Zodia Custody ‘Game Changer’ For Crypto
Zodia Custody, launched by Northern Trust and Standard Chartered is likely to be a “game changer” for institutional adoption of cryptocurrencies.
SC Ventures, the innovation and ventures unit of Standard Chartered, and Northern Trust said this month they are going to launch Zodia Custody, an institutional-grade custody solution for cryptocurrencies. Zodia Custody is in the process of registering with the Financial Conduct Authority under UK money laundering regulations and will apply standards that are equivalent to those already used for custody of traditional securities when it launches next year.
Richard Johnson, founder and chief executive of Texture Capital, which provides a blockchain platform for trading tokenized securities, told Markets Media that more institutions are gaining exposure to cryptocurrency and the entrance of traditional custody providers is a “game changer.”
“With hedge fund heavyweights like Paul Tudor Jones and Stanley Druckenmiller investing in bitcoin, more are sure to follow,” Johnson added. “Trusted custody partners will be essential to increase institutional adoption.”
Justin Chapman, global head of market advocacy & innovation research at Northern Trust, told Markets Media that the firm has been having conversations with clients about cryptocurrencies over the past four to five years but there has been a significant uptick over the last 24 months. Institutional investors currently only account for 9% of investments in cryptocurrencies.
“Asset managers want to launch funds and as the technology evolves more credible players will enter the market,” Chapman said.
We’ve partnered with @scventuresDNA to launch Zodia, a cryptocurrency custodian. Our global head of Market Advocacy and Innovation Research, Justin Chapman, tells us how cryptocurrencies are changing the way our market operates. pic.twitter.com/0W8YlQtSKt— Northern Trust (@NorthernTrust) December 11, 2020
At launch Zodia will provide custody services for the most-traded cryptocurrency assets – Bitcoin, Ethereum, followed by XRP, Litecoin, and Bitcoin Cash – which represent 80% of the total assets traded on the largest cryptocurrency exchanges at approximately $395bn (€322bn).
Maxime De Guillebon, chief executive of Zodia, said in a statement: “We combine the risk management, compliance, governance and security approach of a regulated financial institution with the cutting-edge innovation of crypto asset and key management technologies.”
Chapman continued that Northern Trust is focussed on its digital asset strategy and the roadmap to 2030. Cryptocurrencies are unregulated so this business has been put into Zodia, a stand-alone company, in order to retain flexibility as the market evolves.
“Digital assets could make up between 20% to 30% of the total market in 10 years time which will make a significant difference to how markets operate,” Chapman said. “Digital cash and the launch of central bank digital currencies will accelerate this process.”
David Easthope, senior analyst who heads up fintech research on the market structure and technology team at Greenwich Associates, said in a blog that security tokens will gain more acceptance next year as regulations are becoming more clear.
Greenwich’s research found that 63% of respondents in a study last year cited a lack of regulatory clarity as the biggest challenge to the security tokens market. However ArCoin has become the first blockchain native investment fund registered under the Investment Company Act of 1940 and digital asset exchange INX could become the first token initial public offering registered with the US Securities and Exchange Commission.
Easthope added that a full ecosystem is emerging including issuer support, transfer agents, broker dealer services, and custody to support tokens but, so far, there has been a lack of secondary liquidity.
“The acceleration of alternative trading systems and exchanges outside the U.S. will help,” he said. “SDX is a well-known entrant, and the FCA in the UK has given a license to Archax to be the first FCA-regulated digital securities exchange.”
In August this year Northern Trust was the exclusive asset servicing provider for Singapore-based fintech BondEvalue when it completed the first trade of a fractionalized blockchain-based bond, known as BondbloX, on its platform. Northern Trust communicated cash & securities settlement reporting directly to BondEvalue’s distributed ledger technology using an API.
The two firms formed a strategic partnership last year to deliver integrated asset servicing and digital solutions for fractional ownership of fixed income bonds operating from the Monetary Authority of Singapore’s Sandbox Express.
Rahul Banerjee, founder of BondEvalue, said in a statement: “This milestone represents a significant step towards making institutional grade bonds more widely accessible to certain investors.”
Chapman continued there are current discussions about issuing more blockchain-based bonds on BondEvalue and about fractionalization. He highlighted that digital bonds can add real value alongside existing exchange infrastructures and could have a really big impact in green and blue bond markets where transparency around use of proceeds is paramount.
“We could see a digital green bond within the next 18 months,” he said.
Next year Northern Trust will also be moving more clients onto the DLT platform for private equity servicing that the firm developed in 2017 and transferred to Broadridge Financial Solutions last year.
Chapman said: “This will help the whole industry as the ecosystem will expand further without Northern Trust in the centre as the fund administrator.”
Broadridge will develop the blockchain platform to provide data and analytics tools so private equity can manage, communicate and engage with investors efficiently. It enhances capital and cash flow management and automates the middle office functions.
Pete Cherecwich, president, corporate & institutional services at Northern Trust, said in a statement at the time: “For the benefit of our clients and the industry as a whole, it’s time to hand over the reins to a technology provider with deep fintech expertise. Broadridge’s administrator-agnostic position, coupled with its DLT leadership and global footprint, make them an ideal firm to open up this innovative technology to the marketplace, paving the way for the digitization of the asset class.”