COPE UP OR PACK UP: Traditional Financial Institutions Scamper To Become Digital Currency-Enabled Custodians

Countries worldwide, in a bid to be ahead of the digital financial game, are coming up with their own government policies and regulations in “taming the wild horses” that are majorly disrupting incumbent exchanges. Traditional financial institutions are left to decide while FinTechs are already miles away.

China.

In an unprecedented move, the government of a major economic player worldwide has just officially launched its own cryptocurrency. China, speaking through its deputy Minister of Finance, Liu Kun, announced that sales of their new state coin start this June 14, 2020. Prior to this, China had banned all Chinese Bitcoin exchanges obliging them to cease and desist from crypto trading, while Initial Coin Offerings or ICOs were declared illegal. The ban of over-the-counter or OTC Bitcoin trading was also tightened as the clampdown on all cryptocurrency trading and foreign exchanges have been in effect since September of 2017. The official launch of china’s own coin can mean crypto laws in the country will change anytime soon.

Liechtenstein.

Located southwest of Central Europe is Liechtenstein, once known as a billionaire tax haven. In terms of economics, it has one of the highest GDP per person in the world when adjusted for purchasing power parity. January 2020 has seen the Liechtenstein Blockchain Act coming into force allowing companies and entrepreneurs the straightforward tokenization of almost everything from any right to any asset of any kind without anymore the need for complex legal workarounds and distant interpretations of decade-old paragraphs. This will significantly reduce the amount of time and money needed to process any tokenization upon which the inevitable token economy will emerge. Liechtenstein has gracefully acknowledged that the time has come for its transformation from the physical world it has come to know, to the digital world it is now embracing.

Germany.

The German government’s blockchain strategy of 2019 is regarding the tokenization of assets, particularly securities as one of the central future blockchain applications. Talks and discussions are in the rounds in the legislation for digital securities, starting off with the issuance of digital bonds to the implementation of digital shares. It is clearly pointing out its direction towards dematerializing certification of securities and in its stead will be the requirement for a digital currency custodian for technical and regulatory reasons. In other words, digital currency ‘crypto’ custody will become a financial service in the meaning of the German Banking Act (Kreditwesengesetz, KWG) and regulator BaFin.

Switzerland.

FINMA, the local supervisory authority in Switzerland is aggressively expanding its regulatory framework for FinTechs. As of August 2019, there were two banks namely, Sygnum and SEBA Bank, who were focused on blockchain technology receiving corresponding bank and security licenses to operate cryptocurrencies and tokens to institutional and other professional investors.

The Ability to be Enabled.

Given the examples of some financial institutions regulated by governments to be custody-enabled in the name of crypto and digital assets, it is becoming imperative for others to transform into efficient digital systems to avoid bearing the brunt of processing bottlenecks, accounting imbalances, and reconciliation nightmares, that strategic indecisiveness can bring to the table. The rising FinTech power to niche and upgrade certain institutionalized financial services into positive customer experience are now seeking out fintech relationships. The digital disruption Fintechs are causing the past 30 years have made significant turnarounds for customers to seek them out for wealth and financial management that is challenging loyalty customer foundations of major financial institutions. It can become increasingly difficult to do traditional business transactions for the traditional investors, traders, and brokers and, what more, for the digitally-focused miners, traders, and investors. The more affluent clients can be digitally demanding as to the innovations firms are in. AIs, APIs, quantum computing, blockchain, DLTs, the Internet of Things, and other robotics can produce a culture shock to many who are in denial and may be behind forever, and that can prove to be too costly to fix.

Ever Ancient, Ever New.

The terms of the old world when it comes to the custody of assets are that they are stored physically and issued with certifications of securities as it is being stored safely by a regulated custodian. Now, as in the 5th EU Anti-Money Laundering Directive of 2019, “digital currency/ crypto” custody is defined as the custody, safekeeping, and administering of crypto assets or private cryptographic keys that serve to hold, store, and transfer crypto assets for others. The result of the Liechtenstein Blockchain Act made it clear that any physical object with its associated rights and obligations can be fully transformed into a corresponding digital asset.

Digital Assets: Samples.

Digital assets fall into a category that has no physical presence, but they can be owned and with a store of value.

1. Knowledge.

Documents, books, records, media, and websites are knowledge assets recorded in format.

2. Software.

Software in code or deployed form of services.

3. Data.

Information assets in databases and unstructured formats.

4. Design.

Design assets include visual designs and architectural plans.

5. Patents and Trade Secrets.

Details of inventions documented in digital forms.

6. Art.

Visual works of artistic value such as photography and digitized paintings.

7. Music.

Digital music.

8. Entertainment and Media.

Entertainment such as movies and other media such as news or educational content.

9. Addresses.

Electronic addresses such as domain names.

10. Virtual Property.

Locations, items, and characters in virtual worlds.

11. Digital Currency.

Digital currency such as cryptocurrencies.

Neither Hot Nor Cold.

For purposes of classic definition, hot storage such as crypto exchanges stores crypto assets or private keys such as which are connected to the internet. Investors and holders can have immediate access to their assets. Its downside, however, is that it is prone to hacker attacks. Cold storage, meanwhile, store crypto assets or private keys on an exchange or platform that is not connected to the internet. It tends to be more secure as it is impossible to hack and therefore, is secure. It has its own disadvantages, though, due to its inaccessibility. It can take several hours to days for the investor to gain access to his stored assets and cannot be a solution to investors and traders who are reactive to daily market fluctuations and real-time opportunities. Evolving technology innovations produced the so-called warm storage, which stands in the middle of hot and cold storage, and having the ability to benefit from the digitality of the assets by making it readily accessible and available in few second's time with full liquidity to actively participate in market tussles.

Non-Custodian and Custodian.

A Non-Custodian can simply provide its client the hardware or the software to secure private keys. The client then is solely responsible for the management of the private keys. A Custodian, on the other hand, provides the keys by its own responsibility providing safekeeping and security to mitigate risks of theft or loss.

The Wallex Custody in Conclusion.

Wallex Custody is a FinTech company qualified to hold and safekeep physical, tokenized securities, digital currency (crypto), ERC-backed tokens, and digital assets across borders for the benefit of clients and customers in their name according to the company’s own infrastructure. Wallex is regularly audited and overseen by third parties to make sure that people’s assets are protected. Furthermore, Wallex is not only concerned with speed but also concerned about security.

FinTech companies such as Wallex have gone ahead of the pack in a blockchained-empowered territory and still are evolving together with the latest technological innovations that would put clients and customers abreast of market movements on a local and global spectrum. To its credit, traditional financial institutions have recognized the influence Fintechs can have on its clientele base and are taking serious steps in coping up with the inevitable without let-up. Or pack up altogether.