BNP Paribas out front on digital asset storage
The Office of the Comptroller of the Currency this summer gave national banks the green light to store digital assets, but a large foreign bank already had a head start on its U.S. rivals.
BNP Paribas launched a proof of concept with the technology company Curv in July, right around the time of the OCC's move, to test technology for storing and transferring digital assets in response to demand from customers.
“We started to receive more queries from our clients about what can be done and what cannot be done with digital assets,” said Bruno Campenon, global head of financial intermediaries and corporates at BNP Paribas. “This is a topic that has become top of mind."
The work the Paris-based bank is doing to better understand how to offer services around digital assets is sure to be mirrored by U.S. banks just starting to enter the field after the OCC gave federally chartered banks permission to act as a safekeeper of digital assets such as bitcoin for their customers.
Some hedge fund clients, for instance, are being asked by their customers about their readiness to handle digital assets. Some might want to issue digital bonds to raise cash, for instance. Others are considering including digital assets in funds, to drive higher yields.
“Hence they revert to us as a custodian to inquire about what is feasible, what is possible, what we trust is safe and not safe,” Campenon said.
Ken Monahan, senior analyst on the market structure and technology team at Greenwich Associates, said some customers are looking for a secure place to store the assets and perhaps a way to borrow against them.
“There are a lot of people out there who own a lot of money stored or trapped in crypto assets that can never be sold without attracting attention,” Monahan said. “They hold them, and they wonder where to hold them and what to do with them.”
Then there are hedge funds that realize a lot of money could be made trading digital assets and in fees from having digital assets under management, and arbitrage traders who trade bitcoins against bitcoin futures and collect the spreads.
All of this activity creates demand for digital asset custody and transfer, Monahan said.
In the proof of concept, which was completed in early October, BNP Paribas Securities Services and New York-based Curv transferred a security token between two market participants on the bitcoin blockchain.
Until about three years ago, according to Itay Malinger, founder and CEO of Curv, companies offering storage of digital assets had World War II-style bunkers with security guards and cameras, where the assets were held fully offline but could take 24 hours or more to access.
“The entire world today is moving to the cloud, fully online,” Malinger said. “This is the experience that customers want to have when interacting with digital assets.”
Curv built a software-only cloud service that’s fully online, he said. It uses multiparty computation, a form of cryptography in which parties jointly compute a function, to secure the private keys to digital assets.
“A private key is just a long number that is a secret that enables you to secure and hold the assets,” Malinger said. “Instead of holding that private key, that secret, offline and in hardware, we eliminate it through creating many distributed secrets that are held by different parties in different places in the cloud. This will be secure because if there's nothing to protect, then there's nothing really to steal.”
Curv’s technology also authenticates users, enforces policy around asset transfers and handles the transfer of assets, say, to and from the bitcoin blockchain.
“What they're offering is precisely what we want to integrate into our services as a custodian,” Campenon said.
Curv’s infrastructure and multiparty computation technology was important to BNP Paribas because it helps remove any single point of failure. The use of token standards was also critical, as was Curv’s access to several public blockchains. Curv could be BNP Paribas’ connector to the many blockchains and distributed ledgers out there.
“We wanted to have this kind of flexibility going forward, because we don't know where the demand will originate,” Campenon said.
Many traditional banks that want to serve clients who own digital assets are likely to turn to technology providers like Curv, Monahan said.
“Executing a large technology project from the ground up inside a large investment bank is fantastically expensive and time-consuming,” he said. And from a business, legal and compliance point of view, banks are not set up to do this.
BNP Paribas’ No. 1 responsibility to clients is the safety of their assets, Campenon noted.
“Whenever they invest in anything, they need to ensure that if something goes wrong, we can guarantee the return of those assets to them,” Campenon said.
One of the tricky aspects of digital assets is the fact that regulation is not 100% in place, he said.
“We are starting to see the regulators organize around the topic, and they are willing to know more about it,” he said. “The good news is that they do not perceive distributed-ledger technology as a threat.”
Regulation is different country by country. Germany, France and Luxembourg seem to be moving quickly, as does the OCC in the U.S.
BNP Paribas is international, as are most digital currencies.
“We do not wish to take any risk on behalf of our clients on assets that wouldn't be regulated and therefore we could not guarantee a completely secure framework,” Campenon said.
Another piece that is missing is a digital currency backed by a central bank, he said.
“In a traditional transaction, you tend to secure the transfer of securities against cash in real time,” Campenon said. The lack of a digital currency backed by U.S. dollars or euros is a constraint.
“What we wanted to achieve through the proof of concept we did with Curv was to make sure on our side that everything that was working on paper was concretely working,” he said. “And this has proven to work.”
The next step will be to replicate the proof of concept with a concrete, real-life use case.
“It shouldn't take too much time,” Campenon said. “Now what we need to make this happen is the appetite from clients to go ahead. What would make them willing to invest is the moment when they would see the regulations in place and the security from the custodian.”
Sometime next year, Campenon expects this to happen.
BNP Paribas is straddling a line — it doesn’t want to be a first mover in digital assets. But it does want to lead its clients and help them understand what is possible.