How a startup fits into BNY Mellon’s blockchain strategy – American Banker

ad-midbar
ad-midbar
ad-midbar
ad-midbar

Bank of New York Mellon’s recent partnership with a firm that plans to establish a bitcoin futures exchange raised an immediate question among observers of the $34.5 trillion custody bank: Was it signaling an intent to become a digital-assets custodian?

BNY Mellon has committed to keep assets for only that one firm, Bakkt; it is the first company the bank has supported on the public blockchain.

But Subhankar Sinha, who joined BNY Mellon in May as its new head of blockchain, acknowledged that he is exploring what digital asset custody could look like for the world’s largest custodian.

The bank has not shied away from experimenting with blockchain in other ways. It is interested in how the technology could improve efficiency, reduce cost and eliminate errors.

In 2016, the bank backed up all of its brokerage transactions with a blockchain called BDS 360. It also belongs to a variety of blockchain-related bank consortia, including Enterprise Ethereum and R3.

“Trust is not binary, it’s a continuum,” Sinha said. “Let’s say the amount of trust for banks in the marketplace is 90% and maybe if we use a centrally managed, immutable, verifiable ledger and that trust level increases to 95%, that is significant.”

Sinha spoke with American Banker about what it took to persuade his senior leadership to partner with Bakkt and what other kinds of blockchain startups the bank would be interested in supporting.

The following conversation has been edited for length and clarity.

What’s your top priority right now as head of blockchain at BNY Mellon?

We’re the largest global custodian. So one of the areas that I’m focused on is what is the future of different kinds of assets, and how fast that will be digitized, and what role we might play in custodying these assets. Does that mean we have to create new capabilities for digital asset custody? If so, what would that look like?

Was there anything extra that had to be done to do safekeeping for Bakkt?

There was increased due diligence.

Safekeeping is essentially providing a vault for assets, which is a service we already provide in the financial markets. This opportunity fits in the overall architecture and process framework for what we have already been providing in analog capital markets.

There was a significant amount of education required to explain what exactly we are safekeeping, what that actually means, and what our risk exposure was. We had to educate our senior leadership, risk management team, compliance, regulatory and legal teams. But it’s within the regulatory framework that we already adhere to.

Exploring custody

“One of the areas that I’m focused on is what is the future of different kinds of assets,” said Subhankar Sinha, BNY Mellon’s head of blockchain.

What did you have to educate them about? What exactly are you keeping safe?

When it comes to open permissionless blockchain there are perceptions rightly or wrongly formed because of reports. Generally in the marketplace, there is a notion that it increases the risk profile of any financial institution, but in certain instances that’s not the case at all.

We do have an operating model by which we provide safekeeping of any asset, and people who understand digital asset safekeeping and are close to the implementation of this particular offering, they understand that it doesn’t really change the risk profile of our bank.

Now, I want to point out that there is a misconception in the marketplace since we have gone public with this service, that we are providing digital asset custody. The safekeeping is not the same as custody. We are providing digital asset safekeeping, not digital asset custody.

You needed to explain to senior leadership that the bank wasn’t participating in open blockchain?

I needed to explain to them that the bank isn’t participating in any transaction that involves open permisionless blockchain.

Bakkt has filed for a license with the New York State Department of Financial Services so there needs to be a lot more regulatory clarity before the pieces completely fall into place. But one of the reasons we became comfortable to provide this service to Bakkt is because they are owned by Intercontinental Exchange [the parent company of the New York Stock Exchange].

ICE is a regulated entity, so Bakkt is following all of the regulations which ICE is subject to, and that makes us and our leadership comfortable that they are doing the necessary [know your customer] and [anti money laundering] on their end.

Are there other ways you imagine the bank supporting crypto or blockchain startups?

I would separate those startups into three different buckets.

If you’re talking about digital assets, there’s assets you can have in permissioned private blockchain and assets you can have in open permisionless blockchain. We are starting to see regulated financial assets are starting to be tokenized on open blockchain. We also know that there are crypto native assets which do not adhere to the existing regulations that are also live on open blockchain.

When we look at our business franchise, we look at four areas. One is the customer demand; the second is the assumptions we have to make in terms of market infrastructure; the third is the assumptions we have to make in terms of regulation; and the fourth is, what are the assumptions we have to make in technological development? If those four assumptions become favorable and it aligns with our business strategy, then we’ll provide a service to that startup. But we have to be aware of the assumptions that we’re making.

On the blockchain side, it’s easier because the blockchain side is about improving our existing business. It has to improve the customer experience, increase efficiency and reduce cost, and give us more revenue. With any blockchain idea in the bank we have to also consider ecosystems as well. If it looks great on paper, but requires a bunch of organizations to come together, the adoption is going to be slow.

In 2016, BNY Mellon put blockchain behind its brokerage transactions in BDS 360. Are you going do something similar with other areas of the bank?

The characteristics of blockchain such as immutability, verifiability and maintaining temporality of information are the key drivers. Yes, we are working on similar projects internally, but we can’t talk about them just yet.

News Source

ad-bottom
ad-bottom
ad-bottom
ad-bottom

NO COMMENTS