Recent momentum in investor interest, market adoption and regulatory guidance has given rise to new digital currency opportunities for banks. Charles Gillanders, digital transformation, technology and blockchain lead at U.S. Bank Investment Services, answers six questions about institutional cryptocurrency investing to help you better understand your options in this space.
1. What are the key differences between retail and institutional cryptocurrency investing?
Retail investors can purchase and hold cryptocurrency directly with cryptocurrency exchanges and providers like Coinbase and NYDIG. Unfortunately, this creates a custody gap since most cryptocurrency custodians in that space aren’t set up to hold more traditional assets like securities or cash.
For institutional investors, current restrictions prohibit SEC-registered mutual funds and closed-end funds from investing directly in cryptocurrency. This means the only fund types that can invest in cryptocurrency are private unregistered funds targeting accredited investors and qualified purchasers. At U.S. Bank, we’re able to provide institutional-grade cryptocurrency custody services to those private funds.
2. What are the advantages of using the same custodian for cryptocurrency and non-cryptocurrency assets?
Institutional investors looking to participate in the digital currency market want reliable safekeeping that meets regulatory requirements and conforms to regular business practices with their regular business partners. Before we launched our cryptocurrency custody offering at U.S. Bank, fund clients had to split their portfolio between multiple custodians. Now, an investment fund can hold their cryptocurrency in the same account as their traditional securities, cash and other assets.
3. Are managers embracing cryptocurrency, or are they more hesitant?
There’s a wide range of views on cryptocurrency among our clients based on their goals and investment style.
To date we’ve seen a few specialty managers focused exclusively on investing in Bitcoin. But a larger percentage of the fund management community is observing and waiting to see how the SEC and other regulators both in the U.S. and overseas approach cryptocurrency before adding it to their investment strategies and portfolios.
As mentioned before, SEC-registered mutual funds and closed-end funds are still precluded from investing directly in cryptocurrency, which limits the fund types that can invest in cryptocurrency to private unregistered funds targeting accredited investors and qualified purchasers.
4. Bank custody of cryptocurrency assets isn’t that common right now, and it’s somewhat of a differentiator. Do you see that changing in the future?
At this point in time, assets held by cryptocurrency custodians make up only a small fraction when compared to total assets under custody at major banks – but it’s a fast-growing segment. We definitely see our cryptocurrency offering expanding and evolving over the years to come, and I expect more banks to eventually follow our lead.
5. Since cryptocurrency is a newer asset class, what experience or expertise should managers look for to give them confidence in their custodian?
You really want a custodian with a solid reputation, a risk-based mindset and a long, established history. At U.S. Bank, we’ve been a custodian of client securities and cash for more than 150 years. And now, we’ve paired our experience at keeping client assets safe with the cryptocurrency expertise of NYDIG, our technology partner, to provide cryptocurrency custody services that clients can rely on with absolute confidence.
6. What risk management controls help keep cryptocurrency products safe and secure in custody?
A key component of risk management is performing know-your-customer (KYC) and know-your-transaction (KYT) anti-money laundering (AML) protocols.
As with our traditional onboarding practices, when we onboard a digital currency client at U.S. Bank, we prioritize upfront KYC and establish provenance of funds by screening customers, leveraging block chain analytics and utilizing internal systems. We use our customer due diligence (CDD) information to develop a client baseline. From there, we perform enhanced due diligence (EDD) and use data analytics and blockchain analytics to monitor for unusual activities and escalate transactions that deviate from expectations and require extra scrutiny.
For cryptocurrency accounts, only our technology partner, NYDIG, has access to the private key. The public key is given to the client and pertinent operational teams within U.S. Bank.
Cryptocurrency will continue to gain traction, and the banking industry will continue to evolve to accommodate it. If you’re interested in adding digital assets to your portfolio, the right custodial partner can make the process smooth, streamlined and secure.
U.S. Bank offers customized operational solutions combined with the strength and security of a major financial institution. To learn more, visit our website or connect with our team.
Charles Gillanders is a digital transformation, technology and blockchain lead at U.S. Bank Investment Services. He has more than 20 years of experience leading change programs to help firms develop new capabilities and deepen client relationships, which includes 10 years as co-founder and chief technology officer developing award-winning technology solutions at Quintillion. Quintillion was an independent fund administration firm acquired by U.S. Bank in 2013. Prior to Quintillion, Charles served as the business information officer at PFPC International, part of PNC Bank. Charles graduated with a Bachelor of Science degree in computing for business from the University of Northumbria in Newcastle, England.
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