Key Takeaways

• Citigroup is exploring adding crypto custody services, joining other major banks.
• State Street, BNY Mellon, and others are expanding into digital asset custody.

Citigroup is exploring the addition of crypto custody services to its offerings, according to people familiar with the matter cited by The Information.

The bank’s interest in crypto custody follows its February 14, 2024 announcement of a successful proof of concept project that demonstrated the ability to issue and custody tokenized versions of private equity funds on a blockchain network.

“Coinbase is in talks with banks to offer custody and trading services as a partner. But many banks will still need further regulatory approval, such as from the Fed and NY DFS,” said The Information reporter Yueqi Yang.

Citigroup, which holds approximately $2.4 trillion in total assets as of 2024, joins several major financial institutions expanding into digital asset custody.

BNY Mellon has received regulatory approval for digital asset custody beyond Bitcoin and Ethereum ETFs, while Standard Chartered launched a digital asset custody facility in Dubai.

HSBC has announced plans for an institutional-grade custody service, and Crédit Agricole and Banco Santander’s joint venture secured crypto custody approval in France.

State Street, which manages $44.3 trillion in assets under custody or administration, announced a partnership with Taurus to launch crypto custody and tokenization services for institutional investors in August.

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Yesterday Korea’s Financial Services Commission announced a roadmap to broaden access to cryptocurrencies for corporates, which have not been allowed to trade since 2017. During the first half of this year, non profits, universities, law enforcement agencies and crypto exchanges will be allowed to convert ‘virtual currency’ to cash. This is mainly amounts received as donations, or fees in the case of exchanges. In the second half, 3,500 listed corporates and registered corporations classified as qualified professional investors will be allowed to transact with cryptocurrencies.

However, the FSC is still concerned about contagion, which is why it won’t allow access to financial institutions. Instead, for financial companies it wants to focus on planned legislation for security token offerings.

Regarding the corporates, to qualify for access they must have at least KRW 5 billion ($3.5m) in existing financial investments if they are externally audited, otherwise they must have KRW 10 billion ($7m). Notably, the FSC compared this to Hong Kong, which requires corporates to have HKD 8 million in financial investments and a total assets of over HKD 40 million. Allowing access to other non-financial companies is considered a mid to long term objective.

The regulator cited keeping up with other jurisdictions as one of the reasons for relaxing rules. Its 2017 ban was partly driven by concerns around consumer protection and overheating the market. Some of those issues have been addressed by consumer focused legislation that came into force last year.

As part of its work, the FSC elaborated on approaches in other jurisdictions:

New task force for corporate crypto

Banks and crypto exchanges will vet which corporates can have access. Hence, the FSC is setting up a task force consisting of the Financial Supervisory Service (FSS), Korea Federation of Banks (KFB), and Digital Asset Exchange Alliance (DAXA) to establish standards and guidelines. The FSC also suggested that professional investors should use third party custodians and have access to better disclosures.

Security token legislation

The FSC confirmed that legislation is in progress to classify tokenized securities as electronic securities. It will also establish requirements for issuer “account managers” that want to issue tokens directly without using a securities firm as an intermediary. This may be similar to German registrars or Luxembourg’s control agents, but it remains to be seen.

Meanwhile, the crypto exchange market in Korea is very concentrated, with Upbit taking a market share of 70%-80% and Bithumb the only serious competitor. Together they control around 97% of the market. Yonhap news explored whether the situation might change, without coming to a definitive conclusion. However, there’s apparently quite a bit of juggling related to bank partners, in preparation for corporate onboarding.

Yonhap reported that Bithumb is planning to change its KRW onboarding and offboarding bank to Kookmin Bank and Upbit may move to Hana Bank. Until now Upbit has used KBank for onboarding, and made up a massive proportion of KBank’s business.

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The headline is our summary of a longer question about stablecoins raised by Agustín Carstens, the General Manager of the Bank for International Settlements (BIS) during a BIS conference in Mexico last week.

Following a panel entitled, “Is there a role for cryptocurrencies?”, Mr Carstens posed the question to Berkeley academic Christine Parlour:

“Do you think that a lot of the traction that crypto is gathering has to do with the fact that traditional finance and traditional money has not evolved at the speed of technology and responded to what people need?

 

So let me put (it) one way. If we had, for example, a wholesale central bank money or reserve currency, technologically advanced, do you think that could make up for the demand for stablecoins.

 

For example stablecoins – one of the reasons why I don’t like (them) is that when you talk about money, if you need to put as a previous adjective “stable”, that tells you there is something wrong or there is some vulnerability there. Now stablecoins are backed by US Treasuries or by cash, which at the end of the day is the ‘real thing’. So, shouldn’t we concentrate more on making the ‘real thing’ to be able to be represented technologically in such a way that the space that stablecoins or crypto is filling would be filled in a more solid way?”

CBDC and a matter of trust?

Ms Parlour responded:

“It all comes down to trust. So if you have a world where everyone trusts Tether and everyone uses Tether to make payments, it’s very difficult to see why anyone would switch at this point to something that is issued by one central bank. If it is in fact the case that these stablecoins are used internationally then why should I care about central bank A when I’m in jurisdiction B.

 

Why not just take this large international company that seems to be multinational and doesn’t seem to have sort of strange biases. So I think at this point it’s very very difficult or it will be difficult for central banks to come up – with some dramatic exceptions – central banks to come up with a widely adopted stablecoin that basically could overtake things like Tether.”

Her reference to CBDC “exceptions” included a literal nod to moderator John Rolle, who is Governor of the Bank of Bahamas, which has issued a retail CBDC.

Retail v wholesale CBDC …

Mr Carstens wasn’t referring to retail CBDC. He was talking about wholesale CBDC to be used between banks to empower cross border tokenized deposit payments. The BIS currently is running Project Agorá with seven central banks and 41 institutions.

We’d observe that switching is only an issue if stablecoins are already pervasive in the mainstream.

So far stablecoin transactions are mainly used in crypto. PayPal’s Jose Fernandez da Ponte was asked during a Congressional hearing this week about the proportion of remittances that use stablecoin payments. He responded that it would be a low single digit percentage.

The other use case with some traction is people in economies with weak currencies, which also tend to overlap with regions where cross border transaction costs are high. P2P payments are more likely to be real world, so the graphic below shows the regions where P2P payments are more prevalent. There’s a fuller discussion in a recent report on bank stablecoins and tokenized deposits.

Hence, while stablecoins are making headway in cross border payments, they are not pervasive. Yet.

Three reasons for the lack of traction have been usability, a lack of infrastructure and integration, and regulation. All three are falling away, which is why there’s so much excitement in the space at the moment. On the infrastructure front, Stripe’s acquisition of Bridge is a strong signal, but there are many others.

Can banks save their turf?

That’s not to say that one or more wholesale CBDC solutions will be the foil to stablecoins. How likely are banks to tackle the payment corridors in the above graphic at an early stage?

But the biggest challenge is the lack of urgency in banks because of an under appreciation of the threat. That’s illustrated in this 2023 Citi survey, where only around a quarter of institutions thought they might lose more than a 20% market share during the next five to ten years.

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