Crypto Winter highlights the importance of custody

by Arthur · September 27, 2022

Dan Watkins, head of global market infrastructure EMEA at BNY Mellon, said the crypto winter has underlined the importance of trusted custodian providers to protect assets in the event of a bankruptcy.

Watkins spoke on a panel on capital markets innovation at the AFME Operations, Post-Trade, Technology & Innovation Conference 2022 (OPTIC) in London on 27 September.

The panelists now discuss the current state of capital market innovation. Speakers from @GoldmanSachs @BNYMellon @Clearstream @digitalassetcom & @swiftcommunity assess the current opportunities for technology innovation and the banks’ main priorities in 2022 #OPTIC2022 pic.twitter.com/APW2hH5ACu

— AFME (@AFME_EU) 27 September 2022

The fall in crypto values, which has been dubbed the “crypto winter,” has reminded everyone that custody isn’t always necessarily exciting, but is important, according to Watkins. Investors found that assets held by some crypto exchanges were not protected in the event of a bankruptcy.

“As a custodian with an offering coming into the digital custodian space, we’ve seen an outpouring of interest in a true old-fashioned, bankruptcy remote, ‘my assets don’t disappear when things go wrong,'” Watkins said.

HQLAᵡ DLT Platform

Watkins highlighted how BNY Mellon has used distributed ledger technology, as collateral is very important and the industry is trying to remove time lags.

In July 2022, BNY Mellon and Goldman Sachs completed the first agency securities lending transactions, worth hundreds of millions of US dollars, using the HQLAᵡ DLT platform. HQLAᵡ created ISIN-level securities trackers called digital collateral records (DCRs), the first of their kind, from loaned securities it received from BNY Mellon and provided Goldman Sachs with a digital copy of the trades.

GBBC member @BNYMellon & @GoldmanSachs has transformed the agency’s securities lending 💸 using HQLAX’s ISIN-level securities tracking called Digital Collateral Records (#DCRs) 📜

DCRs enable the transfer of ownership of all securities on HQLAX #blockchain. #GBBCMembers

— Global Blockchain Business Council (GBBC) (@GBBCouncil) 21 July 2022

The digital collateral records enable holders and agents to transfer ownership of any security on the HQLAᵡ distributed ledger without conventional settlement mechanisms and pave the way for eligible clients to reuse ISIN-level DCRs in further collateral commitments with one or more third-party agents.

Amar Amlani, head of EMEA digital assets at Goldman Sachs, said in a statement: “This represents another key step in our use of DLT to facilitate traditional financial activity to unlock efficiencies across market participants.”

D7 platform

Samuel Riley, CEO of Clearstream Holding, agreed with the panel that there must be a business case for using new technology.

He highlighted the launch of the D7 platform, the infrastructure component of Deutsche Börse’s “7 Market Technology” suite that covers trading, clearing, settlement and analytics across global networks and various asset classes. The platform will allow financial institutions to issue, register and process electronic financial instruments and enable end-to-end processing of the entire lifecycle of digital assets.

“D7 is not a cost-effective game,” Riley said. “It’s an effort to be able to embrace new technology and bring it into an existing business where it adds value.”

Samuel Riley, Clearstream

The platform enables Deutsche Börse to bring products that have traditionally been over-the-counter into a more digital environment. Riley said, “The data opens up a new set of possibilities that aren’t available today.”

Deutsche Börse’s D7 partners include Digital Asset, which is helping to build out the standard representation of digital instruments, while blockchain enterprise software provider R3 and cloud computing and virtualization technology company VMWare are working on the protocols for decentralized networks. The team also uses Microsoft for cloud components.

D7 aims to connect both internal developments and independent blockchain and DLT-based services. For example, HQLAᵡ can connect to the platform.

Valeria Zafar, Digital Asset

Valeria Zafar, sales director, EMEA at Digital Asset, said on the panel that financial institutions have moved away from pilots in the last couple of years to use new technologies to address the core challenges of their business.

She continued that regulation has acted as a trigger in many cases, such as in Germany, which introduced legislation for electronic securities registries and added a new license to maintain crypto securities registries.

“In Germany, regulation has been a trigger for the D7 platform and we’ve seen big transformation taking place there,” she added. “Switzerland is another good example where regulation in Europe has been much more accommodating to innovation.”

Standardized data

Vikesh Patel, head of capital markets strategy at SWIFT, said on the panel that another innovation in capital markets is that financial language is becoming more standardized.

“In a world where you have more structured standard data, it becomes quite exciting in terms of what you can do with algorithms,” he added. “Artificial intelligence and machine learning can detect predictive behavior that can provide alerts for action, rather than people wading through that information.”