DLT/Blockchain in Banking

The starting point

Prices of cryptocurrencies have skyrocketed in the past, and this did not go unnoticed. Clients are becoming more interested in this new asset class, and are investing in it more frequently, so why not provide them with the opportunity to participate in these developments using solutions from your own organization?

Crypto custody and execution services tend to be among the first go-to solutions offered to clients when it comes to blockchain and DLT services at a regulated bank. The solution itself can be set up in a variety of ways: do-it-yourself, through a service provider, and even as a hybrid solution where you might focus on the trading yourself and just outsource the actual custody of the assets, depending on your particular area of expertise.

The opportunity for growth

By offering crypto custody and execution services, a bank can provide its clients with a one-stop shop for all their financial needs. This can help banks differentiate themselves from their competitors and attract new clients.

Moreover, compared to self-custody solutions (or unhosted wallets, whatever you want to name it), crypto custody and execution services offered by private banks provide additional benefits. For instance, they can offer their clients:

• a single point of contact for all their financial needs;
• secure storage of private keys, which eliminates the risk of losing access to wealth due to loss or damage of such keys;
• an inheritance solution and corresponding services for their cryptocurrencies, making it easier to pass these assets on to their heirs; and
• reliable statements on matters such as positions, performance, costs, and tax.

The challenge of regulatory compliance

One of the biggest challenges that private banks face when offering crypto custody and execution services is regulatory compliance. Cryptocurrencies are not regulated in the same way as traditional financial instruments, and the regulatory landscape is constantly evolving.

As an example, in Switzerland, the Swiss Financial Market Supervisory Authority (FINMA) has issued guidelines on how financial institutions should handle cryptocurrencies. These guidelines require banks to perform due diligence on their clients and implement robust anti-money laundering (AML) and know-your-customer (KYC) processes.

To comply with these regulations, private banks that offer crypto custody and execution services must invest in technology and infrastructure that can help them to pre- and post-monitor and track cryptocurrency transactions (such as a forensic tools). They must also ensure that their staff are well trained on the latest regulatory requirements and industry best practices.

The challenge of combining the traditional world with the new world

Another challenge that private banks face when offering crypto custody and execution services is how to handle their existing business, as the new world of cryptocurrencies often disrupts the traditional, familiar way of working.

The history of DLT and its relevance for the future in banking

Over the past few years, we have seen a lot of new developments that have revolutionized the way we think about investing and managing assets. Besides crypto custody and execution, three of the most significant developments in recent times concerning DLT and blockchain are initial coin offerings (ICOs), decentralized finance (DeFi), and the tokenization of non-bankable assets. In this article, we will explore these three topics and what they could potentially mean for the future of finance – and what changes they might already have brought about.

ICOs became popular in 2017, when they raised billions. The concept was initially touted as a way for companies to raise money quickly and efficiently without having to go through the traditional fundraising process (using cryptocurrencies instead of fiat). However, the hype surrounding ICOs quickly faded, and the market has since cooled down.

The benefits of DeFi are numerous. For one, it allows for greater transparency in financial transactions. Since everything is recorded on the blockchain, there is no need for intermediaries to keep track of the transactions. Additionally, DeFi allows for greater access to financial services, particularly for those who are underserved by traditional financial institutions. However, the DeFi space in its current form is still largely unregulated. Entering the DeFi space as a regulated entity will not release an institution from its supervisory duties, and this makes it difficult to participate in DeFi products and services.

Tokenization is particularly useful for non-bankable assets because it allows for greater liquidity. Rather than having to hold on to a physical asset, investors can buy and sell digital tokens that represent fractional ownership of the asset. This makes it easier to diversify one’s portfolio and to invest in assets that would otherwise be out of reach. However, tokenization of an asset is only the first step. What most investors look for is liquidity in terms of those assets, and this is leading to some interesting developments in terms of regulated exchanges being able to trade these kinds of investments.

The opportunities presented by the three developments described above are numerous. If client demand is strong and the business case for integrating DLT and blockchain technology into existing business processes is given, banks will still need to think carefully about how to approach this issue and how best to integrate these new solutions into their current product and service offerings. In addition, services provided by unregulated entities bear risks, as previous instances of market turmoil have shown. To ensure trust and a certain level of confidence, a degree of regulation is required – to control the services being provided without restricting the technology itself.

Conclusion

DLT and blockchain technology offer significant opportunities. By embracing these technologies, banks can in the long run improve their security, efficiency, transparency, and competitive edge, while providing their clients with a better experience. Even with the new DLT developments described above, banks can still be the go-to place for clients to interact with these systems in a safe, trusted, and compliant manner. The client-bank relationship is as relevant as ever.