Is Crypto the Cleaner Money? Making the Case for Blockchain Custody

Julian Sawyer points out that it is possible to accidentally throw away a fortune in Bitcoin if you mistakenly dump USB sticks into the rubbish bin. It has happened before, he says.

He also asks what the cleaner money is: The cash in your pocket, which criminals may have laundered yesterday, or the cryptocurrency on a blockchain?

Sawyer gives these examples as he puts the case for blockchain-based custody services, the safekeeping of assets to minimize the risk of theft or loss.

In this case, Sawyer is not talking about traditional money as we know it but the custody of digital assets as chief executive of Zodia Custody.

“Custody is the foundation and bedrock of safety and trust,” he says. “If you get custody right and your assets are safe, everyone is happy. Isn’t that critical?”

‘Institutional Grade’

Zodia Custody’s story began in a Singapore startup incubator as part of the Standard Chartered Bank.

The company has moved its headquarters to London. While Stanchart is still the major shareholder, other equity holders, including Northern Trust, one of the world’s major providers of custody services, and Japan’s SBI Group, have come on board.

Now in its commercial rollout phase, Sawyer says Zodia Custody is “institutional-grade” custody services built on a blockchain to ensure the safety and provenance of a range of crypto assets.

“Everyone is waiting for a product that is the right fit for launch because this is almost the final piece in helping crypto go mainstream.”

Blockchain custody also enables the automation of tax processing and settlement procedures, and the single source of truth it delivers means all parties are acting on the most accurate data.

These features, says Sawyer, should be major catalysts for taking cryptocurrency and tokenization out of the periphery of the global financial industry and into the mainstream.

Now that it has left the startup incubator and has several stakeholders, Zodia Custody’s pitch to banks is not that of a StanChart subsidiary but as a standalone business that has built infrastructure available to the entire global banking industry.

“I’d say that almost every financial institution has a project looking at crypto custody,” said Sawyer.

“Some of these will never go live and are just research and development with a couple of IT guys in a basement. But everyone is waiting for a product that is the right fit for launch because this is almost the final piece in helping crypto go mainstream.”

Turning point

Sawyer points to the introduction of crypto Exchange-Traded Funds (ETFs) in the U.S. early this year as a turning point, with Hong Kong and Australia following more recently.

Regulation was also critical, and Zodia Custody is committed to working only in markets with strong regulatory frameworks.

“We should actually have had this sooner to be able to provide protection for consumers and companies, but I guess what is important now is that we are getting those conversations between regulators and the industry,” said Sawyer.

“What is interesting are the discussions about consistency of applications and controls, and common standards worldwide will be very important.”

Sawyer says that while many people have an image of crypto currency as something for scammers and fraudsters in the grey and black economies, the blockchain makes crypto more transparent because the provenance of ownership is built into the technology.

“I think many of those bad headlines around crypto are clickbait,” he said. “We check every transaction that comes into our platform. This is the law, and the person who sent it and owns it is identified from an AML and KYC perspective.

Tokenization taking off

Beyond custody for crypto currencies, Sawyer sees huge potential in the growth of tokenization in the funds management industry, where the rights to an asset or a pool of assets are converted to a digital token on distributed ledger technology.

Global funds network Calastone, for example, believes that around USD16 trillion of assets currently held by fund managers will be tokenized by 2030, equivalent to around 10% of global GDP.

Calastone recently surveyed fund managers and the majority indicated that tokenized funds are expected to become a significant part of active fund offerings in the next six to seven years.

Specifically, 44% of respondents anticipate launching tokenized funds as their primary new active fund vehicles in this time frame, compared to 29% for ETFs and 27% for mutual funds.

This trend highlights the growing dominance of tokenized funds over traditional mutual funds and ETFs. It is based on the improved transparency, efficiency and security offered by the blockchain.

Sawyer’s point is that appropriate custody services are essential for the tokenization market to take off.

“The other point is that our technology works the same whether that is for money, market funds, crypto of a piece of artwork,” he said.

“I actually think that when the secret revolution happens, we’ll all wake up and realize that it happened because of the blockchain as the underlying technology. I think that is kind of cool.”

Image credit: iStockphoto/Bet_Noire