BNY’s crypto gambit will test custody tech

It wasn’t so long ago that one of the major hindrances holding back institutional investors from cryptocurrencies and other digital assets was the lack of institutional-grade custody solutions. That is slowly changing.

In the past few years, a bunch of crypto players, including BitGo, Fincross International, and Velocity Ledger Financial and Prime Trust, have begun catering to the institutional market.

But as Hu Liang, co-founder and chief executive of crypto-trading platform Omniex, told me previously, in order for crypto to become a true asset class, it’s “absolutely required” for larger regulated institutions to be involved.

Now it looks like that’s starting to happen. In February, BNY Mellon launched its Digital Assets unit to accelerate the development of solutions and capabilities to help clients cope with the needs of digital assets, including cryptocurrencies. The unit is currently developing a prototype for a multi-asset digital custody and administration platform for both traditional and digital assets. Pending further evaluations and approvals, BNY Mellon expects to offer some of these capabilities later this year.

Roman Regelman, BNY’s chief executive of asset servicing and head of digital, told me that digital assets are becoming mainstream. “If you think of a hedge fund … let’s say they have 10% in digital assets. Today, they have an entire infrastructure for 90% [of their fund] and an entire infrastructure for 10%. These two separate infrastructures have a different set of stakeholders, partners, and platforms. These two worlds don’t meet. They cannot lend against one or borrow against the other. I can’t give you the same reports,” he says.

Two into one will go

It’s a challenge that BNY aims to address by enabling clients to keep traditional assets and digital assets in the same portfolio. “I want to provide you with exactly the same infrastructure, so you have consistency in approach and reporting. That’s the mission,” Regelman says.

The technology involved in safeguarding digital assets differs in that it involves storage of digital keys, but Regelman says it’s still custody of an asset—it’s just that the asset is different.

And just as trading in traditional assets has evolved from paper-based certificates, the digital asset industry, too, will continue to evolve. Sure, the questions that need answering may be more complex than the current model, but it’s also important to remember that the current model took years to perfect.

“There were tens of thousands of contracts written, there were precedents, and there were regulators providing clarity. This is all new. So working with clients is not just about providing them with the technology, which is obviously really important, but also working on all these processes,” he says.

Ultimately, chief investment officers should be able to invest in whatever they want, without being constrained by their operating models. “Our job is to be an extension of them and provide an easy, seamless and interoperable way to support the investment,” Regelman adds.

Interestingly, given the growing theme of interoperability in recent years, Regelman talks about the necessity of tying traditional platforms to digital asset/crypto platforms. As more institutions get involved in the crypto and digital assets space, they will naturally want their systems to interact with each other and to have a more consolidated view of their investments.

BNY Mellon is not alone. Northern Trust and Standard Chartered, through its SC Ventures unit, are also taking aim at the digital asset custody market. As yet, though, their goals appear to differ from those of BNY.

The two aim to launch Zodia Custody, which is still pending regulatory approval from the UK’s Financial Conduct Authority, to enable institutions to invest in emerging cryptocurrency assets. Zodia combines the traditional custody principles and expertise of a bank with the agility of a fintech company to provide an infrastructure that meets institutional needs.

If, in the end, firms are managing their traditional assets and digital assets in two non-interoperable platforms, essentially creating an all-new silo, then it doesn’t matter what technology is thrown at the crypto custody problem. It will always continue to struggle.