Northern Trust Creates Digital Asset Products Store
Justin Chapman, global head of market advocacy and innovation research at Northern Trust, said the company was building a product store for digital assets with certain capabilities going live weekly.
Northern Trust said in a report, The Megatrends Accelerating Change in Institutional Investingthat the continued growth of alternative and digital assets, increased focus on cost reduction, and the influence of data science to shape decision-making will all be important in the coming year.
The last few years have brought significant changes to the world of institutional investing. Although change can be unpredictable and rapid, it is often a process. Here are the major trends that are accelerating change in #InstitutionalInvestment https://t.co/Po39Gb4rl7 pic.twitter.com/7ua5fXfmWe
— Northern Trust (@NorthernTrust) March 29, 2022
Chapman was one of the report’s authors alongside Melanie Pickett, Head of Asset Owners, Americas, and Gary Paulin, Head of Global Strategic Solutions. Chapman told Markets Media that there is a correlation between clients increasingly turning to private and alternative assets and their growing interest in digital assets.
The report says asset allocation by global institutional investors to real estate, private equity and infrastructure over a 20-year period has grown from around 7% to more than 26% depending on the Thinking Ahead Institute Global Pension Assets Study 2021. Chapman said many Northern Trust clients have indicated they will allocate crypto assets over the next three to five years.
“We’re assuming that this could represent between 5% and 10% of the assets we care for in this space,” he added. “We’re sitting on about $15 trillion in assets in custody, so it’s not an insignificant number.”
Chapman went on to say that the company receives many questions about cryptocurrencies and is also working on stablecoins, central bank digital currencies, and infrastructure games for digital securities issuance.
“If we create a tokenization capability or a smart contract capability that’s in our product store,” he added. “As these products and markets mature, we are looking to bring them online.”
He gave the example of Northern Trust providing asset services for Singapore-based fintech BondEvalue when it made the first transaction of a blockchain-based split bond, known as BondbloX, on its platform. -form in 2021. Northern Trust reported cash and securities settlement reports directly to BondEvalue’s distributed ledger technology using an API.
Chapman explained that the digital issuance of traditional titles creates more high-quality data at the source – such as environmental, social and governance data or price information on the life cycle of an instrument – which is of real value in making an investment decision. His hope is that eventually the data will incorporate issuer attributes so that annual reports, accounts, diversity and inclusion, carbon footprint can be reported directly from the digital asset.
He said digital broadcast services could be offered to businesses within the next 24 months if they want to go that route.
“We have a suite of capabilities and need to find the right things to deploy to the right customers in the right markets at the right time,” Chapman added. “Capacity is going live in each asset class on a weekly basis, although some volumes are currently very low.”
A number of projects are expected to go live over the next six to 12 months and Chapman thinks there is enough traction to start seeing some digital asset markets attracting liquidity.
Roadmap to 2030
Northern Trust is focused on its digital asset strategy and capacity building for its roadmap to 2030.
“We’ve seen more traction in digital assets over the past 12-24 months than before,” Chapman added. “We are revising our vision and halfway through this year we will look at areas that need investment.”
He added that Northern Trust aims to be at the forefront of delivering digital asset capabilities as the regulatory environment evolves, so customers can get up and running quickly once they have obtained permission.
Find out how the asset servicing industry needs to adapt to the digital future in our latest article, Embracing the Future of Investing: https://t.co/qXBv0UnBuL pic.twitter.com/sQ6e6fTX3Q
— Northern Trust (@NorthernTrust) January 25, 2022
Therefore, it is important for the team to prove the value of the capabilities it has developed by delivering viable products that demonstrate real transaction flow and compliance with regulatory requirements.
He gave the example of Northern Trust and SC Ventures, the innovation and venture capital unit of Standard Chartered, in launching Zodia Custody, an institutional-grade custody solution for cryptocurrencies. In November 2021, Invesco launched a bitcoin exchange-traded product that is 100% collateralized by bitcoins physically held by Zodia Custody. Cryptocurrencies are unregulated and therefore cannot be held by the traditional custodial arm of Northern Trust.
“At the institutional level, Zodia looks like a fintech but has all the auditing, legal and infrastructure capabilities of a bank,” he said. “Blending these two flavors helps our clients make investment decisions because their assets will be in a safe environment.”
Northern Trust also developed a DLT platform for private equity services which the company transferred to Broadridge Financial Solutions.
“2022 will continue to see regulation grow, and investment managers and asset owners will need to start deploying solutions,” Chapman said. “Managers who have lost market share to alternative players will need to examine their value proposition, while those who don’t embrace digital assets may struggle to compete, not just with their current peers, but with new entrants in the future.”