Future proofing the asset servicing business model
Asset servicing revolves around three main pillars; namely safeguarding client assets; fulfilling regulatory requirements and simplifying the overall investment process. Custody of digital assets is no different. This makes major banks, which are subject to rigorous regulatory supervision and balance sheet capital requirements, the ideal partners for institutional investors.
In addition, traditional and digital assets will need to co-exist within portfolios i.e. investors will need to manage both asset types in parallel. The potential operational impacts can be minimised, where investors use large service providers who can support multiple asset classes, including digital assets.
Digital assets could even open the door to new services and opportunities to enhance existing services. For example, custodians could play a vital role in facilitating interoperability between different digital assets and blockchain platforms. Furthermore, custodians could leverage the Blockchain to support clients with their tax and regulatory requirements; provide registrar services and compile analytical reports.
Partnerships are central to digital asset growth
Developing digital asset services will require a significant investment of capital and resources by banks. One solution is for banks to partner with Fintechs to develop new capabilities and conduct POCs (proof of concepts) around digital assets. These strategic partnerships are synergetic by design, allowing Fintechs to take advantage of the expertise, size and infrastructure at banks, while enabling banks to benefit from Fintechs’ agility and flexibility.
BNP Paribas Securities Services partnered with Curv, a cloud-based digital asset security infrastructure for financial institutions, to complete a POC to transfer security tokens securely between market participants. As part of this activity, BNP Paribas Securities Services and Curv transferred a security token using Curv’s multi-party computation solution to ensure the security of the private keys was maintained. Curv’s solution enables for transactions to be signed securely in a mathematically-proven and distributed way. The successful POC has helped to demonstrate that tokenised securities can be transferred quickly, safely and transparently on a Blockchain platform.
Creating the foundations of a market
Central to the creation of any market is the existence of industry-wide standards and effective regulation. Without common standards for digital assets and the DLT platforms facilitating their issuance, trading, custody and settlement, market participants will struggle to interoperate. Just as SWIFT has created consistency in financial messaging through the roll-out of the ISO 20022 standard, a similar framework needs to be adopted for digital assets and DLT. This is an area where progress is being made. BNP Paribas Securities Services, for instance, is working with SWIFT to create a common market practice for digital assets, in what should help drive growth in this nascent market. Presently, the regulation of digital assets is disjointed across different markets. Again, if digital assets are to become widely-traded, greater harmonisation of regulation will be needed.
Asset servicing: 2030
Digital assets could offer institutional investors revenues, at a time when equity and bond markets are experiencing major volatility. However, the involvement of custodians will be critical if digital assets are to gather momentum. Investors will want digital asset servicers to be well-regulated and well-capitalised. Furthermore, providers who can concurrently support both traditional and digital assets will be at a competitive advantage, by offering clients a one-stop-shop solution. This will not only keep costs down, but will also make it simpler for investors whose portfolios are a mix of traditional and digital financial instruments. However, major challenges do remain, particularly around standards and regulation, which need to be overcome. What is clear is that custodians such as BNP Paribas Securities Services have recognised that digital asset investments will become increasingly important to their clients, and as such, are preparing themselves to meet future demand.
This article is the first of a series looking at institutional investors and their custodians as they prepare for the adoption of digital assets. As the regulatory framework continues to progress, we will explore the real value and challenges of digital assets for the capital market ecosystem over the coming months.