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 customers to store and transfer blockchain-based cryptocurrency with the same insurance policies the bank offers to protect traditional assets.
“Touching more than 20% of the world’s investable assets, By has the scale to reimagine financial markets through blockchain technology and digital assets,” BNY Mellon CEO Robin Vince said in a statement on Oct. 11. “We are excited to help drive the financial services industry forward as we begin the next chapter in our innovation journey.”
Digital asset platforms are built to ensure that cryptocurrencies and tokens, the digital representations of a commodity or other physical assets, are kept safe. That’s especially 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 hit 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 partnered with fintech firms, including Fireblocks and Chainalysis, to integrate their technology into the development of its digital asset platform “to ensure it meets the current and future security and compliance needs of clients across the digital asset space .”
Avivah Litan, a vice president and a senior analyst at research firm Gartner, said BNY Mellon’s announcement is important because while the digital asset market is not yet regulated, institutional investors will be much more comfortable investing when an institution like BNY Mellon protects their funds . .
“I’m not sure what the liability arrangements are if client funds are stolen, but I imagine BNY Mellon will take a lot more responsibility for its clients than most crypto exchanges do,” Litan said.
BNY declined to comment on the move, but cited one recent survey by Celent it sponsored; the survey of 271 institutional investors showed significant institutional demand for an “agile, 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. A whopping 41% of institutional investors have cryptocurrency in their portfolios today, and another 15% plan to hold digital assets in the next two to five years.
BNY MellonDespite clear interest, respondents also indicated that certain “key conditions must be met” before their digital asset banking research turns into actual investment. “The asset servicing and custody market is highly fragmented and evolving, and traditional firms have significant opportunities as investors seek to eliminate uncertainty in a multi-variable situation,” the survey said.
70 percent of respondents indicated that they would increase their digital asset activity if services such as custody and execution are available from reputable, 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 is tremendous opportunity 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 such as bitcoin are based on a cryptographically controlled network (blockchain) that is decentralized. In other words, it is not controlled by any single entity such as a central bank. The cryptocurrencies have no intrinsic value; the value is entirely based on what the market decides the value is, not unlike precious metals whose value is based on available quantity 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 between different users. The blockchain ledger creates an immutable record of cryptocurrency transactions, each 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 the participants in the system, and when new data is entered, it can never be deleted. The blockchain contains a true and verifiable record of every single transaction ever made in the system.
As a peer-to-peer network, combined with a distributed time-stamping server, blockchain databases can be autonomously managed to exchange information between different parties. There is no need for an administrator because the blockchain users are actually the administrator.
In the trust economy, an individual’s or entity’s “identity” confirms membership in a nation or society; ownership of assets; right to benefits or services; and, more fundamentally, as proof that the person or entity exists, according to Deloitte.
Blockchain doesn’t just solve data access or sharing problems; it also solves a trust problem.
In the peer-to-peer trust economy, an individual user – not a third party – will decide what digital information is recorded in a blockchain and how that information will be used. Blockchain users will work to create a single, versatile digital representation of themselves that can be managed and shared across organizational boundaries, according to research firm Deloitte LLP.
However, there are cryptocurrencies known as stablecoins, which are backed by fiat money and have the same value as the currency behind them. Governments around the world are well underway in researching and piloting national digital currencies that will have the same value as their currencies, including the US dollar. However, the United States is still far behind other nations when it comes to developing a national digital currency.
However, that may soon change. Over the past year, President Joe Biden and lawmakers have continued to push government agencies 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.
In addition, financial services firms have developed their own digital fiat currencies and tested 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, in 2019 JP Morgan Chase launched JPM Coin, the first of its kind stablecoin used to transfer funds over a “permission” or centrally controlled blockchain network. The network allows stablecoin (US dollar-based digital currency) transfers both internally and between institutional clients.
Caroline Butler, managing director of Custody Services at BNY Mellon, said the bank will continue to “innovate, embrace new technology and work closely with clients to meet their evolving needs.”
