- Key insight: Banks can play an important role in helping their customers safely manage and store digital asset “keys.”
- What’s at stake: Banks are at risk of losing relevance in the investment world if they’re not involved in digital asset custody.
- Supporting data: Custodians currently hold about half ($300 trillion) out of the ~$600 trillion worth of global assets in the market today.
Digital assets are now a prominent element of many institutional portfolios, and with that reality comes questions about what role banks are currently equipped to fulfill for digital asset management.
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As stablecoins grow in popularity and tokenized funds begin to compete with traditional exchange traded funds, banks may have an opportunity to play an important role in decentralized finance by offering custody services for digital assets.
“It’s really important for traditional custodians to be in the space and connecting to that [blockchain] infrastructure to really expand the network of participants and access a lot of these unique features that blockchain can bring,”
In recent months, the need for crypto key safekeeping has created a sub-sector of custody management dedicated to supporting digital assets as a distinct service offering.
The concept of digital assets as a whole is dependent on the use of private cryptographic keys. Crypto keys are used to store, manage and transfer ownership of various digital assets such as cryptocurrencies. Digital asset custody, therefore, is the secure storage and management of those private crypto keys to guard against fraud or theft.
In recent months, the need for crypto key safekeeping has created a sub-sector of custody management dedicated to supporting digital assets as a distinct service offering.
“It’s about who you’re going to trust the safeguarding of your assets to,”
Services provided by a bank custodian, according to the Office of the Comptroller of the Currency’s custody services
Those services are typically, but not always, provided by specialized financial institutions known as custodians.
“If you own a broker account or an institutional or pension fund, those assets will be held at the back of local custodial capability to support the safekeeping of the assets,” he said at the panel discussion. “This is fundamental to making sure that our financial system, our pension funds and our asset owners are protected and can be mobilized globally to give returns and particular futures.”
Milrod said that banks are at risk of losing relevance in the investment world if they’re not involved in digital asset management in some way.
“This is about: Who’s controlling the wallet? Who’s controlling the stores of value on behalf of the investor?” she said. “If it’s not the financial intermediary, then you’ve lost all access to the data, the client relationships, distribution channels. That’s the role we play.”
For traditional financial institutions, digital asset custody can also help them participate in tokenized markets as the market for on-chain trading continues to expand.
“Just like the ETF took out the mutual fund, I think we’re going to see tokenized funds take out the ETF,” Milrod said.
Chapman noted that the custodial role for banks in managing digital assets, such as tokenized funds, will be increasingly important as markets move toward 24/7 trading.
“As you remove the friction from the process, you’re going to need to be really accurate in terms of your capture of information,” Chapman said. “You need to make sure your intermediaries and connections can join the dots between everything. It’s so important that the investment managers can actually access those assets and trust what they’re doing.”
As more markets migrate toward 24/7 and technology migrates toward something beyond existing database technology, existing custodians, banks and financial service providers risk missing out, according to Kuchinad.
“This is actually maybe the biggest change over the last year,” he said. “With 24/7 trading, there are a lot of people who are going to lose their jobs if they’re no longer able to participate in these markets. They’re going to be [getting] $200 million less of revenue because they just can’t even participate.”
The remaining question for many custodial banks, at this point, is what will happen with regulatory rules as the industry awaits the finalization of crypto regulation such as the
“As somebody who worked at the SEC during Dodd-Frank, there’s always going to be a lack of harmony among regulators,” Kuchinad said. “I think that this asset class, this technology, is no different. The SEC said this week that you can still have innovation within the current rule set. In the U.S. especially, there’s a lot of capability and scope to do what we want to do, even in advance of CLARITY.”