Traditional financial institutions will need to work with crypto custodians, sub-custodians, and service providers in the future, but they must also work together with these people.
According to Grayscale Investments’ new report, reimagining the Future of Finance, the digital spaces, experiences, and transactions define the digital economy.
Financial institutions that enable crypto-asset custody increased dramatically last year. Bank of New York Mellon, for example, stated in February 2021 that as an asset manager, they will have the authority to hold, transfer, and issue Bitcoin and other cryptocurrencies. On December 31, 2021, BNY Mellon held or managed $46.7 trillion in assets, according to Michael Demissie, head of digital assets and advanced solutions. BNY Mellon additionally held or managed $2.4 trillion in assets.
Like BNY Mellon, Banco Bilbao Vizcaya Argentaria (BBVA) announced in June 2021 that it would offer Bitcoin trading and storage services in Switzerland. Also in October, US Bank, the fifth-largest retail bank in the US, introduced a solution allowing institutional investors to keep their cryptocurrencies.
According to Managing Director Alex Tapscott, US banks have been trying to keep crypto assets since 2020, when they can. Keeping crypto assets is a lucrative business. $2 trillion in crypto assets An OCC letter allowing federally chartered banks to store cryptocurrencies was sent out on July 22, 2020. He stated last year was a huge adjustment for several financial organizations. In 2021, many traditional banks began offering crypto custody services, resulting in new services.
It’s worth noting that traditional banks are now cooperating with crypto custodians and sub-custodians to secure digital assets.
According to Fidelity Digital Assets product manager Ramine Bigdeliazari, traditional financial institutions should investigate crypto solutions.
He thinks banks should enter the digital asset market via sub-custodial arrangements with well-known and trusted service providers. This is a proven approach to quickly address client requests.
Bigdeliazari said Fidelity Digital Assets provides sub-custody services to clients like banks. By using the same interface and experience as other assets, institutions can give their consumers access to digital assets without having to construct additional infrastructure. The fact that traditional banks and sub-custodians work together is vital.
According to NYDIG’s chief marketing executive, Kelly Brewster, U.S. Bank is not the only major partner. She stated NYDIG has partnered with over 35 banks and credit unions to bring Bitcoin to New York City.
Crypto custodians like Gemini and Coinbase, according to Tapscott, are vital in the digital asset ecosystem. Sub-custodians assist traditional banks into the digital asset ecosystem. For example, Tapscott believes traditional banks will prefer white label solutions to offer crypto custody services. The bank can market custody solutions from Gemini, Anchorage, BitGo or another well-known crypto custodian in the future, he said.
It’s also becoming easier for digital asset managers to interface with regular banks and the crypto world.
Demissie said BNY Mellon already provides fund services for digital asset-linked products like Grayscale Investments’. Our digital asset custody technology is now being tested and we want to launch it this year, subject regulatory permission. We operate with 17 of the 18 active cryptocurrency funds in Canada.
Crypto’s Decentralization is a Threat to Big Banks
Demissie thinks that digital assets are here to stay because he thinks they are becoming more common. He stated that our clients expect us to provide our core services to this new asset class. This may be a big step for the crypto ecosystem, but some may wonder if big banks will change how crypto assets work.
Even though this is a valid concern, Tapscott said that many institutional and retail owners of crypto assets prefer to store their assets with custodians. Whether it’s Gemini or a big bank doesn’t make a difference. The person who has your keys will keep them. However, Tapscott said that this idea doesn’t stop millions of other crypto owners from being their own bank and keeping their coins in hardware wallets.
According to Ownera’s Anthony Woolley, the law requires a person or group to keep track of ownership of any security. This person or group is called a transfer agent. In other words, Woolley doesn’t think digital securities can ever be completely decentralized and still meet all of the rules that govern them.
A world where regulated digital securities trade peer-to-peer, with instant payment, ownership transfer, and payment and settlement, is possible. We think that this is the kind of decentralization that investors and society as a whole need to work better.
Banks Need Crypto Custodians to Stay Safe
Beyond concerns, increased institutional demand for digital assets will lead to traditional financial institutions collaborating with crypto-custodians and service providers.
New products and services must meet stricter regulations, according to former Citi trading executive Matt Zhang.
However, banks must package the service with sub-custodians while figuring out how to make it in-house.
When it comes to crypto custody, Wall Street is playing catch-up right now. Some banks are ahead of the rest, but as a whole, they’re playing catch-up.
Customers and clients prefer to use their current bank to get bitcoin, according to NYDIG’s Bitcoin + Banking survey from last year. This is in line with existing standards of quality and risk management. According to NYDIG, 71% of Bitcoin owners would switch their main bank to one that sells Bitcoin-related products and services. Brewster stated that banks that aren’t ready to offer these new products and services risk being left behind.
Zhang believes that more major banks will be able to access crypto assets, making the market more interesting. As a result, he believes the best financial institutions will be vertically integrated. Think about trading, lending, prime, custody, and banking instead of just custody on its own.
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