Traditional financial institutions must work hand in hand with crypto custodians, sub-custodians, and service providers in the future.
Grayscale Investments’ latest report, “Reimagining the Future of Finance,” defines 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 custody of crypto assets is big business.” Tapscott added that 2021 was a turning point for many financial institutions, noting that earlier, on July 22, 2020, the U.S. Office of the Comptroller of the Currency wrote a letter granting government-chartered banks permission to provide cryptocurrency custody services. As a result, many traditional banks started adding crypto custody services in 2021.
Next Steps
While remarkable, it is worth keeping in mind 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 added that, “While there are a number of ways banks could enter the digital asset market, such as building an end-to-end solution or acquiring existing providers, sub-custody relationships with existing, trusted service providers could provide a superior alternative that enables a quick and proven path to market to meet clients’ needs.”
Tapscott further explained that although 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,” he said.
The evidence shows that Tapscott is right. Kelly Brewster, director of marketing at NYDIG, told Cointelegraph that while the U.S. Bank is among the most prominent banking partners of NYDIG, it is far from being the only one. “NYDIG has already partnered with over 35 banks and credit unions to bring Bitcoin to the mainstream world,” she noted.
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,” he said. However, while the incorporation of digital assets into 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 concept 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 needs.”
In conclusion, it seems sensible for banks to collaborate 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. “Banks need to find ways to partner with sub-custodians to package the service in the short term while figuring 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 going into crypto custody,” said Matt Zhang, a former business executive at global bank Citi and founder of Hivemind Capital Partners.
Ultimately, Zhang believes that leading financial institutions will be those that can offer a vertically integrated product offering.
By Audy Castaneda
