Already in 2020, we are seeing some of the historical barriers that have impeded greater adoption of Digital Assets by institutions being removed. Fidelity, the US-based asset- management firm with over $6 trillion under administration, has just announced that it will be offering a custody service for Digital Assets. According to the Asset Servicing Times publication: “Digital Assets will be secured using long term cold storage using Fidelity Digital Assets, with Nickel Digital Gold, becoming Fidelity’s first European fund in the Digital Assets space”.
Meanwhile, in Germany, the law firm, Freshfields, is highlighting that “crypto custodian businesses’ — defined as businesses involved in the ‘holding, managing and safeguarding of crypto assets or private cryptographic keys that serve to hold, store and transfer crypto assets’ — to have the appropriate financial services licence to operate”. It would appear that the new German laws, in effect, make Cryptocurrencies a financial instrument and so will now be subject to regulatory oversight and compliance in Germany.
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A PWC report, compiled with the asset manager Elwood, stated it was access to custody services that is a growing need for hedge funds, high-net-worth individuals, and financial institutions as they expand their Cryptocurrency holdings. Currently, there are 150 active crypto-hedge funds, which collectively have US$1bn assets under management, and 52 percent of those funds use an independent custodian.
In the UK, Baanx, is offering Crypto-banking services such as custody and lending and, by issuing debit cards in conjunction with Visa, Mastercard or Unipay, has had its recent £600,000 Crowdfunding with Seedrs oversubscribed. Baanx offers a low-cost white-label service for institutions to offer Crypto assets to their clients. Baanx includes free insurance of up to $100,000 in the event of one of its wallets being hacked. Unlike many other Crypto services Baanx account-opening procedures are very simple and user friendly, which is vital in order to get the public engaged more fully with Digital Assets.
SEBA, in Switzerland, has just announced that, on top of the $103 million it has already raised, it is now raising a further $100 million to build its Crypto Digital Bank. SEBA is offering institutional banking facilities for those who wish to open an account with the crypto bank. It can then carry out crypto to crypto and crypto to fiat conversion.
Institutional demand for Digital Assets is further supported by a survey conducted by SIX (the Swiss Stock Exchange) which found that 66% of traders are seeing growing interest from clients who wish to have exposure to this new asset class.
SIX is in the process of building a new Digital Exchange, which will fully integrate the issuance, trading, settlement and custody infrastructure for Digital Assets. SIX reported that, “When asked about their long-term outlook for trading digital assets and crypto products, an even higher majority of traders — 80% — believe that demand will increase. When considering the impact of trading digital assets more broadly, many feel it will streamline the trading and settlement process and reduce overall trading costs”. This last point is likely to prove a key driver for institutions looking to increase how they can improve their risk controls and compliance monitoring in a more cost-effective manner.
Blockchain technology is designed with military-grade security, including enabling data to be held and shared securely, having the ability to track and trace transactions and using Smart Contracts (which can replace many manual repetitive processes and help to automate transactions). The technology offers many benefits to the financial services sector. In addition, it has the ability to, in effect, digitise many financial instruments such as equities, bonds, derivatives and assets (e.g. Real Estate, IP, commodities and cash), by creating Digital Assets. This means more processes can be automated and assets can be digitally distributed, monitored and managed faster, while eliminating costly intermediaries.