Recent momentum in investor interest, market adoption and regulatory guidance has given rise to new digital currency opportunities for banks. Charles Gillanders, digital transformation, technology and blockchain lead at U.S. Bank Investment Services, answers six questions about institutional cryptocurrency investing to help you better understand your options in this space.
Retail investors can purchase and hold cryptocurrency directly with cryptocurrency exchanges and providers like Coinbase and NYDIG. Unfortunately, this creates a custody gap since most cryptocurrency custodians in that space aren’t set up to hold more traditional assets like securities or cash.
For institutional investors, current restrictions prohibit SEC-registered mutual funds and closed-end funds from investing directly in cryptocurrency. This means the only fund types that can invest in cryptocurrency are private unregistered funds targeting accredited investors and qualified purchasers. At U.S. Bank, we’re able to provide institutional-grade cryptocurrency custody services to those private funds.
Institutional investors looking to participate in the digital currency market want reliable safekeeping that meets regulatory requirements and conforms to regular business practices with their regular business partners. Before we launched our cryptocurrency custody offering at U.S. Bank, fund clients had to split their portfolio between multiple custodians. Now, an investment fund can hold their cryptocurrency in the same account as their traditional securities, cash and other assets.
There’s a wide range of views on cryptocurrency among our clients based on their goals and investment style.
To date we’ve seen a few specialty managers focused exclusively on investing in Bitcoin. But a larger percentage of the fund management community is observing and waiting to see how the SEC and other regulators both in the U.S. and overseas approach cryptocurrency before adding it to their investment strategies and portfolios.
As mentioned before, SEC-registered mutual funds and closed-end funds are still precluded from investing directly in cryptocurrency, which limits the fund types that can invest in cryptocurrency to private unregistered funds targeting accredited investors and qualified purchasers.
At this point in time, assets held by cryptocurrency custodians make up only a small fraction when compared to total assets under custody at major banks – but it’s a fast-growing segment. We definitely see our cryptocurrency offering expanding and evolving over the years to come, and I expect more banks to eventually follow our lead.
You really want a custodian with a solid reputation, a risk-based mindset and a long, established history. At U.S. Bank, we’ve been a custodian of client securities and cash for more than 150 years. And now, we’ve paired our experience at keeping client assets safe with the cryptocurrency expertise of NYDIG, our technology partner, to provide cryptocurrency custody services that clients can rely on with absolute confidence.
A key component of risk management is performing know-your-customer (KYC) and know-your-transaction (KYT) anti-money laundering (AML) protocols.
As with our traditional onboarding practices, when we onboard a digital currency client at U.S. Bank, we prioritize upfront KYC and establish provenance of funds by screening customers, leveraging block chain analytics and utilizing internal systems. We use our customer due diligence (CDD) information to develop a client baseline. From there, we perform enhanced due diligence (EDD) and use data analytics and blockchain analytics to monitor for unusual activities and escalate transactions that deviate from expectations and require extra scrutiny.
For cryptocurrency accounts, only our technology partner, NYDIG, has access to the private key. The public key is given to the client and pertinent operational teams within U.S. Bank.
Cryptocurrency will continue to gain traction, and the banking industry will continue to evolve to accommodate it. If you’re interested in adding digital assets to your portfolio, the right custodial partner can make the process smooth, streamlined and secure.
Charles Gillanders is a digital transformation, technology and blockchain lead at U.S. Bank Investment Services. He has more than 20 years of experience leading change programs to help firms develop new capabilities and deepen client relationships, which includes 10 years as co-founder and chief technology officer developing award-winning technology solutions at Quintillion. Quintillion was an independent fund administration firm acquired by U.S. Bank in 2013. Prior to Quintillion, Charles served as the business information officer at PFPC International, part of PNC Bank. Charles graduated with a Bachelor of Science degree in computing for business from the University of Northumbria in Newcastle, England.
U.S. Bank Global Fund Services is a wholly owned subsidiary of U.S. Bank, N. A. Custody and lending services are offered by U.S. Bank N.A. U.S. Bank does not guarantee products, services or performance of its affiliates and third-party providers.
U.S. Bank Global Fund Services (Ireland) Limited is registered in Ireland, Company Number 413707. Registered Office at 24 - 26 City Quay, Dublin 2, Ireland. Directors: Linda Gorman, Brett Meili (USA), Joe Neuberger (USA), Padraic O'Connor, Christine Waldron (USA). U.S. Bank Global Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland.
U.S. Bank Global Fund Services (Guernsey) Limited is licensed under the Protection of Investors Law (Bailiwick of Guernsey), 1987, as amended by the Guernsey Financial Services Commission to conduct controlled investment business in the Bailiwick of Guernsey.
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