Digital Custody Faces a Long Regulatory Road

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Digital custodians want to be regulated like the global custodians, but they are in for a significant wait, according to panelists who spoke at the DAS: Markets conference in Manhattan and hosted by BlockWorks Group.

“We want regulation,” said Pete Najarian, chief revenue officer at BitGo. “We want to be regulated. Please, SEC, CFTC, or whoever is the appropriate regulator in the US, lead this and don’t allow some other jurisdiction to lead this.”

“I would like regulation and to have rules in place,” added Dmitry Tokarev, CEO of London-headquartered digital-trading platform operator Copper. “I would like to give the same level of protection that banks do.”

The consensus amongst the digital custody startups was that technological maturity is the prime obstacle for enacting greater regulation regarding custody.

“The SEC understands inherently that being able to safeguard digital assets is fundamentally a technology problem, and they are looking at this from a technology perspective,” said Nathan McCauley, co-founder and CEO of digital custodian Anchorage. “In many ways, technological innovations will be necessary for this to be a regulated industry.”

However, representatives of global custodians BNY Mellon and State Street on the panel held the opposite perspective.

Many financial assets already exist as a series of ones and zeroes due to dematerialization, noted Frank Fehrenbach, senior principal, digital partnerships at BNY Mellon. “They are already moving digitally.”

Technological maturity plays a part in the slow place of regulation but not the only part, he added citing the Federal Reserve’s resiliency requirements, such as keeping a bank’s backup and recovery sites a minimum of 80 miles from its primary data center.

“When you want to open a bank account, it is not like onboarding at Facebook,” said Fehrenbach. “When you want to be onboarded at a bank, there is a lot of due diligence that goes on behind the scenes like credit checks, anti-money laundering, and know-your-customer.”

BitGo’s Najarian took a quick exception to Fehrenbach’s implied characterization of the state of digital custodians.

“We put a ton of effort into AML and KYC,” he said. “Why? Because we are personally liable, unlike a big bank. I’ve spent 20 years in traditional finance, and I know the difference. We take a ton of time and energy and put it into that.”

Jay Biancamano, managing director, digital product dev & innovation at State Street, ended the panel discussion doubting that a single digital asset, such as cryptocurrency, would change or move the market.

“The cult following of digital assets right now will not change this market,” he said. “When issuers start to issue quality digital assets, you will start to see it move.”