Platforms turn to cryptobanks to bridge assets

With a security pool of digital assets worth around $10.5 billion, MakerDAO, the decentralized autonomous organization (DAO) that manages the DAI cryptocurrency, has become a major force in decentralized finance (DeFi) and the broader crypto ecosystem.

Read more: Dai or Die: ‘Payment Stablecoins’ and why crypto taxonomy matters

So when the lending platform voted to diversify the DAI collateral pool away from pure crypto assets and into US government and corporate bonds, it represented a critical turning point for two interconnected financial systems.

While the flow of money has previously been overwhelmingly from fiat to crypto-assets, the move to include traditional bonds in the DAI security pool demonstrates the increasingly two-way movement between today’s interconnected crypto and legacy investment tools.

And to build and maintain the bridge between the new-school crypto-assets and the legacy security and currency markets, a special kind of bank is needed that has a foot in both worlds.

In the first phase of its diversification strategy to convert half a billion crypto-assets into those backed by fiat currency, MakerDAO chose the Swiss bank Sygnum as its lead partner.

Related: Crypto Bank Sygnum Arrives in the Metaverse

Sygnum’s crypto-fiat gateway will first convert $250 million of DAI’s crypto-security into USD. This will then be diversified into traditional assets via a portfolio of BlackRock’s bond funds.

The commitment of the world’s largest asset manager, whose Swiss division helped advise on the portfolio analysis, also signals the continued movement of stablecoins like DAI into the financial mainstream. In the past, Blackrock has helped Circle with a similar collateral diversification strategy for its dollar-pegged cryptocurrency – USD Coin.

Learn more: With Blackrock Partnership, Stablecoin Issuer Circle Moves One Step Closer to Mainstream

Rajiv Sainani, MakerDAO Europe Growth Lead, explains the rationale behind the portfolio diversification partnership, that it highlights how “innovation and real benefits of traditional assets” are driving the DeFi-enabled financial revolution.

“Sygnum’s DeFi credentials, regulated banking experience, and two-way crypto-traditional financial bridge were deemed essential to ensure the overwhelming support of the Maker community,” Sainani added.

Catering to new and old money

Certainly, the arrival of licensed banks in the crypto space signals a newfound maturity in the ecosystem. And what better country to usher in a new beginning of crypto credibility than one of the world’s oldest and most established banking systems?

Since its inception, Sygnum has made it its mission to systematically and comprehensively integrate digital assets into regulated banking operations. And besides helping organizations like MakerDAO manage their crypto portfolios, it also serves as a regulated gateway to the world of crypto investing.

Armed with its Swiss banking license and an asset management license in Singapore, the financial institution (FI) adds an important layer of trust that opens the door for institutional investors looking to delve into the world of digital assets.

See more: Banking license puts profitability within reach for UAE Neobanks

But Sygnum is not the only Swiss bank looking to bring crypto to the more restrained and conservative corners of the financial sector.

In recent years, Zug-headquartered SEBA Bank – Switzerland’s first regulated crypto bank – has also emerged as a major global player in crypto banking, seeking to serve the growing number of businesses generating crypto revenue.

At the same time, the bank offers institutional-quality structured investment products and digital asset custody to FIs looking for a reliable partner to support their activities in the cryptosphere.

Digital Vaults for Crypto Assets

Traditionally, Swiss banks are considered among the safest in the world with a high level of protection against fraud, making the Alps a top destination for businesses and individuals who want to keep their wealth safe.

Related: Switzerland Violates Neutrality, Freezes Russia’s Assets

In the digital equivalent of the country’s Alpine gold vault, the likes of Sygnum and SEBA have deployed state-of-the-art custody solutions, including both “hot storage” and “cold storage” crypto wallets.

Hot storage refers to wallets that are connected to the internet and is therefore more convenient for people who need quick access to crypto assets. In that field, another Swiss firm, Taurus, has emerged as one of the leading providers of crypto-asset infrastructure for banks and FinTechs including Sygnum. Taurus is also betting on the new field of tokenized securities with its digital exchange TDX.

Cold wallets, on the other hand, are separate hardware devices that require a connection to the internet to process transactions, meaning that cryptobanks’ solutions more closely resemble the traditional image of high-security vaults.

To ensure maximum security, SEBA has, for example, built the “Faraday Cage”, a purpose-built radio-frequency shielded vault protected by several biometric access controls behind which the hardware storing cryptographic keys is secured.

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