Banks should get into the lucrative cryptocurrency custody business soon or risk failing to exploit a key competitive advantage, say Boston Consulting Group (BCG) and law firm White & Case in a new white paper.
This is because banks start from a position of trust with most consumers, BCG and White & Case argue.
“Banks are well trusted to protect customer assets”
“Banks are well trusted to protect customer assets,” the firms say.
As a result, the two firms go on, banks should start offering custodial services for digital assets like bitcoin, ethereum, litecoin and others.
And, they add, banks could offer related services, such as fiat currency to cryptocurrency trading, crypto-enabled digital transactions and investment facilitation.
“Digitally oriented banking customers are beginning to demand these and other new services,” BCG and White & Case say.
A digital safe-deposit box
Banks are well-equipped to offer crypto safekeeping services because this is a digital equivalent to the old-fashioned safe-deposit box, say BCG and White & Case.
When offering digital asset custody, financial institutions can take advantage of the high levels of cyber protection they already use to safeguard financial holdings and records, the two firms say.
“You can’t physically prove it’s safe”
Not everyone agrees with this view.
Earlier this year, Mike Belshe, CEO of specialist crypto-custodian BitGo, told New Money Review that many banks were ill-equipped to handle assets like bitcoin and its derivatives.
BitGo speaks from bitter experience: in 2016, it was involved in one of the largest-ever hacks in bitcoin history, when 119,756 bitcoins (then worth $66m, but now worth over $1.8bn) were stolen from cryptocurrency exchange Bitfinex.
BitGo software was used to manage Bitfinex’s bitcoin wallet and digital signatures from both entities were required to transfer bitcoin from the exchange. However, a hacker managed to circumvent this in-built safety measure and withdraw the cryptocurrency.
“In crypto,” Belshe said, “we’re talking about an asset that’s highly volatile by any historical measure. Then it’s combined with a completely new technology. You can’t physically prove it’s safe: you have to do so mathematically and operationally.”
Two weeks ago Bloomberg reported that PayPal, which has recently entered the cryptocurrency market, was in talks to acquire different companies specialising in this area, including BitGo.
According to BCG and White & Case, banks need to up their game in crypto custody, particularly given recent changes in US regulations.
“No bank has yet established a dominant presence”
In July 2020, the US Treasury’s Office of the Comptroller of the Currency published an interpretive letter clarifying that national banks and federal savings associations in the US have the authority to start offering cryptocurrency custody services and that these should be seen as a modern version of traditional banking activities.
“A few traditional finance players, like Bank of America and Nomura, have announced plans to enter this space, but no bank has yet established a dominant presence,” BCG and White & Case said.
“Banks that offer cryptocurrency services can develop a profitable business model around this type of service. For example, no other enterprise in this field can match banks’ reputations, existing track records, and regulation-oriented skills and relationships.”
Some specialist banks are being set up in the US to offer crypto custody services. Earlier this year, a new bank called Avanti said it was setting up in Wyoming to take advantage of favourable local regulations for digital assets.
For those banks willing to enter the fray, crypto custody is likely to prove much more lucrative, as well as potentially much riskier, than the custody of traditional financial assets like shares and bonds.
Crypto custody could generate as much as 1 percent per annum of the value of the assets stored, say BCG and White & Case.
In the traditional asset custody market, firms like State Street and BNY Mellon may charge as little as 0.01 percent per year of the shares and bonds they hold on behalf of clients.
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