Grayscale Investments’ latest report “Reimagining the Future of Finance” defines the digital economy as “the intersection of technology and finance that’s increasingly defined by digital spaces, experiences, and transactions.”
With this in mind, it shouldn’t come as a surprise that many financial institutions have begun to offer services that allow clients access to Bitcoin (BTC) and other digital assets.
Last year, in particular, saw an influx of financial institutions incorporating support for crypto-asset custody. For example, Bank of New York Mellon, or BNY Mellon, announced in February 2021 plans to hold, transfer and issue Bitcoin and other cryptocurrencies as an asset manager on behalf of its clients.
Michael Demissie, head of digital assets and advanced solutions at BNY Mellon, told Cointelegraph that BNY Mellon had $46.7 trillion in assets under custody and/or administration and $2.4 trillion in assets under management as of December 31, 2021.
Following in BNY Mellon’s footsteps, Banco Bilbao Vizcaya Argentaria (BBVA), stated in June 2021 that it would offer Bitcoin trading and custody services in Switzerland. Then in October of last year, U.S. Bank — the fifth-largest retail bank in the United States — announced the launch of its cryptocurrency custody service for institutional investors.
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Alex Tapscott, managing director of Ninepoint Digital Asset Group, told Cointelegraph that United States banks have been scrambling to launch crypto asset custody since 2020. “Crypto assets are a $2 trillion asset class and crypto-asset custody is a big business.”
Tapscott added that last year was a turning point for many financial institutions, noting that on July 22, 2020, the U.S. Office of the Comptroller of the Currency, wrote a letter granting permission to federally chartered banks to provide custody services for cryptocurrency.
As a result, many traditional banks began to incorporate crypto custody services in 2021.
While notable, it’s also important to point out that traditional banks have started working closely with crypto custodians and sub-custodians to introduce custody for digital assets.
Ramine Bigdeliazari, director of product management for Fidelity Digital Assets, told Cointelegraph that given the growing demand from customers, the exploration of crypto solutions through custodial relationships with digital asset service providers is a natural next step for traditional financial institutions. He said:
“While there are a handful of ways that banks could enter the digital asset market, like building an end-to-end solution or acquiring existing providers, sub-custodial relationships with existing and trusted service providers could provide a superior alternative that allows for a quick and proven path to market to meet clients’ needs.”
Bigdeliazari explained that Fidelity Digital Assets provides sub-custody services to client firms including banks who, in turn, interface with their customers.
“These engagements showcase the potential for digital assets sub-custody to allow institutions to provide their customers access to digital assets through the same interface and experience they use to access other asset classes without having to build any infrastructure.”
To put this in perspective, New York Digital Investment Group (NYDIG) is a sub-custodian that has partnered with U.S. Bank to provide its “Global Fund Services” customers with a Bitcoin custody solution.
The partnership between traditional banks and sub-custodians is an important one. For instance, Tapscott explained that while crypto asset custody is a big opportunity, it’s not without risk for banks.
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“Securely storing private keys can be the difference between a satisfied customer and money in the bank or a class action lawsuit and handcuffs. So, naturally, a lot of big banks prefer to partner with firms that already have that industry expertise,” he said.
This has indeed become the case. Kelly Brewster, chief marketing officer at NYDIG, told Cointelegraph that while U.S. Bank is among NYDIG’s most prominent banking partners, it’s far from the only one. “NYDIG has already partnered with more than 35 banks and credit unions to bring Bitcoin to Main Street,” she remarked.
While sub-custodians are helping traditional financial institutions participate in the digital assets ecosystem, Tapscott said that crypto custodians like Gemini and Coinbase also play an important role.
For instance, Tapscott mentioned that he expects “white label” solutions to be the preferred choice for traditional banks looking to develop their own crypto custody offerings. “Banks will eventually brand custody solutions as their own, which will be powered by Gemini, Anchorage, BitGo, or some other established crypto custodian,” he explained. - Cointelegraph.
