[Insight] Digitalization of Banks, An Era of Custody and Management for Digital Assets
Since the digital assets are on its track, the main agents that are looking for launching consignment (custody) services are boosting up their endeavor. Currently, banks are actively trying to make their own foothold in the custody service field for digital assets. As for the non-formal sector, cryptocurrency-related firms and exchanges are making their own way into the market. Since many are calling this digitalization of the bank Version 2.0, the custody service for digital assets is also expected to take a crucial part. Furthermore, it seems money management companies within the formal sector and cryptocurrency exchanges are even showing some tendencies to manage digital assets by themselves. Then what kind of movements are they making in order to occupy this next-generation field for digital assets in advance?
Banks Are Moving in… The Main Point will be Easing the Risk from Regulations and Establishing Networks
Custody service for digital assets has been an issue for the formal sector since 2017. The discussion about the matter has been started earlier than any other digital-asset related fields. Managing digital assets by themselves means that there will be risks from the regulations. However, the custody, which is a subject of entrustment and procuration, was relatively free from such regulations.
Especially from 2020, banks are making actual movements for the custody service for digital assets. July in the U.S., Office of the Comptroller of the Currency (OCC) allowed the provision of custody service for digital assets held by national saving banks and federal savings associations. This includes all the national banks in all scales and the federal savings associations. Due to this, an official way for the U.S. banks to make their way into the custody service field for digital assets has been granted.
Even in Korea, which is less systemized in the field of compliance for digital assets, there are also some high interests related to the custody service. Banks such as NH Nonghyup Bank, Shinhan Bank, and KB Kookmin Bank, etc. are showing their interests in custody service for digital assets. Jin-Seok Cho, Head of IT Technology Innovation Center, KB Kookmin Bank, had announced at the D.FINE conference held in November that, “We are about to launch a custody service in indirect ways within this year.” Since then, KB Kookmin Bank upholds their promise by establishing KODA, a general management firm for digital assets, by cooperating with Haechi Labs.
On the other hand, DBS, the largest bank in Southeast Asia, took a further step and went beyond custody services. They have launched their own digital asset exchange, the first time for the banks in the formal sector. The launching made by DBS in the third week of December means a lot to the field since they were authorized by the central bank of Singapore to trade in assets such as digitalized stocks, bonds, and private equity, etc. According to this, DBS is offering not only the existing stock trade service but also a token-storage and secondary trade service for digital assets, including Bitcoin. Along with the DBS’s movement, big banks such as Standard Chartered are also giving an impetus to the establishment of the custody service for digital assets.
Cryptocurrency-related Firms Are Establishing Their Own Banks… Will It be Possible for Them to Overcome the Infrastructure of the Formal Sector
On the other hand, cryptocurrency-related firms are showing some movements by establishing their own banks for digital assets. The cryptocurrency-related firms in the U.S., who are at the brink of launching under the authorization by OCC, are especially showing such tendencies. The first such case was Kraken, a digital asset exchange that received authorization for establishment in September. And in the following October, the OCC granted permission for Avanti of the Avanti Financial Group.
However, these two firms are about to launch their service next year, only in the State of Wyoming. In order to expand the boundary, there are some recent movements aiming for not only the certain state but the entire United States. A request for federal authorization for the digital asset bank in November, made by Anchorage, a digital asset service provider, is such a case. If the permission is granted, they can provide their digital asset services to the entire United States. After that, Bitpay and Paxos, who is also a digital asset service provider respectively, also requested a federal authorization in December. As for Paxos, they had already received some interest from the formal sector by adding payment services for digital assets by cooperating with Paypal. Well, of course, some are saying that it will be difficult for cryptocurrency-related firms to run their own digital asset banks for the entire U.S. due to the risks from regulations. Foreign communities are expecting that the forming of Biden’s new government will be the key turning point.
Further Movements of Custody Services by Exchanges, Management Companies in Formal Sectors, and Investment Banks
The custody services by the digital asset exchanges are also becoming more and more elaborate. In fact, the exchanges that are overseeing the digital asset trade by themselves are indeed holding a vantage point in the field of custody. According to this factor, Coinbase, the largest digital asset exchange in the U.S., has been running its own custody long beforehand. And last May, they actually took over Tagomi, a digital asset brokerage startup, seeking to strengthen their custody service further. Coinbase offered an explanation about this takeover, saying, “For the last 1 year, entering of the institutional investors has been increased, and demand for custody and the trading volume for the exchange are showing a substantial increase.”
And most of all, many are pointing out that the movements of the money management firms in the formal sector are the key factor that is heating up the digital asset market further this year. In a recent interview, Abigail Johnson of Fidelity, a global-scale firm that had shown their interest in Bitcoin long beforehand, said, “Our custody business for Bitcoin is riding high beyond our expectations. Now, the main object of Fidelity is to connect the traditional financial business and the future of the digital currency.” The news that even a global money management company such as Fidelity is also showing their interest in custody services for digital assets was indeed welcoming news, good enough to bring good tidings to the market.
Furthermore, Guggenheim Partners announced that they will make an indirect investment in Bitcoin through Grayscale. And even Jefferies, an investment bank in Wall Street also claimed that they will reduce the gold percentage and purchase Bitcoin instead. So it seems the financial service for digital assets will pick up some more momentum for the time being. In such a situation, it will be worthwhile to keep a sharp eye for which camp will eventually seize the initiative in the digital asset field.
*This research and analysis document has been prepared for the purpose of providing information that can be used as a reference based on our reliable data and information but we cannot guarantee its accuracy or completeness.
*The document has reflected the individual’s opinion and it may not be consistent with the company’s official point of view.
