Zodia Custody said the growth of tokenization presents enormous opportunities as State Street and Ripple are also expanding  digital asset custody services.

Ripple Custody said in a statement that custody is a key entry point into the digital asset economy, and is growing. The statement said: “The amount of crypto assets custodied is expected to reach at least $16 trillion by 2030, and moreover, 10% of the world’s GDP is expected to be tokenized by 2030. As such, companies need secure, compliant and flexible options to store their crypto.”

In a report, The Future of Custody in a Tokenised World, Zodia Custody said market growth for tokenized assets is projected to substantially outgrow the crypto market. Therefore, custody is also required for a range of tokenized assets such as non-fungible tokens (NFTs) or tokenized securities, such as shares in tokenized money market funds. Custodians will also need to facilitate the new ways in which these tokenized assets are being used  – for staking, restaking, lending, or borrowing.

Thomas Restout, Group chief executive of B2C2, which provides institutional liquidity for digital assets, said in the report that two market segments are evolving – crypto natives with high technical capabilities and traditional finance players who already hold assets but are not familiar with digital asset custody and the mechanisms required to safeguard assets.

Zodia Custody is backed by Standard Chartered Bank, SBI Group Northern Trust and National Australia Bank.The digital asset custodian is headquartered in London and registered with regulators in the UK, Europe and Hong Kong.

Barbara Schlyter, head of Xtrackers digital products and partnerships at Deutsche Bank’s asset management arm DWS, said in the report that role of the custodian is even more critical as traditional asset managers transition into digital assets given that, for cryptocurrencies in particular, there is a risk of irrevocable private key loss. Schlyter said there is no backup and if you cannot recover the private keys, you will lose access to the asset.

Deborah Algeo, head of enterprise of Zodia Custody, told Markets Media that she joined in July this year after working with the custodian in a previous role as director of innovation at National Australia Bank in the digital assets program.

“The way that Zodia Custody governed their technology and their team was very much like traditional finance,” Algeo said. “They were able to lend their subject matter expertise and skill set to help us through that journey and that was incredibly valuable.”

Algeo’s role at Zodia Custody is global, with Asia being a focus area, and involves ensuring that the firm can provide the right support and services that an enterprise client needs, particularly if they are looking to introduce digital asset services to their clients. Since starting her new role Algeo has found that regulation and security are big themes with clients

“The way we do real-time cold wallet storage and the level of security that we have for technology is a huge deal,” she said. “The other thing that has been really attractive in the ecosystem is that we are backed by banks, with a strict level of governance and security all the way up to our board.”

For example, Zodia Custody said in a statement on 1 October that it has been selected to provide custody services to Jacobi Asset Management  for its spot bitcoin exchange-traded fund. The Jacobi FT Wilshire bitcoin ETF is the first spot bitcoin ETF to be listed on Euronext Amsterdam.

Martin Bednall, chief executive of Jacobi Asset Management, said in a statement: “Beyond being the only ETF with a decarbonisation strategy, our fund flows directly into the underlying asset holding the Bitcoin as an asset, unlike others which are debt instruments and the Bitcoin is held as collateral. Such an innovative approach thus requires equally innovative partners.”

Alongside the provision of custody services for the Bitcoin ETF, the two firms will continue to collaborate as Jacobi looks to launch more innovative digital asset investment vehicles.

Algeo is seeing demand for tokenizing money market funds and issuing stablecoins. For example, in July 2024 Hong Kong Monetary Authority announced the participants of its stablecoin issuer sandbox which included Standard Chartered Bank. As crypto-native assets like bitcoin can be volatile, stablecoins were developed in order to maintain a stable value relative to a specified peg, which can be a fiat currency or assets such as short-dated Treasury bills.

“Stablecoins are where a lot of organizations, especially in Singapore and Hong Kong, are looking to start their tokenization journey,” said Algeo. “A lot of big financial institutions have moved out of development environments and into production.”

Competition

State Street said in a statement in September 2024  that it has appointed Vanessa Fernandes as head of digital asset solutions. Prior to joining State Street, Fernandes was global head of digital experience at BNY Mellon, where she developed a digital-first strategy to transform the bank’s products and platforms. Fernandes will be based in New Jersey and report directly to Donna Milrod, chief product officer at State Street.

Fernandes’ appointment comes at a key moment for State Street’s digital business according to the firm as it follows the  recent strategic agreement with Taurus SA, a digital asset infrastructure provider.

“This collaboration will enhance State Street’s digital asset capabilities by adding tokenization and the technological foundation to offer, subject to regulatory approval, digital asset custody services to its existing fund administration and accounting offerings for digital assets,” added State Street.

On 10 October 2024 Ripple, the digital asset infrastructure provider, said in a statement that it was adding new features and functionality to Ripple Custody to bring bank-grade custody technology to fintechs and crypto businesses.

Ripple Custody now supports XRP ledger tokenization features, enabling businesses to tokenize and manage a wide range of assets, including cryptocurrencies, fiat currencies, and real-world assets while facilitating digital asset issuance and secure transfers directly from its platform. This integration also provides seamless access to the XRPL’s native decentralized exchange (DEX) for efficient, low-fee trading of any tokenized asset.

Customer growth at Ripple Custody has grown 250% year-over-year according to the firm . Clients include top-tier banks, financial institutions and crypto businesses around the world including BBVA Switzerland, Societe Generale – FORGE, DBS, RULEMATCH, Archax and Futureverse according to the statement.

Algeo claimed that being backed by traditional financial institutions is a differentiator for Zodia Custody as governance, risk and compliance have become increasingly important in the last 12 to 18 months. She describes digital assets as the next internet experience for traditional finance and argued that having a custodian that really understands how traditional finance organizations work is a huge benefit.

One of the most frequently cited obstacles to tokenization is legal and regulatory uncertainty, as well as the lack of standards. Zodia Custody’s report said fragmented regulation makes life difficult for all operators in the ecosystem, including custodians. In the UK the FCA and the Bank of England have set up a digital securities sandbox and the legal underpinnings for tokenized assets have also been clarified. The position in the EU has become clearer since the creation of the Markets in Crypto Assets (MiCA) Regulation which is in its first phase of implementation. However in the US,  the SEC’s SAB 121 ruling still requires custodians to recognise all digital assets as liabilities on their balance sheets, which is a significant burden.

“We want to make sure that we are supporting our clients to safely, compliantly and securely store their tokenized assets on public blockchains,” Algeo added.