State Street is the latest in the line of large global custodian banks signalling their foray into the cryptocurrency world.

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While the price of bitcoin has halved since its heady days of more than $64,000 in April, its value is now climbing up again. Despite the volatility and speculative nature of cryptocurrencies more generally, most of the large global banks have been drawn into their orbit – mainly because of client demand.

Not to be left behind, US custodian bank State Street, which provides custody services to institutional investors, launched a digital finance division to expand into areas including crypto, central bank digital currencies, blockchain and tokenisation. Heading up the new division is Nadine Chakar, the bank’s head of global markets.

“We will help clients optimise the performance of their investments by looking to develop digital trading opportunities, a natural expansion of our platforms in foreign exchange trading, by adding new cryptocurrency pairs to our services. We can also leverage our expertise in securities finance and lending to explore how investors can borrow and lend cryptoassets,” said Ms Chakar, speaking at IBM’s Reinventing Financial Services virtual event on June 8. While digitisation will start with over-the-counter instruments to drive efficiencies, she believes that all financial instruments could become digitalised in future.

State Street is following in the footsteps of rival, BNY Mellon, which launched an enterprise digital assets unit in February, with the aim of building a multi-asset digital custody and administration platform for traditional and digital assets. Citi, BNP Paribas Securities Services and HSBC Securities Services are among other large custodians that have indicated their interest in entering this space.

In April 2020, the total locked value in DeFi hovered between $700m and $800m; it is now more than $62bn

Client demand is just one driver for the uptick in activity. The custodian banks have caught sight of what is coming down the pike ­­– the threat of decentralised finance (DeFi). As James King explained in his recent article ‘When Wall Street meets crypto’: “[DeFi] is a fully decentralised, peer-to-peer system that both replicates and reimagines the suite of financial products and services in conventional finance today by offering them (and more) through so-called smart contracts.” In April 2020, the total locked value in DeFi hovered between $700m and $800m; it is now more than $62bn, according to DeFi Pulse.

According to Ms Chakar, “Blockchain technology allows for the emergence of new decentralised market infrastructures that offer less friction and greater control for investors and thus strengthen existing trends such as peer-to-peer trading. The emergence of a new asset class, such as cryptocurrencies, are making their way into the institutional space, and require new service models. They could offer opportunities for increased alpha in the markets that are increasingly correlated but they also point to a different user experience where financial transactions should happen at the speed and ease of sending an email. Tokenisation of an asset issued in today’s marketplace is just the beginning.”

But she is not concerned that custodians like State Street will be disintermediated. “The digital asset industry will require reliable and potentially regulated providers of that post-trade data to power automated workflows in the form of smart contracts. Without this, automation opportunities presented by smart contracts simply will not work,” she says. “Regulated banks can offer these services and act as so-called ‘data oracles’. And importantly, this will create new business models and new business opportunities.”

In his Reg Rage column for the July issue, Global Risk Regulator editor Justin Pugsley argues that it will be the regulators that save banks from DeFi, citing the EU’s Markets in Crypto Assets (MiCA) regulation currently in the works. But banks can’t wait on the sidelines for the regulators to take action. As Ms Chakar said during the IBM event, “This space is evolving at warp speed. I believe the winners will be those who embrace change versus those who stand back and watch – they will be disintermediated or disrupted. Business leaders, including myself, must set the tone that standing still is not an option.”

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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