State Street
Ralph Achkar
27 May 2021
Ralph Achkar of State Street suggests that although initial interest for servicing crypto currency was only from the alternative space, there has been a mentality shift with increased demand from the more traditional client segment
Image: State Street
Could you explain more about State Street’s digital asset pilot with Gemini?
Digital assets is an umbrella term for crypto currencies, security tokens, and anything like stable coins.
At State Street we have been particularly focused on digital assets servicing including the custody space; the pilot is a practical first step to investigate the digital custody space.
Even the largest custodians, including State Street, have not actually moved into that space yet because of the uncertainties around it.
On one side you have the uncertainty about regulation and on the other side, the uncertainty revolves around what the client is demanding.
We found that by conducting a pilot with a reliable partner in the market is a first good step to investigate that space. It gives us the ability to connect our systems and build the operational knowhow.
All of the original systems today were not designed to handle a blockchain world, as an example, such systems require reconciliation, a concept that is not needed in the blockchain world.
The pilot was a good step in connecting existing systems to the onchain world to see how the workflows would look like. It was useful to find out the gaps and how we connect.
It was also a good chance to expose our operating teams to the features and characteristics of an asset that lives on chain. For example, We are used to a corporate action but we are not used to forks or airdrops that could happen for an onchain asset.
Meanwhile on the market side, there has been a lot of noise about the level of client activity in the digital asset world. We needed a way to filter this noise towards zooming in and focusing on where the real client demand is.
Therefore, having a pilot and talking to the clients about it and the model used is a good idea to gain these types of insights.
Do you think it is important to collaborate with fintech firms in the digital asset space to explore those avenues?
The collaboration between incumbents and fintechs is actually needed not only for digital assets but across the board — spanning all of the new technologies, like digital assets or artifical intelligence (AI). It brings the ability of smaller firms including fintechs to scale quickly and leverage distribution capabilities and the client access that an established player has. It also enables established players to leverage the innovation and dynamic capabilities of fintechs.
The field of digital assets is moving quickly at all levels; not only at the technical level but also at the legal and regulatory level. If we only look internally to get our legal and compliance and operating teams ready then we would actually be missing the mark. It is better to open up these conversations and channels with the rest of the industry including fintechs. At the same time, such fintechs could leverage some of the existing relationships, access and reputation that comes with working with a large bank like State Street.
In terms of competitiveness, I would say players could fall behind if they don’t collaborate and explore new opportunities but this won’t happen in the immediate future. There is both an opportunity as well as a threat of such a new asset form. If we are not able to handle this new form then it is a threat for us as well. In addition, this new form will open opportunities across the value chain — in the issuance and in the primary markets. If the banks are not geared up to handle this asset form then we will miss these opportunities.
Even central banks are reacting to this space and are talking about central bank digital currency so it is highly unlikely that banks wouldn’t react to that as well.
Are you seeing a growing demand for crypto currency custody services or at least an increase of interest?
The demand for servicing crypto currency has been interesting and evolving. It started a few years ago in the alternative space rather than from the more traditional funds that we service who were not particularly interested in such an asset class. However, the alternative segment was asking for such services. About seven to eight months ago the mentality shifted, and we are now seeing increased demand from our more traditional client segment looking at the asset class and saying ‘this is interesting and I would like you to service that’.
That being said the demand two years ago was to directly serve underlying cryptocurrencies i.e. to go and buy bitcoin and request for that to be serviced. The demand has shifted. Today, The traditional client segment is still unsure if they could hold bitcoin, for example, but they are more certain that they could hold a structured product that is based on an underlying crypto currency. Today clients are asking for their structured products with crypto underlying to be serviced. Such Structured products can be exchange traded products, like funds or notes, where the underlying is a crypto currency.
There hasn’t been a sudden surge in demand instead it has been a trickling of requests coming in.
We are also seeing a demand for security tokens but it remains a very small market. It is moving and it is behind the crypto market. Our clients are looking to find a good use case for such security tokens.
Is there any other work that you are doing within the crypto currency space at State Street?
We are looking at servicing the demand that comes from our clients. As our clients move to invest in the asset class, we need to increase our focus on the services that are needed there.
They are along the lines of accounting type services and custody services.
We are also working on a few pilots using security tokens. This is where the activity is happening right now.
How do you see the digital asset space expand over the next three to four years?
The immediate future will revolve around crypto currency because this is where the liquidity is. It will evolve from the retail space and the alternative space holding the cryptos directly, to more traditional clients looking to get indirect exposure to that asset class. For example, buying exchange-traded products (ETPs) or exchanged-traded funds (ETFs).
There will be a demand for such products based on crypto currencies in the immediate future. The second area that will continue to see activity is around payments, not only the central bank payments but also the commercial payments that are leveraging the new digital asset form. There are some very interesting models that are emerging. Whether they are peer to peer, or faster models or payment models that are 24 hours. These models are probably going to stay with us. They are not here for just a short period of time.
In the medium to longer term, we will start seeing token representation of existing instruments such as the equities and the bonds and other assets that we service today. We will eventually see new instruments that are much harder to issue today because they are costly and take a lot of time, emerge in native tokens forms to provide the economic exposure desired by investors.
Today we are seeing lots of private securities in token forms. It is still very hard to trade them and have liquidity in secondary markets but eventually that needs to change as well. The servicing needs around these would also need to change, which in turn would change what we are doing today and it would invite new players to the market.
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