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The digital economy is described as the convergence of technology and finance that is increasingly defined by digital spaces, experiences, and transactions, according to Grayscale Investments' recent study Reimagining the Future of Finance. It's not surprising that many financial institutions have begun to offer services that allow consumers to access Bitcoin (BTC) and other digital assets. Last year, in particular, witnessed an increase in the number of financial institutions offering support for crypto-asset custody. For instance, the Bank of New York Mellon, or BNY Mellon announced plans in February 2021 to hold, transfer, and issue Bitcoin and other cryptocurrencies on behalf of its clients as an asset manager. According to Michael Demissie, head of digital assets and advanced solutions at BNY Mellon, as of December 31, 2021, BNY Mellon has $46.7 trillion in assets under custody and/or administration and $2.4 trillion in assets under management. Taking a leaf out of BNY Mellon’s strategies, Banco Bilbao Vizcaya Argentaria (BBVA) announced in June 2021 that it will provide Bitcoin trading and custody services in Switzerland. Then, in October of last year, institutional investors were also in for the news. The U.S. Bank — the country's fifth-largest retail bank- also announced establishing cryptocurrency custody services for institutional investors. Managing Director of Ninepoint Digital Asset Group, Alex Tapscott thinks that the US banks have been rushing to offer crypto asset custody for two years.
“Crypto-assets are a $2 trillion asset class and crypto-asset custody is a big business.”
Tapscott stated that last year was a climacteric period for many financial institutions. On July 22, 2020, the U.S. Office of the Comptroller of the Currency issued a letter that allowed bitcoin custody services to be provided by federally chartered banks for cryptocurrency. As a result, in 2021, many traditional banks began to provide crypto custody services. While this is noteworthy, it is also worth pointing out that traditional banks have begun to collaborate closely with crypto custodians and sub-custodians to establish custody for digital assets. The Director of Product Management for FDA, Ramine Bigdeliazari, states that the increased demand from consumers and exploring crypto solutions through custodial agreements with digital assets providers will build a platform for traditional banks.
“While there are a handful of ways that banks could enter the digital asset market, like building an end-to-end solution or acquiring existing providers, sub-custodial relationships with existing and trusted service providers could provide a superior alternative that allows for a quick and proven path to market to meet clients’ needs.”
He explained that Fidelity Digital Assets provide sub-custody services to client organizations like banks, who in turn can interact and involve their consumers. This helps in portraying the potential of digital assets sub-custody to allow firms to provide the same interface and experience to consumers as they access digital assets. For instance, the partnership between the New York Digital Investment Group (NYDIG), a sub-custodian and U.S. Bank help offer 'Global Fund Services' - a Bitcoin custody solution to consumers. Traditional financial institutions and sub-custodians have an important partnership. Tapscott further explains that although crypto-asset custody has significant potential, it does not come without any 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 handcuffs. So, naturally, a lot of big banks prefer to partner with firms that already have that industry expertise,” he said.
The Chief Marketing Officer of NYDIG, Kelly Brewster, points out that although the U.S. Bank is NYDIG’s most notable banking partner, it is not the only one. To bring Bitcoin to Main Street, NYDIG has already built partnerships with over 35 banks and credit unions. As the sub-custodians have begun assisting traditional banks to participate in the digital asset ecosystem, Tapscott feels that crypto custodians including Gemini and Coinbase have an essential role to play. He also expects ‘white label’ solutions to be the preferred option for banks to develop their crypto-custody offerings.
“Banks will eventually brand custody solutions as their own, which will be powered by Gemini, Anchorage, BitGo, or some other established crypto custodian,” Tapscott remarked.
Furthermore, digital asset infrastructure providers are bridging the gap between traditional banks and the realm of cryptocurrency. Fireblocks, for example, has collaborated with BNY Mellon to enable its digital asset custody service. Michael Demissie went on to say that BNY Mellon is also in plans of developing its own digital assets custody platform. In March 2021, BNY Mellon made a Series C investment in Fireblocks.
“Our digital asset custody platform is currently under development and we plan to bring it to market this year.” Demissie further stated that BNY Mellon is also providing fund services for digital asset-linked products including Grayscale Investments as well.
Are Big Banks About to Threaten Crypto’s Decentralization?
Demissie feels that digital assets are here to stay and that they are gradually becoming a part of the mainstream.
“Our clients expect BNY Mellon, as their trusted service provider, to extend our core services to this emerging asset class.”
On one side introducing digital assets within banks can be a huge step for the crypto space, however, on the other side, there is a threat by banks to decentralize the nature of crypto assets as well. Although a valid concern, Tapscott points out that many institutional and retail crypto-asset holders opt to store assets with custodians, where he states that “your keys will be held by someone else.” The Head of Business Development at Ownera - a market digitalization startup, Anthony Woolley, claims that regulations mostly are fulfilled by one entity itself, like a transfer agent, which is held liable for the record of ownership of security. As a result, Woolley believes that digital assets can never be completely decentralized. In contrast to his remark, he states that digital assets can be decentralized only to construct a world where regulated digital assets can be transacted peer-to-peer with faster payments, ownership transfers, and settlements.
“We believe that this is the type of decentralization that investors and society as a whole need.”
Banks Should Work With Crypto Custodians
Keeping the concerns inside, it seems sure that due to the increased institutional demand for digital assets, the traditional banks will collaborate with crypto custodians and service providers. A former trading executive of global bank Citi, Matt Zhang is the founder of Hivemind Capital Partners - a $1.5 billion multi-strategic fund designed to help institutionalize ‘crypto-investing’ says that banks have a higher regulatory bar in terms of developing new products and services, and the most complex one there is, has been the crypto custody.
“The client demand is there so banks need to find ways to partner up with sub-custodian to package the service in the short term while figuring out the road map to develop it in-house.”
According to Matt Zhang, Wall Street is also catching up with the game to step into crypto-custody. The research from NYDIG’s Bitcoin and Banking Survey collected last year reveals that consumers would likely choose to access Bitcoin through an offering from their current bank that adheres to existing quality and risk management requirements. According to NYDIG’s survey, 71% of Bitcoin owners would likely move their primary bank to a bank offering Bitcoin-related services. Zhang also believes that major banks will provide access to crypto-assets, making the crypto space more competitive. Thereby, Zhang concludes that the most successful financial institutions would be those that provide vertically integrated products and services offering. He urges consumers to think of more than just custody, like trading, lending, and banking as well.