Crypto assets are the "hype" topic par excellence for banks. It is worthwhile to methodically shed light on the strategic criteria banks can use to determine how far they shape their value chain, e.g. self versus sub custody.
Everyone has been talking about crypto assets or digital assets for several years. In particular, cryptocurrencies have become more relevant due to their market maturity. The market capitalization of the two best-known cryptocurrencies, Ether and Bitcoin, is now well above the combined market capitalization of Tesla, IBM and McDonalds and is almost half the size of Germany's gross domestic product. Reasons for this are, among other things, that the supporting market infrastructures have matured and new regulations (e.g. eWPG) have been implemented that make the risks for investors clearer.
However, direct investments in cryptocurrencies are no longer the only way to participate in the crypto business. The trend is towards so-called crypto assets, real assets that have not previously existed in digital form. With the help of tokenization, for example of real estate, paintings, but also promissory notes and funds, it is possible to acquire only a fraction of individual objects instead of the entire property right and to achieve an economic profit by holding or using this share. This could open up new opportunities for financial intermediaries such as banks as âtrusted playersâ, although âcrypto-nativesâ assumed that all intermediaries would be replaced by blockchain technology. You can reposition yourself with your customers, possibly even acquire new customers who previously seemed unreachable.
Strategic options for banks
Due to the growing share of crypto in the overall market, it is becoming an increasing necessity for banks to be able to advise and serve their customers in this area as well. The forecasts of the World Economic Forum have been backing this up since 2018 with the prospect that the market capitalization of crypto assets should increase to USD 24 trillion by 2027. However, the requirements for this new line of business are so demanding that banks without an understanding of this area will in future be forced to outsource parts of their value chain or to do without them entirely, which will result in an immense competitive disadvantage.
For this reason, banks will have to decide within the next few years whether they want to offer their own crypto custody or handle this area through a third-party provider. In order to preserve the earnings potential here, almost all banks are currently dealing with this topic. Some on the basis of independent experiments and "proof-of-concept" piloting, other banks with concrete steps in the direction of fully integrated custody systems.
In addition to the issuing and trading of tokens, ensuring property rights also play a central role. In the blockchain world, this is based on cryptography, for example on asymmetric encryption methods. The different technical variants in the management of these keys offer a wide range of possible business models. However, cryptoasset custody and register management for digital assets is a completely new construct compared to traditional securities custody, technically, contractually and regulatory. Financial institutions encounter a largely unknown technological sophistication and special dangers that challenge them to adapt their risk framework at the technical, operational, regulatory and product level.
New opportunities through blockchain technology
Banks that decide to invest in blockchain technology offer their customers the value proposition of opening up new opportunities and making contemporary instruments available. On the one hand, this satisfies the needs of the customers, and on the other hand, provides customers with further advantages that they might not expect at first glance.
A key feature of blockchain technology is its independence from central intermediaries. At first glance, when using the blockchain, trust in a single institution or organization is not necessary. Instead, a decentralized network and cryptographic procedures must be trusted. A clever combination of cryptography and transparency enables value transactions to be carried out between generally unknown participants without having to rely on the security of a trust-building authority.
Eliminating other intermediaries (e.g. clearing houses) even enables customers to save costs, since banks also save costs. Another advantage for customers is that they have the option of receiving all of their assets and banking services (checking account, credit, digital asset custody, etc.) from a single source. The customer advisor has the opportunity to provide the customer with full technical advice, as he can possibly have an overall view of the customer's situation. In addition, the customer is assured that all German regulatory requirements are being met by a market participant known to them.
Banks have to act
With increasing interest and larger investments in crypto assets, it is absolutely clear that banks need to act. The first investment funds and ETFs that make it possible to invest in crypto assets in this way were brought onto the market. Younger investors in particular who are interested in crypto technology are looking for such investments and not all of them want to take full technical responsibility for their own independent wallet with all of their assets.
Many activities within a bank, such as treasury of cryptocurrencies, hedging, risk management, compliance, accounting and reporting are affected here. In almost all areas, similar problems have to be solved for crypto assets that have already been solved for the established products. Banks now have to decide what to do to stay relevant. The organizational, technical and regulatory challenges can be daunting. But banks that don't understand the cryptocurrency business either have to buy in critical parts of this new value chain or avoid this business area altogether. In the latter case, they risk being left behind. On the other side of the spectrum, âfirst moversâ gain a pole position for a new business with enormous potential for returns and the expansion of the current business model.
Design, implementation and operation of a crypto assets infrastructure
The implementation of a new, scalable infrastructure, which initially starts with a pilot project, but is then expanded and complies with German and European regulations from the start, requires a partner with strong experience and presence in the provision of relevant IT infrastructure in the financial industry, that is up to the technical, regulatory and administrative challenges.
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