Wall Street giants are poised and ready, targeting the custody business of digital assets.
Wall Street giants are ready to target digital asset custody business.
This article is from Bloomberg, written by Emily Nicolle & Anna Irrera; translated by Planet Daily.
The battle between Wall Street giants to “compete” for the custody service of the trillion-dollar digital asset market is quietly heating up, turning this financial business, which is usually considered to have little attention, into one of the most active areas in recent times.
On the surface, the custody of encrypted assets seems to have encountered many obstacles. For example, Nasdaq Inc. last week announced that it will suspend its plan to launch its own encrypted asset custody service, citing a lack of business opportunities and an uncertain regulatory environment. In addition, Citigroup Inc. is evaluating its relationship with Swiss digital asset custody software provider Metaco Inc., which has been acquired by another cryptocurrency company, and State Street has canceled its transaction with London-based Copper Technologies.
However, at the same time, the field has also made remarkable progress, including Societe Generale obtaining a license from French market regulators to provide storage and custody services for digital assets, and Schroders, a UK asset management company, looking for a cryptocurrency custody solution, and so on.
Last year, the consecutive closures of FTX and other cryptocurrency platforms resulted in heavy losses for traders who stored cryptocurrencies on these platforms. These successive events have also led to a surge in demand for third-party custody by investors, and more and more banks and institutions have seen opportunities to make money from it.
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Anatoly Crachilov, CEO of Nickel Digital Asset Management, a London-based cryptocurrency fund, said: “From day one, gaining custody rights has always been the most important thing for digital asset investors, but after multiple failures last year, investors’ risk tolerance has changed.”
“Unfortunately, many investors did not realize until the FTX incident that the separation of core functions such as custody and matching engines can provide key protection for investors and help the development of this field,” Crachilov said.
Is it the right time?
Although this perception provides opportunities for traditional financial companies to gain a foothold in custody business, differences in regulatory and cost dynamics around the world allow some participants to take the initiative, while causing other participants to re-evaluate. In the case of Nasdaq, the uncertainty of US regulation played a role in its decision to withdraw.
Nasdaq Chairman and CEO Adena Friedman said on Wednesday’s earnings conference call: “This made us decide that now is not the right time to enter this business.” However, Friedman added that the exchange group still believes in other areas with prospects, such as supporting potential Bitcoin exchange-traded funds (ETFs).
The rules established by the U.S. Securities and Exchange Commission (SEC) in March last year, as well as other rules expected to be introduced soon by the Basel Committee, will impose higher capital requirements on some regulated entities that custody crypto assets. Michael Shaulov, CEO of digital asset technology provider Fireblocks Inc., believes that this will increase the costs for some major financial institutions to operate in this field.
Shaulov added that earlier this year, crypto-friendly banks such as Silicon Valley Bank and Signature Bank went bankrupt one after another, making the situation worse. U.S. regulatory agencies have cracked down on some major crypto companies, including Binance and Coinbase. Without new rules, the enforcement actions by these regulatory agencies have actually played a guiding role, causing many participants to adopt a cautious approach to doing business in this field before clearer regulations are issued.
“The complexity of custodial regulation makes it difficult for new participants to enter this field, and existing participants also find it difficult to fully unleash their potential,” said Clarisse Hagège, founder and CEO of custodial technology company Dfns. “This is not to say that compliance is impossible,” she added, but the confusion surrounding certain rules “has hindered the U.S. market.” It is reported that Dfns has received support from ABN Amro’s venture capital department and market maker Susquehanna.
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One approach that some banks have taken to address regulatory challenges in other jurisdictions is to spin off a wholly-owned or majority-owned subsidiary, such as Zodia Custody Ltd., a subsidiary of Standard Chartered. Julian Sawyer, CEO of Zodia Custody, said that these subsidiaries are usually not subject to the same capital requirements as their banking owners, making it easier for them to operate in this field.
Standard-setters such as the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSC) emphasize that companies seeking to engage in crypto asset business should ensure that activities such as trading, custody, and settlement are separate to avoid excessive risk.
However, Larry Tabb, Head of Market Structure Research at Bloomberg Intelligence, said that because the regulatory environment is still unclear and institutional demand is not yet high, banks considering developing their own custodial institutions may find that “there are better ways to use their investment capital.”
A spokesperson for D.F. Bank revealed that the bank is pushing ahead with the development of its own digital asset custody service and is awaiting regulatory approval after ending its transaction with Copper. Even Nasdaq, which announced the suspension of its custodial business, stated that it plans to continue developing technology for custodial services.
Matthew Homer, a board member of Standard Custody & Trust Co. and a managing member of XYZ’s venture capital firm DeLianGuairtment, said, “What you see is people quietly continuing to build and engage in development activities.” Standard Custody & Trust Co. has previously collaborated with Cowen Digital, the crypto division of boutique investment bank Cowen Inc. Cowen closed the division in May.
“The challenges faced by these companies are actually about timing – where most participants may believe that cryptocurrencies will continue to exist.” Homer further pointed out, “The demand for digital assets such as Bitcoin will continue to exist. The real question is about timing and when the regulatory environment will allow it.”