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looking at cryptocurrencies , but few have yet to do anything tangible with them . A number of high-profile names : - including BlackRock – have publicly said they will not invest in cryptocurrencies until the regulatory environment becomes clearer . Outside of cryptocurrencies , activity in digital assets has been flaccid at best . The regulated security token market is still illiquid , although a lot of institutions believe these types of digital assets offer the most potential , at least in the medium to long-term . Excusing a handful of markets which have launched digital versions of their own currencies , most CBDC projects are still at the proof of concept stage , suggesting their wider adoption will not happen anytime soon .
New assets require new solutions As more investors talk about trading digital assets – either now or in the future it follows there will be a need for institutionalcalibre custody solutions to support them . “ There are several categories of digital asset custodian ,” according to Jason Nabi , chief revenue officer at Bosonic , a non-custodial real-time clearing and settlement infrastructure for institutional digital asset trading .
So what are they exactly ? Firstly , there are the traditional bank custodians , some of whom are utilising third-party technology solutions to launch their own proprietary digital asset custody platforms . This includes the likes of State Street and BNY Mellon . In the case of State Street , the bank has entered into a licensing agreement with Copper . co , a provider of institutional digital asset custody and trading infrastructure , whereby it will leverage the latter ’ s technology to provide institutional digital asset custody . Meanwhile , BNY Mellon is using Fireblocks technology to offer digital asset custody to its clients . “ Some custodians will not want to build a digital asset custody offering from scratch , and will most likely partner with crypto-custodians by forming crypto-custody networks ,” says Alessio Quaglini , CEO and co-founder of Hex Trust , an
institutional crypto-custodian . “ Custodians will find it hard to develop crypto-custody products by themselves , as they lack the expertise . The digital asset market is also changing at a very fast pace , and bank custodians do not have the agility to respond in good time to these market dynamics .” Justin Chapman , global head of digital assets and financial markets at Northern Trust , notes that traditional custodians operating digital asset custody platforms are looking to service regulated digital securities as opposed to some of the unregulated cryptocurrencies . “ Digital equities and bonds fall under existing securities laws , but the current regulatory environment does not allow us to custody cryptocurrencies . Unless the regulation changes , the banks will not move into this space .” Other custodians are acquiring equity stakes in third-party digital asset custodians , which can support multiple digital asset class types . High-profile examples in this category include Zodia Custody – a crypto-custody provider which counts among its investors the venture capital arm of Standard Chartered and Northern Trust . Meanwhile , Nomura recently threw its weight behind a digital asset custodian called Komainu alongside Coinshares , a digital asset management company and Ledger , a digital asset security firm . There are also a number of non-bank and non-bank backed digital asset custodians supporting an extensive range of digital assets . These comprise of standalone crypto-custodians and crypto-custodians owned and operated by crypto-exchanges , such as Coinbase .
“ Institutional managers will also require fund administration and depository , along with connectivity to the traditional world of securities .”
SWEN WERNER , MANAGING DIRECTOR , GLOBAL HEAD OF DIGITAL CUSTODY , STATE STREET
Are standalone crypto-custodians financially viable ? Just as a number of blockchain companies – which promised to shake up securities markets five years ago – disappeared once they exhausted all of their venture capital money , one has to wonder whether something similar is happening in the digital asset custody space ? A number of pure crypto-custodians are certainly having a torrid time at the moment given that their revenues are pretty much correlated to the price of crypto-currencies , whose movements have been shockingly volatile of late . Andrew Wright , chief administration officer at Thomas Murray says certain standalone digital asset custodians - especially those reliant on venture capital money - could face challenges over the long-term against traditional custodians who are endowed with
“ Our battle tested offline cold storage is built as a solution for the largest institutions in the world . The first line of defence is our security protocols , and we have got an unblemished track record in that respect .”
KELLY PETTERSEN , SENIOR MANAGER , INSTITUTIONAL SALES AND TRADING , EMEA , COINBASE deep balance sheets and extensive regulatory experience . Assuming it takes 5-10 years for the digital asset market to mature , some digital asset custodians might exhaust their cash reserves well before that time – just as their blockchain predecessors did . This is acknowledged by Northern Trust ’ s Chapman . “ Northern Trust is working to a 2030 plan , where we anticipate around 5 % -10 % of assets will be digitally issued and managed . The problem for start-ups is that they need returns now , so planning five or 10 years ahead for them is not easy ,” he adds . Others concur . “ New digital asset custodians and sponsored digital asset custodians seem like a medium term more appropriate service model for institutional investors , but the challenges of setting up and generating revenues is not for the
48 Global Custodian Fall 2022