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‘Crypto Winter’ Highlights Importance of Custody

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

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

The fall in crypto valuations, which has been dubbed the ‘crypto winter’ has reminded everybody that custody may not always be 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 in the digital custody space, we’ve seen an avalanche of interest in a true old fashioned, bankruptcy remote, ‘my assets don’t disappear when the thing goes wrong’ service,” said Watkins.

HQLAᵡ DLT platform

Watkins highlighted how BNY Mellon has been using distributed ledger technology, as collateral efficiency is very important and the industry is trying to remove time delays.

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 gave Goldman Sachs a digital copy of the trades.

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 onward collateral obligations at one or more triparty agents.

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

D7 platform

Samuel Riley, chief executive of Clearstream Holding, agreed on the panel that there has to 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” series covering 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 the end-to-end processing of the entire life cycle of digital assets.

“D7 is not a cost efficiency play,” said Riley. “It’s a bet on being able to embrace new technology and bring it into a current business where it adds value.”

 Samuel Riley, Clearstream

The platform allows Deutsche Börse to bring products that have typically been over-the-counter into a more digital environment. Riley said: “The data opens up a new set of opportunities which are not accessible today.”

Deutsche Börse’s D7 partners include Digital Asset, which is helping 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 is also tapping Microsoft for cloud components.

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

 Valeria Zafar, Digital Asset

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

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

“In Germany regulation has been a trigger for the D7 platform and we’ve seen great transformation taking place there,” she added. “Switzerland is another great example where regulation in Europe has been a lot 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 gets pretty exciting in terms of what you can do with algorithms,” he added. “Artificial intelligence and machine learning can spot predictive behaviour that can provide alerts for action, rather than people wading through that information.”