The Bank of New York Mellon Corporation (BNY Mellon) has gone live with an electronic platform that stores and protects cryptocurrencies, including bitcoin and ether.
The 238-year-old bank’s new Digital Asset Custody platform currently allows its US clients to store and transfer blockchain-based cryptocurrency with the same assurances the bank offers to protect traditional assets.
“Touching more than 20% of the world’s investable assets, BNY Mellon has the scale to reimagine financial markets through blockchain technology and digital assets,” BNY Mellon CEO Robin Vince said in an Oct. 11 statement. “We are excited to help drive the financial industry forward as we begin the next chapter in our innovation journey.”
Digital asset platforms are built to ensure cryptocurrencies and tokens, the digital representations of a commodity, or other physical asset, are kept safe. That’s particularly important given that cybercriminals have stolen more than $15 billion in crypto over the past eight years or so. And crypto theft has only grown since the COVID-19 pandemic struck in 2020.
BNY Mellon created its enterprise Digital Assets Unit in 2021 to develop services for digital assets; it plans to launch the industry’s first multi-asset platform that bridges digital and traditional asset custody under one service umbrella.
BNY Mellon said it collaborated with fintech firms, including Fireblocks and Chainalysis, to integrate their technology in the development of its digital asset platform “to ensure it meets the present and future security and compliance needs of clients across the digital asset space.”
Avivah Litan, a vice president and distinguished analyst at research firm Gartner, said BNY Mellon’s announcement is significant because even though the digital asset market is not yet regulated, institutional investors will be much more comfortable investing when an institution like BNY Mellon is protecting their funds.
“I’m not sure what the liability arrangements are if the customer funds are stolen, but I imagine BNY Mellon will take much more responsibility for their customers than most crypto exchanges do,” Litan said.
BNY declined to comment on the move, but cited a recent survey by Celent it sponsored; the survey of 271 institutional investors showed significant institutional demand for a “resilient, scalable financial infrastructure built to accommodate both traditional and digital assets.”
The survey found that almost all (91%) respondents were interested in investing in tokenized products. Fully 41% of institutional investors hold cryptocurrency in their portfolios today, and another 15% plan to hold digital assets within the next two to five years.
BNY MellonDespite clear interest, respondents also indicated certain “key conditions must be met” before their research into digital asset banking turns into actual investment. “The asset servicing and custody market is highly fragmented and evolving, and traditional firms have significant opportunity as investors look to eliminate uncertainty in a situation with many variables,” the survey study said.
Seventy percent of respondents indicated they would increase their digital asset activity if services such as custody and execution are available from recognized, trusted institutions.
The survey results, Litan said, are significant in that they show demand for an area that has “barely scratched the surface and is where there are enormous opportunities to modernize our financial systems.”
How blockchain builds trust
Unlike traditional fiat currencies such as the US dollar, which are issued by a central governing authority, cryptocurrencies like bitcoin are based on a cryptographically controlled network (blockchain) that is decentralized. In other words, it’s not controlled by any single entity such as a central bank. The cryptocurrencies hold no intrinsic value; the value is wholly based on what the market determines its value is, not unlike precious metals whose worth are based on the quantity available and use cases.
Cryptocurrencies are built and exchanged on top of a blockchain public electronic ledger — similar to a relational database — that can be openly shared among disparate users. The blockchain ledger creates an unchangeable record of cryptocurrency transactions, each one time-stamped and linked to the previous one. Each digital record or transaction in the thread is called a block (hence the name); it allows either an open or controlled set of users to participate in the electronic ledger. Each block is linked to a specific participant.
Blockchain can only be updated by consensus among participants in the system, and when new data is entered, it can never be erased. The blockchain contains a true and verifiable record of each and every transaction ever made in the system.
As a peer-to-peer network, combined with a distributed time-stamping servers, blockchain databases can be managed autonomously to exchange information between disparate parties. There’s no need for an administrator because, in effect, the blockchain users are the administrator.
In the trust economy, an individual’s or entity’s “identity” confirms membership in a nation or community; ownership of assets; entitlement to benefits or services; and, more fundamentally, as evidence that the person or entity exists, according to Deloitte.
Blockchain doesn’t simply solve data access or sharing issues; it also solves a confidence problem.
In the peer-to-peer trust economy, an individual user — not a third party — will determine what digital information is recorded in a blockchain and how that information will be used. Blockchain users, will work toward creating a single, versatile digital representation of themselves that can be managed and shared across organizational boundaries, according to research firm Deloitte LLP.
There are however, cryptocurrencies known as stablecoins, that are backed by fiat money and hold the same value as the currency behind them. Governments around the world are well into research and pilots of national digital currencies that would hold the same value as their currencies, including the US dollar. The US, however, remains far behind other nations in developing a national digital currency.
That may soon change, however. Over the past year, President Joe Biden and lawmakers have continue to push government bodies to develop and test a digital dollar. The electronic dollar, a virtual representation of a US dollar, would allow people to make payments using tokens on mobile phones or through cards versus cash.
Additionally, financial service firms have developed their own fiat digital currencies and piloted them as a way to enable cross-border financial transactions in near real time and without the high fees associated with financial networks such as SWIFT.
For example JP Morgan Chase in 2019 launched JPM Coin, the first of its kind stablecoin used to transfer funds over a “permissioned” or centrally controlled blockchain network. The network allows stablecoin (US dollar-based digital currency) transfers both internally and between institutional clients.
Caroline Butler, CEO of Custody Services at BNY Mellon, said the bank will continue to “innovate, embrace new technology and work closely with clients to address their evolving needs.”
Copyright © 2022 IDG Communications, Inc.
