[ N E W S
R E V I E W
Speaking: Swen Werner, State Street, and next
to him to the right, Kara Kennedy, custody
product manager, director, BNY Mellon.
space without the presence of an estab-
lished and irrefutably reputable safeguard-
er of said products.
With the exception of a handful of hedge
funds, endowments and family offices,
most institutional investors cannot trade
digital assets as regulation – along with
their investment mandates – prohibit them
from using unregulated entities to safekeep
their private keys. This is certainly the case
with those subject to US 40 Act rules or
UCITS.
“Institutional investors cite varying con-
cerns about the regulatory status, balance
sheet capital and operational controls of
some crypto custodians,” one expert told
Global Custodian last year.
On the panel with Kennedy was State
Street’s Swen Werner, perhaps the most
synonymous figure when you think of the
traditional custody and cryptocurrency
worlds combining.
Werner has been an active advocate of
tokenisation and somewhat of a spokesper-
son for the incumbent banking world when
it comes to digital assets. He also penned a
piece for Global Custodian in August 2019
titled “What is custody of digital assets?”
which outlined a potential approach for
incumbent custody solutions for digital
assets.
“Tokens are important for market change,
we have to service assets and if the nature
of those assets changes we have to be there
when and if that materialises,” he ex-
plained at DAS: London. “Crypto may be an
extension and we are looking into this. But
the decision is for another day, not today.
“Just because there’s an asset it doesn’t
mean that we can take it into custody.
There’s a lot of assets out there we don’t
take in. The custody rules of the SEC re-
gards securities, and Bitcoin is not covered
by that at this time.
The emerging definition of crypto custody
Werner added that we need to get away
from the idea of hot and cold storage –
essentially on and offline, respectively –
while regulations are crucial to escape iso-
lated views and definitions of digital asset
providers see as, essentially, safe storage.
“We are dealing with crypto keys, there’s
nothing unique or terribly exciting about
this, the issue is that I need to demonstrate
a level of asset segregation and control,”
he added. “The problem with Bitcoin is
that there’s no issuer and none of this legal
structure exists.”
Werner concluded in his comment piece
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D I G I TA L
A S S E T S ]
for Global Custodian last year that “Clearly,
a digital custody solution necessitates pri-
vate key storage capability whether that’s
for Bitcoin, blockchain or DLT. As a result,
the question around how those private keys
are controlled is a critical one for defining
the role of custody of crypto assets. This is
a given.
“However, differences in technology
between crypto and institutional platforms,
as well as the applicable and still evolving
regulatory framework, requires a more ho-
listic view of custody that goes beyond the
storage of keys. Put simply, the emerging
definition of what is digital custody will
be more than a question of who holds the
private key.”
Joining the two custody giants on the
panel was Pete Najarian, chief revenue
officer at BitGo, a seven-year old crypto
custodian, which has established itself
as a safeguarder of assets within the new
industry.
Najarian said it speaks volumes that both
State Street and BNY Mellon are engaging
in the conversations along with the rep-
resentatives they are putting forward. He
described the custody giants as making a
“180-degree turn” on the matter in the last
two years.
“You have State Street, BNY Mellon and
others who have a long history, then a
bunch of guys who call themselves crypto
custodians who really are just software
providers and vaults,” he explained. “The
business is going in the direction of tradi-
tional financial services and we’re going to
meet in the middle in my opinion.”
The message on the day from both BNY
Mellon and State Street was clear, and the
best way to summarise is a flight analogy:
they are both in a holding pattern circling
around digital assets, communicating with
both ground control and their passengers
without fully committing to a landing time
or location.
“Our eyes are open to what that custo-
dian role might look like in the future,”
said BNY Mellon’s Kennedy. “We’re clear
that the role we play might change. Some
clients might want to use us and not deal
directly with the platforms.
“The general conversation ongoing and
it’s on us to look at how the industry adapts
and evolve on this. How do you apply ex-
isting regulatory frameworks to this space,
because that’s what is needed.
“It’s going to be a long process and I ex-
pect we won’t get all the answers we need
in a short space of time.”
Spring 2020
globalcustodian.com
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