Why America’s Oldest Bank Launched a Crypto Custody Service

The Bank of New York Mellon Corporation (BNY Mellon) has gone live with an electronic platform that stores and protects cryptocurrencies, including bitcoin and ether.

The 238-year-old bank’s new Digital Asset Custody platform currently allows its US customers to store and transfer blockchain-based cryptocurrency with the same guarantees the bank offers to protect traditional assets.

BNY’s new services are rare due to regulatory uncertainty surrounding cryptocurrencies, and most US banks are waiting for more clarity, according to Avivah Litan, a vice president and senior analyst at research firm Gartner.

“Their [BNY Mellon] customers ask them for this service, and because they are the largest and oldest custodian bank in the world, they have listened and acted,” said Litan. “They have a long-term view of digital assets and realize that cryptocurrencies are only a fraction of the assets they own. likely to support in the future.”

Tokenized real financial and non-financial assets are likely to represent a much greater opportunity for BNY Mellon’s customer base over the next decade, Litan added.

Digital asset platforms are built to ensure that cryptocurrencies and tokens, the digital representations of a commodity or other physical asset are kept safe. That’s especially important because cybercriminals have stolen more than $15 billion worth of crypto in the past eight years. And crypto theft has only increased since the COVID-19 pandemic hit in 2020.

BNY Mellon established its enterprise Digital Assets Unit in 2021 to develop services for digital assets; it plans to launch the industry’s first multi-asset platform that bridges digital and traditional asset custody under a single service umbrella.

BNY Mellon said it has partnered with fintech companies, including Fireblocks and Chainalysis, to integrate their technology into the development of its digital asset platform “to ensure it meets customers’ current and future security and compliance needs in the digital world.” asset space.”

BNY Mellon’s announcement is important because while the digital asset market is not yet regulated, Litan says institutional investors will be much more comfortable investing when an institution like BNY Mellon protects their funds.

“I’m not sure what the liability arrangements are if the client’s money is stolen, but I think BNY Mellon will take a lot more responsibility for their clients than most crypto exchanges do,” Litan said.

BNY declined to comment on the move, but quoted a recent survey Celent sponsored; the survey of 271 institutional investors showed significant institutional demand for a “resilient, scalable financial infrastructure built to house both traditional and digital assets.”

The survey found that almost all (91%) respondents were interested in investing in tokenized products. Fully 41% of institutional investors have cryptocurrency in their portfolios today, and another 15% plan to hold digital assets within the next two to five years.

bny image BNY Mellon

Despite apparent interest, respondents also indicated that certain “important conditions must be met” before turning their digital banking research into actual investments. “The asset maintenance and custody market is highly fragmented and evolving, and traditional companies have significant opportunities as investors seek to remove uncertainty in a multi-variable environment,” the survey study said.

Seventy percent of respondents said they would increase their digital asset activity if services such as custody and fulfillment were available from recognized, trusted institutions.

The survey results, Litan said, are significant because they show demand for an area that has “barely surfaced and where there is tremendous potential to modernize our financial systems.”

How blockchain builds trust

Unlike traditional fiat currencies such as the US dollar, which are issued by a central governing authority, cryptocurrencies such as bitcoin are based on a cryptographically controlled network (blockchain) that is decentralized. In other words, it is not controlled by a single entity such as a central bank. The cryptocurrencies have no intrinsic value; its value is based entirely on what the market determines its value to be, not unlike precious metals whose value is based on available quantity and usage scenarios.

Cryptocurrencies are built and exchanged on top of a blockchain public electronic ledger – similar to a relational database – that can be openly shared between disparate users. The blockchain ledger creates an immutable record of cryptocurrency transactions, each time-stamped and linked to the previous one. Each digital record or transaction in the thread is called a block (hence the name); it allows an open or controlled group of users to participate in the electronic ledger. Each block is linked to a specific participant.

Blockchain can only be updated with consensus among participants in the system and when new data is entered, it can never be erased. The blockchain contains a true and verifiable record of every transaction ever made in the system.

As a peer-to-peer network, combined with distributed timestamp servers, blockchain databases can be autonomously managed to exchange information between different parties. There is no need for an administrator, because in fact the users of the blockchain are the administrator.

In the trust economy, the “identity” of a person or entity confirms membership in a nation or community; ownership of assets; entitlement to benefits or services; and, more fundamentally, as proof that the person or entity exists, Deloitte said.

Blockchain doesn’t just solve data access or sharing problems; it also solves a trust problem.

In the peer-to-peer trust economy, an individual user – not a third party – determines what digital information will be recorded in a blockchain and how that information will be used. Blockchain users will work to create a single, versatile digital representation of themselves that can be managed and shared across organizational boundaries, according to research firm Deloitte LLP.

However, there are cryptocurrencies known as stablecoins, which are backed by fiat money and have the same value as the currency behind it. Governments around the world are well on their way to research and pilot national digital currencies that would have the same value as their currencies, including the US dollar. However, the US is lagging far behind other countries in developing a national digital currency.

However, that could soon change. Over the past year, President Joe Biden and lawmakers have continued to urge government agencies to develop and test a digital dollar. The electronic dollar, a virtual representation of a US dollar, would allow people to make payments with tokens on mobile phones or with cards instead of cash.

In addition, financial services firms have developed and tested their own fiat digital currencies as a way to enable cross-border financial transactions in near real-time and without the high costs associated with financial networks such as SWIFT.

For example, in 2019 JP Morgan Chase launched JPM Coin, the first of its kind stablecoin used to transfer money through a “permissioned” or centrally controlled blockchain network. The network enables stablecoin (US dollar-based digital currency) transfers both internally and between institutional clients.

Caroline Butler, CEO of Custody Services at BNY Mellon, said the bank will continue to “innovate, embrace new technology and work closely with clients to meet their evolving needs”.

Copyright © 2022 IDG Communications, Inc.

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