Digital asset custody solutions are emerging for pension funds, asset managers and banks
Leaseum Partners senior advisor, Jonny Fry, discusses the emerging world of digital asset custody.
The market for offering custody services globally is massive. The top 15 World’s Largest Global Custodians have over $131 Trillion of assets in custody. This list includes the likes of BNY Mellon, State Street and J.P. Morgan. As we see more institutions investing in digital assets, we need to have organizations offering custody services to cater for this new asset class.
We can already see this opportunity has not been lost on custody providers. One of the largest custody providers Northern Trust has been rumoured to be launching a custody service for digital assets.
“As we see the adoption of digital assets increase, both new as well as traditional custody service providers are beginning to offer a range of services for pension funds, asset managers and banks.”
Intercontinental Exchange (ICE), that runs 12 different stock exchanges and has a revenue of over $6 Billion, has just acquired DACC who offer digital asset custody services for over 100 cryptocurrencies using 13 Blockchains. Furthermore, one of ICE’s subsidiaries, Bakkt has applied to the New York Department of Financial Services to be a trust company, an application if granted that will enable the firm to serve as a Qualified Custodian for digital assets.
Kingdom Trust, a Kentucky based custodian, was the first custody provider to get Lloyd’s of London to insure their digital asset custody service last year. Within traditional assets, Kingdom Trust holds over $12 billion in assets under custody and already offers custodial services for over 30 different digital assets.
Nomura, the massive Japanese bank with over 26,000 staff and offices globally, announced last year a joint venture with Ledger and Global Advisor Holdings, a cryptocurrency manager based in Jersey in the Channel islands, to launch an institutional-grade custody solution for digital assets. The three parties have established a company called Komainu, and it is looking to offer custody services that will also cover the insurance, regulation and certification of the digital assets that it offers custody services for.
Kingdom Trust already offers custodial services for over 30 different digital assets.
It would appear that we are seeing a reversal back to where we were before asset managers relied on nominees and custodians’. In the 1970s due to the huge amounts of paperwork that bearer securities created, nominees like DTCC were created. Interestingly digital assets which can be traded and transferred using Blockchain technology are not dissimilar to bearer securities as these assets’ ownership are not recorded by a third party. This means the bearer, the person presenting the asset, is paid directly usually if they wish to sell. Blockchain technology is able to record the transfer digitally of assets efficiently and potentially at a cheaper price, and without the need for many of the current intermediaries, all of whom charge fees for their services, so adding to the friction costs of trading securities.
Will we need custody providers for digital assets in the future?
There is an argument that with the creation of Multisig wallets you do not need a custodian, as a third party, like a trustee, could be appointed. This third party could authorise the transfer of assets from a digital wallet under agreed terms and conditions. This type of trustee service is currently being investigated by trustee providers like PTTrustees for the holders of digital assets.
So we can see that as the adoption of digital assets increases, both new as well as traditional custody service providers are beginning to offer a range of services for pension funds, asset managers and banks. There is no doubt there will be more to follow…..
This article was written by Jonny Fry, one of Leaseum Partners senior advisors in asset management and blockchain. It was originally published in his Digital Bytes newsletter.
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