Security issues, lack of standards and fragmented regulations hinder growth
Ryan Cuthbertson, head of product management, financing and securities services at Standard Chartered, is the winner of the Digital Leadership Award from The Asset Triple A Sustainable Investing Awards for Institutional Investor, ETF, and Asset Servicing Providers 2020. In this interview with The Asset, Cuthbertson shares his views on digital assets and the challenges facing traditional custodians in servicing this emerging asset class.
The trends in digital asset servicing are largely the same or have not changed dramatically. We continue to see interest growing at a steady pace as investors’ attitudes shift. A recent study by Fidelity Digital Assets found that 36% of institutional investors have exposures to digital assets, while 60% agree these instruments should have a place in investment portfolios.
There is more demand for the services. The pandemic has accelerated the focus and momentum behind central bank digital currencies (CBDC). COVID-19 has accelerated the digitalisation focus in a number of areas and CBDC is seen as an area which can facilitate cross-border payments and reduce physical cash handling.
Ryan Cuthbertson Head of Product Management, Financing and Securities Services
Where other digital assets have raised risk concerns, CBDC is seen to carry a reduced counterparty risk as they are issued by central banks.
A number of countries have launched their own CBDC trials, including China, Canada, Singapore, France, and most recently the UK.
In addition to the trends around digital assets and the servicing requirements, the pandemic has brought greater focus to and acceleration of digitalisation efforts. We are seeing greater demand for some of the benefits that we would see from blockchain technologies or single ledgers. These benefits include a single source of truth, streamlining of roles and intermediaries, focus on key data points, and reduction in points of failure.
In addition to the trends around digital assets and the servicing requirements, the pandemic has brought greater focus to and acceleration of digitalisation efforts.
Security – that’s the most important issue of all. Assets must be secure for large institutionals to hold them. Then there are AML risks.
Scalability is another issue. There must be standardisation of processes, roles, regulations and definitions for digital assets to succeed as an asset class. Regulation is fragmented across markets.
Foremost among the challenges is a lack of standards and hence interoperability. The industry must reach a common view in terms of definitions of assets and how to make interoperability a reality.
While there are clear benefits to digital assets over the existing model, a fragmented approach will not add benefits.
And while there are emerging custody solutions for digital assets, there is currently a lack of service providers that can meet the equivalent asset protection standards for traditional assets. Nascent and heterogenous regulations are also an impediment to adoption.
First there must be clear regulations; and direction is required to ensure greater adoption and consistent standards across markets.
The industry needs to collaborate and agree on standards around CBDCs, especially for cross-border transactions.
A large-scale approach to the issues and challenges is a huge undertaking. Perhaps the way forward to find a workable solution is to bring key groups together to focus on specific problems.
The pandemic has accelerated the focus and momentum behind central bank digital currencies (CBDC).
We believe there are different roles a custodian can play in developing a digital asset servicing capability. We and our clients must be ready for a change in the way we communicate with both traditional and digital asset exchanges and other participants in the industry.
Tokenisation is an area we have spent a considerable amount of time exploring and understanding. We have created an asset tokenisation platform on a permissioned blockchain which allows us to provide tokenisation and token management services for our clients, and this is extremely useful for illiquid assets. Tokenising allows them to be more liquid and attract investors who are looking for smaller-size investments or more precise exposure. The platform also allows us to issue digital assets. Using the platform, we are involved in many interesting projects across the bank where all the use cases are building on top of our asset tokenisation platform.
We believe there are different roles a custodian can play in developing a digital asset servicing capability.
We also believe that it is important that different platforms are interoperable and with this in mind we also spent time exploring a blockchain bridge solution and how to exchange value over different blockchain technologies.
We have successfully completed a DLT Bridge PoC (proof of concept) where we have created a blockchain agnostic middle layer, which is used to connect to any type of internal or external blockchains, and it translates messages between different blockchains to enable transactions or coordinate atomic swap of tokens. For example, we have seen many CBDC projects from central banks and this blockchain bridge will enable us to connect to the CBDC networks to settle both the cash and asset legs of a transaction on chain in real time.
We are also working to create a digital custody solution for crypto-assets which are created on public blockchains. The solution generates and safekeeps the private keys of clients’ wallets, as well as facilitates client settlement with selective trading venues. At the same time, we have a Net Asset Value Report service which is currently live in production for the top 50 cryptocurrencies.
This allows us to provide a comprehensive solution to our clients who are investing in crypto-assets from both a reporting and safekeeping perspective.
Lastly, as the role of a custodian evolves, connectivity will become an increasingly more important part of the servicing we can provide. We are working to create a DLT-on-Demand platform which can provide node hosting services for clients as well as allowing us to join any consortium blockchain in a fast and efficient manner.
As the role of a custodian evolves, connectivity will become an increasingly more important part of the servicing we can provide.
