The financial future: US banks collaborate with cryptocurrency custodians

Moving ahead, traditional financial institutions must collaborate with cryptocurrency custodians, sub-custodians, and service providers.

The digital economy is described as “the convergence of technology and finance that is increasingly characterised by digital places, experiences, and transactions,” according to Grayscale Investments’ recent study “Reimagining the Future of Finance.”

With this in mind, it’s not surprising that many financial institutions have started to provide services that enable consumers to access Bitcoin (BTC) and other digital assets.

Last year, in particular, witnessed an increase in the number of financial institutions offering assistance for crypto-asset custody. For example, Bank of New York Mellon, or BNY Mellon, announced intentions in February 2021 to store, transfer, and issue Bitcoin and other cryptocurrencies on behalf of its customers as an asset manager. As of December 31, 2021, BNY Mellon has $46.7 trillion in total assets under custody and/or administration and $2.4 trillion in assets under management, according to Michael Demissie, head of digital assets and advanced solutions.

Following in the footsteps of BNY Mellon, Banco Bilbao Vizcaya Argentaria (BBVA) announced in June 2021 that it will provide Bitcoin trading and custody services in Switzerland. Then, in October of last year, U.S. Bank, the country’s fifth-largest retail bank, announced the debut of its bitcoin custody service for institutional investors.

According to Alex Tapscott, managing director of Ninepoint Digital Asset Group, US banks have been hurrying to offer crypto asset custody since 2020. “Crypto assets represent a $2 trillion asset class, and crypto-asset custody is a multibillion-dollar industry.” Tapscott stated that last year was a watershed moment for many financial institutions, stating that on July 22, 2020, the U.S. Office of the Comptroller of the Currency issued a letter allowing federally licenced banks to offer bitcoin custody services. As a consequence, in 2021, several regular banks started to provide cryptocurrency custody services.

Next steps

While this is noteworthy, it is also worth noting that conventional banks have begun to collaborate closely with cryptocurrency custodians and sub-custodians to establish custody for digital assets.

According to Ramine Bigdeliazari, director of product management for Fidelity Digital Assets, the exploration of crypto solutions through custodial relationships with digital asset service providers is a natural next step for traditional financial institutions given the growing demand from customers. He stated:

“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.”

According to Bigdeliazari, Fidelity Digital Assets offers sub-custody services to client organisations such as banks, who in turn interact with their consumers. “These partnerships demonstrate the potential for digital assets sub-custody to enable institutions to give their consumers with access to digital assets using the same interface and experience they use to access traditional asset classes without the need to create any infrastructure.”

To put this in context, New York Digital Investment Group (NYDIG) is a sub-custodian that has teamed with US Bank to provide a Bitcoin custody solution to its “Global Fund Services” clients.

The collaboration between conventional banks and sub-custodians is critical. For example, Tapscott stated that, although crypto asset custody represents a significant potential for banks, it is not without danger. “Securely storing private keys may be the difference between a happy customer and cash in the bank and a class action lawsuit and handcuffs.” “As a result, many large banks want to deal with organisations who already have that sector knowledge,” he said.

This is exactly what has happened. According to Kelly Brewster, chief marketing officer at NYDIG, although U.S. Bank is one of the company’s most notable banking partners, it is far from the only one. “To bring Bitcoin to Main Street, NYDIG has already worked with more than 35 banks and credit unions,” he said.

While sub-custodians assist conventional financial institutions in participating in the digital assets ecosystem, Tapscott believes that cryptocurrency custodians such as Gemini and Coinbase also play an essential role. Tapscott, for example, said that he believes “white label” solutions would be the preferable option for conventional banks wishing to establish their own crypto custody capabilities. “Eventually, banks will market custody solutions as their own, which will be powered by Gemini, Anchorage, BitGo, or another prominent crypto custodian,” he stated.

Furthermore, digital asset infrastructure providers are bridging the gap between conventional banks and the realm of cryptocurrency. Fireblocks, for example, has collaborated with BNY Mellon to enable its digital asset custody service. BNY Mellon is leveraging Fireblocks’ technology stack, along with other internal components, according to Stephen Richards, vice president and head of product strategy and business solutions at Fireblocks.

Demissie went on to say that BNY Mellon is developing its own digital asset custody platform, which is made possible by the bank’s technological investments in the field. BNY Mellon, for example, made a Series C investment in Fireblocks in March 2021.

“Our digital asset custody platform is currently in development and testing, and we plan to bring it to market this year pending regulatory approvals,” Demissie said, adding that BNY Mellon is already providing fund services for digital asset-linked products such as those from Grayscale Investments, the world’s largest digital asset manager. “We also serve 17 of Canada’s 18 active bitcoin ETFs.”

Will big banks threaten the decentralization of cryptocurrency?

Concerns aside, increased institutional demand for digital assets will result in conventional financial institutions collaborating with cryptocurrency custodians and service providers.

Matt Zhang, a former trading executive at global bank Citi and the founder of Hivemind Capital Partners — a $1.5 billion multi-strategic fund designed to help “institutionalise crypto investing” — explained that banks face a much higher regulatory bar when it comes to developing new products and services, and crypto custody is one of the most complex:

“That said, the client demand is there so banks need to find ways to partner up with sub-custodians to package the service in the short term while figuring out the road map to develop it in house. Certain banks are definitely ahead of the others but, as an industry, Wall Street is playing a catch up game right now coming into crypto custody.”

To Zhang’s point, findings from NYDIG’s Bitcoin + Banking study conducted last year revealed that consumers and clients would prefer to access Bitcoin via an offering through their current bank that adheres to existing quality and risk management requirements. According to NYDIG’s results, 71% of Bitcoin owners would move their main bank to one that provides Bitcoin-related goods and services. “Banks that aren’t ready to provide these goods and services risk falling behind,” Brewster added.

More precisely, Zhang said that he believes several large banks would provide access to crypto assets, making the industry more competitive. As a result, he thinks that the most successful financial institutions would be those that can provide a vertically integrated product offering. “Think trading, lending, prime, custody, and banking as a whole, rather than simply custody on its own.”