Cryptocurrencies thrust custodians into the spotlight (once again)

It’s been quite a week in the crypto custody space as Bitcoin enthusiasts rejoice that banks are stepping into their world, but are the moves being reported in the right way? Asks Jonathan Watkins.

Just a couple of weeks after Robinhood and retail traders turned settlement into a conversation topic among the masses, post-trade is back in the limelight and this time it’s good old-fashioned custody, but in the context of the much newer concept of cryptocurrencies. 

Whenever custody becomes the talk of the town, I’m obliged to point out that our industry is usually referred to as the ‘unsexy’ side of banking. I also often think to myself: oh, now you big media players are interested in us! Well where was your coverage during the decades of mind-numbing T2S delay stories?Maybe I’m a just custody purist, but I really feel like you have to earn your stripes covering bizarre custody mandates from an asset manager in Outer Mongolia before covering the big stuff. 

Anyway, I’m happy for custody and its newfound fame through finding common ground with broader finance and the retail world through cryptocurrencies, even if I believe it’s a tad bit overblown.

The type of custody headlines we’ve seen over the last week are usually reserved for M&A or scandals, but this time its banks’ alignment with the soaring popularity of crypto.

BNY Mellon – or WORLD’S LARGEST MULTI-TRILLION DOLLAR CUSTODIAN BANK as some media outlets labelled them – confirmed it would be setting up a unit to establish its own crypto custody and fund administration offering, sending the price of Bitcoin up and interest in the securities service space through the roof. The story is accurate, but this has been a long-time coming. 

Then at the end of last week I saw a note about Deutsche Bank exploring digital assets custody doing the rounds, before again being picked up by some websites as DEUTSCHE GETS INTO CRYPTO CUSTODY AND PRIME BROKERAGE.  

This came via a paper submitted by Deutsche Bank to a World Economic Forum report on cryptocurrencies, which then sparked media reports that the German custodian will offer services around digital assets. After contacting a spokesperson for Deutsche Bank, I can confirm that this really was just an outline of the custodian’s digital assets strategy, and it remains in the same exploratory stage it has been in for some time. There have been no further decisions made on a launch.

It’s safe to say we’ve reached a point with crypto custody where any small move the incumbents make becomes a story pounced on by cryptocurrency enthusiasts – just look at any digital asset headline with ‘Goldman Sachs’ or ‘JP Morgan’ in it and watch the price of Bitcoin soar!

Now, while I can’t promise that we won’t run some stories about crypto custody explorations, I think it’s fair for us all to assume that every top tier custodian bank is exploring this, in addition to tokenisation. It’s not a stamp of approval for Bitcoin, or a left-field business venture, it’s a response to client demand and a new source of revenue at a time where the traditional custody model is facing challenges.

Now servicing digital assets is a different ball game to traditional securities, and that’s why it’s taking some time to work with the technology and clients to set up institutional-grade services throughout the custody world. Also, bear in mind that this remains an unregulated space without other accompanying infrastructures in the form of other traditional services like KYC, AML and prime brokerage.

There are some bona fide solutions coming to the fore, which we’ve covered previously, namely Standard Chartered and Northern Trust’s Zodia, SIX Digital Exchange, Fidelity, BBVA and Nomura. Outside of these, consider that most other major players in the securities services space will be readying their own offering in the background.

My takeaway from the many conversations I’ve had about this recently is that the securities services world believes that digital assets are here to stay, as a concept. If hedge funds, endowments, family offices and, eventually, traditional asset managers are looking for a familiar partner to look after their crypto assets, then custodians will look into ways to do this. In addition, many see tokenisation as a new revenue opportunity in an otherwise incredibly uncertain future.

So, take some of the big claims from less familiar brands in the institutional media space with a pinch of salt. I feel like we’ve been through this with JP Morgan and Jamie Dimon’s comments over the past couple of years where every passing comment became a story. There will be a lot of developments and announcements in the coming years, but the space as a whole will take a while to really gain traction as the traditional asset servicing sector looks to align with this technology-driven phenomenon.