Wall Street giants are gearing up to target crypto asset custody business

Odaily星球日报 · 2023-07-24T15:53:04.000Z

This article comes from Bloomberg, original author: Emily Nicolle Anna Irrera The battle between Wall Street giants is quietly heating up in order to "compete" for the pie of providing custody services to the digital asset market with a market value of more than one trillion US dollars - thus leading to a sudden change in this financial business that is usually considered to have little attention. , has become one of the most active fields recently. In fact, on the surface, the crypto custody space seems to have encountered a lot of obstacles. Nasdaq Inc., for example, said last week it would pause plans to launch its own crypto-asset custody service, citing a lack of business opportunities and an uncertain regulatory environment. Separately, Citigroup Inc. is evaluating a partnership with Swiss digital asset custody software provider Metaco Inc., which has been acquired by another cryptocurrency company, while State Street canceled a partnership with London-based Copper Technologies deal.

This article is from Bloomberg, original author: Emily Nicolle Anna Irrera
The battle among Wall Street giants to provide custody services to the trillion-dollar digital asset market is quietly heating up - turning this financial business, which is usually considered to be of little concern, into one of the most active areas in recent times.
In fact, on the surface, the crypto custody field seems to have encountered many obstacles. For example, Nasdaq Inc. said last week that it would suspend plans to launch its own crypto asset custody service, citing a lack of business opportunities and an uncertain regulatory environment. In addition, Citigroup Inc. is evaluating a partnership with Swiss digital asset custody software provider Metaco Inc., which has been acquired by another cryptocurrency company, while State Street canceled a deal with London Copper Technologies.
At the same time, however, there have been notable developments in the space, including Societe Generale receiving a license from France’s markets regulator to offer services for the storage and custody of digital assets, and British asset manager Schroders seeking a cryptocurrency custodian.
The collapse of FTX and other cryptocurrency platforms last year caused heavy losses for traders who stored cryptocurrencies on these platforms. These successive events have also led to a surge in investor demand for third-party custody, and more and more banks and institutions have also seen opportunities to make money.
“Access to custody has been the most important thing for digital asset investors since day one, but after the multiple failures last year, investors’ risk tolerance has changed,” said Anatoly Crachilov, CEO of London-based cryptocurrency fund Nickel Digital Asset Management.
"Unfortunately, many investors did not realize until the FTX incident that separation of core functions such as custody and matching engines could have provided key protections for investors and helped the space grow," said Crachilov.
Not the right time?
While this recognition has provided an opportunity for traditional financial firms to gain a foothold in the custody business, regulatory differences and different cost dynamics around the world have enabled some players to “move ahead” while causing others to reassess. In the case of Nasdaq, regulatory uncertainty in the U.S. played a role in its decision to exit.
"That led us to decide that now was not the right time to get involved in that business," Nasdaq Chairman and CEO Adena Friedman said on an earnings call on Wednesday. However, Friedman added that the exchange group still sees promise in other areas, such as supporting a potential bitcoin exchange-traded fund (ETF).
Rules set by the U.S. Securities and Exchange Commission (SEC) last March, and other rules expected soon from the Basel Committee, will impose higher capital requirements on some regulated institutions that custody crypto assets. Michael Shaulov, CEO of digital asset technology provider Fireblocks Inc., believes this will increase the cost for some major financial institutions to do business in the space.
Shaulov added that the situation was made worse by the collapse of crypto-friendly banks such as Silicon Valley Bank and Signature Bank earlier this year. U.S. regulators have cracked down on some major crypto companies, including Binance and Coinbase, and in the absence of new rules, these regulators' enforcement actions have actually served as a guide, making many players cautious about doing business in this space until clearer regulations are introduced.
“The complexity of custody regulation makes it difficult for new players to enter the space and for existing players to gain traction,” said Clarisse Hagège, founder and CEO of custody technology company Dfns, which is backed by ABN Amro’s venture capital arm and market maker Susquehanna. “That’s not to say compliance is impossible,” she added, but confusion around certain rules “has been a hindrance to the U.S. market.”
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One way some banks have navigated regulatory challenges in other jurisdictions is by spinning off a wholly or majority-owned subsidiary, such as Standard Chartered’s Zodia Custody Ltd. Such subsidiaries are typically not subject to the same capital requirements as their bank owners, making it easier for them to operate in this space, said Zodia Custody Chief Executive Officer Julian Sawyer.
Standard setters such as the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSC) have stressed that firms seeking to engage in crypto-asset businesses should ensure activities such as trading, custody and clearing are separated to avoid excessive risks.
But Larry Tabb, director 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 custodians may find that "there are better ways to use their investment funds."
A spokesperson for State Street Bank revealed that after ending the deal with Copper, the bank is moving forward with developing its own digital asset custody services and is awaiting regulatory approval. Even Nasdaq, which announced a suspension of its involvement in the custody business, said it plans to continue developing technology for the custody business.
“What you’re seeing is people quietly continuing to build and engage in R&D behind the scenes,” said Matthew Homer, a board member at Standard Custody Trust Co. and managing member of venture capital firm Department of XYZ. Standard Custody Trust Co. worked with Cowen Digital, the crypto unit of boutique investment bank Cowen Inc. Cowen closed the unit in May.
"The challenge these companies face is really timing - most of these players probably believe that cryptocurrencies are here to stay." Homer further pointed out, "The demand for digital assets such as Bitcoin will continue to exist. The real question is timing and when the regulatory environment will allow this."