Asset managers and assets owners consider digital assets as a lever for further efficiency gains and, as such, are willing to experiment them and start the learning curve. As institutional investors gradually integrate digital assets into their portfolios, custodians are readying themselves to support a new type of asset, looking at partnerships with Fintechs, and collaborating with market authorities and their counterparts to design the components of the future digital asset marketplaces.
Assisting investors on their digital asset journey
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 for an extended timeframe within portfolios, i.e. investors will need to manage both asset types in parallel. The potential operational impacts can be minimised, when investors use service providers who can support multiple asset classes, including digital assets. This has long been part of the value proposition of the top-tier custodians and could allow them to play a vital role in facilitating asset managers and asset owners on their digital asset journey.
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, yet the complexity lies in picking the right partner(s). These strategic partnerships are synergetic by design, allowing Fintechs to take advantage of the expertise, size and client reach of banks, while enabling banks to benefit from Fintechs’ agility and flexibility.
One area of focus relates to security and connectivity for blockchain based assets. Considering the rapid evolution of the provider landscape in this area, our approach is to work with multi-providers at the same time. This will allow us to ensure continuity of our services regardless of the ever-changing technological landscape.
Creating the foundations of a market
Various challenges remain before digital assets can scale up for institutional activity. Regulation and cash “on-chain” are two of the primary challenges.
Presently, the regulation of digital assets is disjointed across different markets. If digital assets are to become widely adapted, greater harmonisation of regulation will be needed. An example is the policy and regulatory work in Europe with MiCA (Markets in Crypto-Asset Regulation) and the Pilot Regime, with the objective to have a comprehensive framework in place in the coming years. MiCA aims to provide legal clarity and certainty for crypto-issuers and providers, while the pilot regime aims to test the development of the European infrastructure to trade, clear and settle transactions of blockchain based financial instruments.
Having a widely accepted means of payment is necessary for DvP settlement, forex and payment of income on the blockchain. There are many ongoing initiatives with Central Banks and main market players to explore the introduction of a Central Bank Digital Currency (CBDC). As an example, the French Central Bank successfully conducted an experimental program across 2020 and 2021 to assess several use cases of CBDC in payments and settlement between financial intermediaries. Some Central Banks are exploring solutions to trigger traditional payment systems for security token settlement. Moreover, commercial banks are also exploring stable coins, such as Caisse des Dépôts et Consignation which created a consortium and led a first successful Proof of Concept (POC) in July 2021, covering DvP, coupon payment and early redemption.
Asset servicing: 2030
Digital assets should provide institutional investors with many advantages over the longer term, but will increase complexity for the near term. The involvement of custodians will be critical if digital assets are to gather momentum. Investors will want their providers to be well-regulated and well-capitalised. They will also need to manage an extended transition period where traditional and digital assets will co-exist and therefore look for providers who can minimize the impacts by offering consolidated services across asset classes.
However, major challenges do remain, particularly around cash on-chain 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.
As the regulatory framework continues to progress, we are periodically publishing articles to share our views on the path to digital assets and our current initiatives.
Transfer Agency in Luxembourg and France: BNP Paribas Securities Services is already connected with IZNES and FundsDLT, and as such, is able to manage Blockchain orders in the same way as orders coming from any distribution channel, with the same level of service. In France, where the shares are issued on the Blockchain we also offer a new DLT (Distributed Ledger Technology) Integration service where we provide a consolidated view on the shares issued traditionally and on the Blockchain.
Digital asset custody: we are working on extending our existing services to cover digital assets, providing our clients a seamless, consolidated and secure solution across traditional and digital assets. This will include the full range of services we already offer, including custody, depositary services and fund administration with Germany being the pilot country for this initiative, which will be extended globally in later phases.
Digital currency experimentations: we have been strongly involved in 2 out of the 8 projects selected by Banque de France as part of its experimental CBDC program, giving us the opportunity to gain a practical knowledge of the benefits and risks surrounding the introduction of a CBDC in settlement processes. One of the projects was led by LiquidShare* and covered primary and secondary market delivery versus payment (DvP) transactions for both listed and non-listed equity tokens on blockchain. The other project was led by Euroclear and covered the issuance of French Government Bonds (Obligations Assimilables du Trésor) by Agence France Trésor, primary and secondary market DvP transactions, liquidity optimisation mechanisms (repo, auto-collateral) and interest payments.
*LiquidShare has been liquidated as of August 2022