Is the increasing role of banks in the digital asset custody market for real?
- Future of Finance
- Dec 15, 2023
- 4 min read
In the last two years the number of banks recorded by the Future of Finance database as offering digital asset custody services has more than doubled (see Chart 1). In fact, bank entrants accounted for 90 per cent of the overall increase in the number of digital asset custody service providers in the database.
This surge is almost certainly more apparent than real, in that it measures the increasing reach and sophistication of the Future of Finance database rather than increased commitment to digital asset custody by regulated banks.
Banks are not an easy group to monitor, because they can enter the market using existing or modified banking licences, and, with only a minority of clients demanding cryptocurrency custody services, they lack powerful incentives to publicise their activities. So their behaviour must be captured through media announcements, press contacts and press stories.
These have obvious limitations in terms of their explanatory power. However, it is clear that the overwhelming majority of banks entering the market are offering no more than custody of a limited range of the larger cryptocurrencies. The services are also designed to support a minority of private banking and institutional asset management clients that are active in the cryptocurrency market. Since the significant opportunity for regulated banks lies in tokenised securities and funds, the commitment is inevitably limited. It would be a mistake to misinterpret even a series of bank entrances of this kind for a secular trend.
Germany provides a useful check on this judgment because every digital asset custodian active in Germany has to be licensed separately by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Though the press reports a steady flow of bank applications for licences to provide digital asset custody services in Germany, they are not visible in the BaFin data. Only one bank (Commerzbank, in November 2023) has actually received a licence from the BaFin. (1)
However, this might under-estimate the number of German banks active in cryptocurrency custody because the BaFin has allowed firms to operate for extended periods with a provisional licence (BitGo, for example, has held a provisional licence for more than three years).
Developments in France also suggest bank involvement is limited. The register of DASPs maintained by the AMF in France - whose chief criterion for admission is compliance with the fifth iteration of the EU Anti Money Laundering Directive (AMLD V), with which all banks comply already - records just three banks.
One is Banque Delubac & Cie, a limited partnership private bank that has offered a “crypto-asset service” since April 2022 using technology supplied by the Taurus Group. Delubac applied to the AMF for a licence just a month before launching the service; a full licence has yet to be granted.
Another Taurus client is CACEIS Investor Services, the custodian bank and fund administration arm of Credit Agricole that has set up what it calls a “Digital Asset Factory” to – importantly – service securities tokens in particular. (2) Its French entity (CACEIS Bank) received approval from the AMF to register as a DASP in June 2023.
The clear leader among French banks is Société Générale, whose FORGE digital assets subsidiary applied for registration as a DASP in September 2022, and in July 2023 became the first DASP to actually receive a full licence.
BNP Paribas Securities Services, a major global and sub-custodian on a global scale with US$13.6 trillion in assets under custody (AuC) in November 2023, which has shown a sustained interest in digital assets and which is now working with two major vendors of digital asset custody technology – namely, Fireblocks and METACO - is a notable absentee from the AMF list of DASPs.
In the United States, the major global custodian banks are also proceeding cautiously. Northern Trust has entered a joint venture with Standard Chartered Bank and SBI (Zodia Custody). State Street had a short-lived licensing agreement with digital asset custody technology vendor Copper that ended in March 2023. Citi announced in June 2022 it was developing digital asset custody capabilities with METACO, but no service was announced before METACO was acquired by Ripple.
However, Citi Securities Services did announce in September 2023 that it was providing custody of the digital assets created on the Singapore-based BondbloX Bond Exchange (BBX), a blockchain-based platform for fractionalised bonds. Citi was already the custodian of the underlying bonds but is now also custodying the digitised fractional bonds. This is expected to encourage institutional clients to trade on BBX. (3)
Despite the decision by The Office of the Comptroller of the Currency (OCC), in an interpretive letter of July 2020 (4) permitting nationally regulated banks in the United States to custody cryptocurrencies, take-up is limited.
Anchorage Digital, which in January 2021 became the first federally chartered bank authorised by the OCC to provide digital asset custody services, remains the only one. Other contenders - Paxos and Protego – have had conditional licences withdrawn. (5) Custodian banks in the United States have relied instead on limited purpose charters, principally from the New York Department of Financial Services (NYDFS) – and the last NYDFS licence was issued as long ago as May 2021.
In Japan, the Financial Services Agency (FSA) published in October 2022 legislation agreed by the Japanese government that allows the trust banks – the major domestic custodian banks in Japan - to offer cryptocurrency custody services. (6) But activity is limited.
Mitsubishi UFJ Trust and Banking Corporation, the trust banking arm of MUFG, the largest bank in Japan, announced in August 2023 a partnership with cryptocurrency wallet provider Ginco. Importantly, MUFG is also the founder of Progmat, a security token platform, so its longer-term vision of the opportunity is clear.
In short, the increase in bank activity in digital asset custody recorded by the Future of Finance database is not illusory, but probably exaggerates the degree to which banks as a group are increasing their commitment.
(2) See CACEIS News, CACEIS’ Digital Asset Factory - the future of asset servicing, 9 May 2023, at https://www.caceis.com/whats-new/news/spotlight/article/caceis-digital-asset-factory-the-future-of-asset-servicing/detail.html
(3) Citi press release, Citi to Become First Digital Custodian on BondbloX Bond Exchange, 15 September 2023 at https://www.citigroup.com/glob-al/news/press-release/2023/citi-to-become-first-digital-custodian-on-bondblox-bond-exchange
(5) See page 61 below and Future of Finance, Digital Asset Custody Guide: The Future Looks Like the Past, Issue 1, page 25.
Custody Market