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 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 bank’s technology investments 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 said, adding that BNY Mellon is currently offering digital asset-related products. Fund services, including products from Grayscale, the world's largest digital asset management company. “We also serve 17 of the 18 active cryptocurrency funds in Canada.”
Are big banks threatening the decentralization of cryptocurrencies?
Demissie believes that digital assets are here to stay, as he believes they are increasingly becoming a part of the mainstream. “Our clients expect that, as their trusted service provider, BNY Mellon will expand our core services into this emerging asset class,” he said, although the integration of digital assets into traditional finance may be a challenge for crypto, he said. A big step for the ecosystem, but some may wonder if big banks threaten the decentralized nature of cryptoassets.
While this is a related concern, Tapscott noted that many institutional and retail holders of crypto assets prefer to keep their assets in custodial institutions. "Whether it's a crypto-native custodian like Gemini, or a big bank, it doesn't matter. Your private keys will be held by someone else." However, Tapscott said, this concept does not prevent millions of other Cryptocurrency holders become their own bank and store cryptocurrencies in hardware wallets.
Anthony Woolley, head of business development at market digitization firm Ownera, told Cointelegraph that regulation, without exception, requires an entity, such as a transfer agent, to be responsible for the ownership record of any security, further illustrating the problem. Therefore, Woolley believes that it is impossible for digital securities to be fully decentralized and at the same time comply with regulatory requirements.
However, Woolley argues, we can envision a world where regulated digital securities can be traded peer-to-peer with instant payments, title transfers and settlements. “We believe this is the kind of decentralization that investors and society in general need.”
Bottom Line: Banks Must Work With Crypto Custodians
These concerns aside, the rising demand for digital assets from institutional investors will lead traditional financial institutions to join forces with crypto custodians and service providers.
Matt Zhang, former head of trading at global bank Citigroup and founder of Hivemind Capital Partners, said in an interview with Cointelegraph that banks face higher regulatory barriers when developing new products and services, and crypto custody is one of the most complicated. Capital Partners is a $1.5 billion multi-strategy fund that aims to help “institutionalize cryptocurrency investing.”
“That said, the demand from customers is there, so banks need to find ways to work with sub-custodians to package services in the short term while developing a roadmap for internal development. Certain banks are certainly ahead of others, but as a industry, Wall Street is now playing a catch-up game in terms of getting into crypto custody.”
In Zhang’s view, NYDIG’s Bitcoin+Banking survey released last year found that users and customers prefer to acquire bitcoin through services provided by existing banks that meet existing quality and risk management standards. NYDIG’s findings also revealed that 71% of Bitcoin holders would 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 may be left behind,” Brewster said.
More specifically, Zhang added that overall, he thinks many big banks will offer crypto assets, making the space competitive. Therefore, he believes that the leading financial institutions will be those that can offer vertically integrated products. "Think about trading, lending, custody and banking, not just stand-alone custody."
Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. Readers are requested to establish correct currency concepts and investment concepts, and earnestly raise risk awareness.
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