A ‘Cambrian explosion’ of assets: why State Street went digital
While institutions are yet to make the jump into cryptocurrencies, State Street’s move to launch its first new division in 40 years shows that a whole new universe of assets is here to stay.
“It’s very hard to find somebody that’s neutral about cryptocurrencies,” Nadine Chakar, global head of State Street Digital, told ASI on Wednesday (June 15). “Either you’re for it and think it’s going to change the world and the way monetary policy is administered… or you think it’s just a whole bunch of code. Either it’s zero or to the moon.”
Cryptocurrencies are now emerging as a “fifth asset class”, Chakar said. Accordingly, State Street launched its Digital division in June last year – but just like digital assets, its development stretches back much further than the market’s current preoccupation.
State Street’s “emerging technology centre” was established in the early 2010s – the brainchild of its chief strategy and legal officers, who’d seen that fintech firms were starting to encroach on the kinds of services custodians had traditionally provided. At the time it was “more of a defensive play” to understand what new providers were bringing to the table.
“We wanted to investigate how these technologies might cause disruption,” said Irfan Ahmad, APAC product lead for State Street Digital. “The mandate of that group at the time was looking at frontier technologies, which is a nebulous term – AI, machine learning, cognitive computing, as well as distributed ledger technology (DLT).”
Ahmad describes it as a “geek squad” of about five to ten people drawn from various different corners of the bank. Over time, State Street’s clients took a shine to DLT, which they believed would allow them to do what they were already doing “quicker, faster, and cheaper.” That led to the establishment of the Digital Product Development and Innovation team – State Street was going through a four-letter acronym phase, Ahmad says – dedicated to exploring DLT, and finally State Street Digital.
“This is the first division we’ve had launch in forty years” Ahmad said. “We saw clients demanding products and services that would allow them to access this new asset class; we’re starting to see regulatory clarity; and there’s a belief also that the underlying technology is going to be transformative for our industry.”
Digital assets, to State Street, is anything that “lives natively” on blockchain or DLT – anything from cryptocurrencies like Bitcoin and Ethereum, to utility tokens and security tokens, central bank digital currencies, and non-fungible tokens (NFTs). Their uptake has so far been restricted to family offices, high net worth individuals, and hedge funds.
“It’s really an entire new universe of assets that’s been born in some kind of Cambrian explosion,” Ahmad said. “What we noted initially was those groups had started to really come into this space and take advantage of the return profiles of these assets – the cryptocurrencies that had the most liquidity…. What they were really seeking was an institutional grade service – something they’re used to today from their traditional custodian partners.”
While the word “custody” is shared between the digital and traditional divisions, the operations and technology that underpin it are “poles apart”. For State Street, it was important to understand “the de facto level of security” clients desired in a marketplace that today consists of 200+ companies claiming to have an institutional grade digital custody offering; it seems that established custodians will have the edge here.
“Having the experience with working with global regulators on what their expectations are as well as growing up with a custody product that has had to grow up over time with regulation and policy changes in the hundred or so markets is a very, very different proposition.”
A common item of speculation in the Australian financial landscape is whether a super fund will actually invest in cryptocurrency anytime soon. Given the lack of a Your Future Your Super performance benchmark, and the dearth of long-term performance data (or at least, long-term performance data conducive to a decision to buy the stuff) it seems unlikely that big funds will jump on the crypto train. But Ahmad says it’s still early days, and the applications of the broader ecosystem of technologies are yet to be fully appreciated.
“As an asset class, we have to remind ourselves that Bitcoin’s white paper came out thirteen years ago. They just celebrated Bitcoin Pizza Day for the twelfth time the other day (ed: the first recorded transaction in which Bitcoin was used; 10,000 Bitcoin for a pizza, making this a contender for the worst trade of all time). It’s still very young. In terms of what we’re expecting, it still has to go through a multitude of cycles.”
“As far as super funds are concerned, I understand they have a mandate to keep an eye on the future, whilst ensuring that the types of assets they bring in to their portfolios and allow their members to access is also in their best interests… If we turn the conversation to tokenization, and what it has the ability to do in terms of bringing transparency and liquidity to otherwise opaque markets, that’s something that’s of more interest.”