Bank of New York Mellon has begun to develop the technology and business acumen needed to manage cryptocurrency, driven by strong demand for digital-asset services among clients.
The New York company, which has $425 billion of assets and more than $2 trillion of assets under management, announced last week that it’s building the ability to store and manage digital assets on behalf of customers.
This includes forming a team of technology and business professionals; developing technology that will allow customers to manage cryptocurrency alongside all their other assets; working through the security and risk challenges of handling digital currency; and figuring out which crypto assets will be most popular with clients going forward.
BNY Mellon is joining other established financial services firms, like State Street, Fidelity and Northern Trust, that are betting investors want a traditional institution to handle their digital assets, rather than a crypto-age company such as Coinbase. JPMorgan Chase, Goldman Sachs and Citigroup are all said to be working on this capability, too.
So will the companies racing to build out their crypto strategies have a first-mover advantage?
“I think the devil is in the details,” said Brad Bailey, research director for capital markets at Celent. “Fidelity, for instance, has had a type of offering for a while. If a bank can come up with a reasonable crypto custody strategy where they are comfortable with the risk, we are opening up a very new chapter in the short but interesting history of cryptocurrencies.”
Bank executives say the initiative is driven by customer demand that they believe is here to stay. Institutional clients, asset owners, corporate clients and wealth management clients have all been asking for this, said Michael Demissie, the head of advanced solutions at BNY Mellon. These clients seek to manage their cryptocurrency through a highly regulated financial institution versus a newer or lesser-known company.
“Our clients hold certain assets with us and now with the introduction of a new asset class, it would make sense for them to be able to have everything in one place, where they can get all services together: one view, one source of reporting and the ability to do all the things they do with other assets, like lending, collateral and other services in one place,” Demissie said.
“Trust is key, right? It’s what we do for a living,” said Caroline Butler, the head of custody at BNY Mellon. “One of the first principles of being a custodian is to make sure you’ve got the right control environment set up to keep clients’ assets safe. And 250 years of doing this as a company, we are matured in terms of our policies and practices and have gained that trust from clients, but also from regulators.”
The Office of the Comptroller of the Currency has said national banks can offer cryptocurrency services. Such regulatory assurance is a help, but it’s not driving BNY Mellon’s new effort.
“When you think of how large we are and how many markets we operate in, we pay attention to all our regulators and actively engage with them and work with them,” Demissie said. ”All of those matter, but no single interpretive letter is sufficient to address all of this stuff. It still is an ongoing process.”
The bank’s starting point will be to offer bitcoin custody. But over time, it plans to add on custody of other cryptocurrencies and other types of digital assets, and other asset services, such as the ability to trade on peer-to-peer exchanges.
“These new forms of assets offer new possibilities,” Demissie said.
The bank is prototyping and testing software designed to store and manage crypto keys and integrating those capabilities into existing technology.
“It’s a two-step process: one is making sure the technology is working appropriately and the product capabilities are set up, the other is making sure the control environment, which extends right through to the regulatory environment, is ready for us as well, to make sure we can take the product to market,” Butler said.
BNY Mellon is working with a vendor on the technology, though it’s not making the name of the company public, Demissie said.
“We take on this mindset that not everything that we offer needs to be built in house,” he said. “We constantly scour for best-in-class technologies fit for purpose that we can bring in, but it needs to be resilient, it needs to be secure, it needs to be scalable and it needs to integrate it into our system. That accelerates our time to market and allows us to focus on what we’re good at.”
The bank is building the ability to let clients see all their assets, digital and traditional, in one place. Some customers will want dashboards, Butler said. Others will just want data about their crypto activity integrated to their risk systems.
“The ability to have transparency across portfolios will be critical for clients, and then the ability to move between the assets,” Butler said. “As clients start to leverage opportunities to lend bitcoin against Treasuries or cash, being able to transact the movement between those assets as one would do as a custodian is important as well.”
There are risks to holding cryptocurrency. There’s price volatility, but there also have been episodes of cryptocurrencies being stolen or compromised in some way.
“When you look at this asset segment, security is the first thing you think about,” Demissie said. “But that’s not new to us. When you think of how much of the world’s investable assets we hold custody, we already need to have a very robust, secure infrastructure that looks after cyber and all kinds of different attack surfaces and ensures that we have a resilient system that can stand that.”
The team has built the technology to offer cold (completely offline), hot (online and always available) and warm (data can be retrieved through the internet, but not instantly) storage of digital assets.
“All the different types of wallet are needed because of different client expectations on the availability of the asset,” Demissie said. Regulatory requirements also impact the level of security and availability the bank needs to provide.
BNY Mellon had some people with cryptocurrency expertise, but it’s also hiring in this area.
On the business development side, the bank has created a brand-new digital asset custody team whose members are all women.
“It’s the first all-girls [profit-and-loss] team in the digital assets space,” Butler said. “We are crying out for more diversity in the crypto world. We’re doing our part there.”
The bank expects clients’ interest in investing in digital currency will only grow.
“We firmly believe digital assets are here to stay, so that’s the future,” Demissie said.
What might change are the popularity of different types of digital coin. At the moment, BNY Mellon’s clients are focused on bitcoin. In the future, they might be interested in Ether, other alt-coins, and the digital currencies central banks are considering issuing.
“It’s too early in that evolution to call,” Demissie said. “That’s one of the reasons when we talk about this space, we remind folks, it’s not just about bitcoin. It’s much bigger than that.”
By building infrastructure that can support all forms of digital assets, BNY Mellon is “future-proofing” its digital asset services, Demissie said.
“We recognize it still is early days for this and we need to continue to pay attention to it and adjust our road map accordingly,” he said.