The financial ecosystem is at a moment of fundamental transformation. When Alexander Hamilton founded what is today BNY Mellon 237 years ago, it was to finance the economic success of a new world. But in the current moment, the frontier has moved from the geographic to the digital.
Pioneers and digitally native institutions have made significant progress in creating new ways for financial markets to operate. As the next digital chapter materialises, BNY Mellon is collaborating with clients and others across the industry to deliver the potential of and mitigate the challenges presented by digital assets.
Many financial institutions across the globe have been working to integrate and expand their digital asset offerings and investments. Others have realised they can no longer take a wait-and-see approach. As they formulate their strategies, they are eyeing the benefits of disintermediation that digital assets offer. But they also desire the risk management and secure infrastructure that they have come to expect from mature institutions.
Three key considerations are driving this demand. First, the increasing interest in digital assets. In August 2021, the global market capitalisation of cryptocurrencies was more than $2tn, more than double what it had been at the end of 2020. After just a decade, cryptocurrencies had reached approximately 20% of gold’s market capitalisation – the reserve asset champion throughout most of modern history.
Second, the emerging potential of tokenisation. This process converts an underlying asset into a digital ‘token’ that acts as its proxy. It is possible to tokenise a wide range of assets, from cash, equity securities and debt securities to real assets such as real estate, commodities, artifacts and works of art. Such developments unlock potential innovations in areas including custody, collateral management, cash and liquidity, fund administration, accounting and payments. In a BNY Mellon study in August 2021, 72% of institutional asset managers said they plan to develop solutions for asset tokenisation.
Third, the evolving regulatory environment. Regulators are working to address gaps and promote consistency in the regulatory environment for digital assets. In 2020, the European Commission published drafted legislation to create a European Union-wide framework for digital assets. The Markets in Cryptoassets Regulation is expected to become applicable in 2024. In the US, the Federal Reserve, Office of Comptroller of Currency and the Federal Deposit Insurance Corporation are engaged in an interagency crypto ‘sprint’ to develop a joint framework for crypto supervision.
With the increasing relevance of digital assets, institutional demand for a global infrastructure to provide stability and safety is growing. Investors expect the same institutional level of service as in the traditional space. In addition, institutional stakeholders of all stripes require stable, reliable servicing of the entire asset life cycle from issuance to custody, trading and settlement to core fund servicing, accounting and payments.
Such requirements fall into three categories. First, given the potential of the digital space, institutions are looking for the same level of risk management, focus on regulatory compliance and rigorous safety and security standards that are available for traditional assets.
Second, institutions are looking for scalability, transparency and full-spectrum support to help them navigate the risks of the digital assets ecosystem. Multi-jurisdictional regulatory reporting, resilience and experience handling complex institutional scale scenarios will set some providers apart from others.
Third, institutions want a one-stop shop to support the expanding use cases of digital assets as well as delivering value across the full financial life cycle of digital assets (such as trading, safekeeping, collateral management and lending).
Because digital assets and markets are inherently linked, delivering these requirements takes close collaboration within the industry and with fintech providers. In the world of traditional assets and markets, asset owners, asset managers, institutional investors and service providers already work closely together.
Collaboration will be essential for bringing digital assets to full maturity. If technology developers, financial infrastructure and service providers and stakeholders along the whole value chain come together to create and deploy integrated solutions, rather than a collection of one-off innovations, the end result will be much more robust.
Just as traditional markets have evolved by means of collaboration among stakeholders, we believe the same must be true for digital assets, albeit more quickly. Decentralisation is a built-in feature of the distributed technologies that constitute digital assets.
As we stand at the cusp of digital assets becoming institutionally ready, we expect the emerging world to be multi-centred, with global institutions and their partners all playing their part. This new ecosystem, which must be grounded in both trust and innovation, will provide significant opportunities for growth.
Michael Demissie is Head of Digital Assets Unit and Advanced Solutions, BNY Mellon.