New horizon for custody

State Street’s decision at the end of last year to terminate its acquisition of Brown Brothers Harriman’s investor services unit may have been a casualty of an unforgiving M&A climate, or due to problems with a highly priced deal, but it does highlight the stresses placed on the custody business by the need to innovate and develop services. One more stress to be added to the list is the need to accommodate the booming demand for crypto custody services. 

One of the most significant developments is the proposal by the US Securities and Exchange Commission earlier this year to expand US custody requirements to cover cryptocurrency exchanges and asset holders with crypto assets. Since other US regulations limit bank custody of crypto assets, the move is bound to push further restructuring in the crypto space, and in crypto custody. 

The SEC stated that the new regulations are intended to “ensure client assets are properly segregated and held in accounts designed to protect the assets in the event of a qualified custodian bankruptcy or other insolvency”. This is less likely to impact established traditional custodians than the new breed grown up around crypto assets.

There’s little doubt that greater regulation and supervision is the inevitable consequence of the FTX debacle and numerous other cryptocurrency scandals. Some in the cryptocurrency space were even talking of regulated custody as the necessary step to restore trust in the asset. 

Meanwhile, major banks are not standing still in their crypto custody ambitions. Crédit Agricole and Banco Santander’s asset servicing joint venture has already received crypto custody approval from French regulators. Further east, Standard Chartered launched a digital asset custody facility in the Dubai International Financial Centre in May. 

Like it or not, this is the new horizon for custody. Perhaps it’s one that the custody discipline didn’t need. Perhaps it’s one that asset holders didn’t really need if they were driven more by prudence than investment fashion. 

Custody services providers are certainly under no obligation to ride to the rescue of a discredited asset class rife with malfeasance. But the fact remains it’s a reality now. And custody is going to have to add it to the demand and competitive pressures already bearing down on the discipline.