Where Next For Banks And Digital Assets?

Jeremy Boot 2 February 2023

Where Next For Banks And Digital Assets?

Towards an era of asset tokenization
Beyond crypto trading and custody services, perhaps a bigger prize for banks is exploiting blockchain tech to optimise existing financial services, most notably in the area of asset tokenization.

Major banks having been jumping in – ABN AMRO, UBS, Bradesco, Credit Suisse, and JPMorgan to name a few. Banks are seeking gains in issuance processes, faster settlement, reduced counterparty risk, and better liquidity management compared with traditional systems.

The road ahead may seem long but some countries such as Switzerland already have clear legislation and legally-compliant security token standards, as published by the CMTA for example, which could pave the way to adoption.

Banks should be building expertise in digital asset custody if nothing else in order to prepare for this tokenized future.

Custody approaches
So how should banks go about it? They can work with third-party custodians to manage assets for them. This would typically offer faster time to market, a simpler integration architecture, and lower barrier to entry – they don’t require as much in-house expertise.
Alternatively, they can self-custody using infrastructure providers to manage customer assets in enterprise grade wallets connected to blockchains. With this approach banks can avoid additional participants that lower their margins, have greater flexibility in terms of managing tokens they want to support, and eliminate counterparty risk.

Banking platform integration
Integrating digital asset platforms to core banking systems is a necessary step for a full end-to-end capability. The core banking system needs to synchronise asset tokens as supported instruments available for customer trading, link customer records to segregated on-chain accounts, integrate on-ledger transactions to be able to mark-to-market customer assets, provide regulatory and tax reporting as well as provide the gateway to digital banking apps for customer accessibility.

To achieve all this, banks need to rely on a modern, flexible, and open banking platform that allows them to integrate their core systems to digital asset providers. By opting for established banking platforms with an ecosystem of pre-integrated digital asset partners, banks can quickly move forward with these new capabilities as local regulation allows.

Getting ready
Blockchain is still waiting for its killer-app moment. Nevertheless, real-world use cases across broader tokenization such as for securities may help drive the major blockchains and projects that are able to demonstrate value, and distinguish themselves from the speculative Dogcoin froth.

Regulatory clarity is urgently needed and should catch up in the months ahead. Now is the right time for banks to step into this new technology, refine their strategies, and start building. The digital assets future may just offer a wealth of opportunity.

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