Current crypto ecosystem not yet viable for institutional investors, says Northern Trust

DTCC's global head of market advocacy and innovation says asset managers and pension funds are still waiting for the right infrastructure for the trading and custody of digital assets.

The current ecosystem for trading cryptocurrencies is still not suitable for institutional investors to expand into the new asset class, according to Northern Trust’s technology expert.

Justin Chapman, global head of market advocacy and innovation, Northern Trust

Speaking at the DTCC’s FinTech symposium Justin Chapman, global head of market advocacy and innovation, argued that asset managers and pension funds are still waiting for the right infrastructure for the trading and custody of digital assets.

“What we need to do is move away from how the technology stack was originally developed for cryptocurrencies. We need market makers, broker-dealers, and exchanges to shift their models rather than moving digital assets into a vault,” said Chapman.

“Having a single firm that provides KYC, exchange, market-making, and custody services, there is conflict of interest and does not appeal to our clients.”

There have been efforts to bring established post-trade standards to the digital asset market. In March, DTCC published a white paper outlining the post-trade responsibilities that should be undertaken to enhance security for token platforms.

These principles include demonstrating a legal basis for providing post-trade services for crypto assets, having an identifiable governance structure, procedures for risk management and final settlement, demonstrating resilience, and having issuance, custody and asset servicing capabilities.

Northern Trust’s Chapman added that custodians could rather use the best parts of blockchain technology, which underpins cryptocurrencies, and apply it elsewhere. Northern Trust currently uses distributed ledger technology (DLT) to automate the full lifecycle of private equity fund administration.

The Chicago-based custodian also provides fund administration services to a small number of hedge fund clients that have a small portion of their assets in crypto. Earlier this week, BNY Mellon also made its first foray into the cryptocurrency world by collaborating with digital currency exchange Bakkt to help it launch a custody service.

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