Public Key Podcast

How US Crypto Regulations Impact Institutional Adoption of Digital Assets: Podcast Ep. 54

May 1, 2023 | by Chainalysis Team

Episode 54 of the Public Key podcast is here! USA crypto regulatory conversations are gearing up, and we get to speak to Sam ten Cate (Managing Director of State Street Digital, State Street) to discuss the existing regulatory landscape amidst a chaotic year in crypto.

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 54.

Public Key Episode 54 preview: Why institutional adoption of crypto in the US is a hit or miss

This April has had cryptocurrency industry stakeholders glued to their phones, watching the regulatory developments from the SEC and the proposed legislation around stablecoins. 

In this episode, Ian Andrews is joined by an avid reader of reports coming from USA regulatory authorities regarding crypto, Sam ten Cate (Managing Director of State Street Digital, State Street).

Sam discusses how major bank and crypto exchange failures have had an impact on the regulatory conversation in the US and explains key concepts related to institutional crypto adoption, like segregation of activity and tokenization. 

Sam explains how State Street started innovating in the crypto space and provides results from their recent survey to show the current state of institutional investor interest in the crypto market during a very chaotic and regulatory-heavy 2023.

Quote of the episode

“So if you don’t necessarily know who the counterparty is, that is a big issue for the federal regulators. If you’re not able to verify identity, that is a large issue for prudential regulators, and that goes along with things like customer protection and cybersecurity. So those are some of the things that they’re really concerned about in this particular [digital asset] space.” – Sam ten Cate (Managing Director of State Street Digital, State Street)

Minute-by-minute episode breakdown

  • (2:35) – How announcements from the OCC, FDIC, and Federal Reserve in the USA set the stage for a chaotic 2023 for the crypto industry 
  • (7:15) – Understanding how the crypto industry is connected to the demise of SVB, Signature Bank, and Credit Suisse 
  • (10:40) – Discussion on how to mitigate risk as a node operator when counterparties are unknown
  • (13:30) -How State Street has innovated from being the first to design the exchange-traded fund (ETF) to navigating the digital asset space
  • (15:45) – What is Segregation of Activity, and how could it have kept crypto exchanges from failure
  • (18:35) – Explanation of the FedNow service and what to expect from the launch in 2023
  • (21:10) – Tokenization of every asset?
  • (28:45) – What is the current state of institutional interest in the crypto market during the crypto winter
  • (30:25) – How will regulations impact the thriving stablecoin ecosystem and the future of digital identity 

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

  • Ian Andrews * Host * (Chief Marketing Officer, Chainalysis) 
  • Sam ten Cate (Managing Director of State Street Digital, State Street)

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Prefer to read the episode? Check out the transcript below:

Ian:

All right, back for another live from Links episode of Public Key. Today I am joined by Sam ten Cate from State Street. Sam, welcome to the podcast.

Sam:

Thank you for having me. It’s great to be here.

Ian:

It’s been a pretty wild couple weeks, couple months in banking, which is a statement I didn’t expect to be making this week, I’ll be honest with you. I think a lot of people think, oh, crypto is the fun end of financial services modernizing the boring state, traditional world of banking. But there’s been some wild stuff going on. Maybe we can start, if you can share some perspective, contextualize what’s going on in the industry right now for our listeners.

Sam:

Sure, absolutely. So from a banking perspective, what really kicked off the year was a January 3rd joint statement by the office of the comptroller of the currency, the Federal Deposit Insurance Company, and the Federal Reserve. So the three prudential regulators in the United States got together and issued a about three page statement in which they identified a number of risks that they see with the industry. A lot of it was expected and sort of emblematic of what we’ve seen over the last turbulent year or two. But there was one bullet in there in specific that was quite apropos for what’s happening now, and that was that they highlighted the risk that they believe banking institutions face when they interact with public, permissionless or otherwise decentralized networks. And they find that banks that are interacting with public permissionless or otherwise decentralized networks cannot do so in a safe and sound manner.

So there’s two parts to that. One is they’re singling out anything that’s public or permissionless or decentralized. And the second part to that is that there are hinging that claim on safety and soundness. And so for those of you who don’t know, the OCC, the Office of the Comptroller of the Currency, their prudential regulation, and they really focus on safety and soundness. And safety and soundness is a general term that includes the ability to have internal controls, to have the appropriate management, appropriate information systems, technology, and to be able to identify and manage risk. And so what they’re really saying is that at this time, they have not seen any bank be able to interact with digital assets that are based on public chains that they think should be allowed into the banking sector. So they’ve exclusively pushed some of the activity to the sidelines.

So that was the first indication that we got in the beginning of the year. Then on February 27th, or sorry, January 27th, the Federal Reserve released a policy statement updating Section 913 of the Federal Reserve Act. The Federal Reserve Act is the act that basically started the Federal Reserve. It was issued in 1913. So they updated a very old act, and they basically stated that any state member bank of the Federal Reserve should be held to the same standards as national banks, and national banks are held to the standard by the OCC. So they effectively brought in other entities that are state regulated, but have access to the Federal Reserve or a Fed Master account into the same expectations that national banks would have from the OCC. So you say, why is this matter? In the United States, most of the large banks that you would think of are either regulated by the OCC as a national bank, or are regulated as a state member bank as part of the Federal Reserve.

So they’ve really cut out, at least for the time being, any banking activity that’s not a state member only bank from engaging in public permissionless or decentralized finance. So it’s quite a significant statement from the regulators. It wasn’t necessarily unexpected. At the end of, sorry, the beginning of 2022, they released a statement, all three of the agencies together as part of the president’s executive orders that stated that they were taking some time to work together and to come with a more unified voice. And that was really a request from the industry, and they’ve provided that unified voice. So a lot of what you’ll hear at chain analysis is we need regulatory clarity, we need clarity. But the agencies, I think would say that they’ve provided that clarity that this time they don’t perceive it being able to interact in a safe and sound manner.

Ian:

Is there any sense of why they’re taking that position? Yep. Great. We got clarity. Great we got unified voice, I would guess for almost everyone in the cryptocurrency blockchain industry, probably not the answer they were looking for.

Sam:

Sure. Sure. So again, the devil’s here in the details, and so I would encourage everybody to go and read this joint statement. It’s, again, three pages. It’s written for the layman. Anybody can really understand it.

Ian:

Yeah.

Sam:

The last bullet on the first page is really where they go into detail about why they think that you can’t do it in a safe and sound manner. They mention things like an ability to have real legal certainty around rules and responsibilities and contractual obligations. So if you don’t necessarily know who the counterparty is, that is a big issue for the federal regulators. If you’re not able to verify identity, that is a large issue for prudential regulators. And that goes along with things like customer protection and cybersecurity. So those are some of the things that they’re really concerned about in this particular space.

Ian:

Yeah. Well, and those are all very legitimate concerns. I think everybody in crypto and outside is definitely thinking about those things. I’m curious, how do you connect, and maybe they’re not connected at all, the two things that you just talked about from the prudential regulatory side to then the collapse of Silicon Valley Bank, the closing of Silvergate, Credit Suisse ultimately failing and being sold off to UBS. Are those related or are these totally distinct incidents that happened within a few months of each other?

Sam:

Sure. So I think a lot of the information’s still unfolding. So I think I’ll carry out with, but we don’t know all of the facts yet.

Ian:

Fair.

Sam:

However, I think the general consensus is, at least in the industry right now, is that Silvergate was related to crypto volatility. Silicon Valley Bank was related to liquidity risk management and really had nothing to do, or had maybe less to do with the crypto market overall. And then Signature is a bit of a toss up, and I think there’s quite a bit of, we’ll see that play out on the public stage to see whether that was really related to crypto or whether that was a combination of different factors. So I think the bank failures are definitely something that has just shocked the industry.

Ian:

Yeah.

Sam:

I think if we tie it back to how Bitcoin began, it began in 2008, or the paper was published in 2008, and then the first block was done in 2009. That was really part of the banking crisis. And part of that genesis block said the chancellor on the brink of second bailout for banks, and that was really a commentary on the dangers or the risks associated with a fractional banking system. And that is what we have. We have fractional banking system. That’s how traditional finance works here in the United States and in most other places. So there is risk in banking. I don’t think anybody would claim that banking is riskless.

Ian:

Yeah.

Sam:

It’s about how you manage those risks and that’s what really brings around safety and soundness. So I think that if you were to speak to regulators, you would probably hear that Silicon Valley Bank was not operating in a safe and sound manner. There are multiple things that they would probably point to in terms of liquidity, risk management, oversight by a missing CRO and other things like that where those things would be for them safety and soundness issues.

So similar to crypto having safety and soundness issues, I think they would claim that traditional banking services have safety and soundness issues as well. And you can’t regulate away all risk. Things will happen and I think if you look at the history of US regulation, it usually takes something disaster or something to happen for them to stimulate new regulation. We got the SEC that was started in 1970 because of a market crash. And so the SEC is really focused around investor protection, ensuring healthy and efficient markets, and making sure that investors have the information they need to make sound investments. And that was really the result of lack of transparency and opaqueness in the markets and the crash back in the sixties.

Ian:

Yeah. Yeah. So we can expect maybe more developments in the coming months and years on the regulatory front as we start to ingest or consider what’s happened over the last year.

Sam:

Absolutely. I think we’re definitely expecting more regulation. I think from my personal perspective, I think that we have the right regulatory frameworks in place. It’s either reinterpreting some of the statutes that are underneath those or expanding some of the remits. And so I think we’re unlikely in the United States to see something completely new and different like you might find in Europe with MiCA regime, I think here we’re much more likely to see expansion of certain terms and definitions. So one example of that is that the OCC at the end of 2021 published three interpretive letters. So if you haven’t seen these and you’re in the crypto space, it’s 100% worth reading these. Again, they’re written for a lay audience. Anybody can read them. They’re five or 10 pages each. So the three papers that you should definitely read are 1170, Interpretive Letter 1170, which allows banks to engage in digital asset custody. So that’s one big core element of the crypto ecosystem.

The second one is 1172, which allows banks to hold stablecoin reserves. And then the third one is 1174, which allows for banks to run independent node validation networks for stablecoin arrangements. So those are the three letters where they haven’t actually changed the regulation. What they’ve done is they’ve provided a legal interpretation of how existing regulation allows banks or permits banks to enter in this type of activity. We call that permissibility. I will note, however, excuse me, that the OCC then published also 1179, and then the Fed followed with something very similar at the beginning of this year where they stated that permissibility or legal permissibility is not enough for a bank to engage in this activity. Safety and soundness is also a concern. So even though you might be legally allowed to do some activity, it doesn’t mean necessarily that you can just do so. Excuse me.

Ian:

So we will absolutely link to those papers in the show notes so people can go to the show notes and read those after the conversation here. So I think that though might create this situation where when people are asking for regulatory clarity, it’s like, oh, wait, you said these things are all allowed, great interpretation. And then you’re saying, well, but it may not be safe or sound to do. So therefore inadvisable.  But I can imagine a listener going, well, you just said legally permissible is the interpretation. And then-

Sam:

Certain activities are legally-

Ian:

Yeah, absolutely. Certain activities legally permissible. But then it seems like the latest documents that we started talking about at the top of the show reverse that opinion. So now we’re back in this gray area in the middle.

Sam:

Yeah. So let me give you a specific example that I think the industry needs to wrestle with and figure it out, and it falls under the bucket of safety and soundness. So financial crimes is a big topic for regulations, and of course that includes deterring money laundering, but also deterring or reporting sanctioned activity. So super important for national security purposes and whatnot. So I don’t think anybody would argue that that is not a concern. However, what is new in this space is that if you are running a node on the Ethereum network and you want to submit a transaction or you want to submit something, then you have to pay gas fees.

So when you’re paying gas fees, you pay to the network, and then the network randomly, or depending on who’s connected to the network, will pay that fee to the node validator. So you don’t actually know who the node validator is, where they’re domiciled, the entity behind that. And so you’re working with a unknown counterparty, and that counterparty could be in a sanctioned entity, it could be a money launderer. And so we have to figure out, as an industry, how do we either accept that risk or figure out how to eliminate or minimize that risk?

Ian:

Yeah.

Sam:

Because it is a serious risk, and it’s something that I don’t think the industry has fully fleshed out yet.

Ian:

Yeah. Yeah. There’s been a lot of complexity post the sanctioning of Tornado Cash about how node operators should accept or reject transactions that have-

Sam:

Absolutely.

Ian:

… funds related to that. So maybe bring it back to your current role a little bit. Talk to us about State Street. I imagine there’s a few listeners out there that are going, why is State Street on this crypto podcast? Maybe start with some background on overall State Street and then-

Sam:

Sure.

Ian:

… talk about the digital asset strategy.

Sam:

Sure. Absolutely. So State Street is a large custodian bank. We have about 36.7 trillion assets in custody and in our administration. So State Street’s sometimes not thought of as the sexy bank or the commercial or private banks that you might think about out there, but we play a large part in the financial infrastructure, not just in the United States, but in the world. So we hold a lot of assets for the world. And so when digital assets really became more and more popular, and we saw the promise of blockchain distributed ledger technology, of course, we wanted to make inroads into this space as well, because we want to be at the forefront. Many people might not know this, but State Street has a history of innovation. We were the first bank to design the exchange traded fund or the ETFs.

Ian:

I actually didn’t know that. That’s-

Sam:

Yeah. So we have a long history of innovation, but again, maybe in the background, and we only serve institutional investors, so we don’t have any retail or anything like that, but we are a large player in the market infrastructure. We’re also a globally systemic important financial institution, which is a designation from the Basel committee, which basically says that we are a critical infrastructure for the financial system in the world. And so we have a very key role, but that also comes with a lot of responsibility and a lot of very high regulatory expectations.

Ian:

Yeah.

Sam:

So that said, we are definitely committed to this space. We have State Street Digital, which is a subunit within State Street that is focused on the promise of digital technologies. We think of it in four or three different pillars. The first one being custody and payments, the second being tokenization, particularly tokenization of existing financial instruments. And then the third leg is fund administration and accounting. So those are the three areas that we focus on. The first one, custody and payments. That is where we are looking to come to market with some custody product, particularly around digital assets.

Ian:

I think this is an interesting one because in the crypto world, I think a couple motivations got conflated in a weird way where it was self-sovereignty coming out of the 08 financial crisis. We don’t trust banks, so I’m going to control all my financial assets personally, this is the, not your keys, not your crypto-

Sam:

Yeah, absolutely.

Ian:

… meme that we see running around the internet, but it turns out technically that’s super complex beyond the average user. So then we see the rise of crypto exchanges and those exchanges, rather than doing what happens in the traditional financial system where they use a third party custodian for their assets, like your business, they self custody. And it’s led into the quite a few instances of fraud but also cyber incidents and all these other control issues. But I don’t have a good sense of the industry has yet said, oh, third party custodian is actually the solution here, tried and tested. It’s worked in the banking system forever. In terms of your business, I’m guessing you see a big opportunity there to make that the de facto way the digital asset ecosystem is operating.

Sam:

Absolutely. Absolutely.

Ian:

Okay.

Sam:

I think what we’ve seen in some of the failures with exchanges is that we don’t have segregation of activity. And so the traditional financial system didn’t just magically come up with this. It’s been a progress over multiple years where your investment manager or your investment advisor has a certain amount of responsibility, but it’s much safer to segregate that responsibility from the safekeeping of assets. And so that is a requirement in traditional finance. And if you follow along with US regulation, the SEC has a proposed custody rule where that actually expands the definition of the assets that are required to be held by a independent qualified custodian. And so even though in the previous regulation it was mostly focused on securities, they’re broadening the definition of what would be required to be held by a third party custodian.

And although there’s some complications in that particular proposed rule, it’s like, I don’t know, 500 pages, the general concept of being able to have a qualified custodian hold your assets is something that we definitely believe in as being a third party custodian. I’ll also say that it’s not easy to protect assets, particularly around digital assets, you have a lot of different cybersecurity threats and other things like that that you want to make sure that you address.

And so having a entity that is solely focused on only safekeeping your assets, in my personal view, is something that the industry probably should embrace, because if you’re doing exchange services, you’re also doing custody services, you’re potentially also doing proprietary trading. That is a whole mix of different services that you probably want to segregate out. And that is in an effort to protect both investors as well as customers of different exchanges or digital assets, I think you want to. Personally if I had several thousands of dollars, I would be much more comfortable if I knew that it was with a custodian than if I had it on a thumb drive under my bed or thumb drive in my bedroom somewhere.

Ian:

That’s right. Or just on your phone in your pocket.

Sam:

Yeah. Absolutely.

Ian:

Yeah. I’m with you. You mentioned in this area of strategy payments. Talk a little bit about what you’re seeing in the payment space.

Sam:

So we’re not a payment bank, but we definitely want to be involved in evolution of this. So we are participant in Fnality, which is a payment startup that’s working with a number of different large banks and central banks to come up with a, you can think of it as a large bank consortium, not really a CBDC, but coming close to a CBDC.

Ian:

Okay.

Sam:

Yeah.

Ian:

And so this would be for intra bank transfers?

Sam:

Intra bank settlement and payments. Yeah.

Ian:

Okay. How does that relate to something like FedNow?

Sam:

Sure. So FedNow, I think is an exciting development. The FedNow, for those of you who don’t know, is an advancement of being able to access the Fed Master accounts that allows for more real time access to US dollar clearing. In the United States the FedNow has been expected for some time, but earlier this year was released that it was most likely go live towards the middle or end of this year. So I think a lot of everybody’s very excited about to see what FedNow can do. So the FedNow solves this problem of 365, or attempts to solve the 365, 7 days a week, 24 hour access to Fed US dollar clearing.

Ian:

Yep.

Sam:

So that tries to solve that problem. So this, I’m not super in depth of all of the details of Fnality, but this tries to provide some sort of payment rail between the different large banks to allow for similar types of clearing between entities.

Ian:

So it’s complimentary, but bank to bank rather than bank to Fed is probably?

Sam:

Yes.

Ian:

Okay.

Sam:

Yeah.

Ian:

Interesting.

Sam:

And they’re working, I think the Fnality is now working with the Bank of England to look at the pound as one of the first use cases. So I think that’s where the developments are with Fnality.

Ian:

Okay. Yeah. So you get some foreign exchange activity happening-

Sam:

Yeah, or not using a US dollar as the underlying asset, but the pound.

Ian:

Okay.

Sam:

Yeah. As a first proof of concept.

Ian:

Interesting. Okay. So you mentioned the second big area of the strategy relates to tokenization, which I feel like I was in Switzerland for Davos, and it felt like-

Sam:

Nice.

Ian:

… at least half of the crypto conversation, maybe even more than half, was all about real world asset tokenization. And the drumbeat of that conversation is, feels to me like it just keeps going up over the last three months since that event. So how are you looking at that opportunity? What’s interesting in that market to you? What are you guys doing around tokenization?

Sam:

Sure. So I think most banks have been focused on tokenization for some time, and it really speaks to the promise of distributed ledger technology and blockchain. I think that the most large banks, while they were pursuing both different maybe proof of concepts with public permissionless or otherwise decentralized entities and networks, as well as doing tokenization on private permission blockchains, now have shifted some of their focus potentially to focus more exclusively on tokenization, given some of the regulatory scrutiny in the United States around public permissionless networks.

So having said that, in tokenization, I think we think there’s a lot of promise in the technology, but we still have to figure out how to really apply it in the right use cases. So even though tokenization and DLT is a fantastic innovation, it’s not appropriate for all asset classes, it’s not appropriate for all kinds of processes that we want to do. However, we think there’s great promise in terms of facilitating realtime settlements or near realtime settlements, or T+1, T+0 is some of the things that you might hear in this space, as well as making more asset, some assets that are somewhat illiquid, more liquid so that they have broader appeal to a broader market.

Ian:

So I’ve been trying to think about this space a little bit, and I’m far from an expert here. So when someone says, oh, I want to tokenize a bond, I’m like, okay, well, that’s largely an electronic instrument at this point. I guess you could get a piece of paper that represents a corporate bond or a government bond, but nobody really holds those pieces of paper. They’re effectively digital today.

Sam:

Yep.

Ian:

And so what we’re saying is, okay, now we’re going to create an even more digital native representation of that, and we’re going to solve some of the settlement custody clearing complexity that exists because of the backend infrastructure systems between all the entities who are buying and selling these things.

Sam:

Yeah.

Ian:

Is that roughly…

Sam:

That’s roughly it. So when you have bond, somebody’s actually holding that, in some cases, State Street might be holding that and backend you as the end holder of that bond, depending on who you’re buying it from, may not know about all of the different procedural steps that go into that in the background. So maybe a bond, but let’s take a security for instance. So you buying Apple stock?

Ian:

Yep.

Sam:

So even though you might see on your app or your cell phone, okay, I bought an Apple stock, and then it provides there, there are multiple transactions that are occurring in the background. And for securities usually cleared through a central securities depository where they are the ones that are registering who owns what of the securities. And so somebody’s actually holding a digital representation of a certificated security. In some cases there may be no certificate, but then that ownership is recorded through a transfer agent. And so somewhere there has to be a record of who owns what.

Ian:

Yeah.

Sam:

So I think-

Ian:

In the US is that DTCC, is-

Sam:

Yes. Yep.

Ian:

… is the primary entity that does that.

Sam:

Does the securities clearing.

Ian:

Yeah.

Sam:

Yeah. So when we talk about tokenization, what’s likely, I think in my personal view to happen is that some of the securities are still held by the traditional institutions, but we create a tokenized version of that security, and that token can then be moved around more freely, and then if the entity wants to redeem that token, then all of the backend processes that we have in traditional finance get executed in terms of ultimate ownership. So that’s one aspect of tokenization. And then you also have on-chain or native on-chain tokenization where the actual share or the actual share class is actually issued natively on the blockchain rather than associated with something that is still represented in the traditional system. But as you say, it’s not a necessarily piece of paper, but it is a ledger entry in a centralized database that would represent traditional financial means of record ownership, recording ownership.

Ian:

So that all makes sense to me, and I think the primary value proposition is an improvement of the processing steps that most people don’t see. If you’re in banking, you understand all these things, but if you’re-

Sam:

Yeah, or even if you’re in banking, it’s still complicated and difficult to understand, but yes. Yeah.

Ian:

Yeah. But for the average person who’s buying a share of stock via their online brokerage, nothing really changes in this tokenization context in terms of their experience. The share shows up in their brokerage account.

Sam:

So one of the things that you might notice in the media, maybe five year term period, is accelerated settlement. So that’s something that I think a lot of banks are looking at. So now, typically, if you purchase a stock, for instance, it’s about two days. So it’s about, it’s usually can be a little faster. I’m pretty sure the industry’s a T+2, but it could be T+3 and transitioning to T+2. But that basically allows two days for all of these processes to occur.

So if you’re buying a stock on an app or something like that, it usually takes two days for that stock to actually be in possession of the bank that is showing you that you have that stock. And that’s why sometimes you have to wait to cash out if you sell the stock, because the actual ownership has to go and pre-process, and then they’ll actually provide you that. Now, in some cases, banks might provide that in advance because they know or they’re confident that the clearing will occur on the backend, but I think you’ll see some of the faster settlement cycles, and that’s one of the big promises of the blockchain technology.

Ian:

That’s a great point. Where I was going with the question though was when we think about, you mentioned less liquid assets, and I’ve seen a lot of people talking about, oh, we’re going to tokenize real estate, and we actually, there’s a company called Dibs who is working on digital representation of real world things. They’ll store your artifact, piece of art, fancy pair of shoes in a vault. They’ll give you a digital representation of that as an NFT that exists on a blockchain. And if at some point you want the real object, you can burn your token and they’ll ship you the real object.

Sam:

Sure.

Ian:

I’m wondering your perspective on the less liquid end of the spectrum, is that useful? Is it necessary? What’s the drive in that area, in your opinion?

Sam:

Yeah. So I think the concept of taking a less liquid [inaudible 00:30:10] and making it more liquid provides for broader access, better distribution, and so more people can participate. So I’m not necessarily as familiar with real estate or potentially expensive art, but in the banking sector, and something that we’re looking into is the tokenization of private funds or hedge funds. So those are not necessarily as liquid as potentially a stock or something like that, where there’s usually a higher barrier to entry, and you don’t typically have thousands of investors in a private fund. You might have maybe several hundreds, or even in the teens depending on the type of funds.

So in the alternative investment space or in private funds, again, those funds are really ripe for some disruption in terms of providing more access to a broader set of communities. If you and I wanted to invest in a private fund, it would be more challenging. And there might be minimums, for instance, it might be a minimum of $10,000 or a $100,000. And so being able to tokenize that and making the barrier to entry much smaller and taking away some of that administrative costs might allow for more individuals like you and me or smaller institutional investors to get into a private fund.

Ian:

Yeah. In some ways, that sounds a little bit like what’s happened with ETFs where suddenly-

Sam:

Absolutely. Yeah, yeah.

Ian:

… I don’t have-

Sam:

ETFs made it way more accessible for a broader audience. Yeah, absolutely.

Ian:

Interesting. Okay. I hadn’t thought about it like that. That’s fascinating. There was a third part of the strategy, and now I’m blanking on the-

Sam:

Sure. Fund administration and accounting.

Ian:

Yeah, yeah. Talk to us about what you’re doing there.

Sam:

Sure. So we have a live product. That’s where we provide fund administration accounting for institutional investors that are invested in the digital asset space. We have a partnership with LUCA that is providing information and data around that as well, that’s a public partnership that you can look into. So fund administration accounting is, again, maybe not the sexiest thing in the space, but as a requirement, you need to be able to produce what we call a NAV or net asset value determination. And you need to be able to price your overall portfolio. So there are a number of services that we do related to that particular product line.

Ian:

Yeah. How much demand are you seeing from asset managers in the space? I’ve heard conflicting reports depending on who I’ve talked to where on one hand it’s like every asset manager in the country wants to be able to add crypto as a asset that is available to buy and sell for their clients. To the other end of, oh, demand’s dropped way off, as we’ve seen prices come down over the last 12 months. Any perspective there?

Sam:

Sure. So State Street did a survey that we actually, we published. So we encourage people to check that out.

Ian:

Yeah. We’ll link to it.

Sam:

Yeah. And we also do a State Street Digital Digest where we talk about certain things like this. We can provide you that link as well. But I think what we found when we looked, when we asked our customers and our clients, are you still interested in this space, or are you still… I think overwhelmingly the answer is yes, institutional asset owners, asset managers are still quite interested in this space. They’re a little bit more cautious now than they were 16 months ago. And of course that makes a lot of sense given all the volatility and some of the bad actors that have fallen out from this space. And again, similar to our focus, and we like to try and follow our clients and try to service their needs, the focus has shifted somewhat from public cryptos to some of the potential that might be realized by tokenization of financial instruments. Having said that, there still is quite a bit of demand, at least we believe in public cryptos as well.

Ian:

That’s great.

Sam:

And services that we would offer such as custody.

Ian:

Yeah. You touched on stablecoins earlier in the conversation a little bit, and I think one of the big topics over the last year and a half has been, where do the reserves backing these dollar denominated or hard currency denominated assets actually sit? Are you guys doing any work in, are you doing custody for any of the stablecoins that are out there at this point?

Sam:

So I can’t speak to any of that in particular, but I would say that stablecoin is something that is, again, like market infrastructure. I think if we look at the United States, the most likely legislation that would get passed if we see some action from Congress is likely to be around stablecoins. So the House committee on financial services, there’s a subcommittee. They do hearings I think every week or every other week. And so those are really interesting to listen to and to see where they’re tracking and their focus, at least in the short term, at least the chair, Republican McHenry, I think is his name, has stated that stablecoin legislation is where they’re headed. So I think that’ll be something interesting to watch in the short term.

Ian:

Do you think that that lines up with what the MiCA regulation in Europe did around stablecoins, or do you think there’s more to it if it comes to pass?

Sam:

I’m not sure.

Ian:

Okay.

Sam:

Yeah, we’ll have to see. I’m sure that they will look at MiCA since it’s been out there. We have to note that MiCA has not been fully implemented yet. So there might be still changes that come or maybe we’ll see adaptions to MiCA. But I’m sure that the US federal regulators will, or sorry, Congress will look at that as an example and then try to adapt it to what else they can do. I think what you’ll also find on stablecoins is encouraging them. I’m all about primary sources. People can go and read it for themselves. If you haven’t heard of the Bank of International Settlements, BIS, that is a global standard body that works with, so the central bank of central banks that works with all of the central banks from different jurisdictions. They’ve also put out a number of guidance around stablecoins. And it’s important to look at these types of standard setting bodies because it influences how all of these other jurisdictions interpret the high level standards that they need to consider in developing stablecoins or stablecoin regulation.

So the BIS actually just released another report, I think earlier last week around stablecoins. It’s on my own personal to-do reading list. So I haven’t read all of it yet. But again, it shows a real focus on stablecoins and there is clear guidance about things that nation states should be expected to follow should they implement stablecoin regulations.

Ian:

Yeah. Maybe as we wrap up the conversation, when you look out into the future, and I know predicting the future in this digital asset space is super hard, but what are you excited about? What are you hoping to see happen this year, next year?

Sam:

Sure. Absolutely. So I think something the industry’s not really talking about as much is digital identity. I think digital identity, if we as an industry can progress that will solve a number of some of the issues that are now associated with public permissionless or otherwise decentralized entities and allowing, fixing this public private key synonymous issue in terms of having a identity that’s on chain that allows you to understand who the counterparty is, who you’re doing business with, and I think it’ll resolve some of the issues that we currently see around financial crimes and other things associated with doing business on a public chain.

Ian:

Yeah, great point. Excellent place to wrap up. Sam, thanks for joining us.

Sam:

Sure. Absolutely. Nice. Thank you for having me.

Ian:

Yeah.

 

 

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