Digital Assets a Transformational Force in Finance
Nadine Chakar was appointed in June to lead State Street’s new division focused on the digital economy and decentralized finance and said digital assets will be one of most transformational forces affecting finance over the next several years.
Chakar was previously head of global markets at State Street. She told Markets Media in an email: “From February to April of 2021 we saw tremendous growth in clients’ investments in cryptocurrency and knew it was time to have a dedicated area that can support the entire digital investment cycle from pre-trade, trade, and post-trade as well as other initiatives designed to enhance the client experience.”
She highlighted that State Street had already been actively engaged with clients and partners in delivering solutions for digital assets for a number of years before the official launch of State Street Digital.
For example, State Street has been announced as the back-office administration and transfer agent for VanEck’s bitcoin exchange-traded fund that is pending approval by the US Securities and Exchange Commission. State Street is also the administrator of a planned bitcoin backed exchange-traded note initiated by Iconic Funds BTC and WisdomTree for a tokenized ETF.
The new division includes crypto, central bank digital currency, blockchain, and tokenization. The firm said its proprietary GlobalLink technology platform will be an integral component of State Street Digital and will be enhanced into a digital multi-asset platform.
Chakar continued that as the financial industry is transforming to a digital economy with DeFi, digital currencies and tokenization continue to gain momentum. In addition fintech, as well as the pandemic, has accelerated the unbundling and digitization of financial services so the industry’s operating models and technology platforms service models need to evolve.
“We need to be able to provide clients with full solutions for their digital needs. State Street Digital will bridge that journey for our clients,” she added. “Our goal is to create a digital financial services company designed to support the entire investment process from front-to-back.”
Build versus buy
In deciding whether to build capabilities internally or to partner with other firms State Street evaluates if it is a capability the firm should own for strategic reasons.
“If the capability represents a critical path, then we will likely want to own it,” said Chakar. “We have been fortunate to have found fantastic new entrants in the digital space, and we’ve partnered and made investments, as was the case with Securrency and Lukka, for example.”
In April this year Securrency, a developer of institutional-grade blockchain-based financial and regulatory technology, announced it had raised $$30m in its Series B funding round from investors including State Street, WisdomTree Investments, Abu Dhabi Catalyst Partners Limited (ADCP) and U.S. Bank.
Dean Sakati, head of product innovation and business development for State Street Global Markets, said in a statement at the time: “We believe in the value Securrency can bring to our clients by promoting interoperability, regulatory compliance across multiple jurisdictions, and solutions for identity management, as we continue to develop our digital assets servicing models.”
In July this year State Street announced it will provide digital and cryptocurrency asset fund administration capabilities for the firm’s private funds clients with Lukka, an enterprise crypto asset data and software provider. State Street had led Lukka’s Series C funding round in December 2020 and Chakar said their strong data capabilities provides the necessary tools to support State Street’s private market clients as seamlessly as possible.
Robert Materazzi, chief executive of Lukka, said in a statement: “Large, traditional funds are rapidly looking to add crypto to their offerings, which leads them to ask their existing, trusted service providers such as State Street for fund administration.”
Other traditional financial firms are also entering the digital asset sector. Zodia Custody, an institutional grade cryptoasset custody solution based in London, has been formed by SC Ventures, the ventures and innovation arm of Standard Chartered, and Northern Trust. In July Zodia Custody was registered with the UK Financial Conduct Authority. TP ICAP is waiting for FCA approval to launch a wholesale trading platform for cryptoassets in collaboration with Fidelity Digital AssetsSM, Zodia Custody and Flow Traders.
Chakar argued that State Street’s main competitive advantage is the openness and interoperability of its platform, which is somewhat counterintuitive to how much of the rest of the industry operates.
“We are not simply digitizing the old but reimagining and repositioning our role in the investment process,” she added. “State Street also differentiates on breadth of services, reputation and scale of client relationships.”
She continued that these factors are important for institutions who will view digital asset investing as an extension of their existing portfolio strategy.
“State Street connects all of the services together under one roof,” she said. “Scale is also critically important in an environment where network effects and liquidity will be important for success.”
Only the first inning
Bank of America said in a report that crypto-based digital assets could form an entirely new asset class. The bank launched its digital asset research with the publication of a report, Digital Assets Primer: Only the first inning, led by Alkesh Shah, head of global cryptocurrency and digital asset strategy. The report said the digital asset universe is too large to ignore with a market value of more than $2 trillion and more than 200 million users.
Venture capital digital asset/blockchain investments were more than $17bn in the first half of this year, compared to $5.5bn in the same period in 2020.
This creates a new generation of companies for digital assets trading, offerings and new applications across industries, including finance, supply chain, gaming and social media according to the report.
“Our view is that there could be more opportunity than skeptics expect,” added the bank. “In the near future, you may use blockchain technology to unlock your phone; buy a stock, house or fraction of a Ferrari; receive a dividend; borrow, loan or save money; or even pay for gas or pizza.”