The landmark announcement by the US OCC yesterday provided the needed regulatory clarity for nationally chartered banks to custody crypto assets.
This will minimize the market share of long standing and newer crypto custodians (maybe even names like Fidelity) because most clients, especially traditional institutions, will prefer to have a federally chartered bank holding their assets when given the choice.
In the UK we see at least Standard Chartered is launching institutional crypto asset custody business, so there must be enough regulatory clarity there to give comfort to banks. In any event we imagine the UK will no doubt follow suit in supporting bank initiatives. Interestingly most of the crypto custodians in the UK right now are not formally regulated, so banks entering the space would have a huge impact on the viability of the unregulated crypto custodians.
Banks entering crypto custody will need tried and true crypto asset storage technology, so they will face the usual buy vs. build decision. This will likely lead to smaller crypto custodians with good technology in place serving as sub-custodians for the banks, which is explicitly permitted in the Interpretive Letter. It will also be good for those that sell custody technology like Ledger Vault, but do not operate a custody business directly. It will also no doubt lead to consolidation as banks buy companies to acquire their technology.
The OCC’s Interpretive Letter also said banks can facilitate exchange transactions, settlement, trade execution, record keeping, valuation and tax services. Banks can perform a full suite of services around crypto asset custody, but the big question is how will they deliver the services and especially how will the manage the risks acceptably.
The answer is Prime Brokerage. Industry leaders recently concluded that the single most important piece of market infrastructure that is currently missing from digital assets is Prime Brokerage. You can’t scale the crypto asset markets or have traditional institutional adoption without elimination of trading counterparty and settlement risk.
This is the primary function of Prime Brokerage, with this credit intermediation normally being supported by big bank balance sheet in traditional markets like FX. However, it is unlikely that banks will take these risks for crypto assets onto their own balance sheet any time soon, and even if they did it would only be for the most creditworthy clients with their own very large balance sheet.
The other issue is how siloed crypto asset custody will become, much like crypto liquidity is today, with no connective tissue.
Again, Prime Brokerage is the bridge the bank and their customers will need. What Bosonic has built over the past 4-years is a technology equivalent of Prime Brokerage that provides the connectivity between all the parties and eliminates counterparty and settlement risk.
The infrastructure is powered by a multi-custodian blockchain network that facilitates one-click tokenization of client assets locked at the custodian and cross-custodian trading/clearing and settlement of assets directly from existing crypto asset storage solutions.
Custodians are provided with a free, turn-key platform that works with any underlying crypto asset storage solution and allows the custodian to deliver the full suite of Prime Brokerage services including market access to any liquidity source and trading from a single account with zero counterparty or settlement risk.
Very importantly, the solution can facilitate frictionless aggregation of 3rd party balance sheet held by customers at any bank custodian (crypto and Fiat) to fund Prime Services like shorting/leverage with no direct credit or balance sheet risk to the bank itself. We believe this is a much needed infrastructure let banks and their customers to get the most out of their crypto asset custody businesses.