The digital economy is described as "the convergence of technology and finance that is increasingly defined by digital spaces, experiences, and transactions," according to Grayscale Investments' recent report "Reimagining the Future of Finance."

With this in mind, it's no wonder that many financial institutions have started to offer services that give customers access to Bitcoin (BTC) and other digital currencies.

In example, last year saw a surge in financial institutions adding assistance for crypto-asset custody. For example, in February 2021, Bank of New York Mellon, or BNY Mellon, announced plans to hold, transfer, and issue Bitcoin and other cryptocurrencies on behalf of its clients as an asset manager. As of December 31, 2021, BNY Mellon has $46.7 trillion in total assets under custody and/or administration and $2.4 trillion in assets under management, according to Michael Demissie, head of digital assets and advanced solutions at BNY Mellon.

Banco Bilbao Vizcaya Argentaria (BBVA) announced in June 2021 that it would offer Bitcoin trading and custody services in Switzerland, following in the footsteps of BNY Mellon. Then, in October of last year, U.S. Bank, the country's fifth-largest retail bank, announced the debut of its institutional bitcoin custody service.

Since 2020, according to Alex Tapscott, managing director of Ninepoint Digital Asset Group, US banks have been scrambling to launch crypto asset custody. "Cryptoassets represent a $2 trillion asset class, and crypto-asset custody is a multibillion-dollar industry." Tapscott went on to say that last year was a watershed moment for many financial institutions, noting that the US Office of the Comptroller of the Currency issued a letter on July 22, 2020, allowing federally licenced banks to provide cryptocurrency custody services. As a result, in 2021, many regular banks began offering crypto custody services.

Next steps

While this is noteworthy, it's also worth noting that traditional banks have begun collaborating with crypto custodians and sub-custodians to bring digital asset custody.

Given the growing demand from customers, Ramine Bigdeliazari, director of product management at Fidelity Digital Assets, told that exploring crypto solutions through custodial relationships with digital asset service providers is a natural next step for traditional financial institutions. He stated:

"While banks could enter the digital asset market in a variety of ways, such as by building an end-to-end solution or by acquiring existing providers, sub-custodial relationships with existing and trusted service providers could provide a superior alternative that allows for a quick and proven path to market to meet clients' needs."

Fidelity Digital Assets, according to Bigdeliazari, provides sub-custody services to clients such as banks, who then interact with their customers. "These engagements demonstrate the potential for digital assets sub-custody to allow institutions to give their customers with access to digital assets using the same interface and experience they use for traditional asset classes without having to create any infrastructure," says the company.

To put this in context, New York Digital Investment Group (NYDIG) is a sub-custodian that has collaborated with U.S. Bank to provide a Bitcoin custody solution to its "Global Fund Services" customers.

The collaboration between traditional banks and sub-custodians is crucial. For example, while crypto asset custody represents a huge opportunity for banks, it's not without danger, according to Tapscott. "Securely storing private keys can be the difference between a happy customer and cash in the bank or a class action lawsuit and handcuffs. As a result, many big banks prefer to deal with companies that already have sector expertise," he explained.

This is exactly what has happened. While U.S. Bank is one of NYDIG's most well-known financial partners, Kelly Brewster, chief marketing officer, informed that it is far from the only one. "To bring Bitcoin to Main Street, NYDIG has already worked with more than 35 banks and credit unions," he said.

While sub-custodians assist traditional financial institutions in participating in the digital asset ecosystem, crypto custodians such as Gemini and Coinbase, according to Tapscott, also play a significant role. Tapscott, for example, believes that "white label" solutions will be the preferable option for established banks wishing to develop their own crypto custody capabilities. He continued, "Banks will eventually market custody solutions as their own, which will be powered by Gemini, Anchorage, BitGo, or another recognised crypto custodian."

Furthermore, digital asset infrastructure providers are assisting in the bridge-building process between traditional banks and the crypto sector. Fireblocks, for example, has teamed up with BNY Mellon to make its digital asset custody solution available. BNY Mellon is employing Fireblocks' technology stack, along with other internal components, to enable customers to hold digital assets, according to Stephen Richards, vice president and head of product strategy and commercial solutions at Fireblocks.    

BNY Mellon, according to Demissie, is developing its own digital asset custody platform, which is made possible by the bank's technology investments in the field. BNY Mellon, for example, invested in Fireblocks in a Series C round in March 2021.

"We plan to bring our digital asset custody platform to market this year, pending regulatory approvals," Demissie said, adding that BNY Mellon is currently providing fund services for digital asset-linked products, including those from Grayscale Investments, the world's largest digital asset manager. "In addition, we service 17 of Canada's 18 active cryptocurrency funds."

Will the decentralisation of cryptocurrency be jeopardised by major banks?

Digital assets, according to Demissie, are here to stay, as they are gradually becoming part of the mainstream. "As their trusted service provider, our clients expect BNY Mellon to expand our core services to this burgeoning asset class," he said. While merging digital assets into traditional banking may be a significant step forward for the crypto ecosystem, some may be concerned that major banks would jeopardise crypto assets' decentralised character.

Despite the fact that this is a valid concern, Tapscott points out that many institutional and retail crypto asset holders prefer to store their assets with custodians. "It makes no difference whether it's a crypto-native custodian like Gemini or a major bank. Someone else will be in charge of your keys." But, as Tapscott pointed out, this doesn't stop millions of other crypto holders from acting as their own bank and holding their money in hardware wallets.

In order to throw further light on the situation, Anthony Woolley, head of business development at market digitalization firm Ownera,  told that regulation usually requires an entity, such as a transfer agent, to be accountable for every security's record of ownership. As a result, Woolley believes that digital securities will never be truly decentralised while remaining compliant with regulatory requirements.

Woolley, on the other hand, proposed that a world in which regulated digital assets are traded peer-to-peer with fast payment, ownership transfer, and settlement would be achievable. "This is the type of decentralisation we feel investors and society as a whole require."

Regardless of concerns, increased institutional demand for digital assets will lead to traditional financial institutions collaborating with crypto custodians and service providers.

Matt Zhang, a former trading executive at Citi and the founder of Hivemind Capital Partners, a $1.5 billion multi-strategic fund aimed at "institutionalising crypto investing," told that banks face a much higher regulatory bar when it comes to new products and services, and crypto custody is one of the most complicated:

"However, because client demand exists, banks must find ways to collaborate with sub-custodians to package the service in the short term while determining a road map for developing it in-house." Certain institutions are clearly ahead of the pack, but Wall Street as a whole is still catching up when it comes to crypto custody."

To Zhang's point, the findings of NYDIG's Bitcoin + Banking survey from last year revealed that customers and clients would prefer to access Bitcoin through their current bank's service if it met existing quality and risk management criteria. According to NYDIG's results, 71% of Bitcoin users would change their primary bank to one that offers Bitcoin-related products and services. "Banks that aren't ready to offer these products and services risk falling behind," Brewster said.

Zhang went on to say that he believes many major banks would offer access to crypto assets in the future, making the market more competitive. As a result, he believes that the financial institutions that can provide a vertically integrated product offering will be the most successful. "Think of trading, lending, prime, custody, and banking as a whole, rather than just custody."