State Street Corp.'s headquarters stand in Boston, Massachusetts, U.S.Photographer: Brent ... [+]
As the second largest custody bank in the world, holding the equivalent to 10% of the world’s assets, how State Street thinks about how financial instruments will be created, traded, serviced and custodied, in the future, is something that observers in the financial markets industry pay close attention to.
Jay Biancamano - Head Of Digital Assets At State Street
In December 2019 Jay Biancamano, head of US Digital Assets for State Street provided his perspective to Forbes.com on the future of digital assets. A timely discussion given that earlier that month the bank was sending decidedly mixed messages to the market; on one hand announcing the cessation of a large distributed ledger project, and on another, inking a partnership deal with crypto exchange Gemini.
Jay starts by explaining how these developments fit within a broader context of an organizational maturation of how State Street is approaching blockchain.
“We’re increasingly business-centric as opposed to looking at the technology for its own sake. We’re also getting away from the notion that any proof of concept is successful irrespective of the outcome as the learning in itself is valuable. It has to move the needle commercially.”
Crossing The Chasm – It’s All About Client Demand
“Ultimately, everything has to be client driven, and that’s why we didn’t get into bitcoin – there is no real client demand at the moment”, says Jay who refers to the handful of advanced clients that are driving State Street to invest the time to trial blockchain initiatives as the “chasm crossers”.
Cameron Winklevoss, chief executive officer and co-founder of Gemini Trust Company LLC, left, ... [+]
Gemini is one such chasm crosser which is combining its Gemini Custody™ service with State Street’s back office reporting capabilities providing clients with a consistent reporting experience across the two organizations, a signal of how digital assets are starting to become integrated in the existing fabric of financial services.
Digital Asset Themes
However, being client-led doesn’t necessarily mean that State Street is merely taking orders from clients, rather that there is an intersection between how the bank sees the market evolving and where there is client demand to move it forward in a commercially efficient way. As I chat with Jay on the future of the industry, five themes start to emerge.
1. The Role Of Private Money: The role of the burgeoning private money market, which the bank sees as one of the main theaters where digital assets will play out over the next few years.
2. Making The Illiquid Liquid: The role of blockchain to bring liquidity to asset classes that are thinly traded or not commonly part of traditional portfolios (Real Estate and IP for example) .
3. The Blending Of Asset Classes And Emergence Of Multi-Asset Trading: With highly configurable digital financial instruments, they can be sliced and diced to create new financial instruments.
4. Asset Intelligence and Data: As assets become more trade-able and transparent as they are digitized, this opens up new data streams that will enable companies to generate alpha.
5. Blockchain Enabled Exchange Traded And Mutual Funds: Blockchain has the potential to improve the way that funds are managed and traded.
Trend 1: The Role Of Private Money
Private capital is growing far faster than public capital, and presents a unique opportunity for digital assets which can directly connect investors with investments. The phenomenal growth of global private capital led by sovereign wealth funds, private equity sponsors and family offices means that there is a near endless resource of cheap private funding available to companies.
Jay sees the supply of this funding only growing, if investor regulations are eased.
“[Yesterday] the SEC announced that it was looking to expand the definition of a qualified investor. To me this means that there will be more liquidity in the private markets”
While public equity and debt has a mature and orderly “electronic” market infrastructure, private deals tend to be bespoke and shrouded in a physical paper trail. Digital assets have the potential to bring order to this market. Assets that are more standardized and can flow more easily through the digital pipes of the capital markets infrastructure will attract more liquidity.
Trend 2: Making The Illiquid, Liquid
The market size for illiquid assets – comprising any asset that has value but cannot be easily bought or sold – is large, rivaling the size of global public equity markets. However illiquid assets can be problematic for investors. Liquidity is important for a mutual fund investing perspective because the SEC places limits around illiquid asset allocations”, says Jay, “that’s why you can’t have a carbon credits for example in a mutual fund.“
Through digital asset technology, illiquid assets can be turned into liquid instruments by digitizing and standardizing them and creating marketplaces where investors can be met with issuers. For example, in the field of art, paintings can be fractionalized into multiple digital rights which can then be issued and resold, creating an orderly market and price transparency.
Fractionalized art has been a dominant theme at recent arts events such as Art basel and the Miami ... [+]
Trend 3: The Blending Of Asset Classes And Emergence Of Multi-Asset Trading
Whereas today, different types of assets are traded in different ways, with separate trading teams, venues and systems, as assets become digitized, the way that they can be accessed and traded will be harmonized, making it far more efficient to trade between different asset classes.
Jay points to the example of moving between asset classes. “Say you’re moving between fixed income and equities, these are traded in very different ways and you get a lot of drag in the process. Whereas in the future, all these financial instruments can be traded in the same way, and 24/7 globally”.
Jay goes on to point out that we’ve seen this before in the last modernization wave. “There is a historic precedent for this, Think of all the ways that public equity used to be traded – OTC, the floor guys, market makers, the public markets. That all changed, much of it disappeared”.
Furthermore, the assets themselves will increasingly morph to the point that the distinction between a stock, a bond will start to blur.
“With a digital assets it is far easier to, say strip out the dividends and voting rights of a stock and trade those elements separately”
Trend 4: Asset Intelligence and Data
As assets become digitized, a wealth of information about demand and supply and historical asset performance becomes available and that can provide financial institutions with a leading edge to generate outsized returns i.e. alpha.
“Financial services is essentially a data play,” Jay reminds me, “when you can get transparent data around how an asset trades means you can start automating trading against that digital asset, in the same way that the emergence of trade cost analysis enabled benchmark pricing which led to the rise of algorithmic trading in equities.”
And that plays into a key element of State Street’s strategy which is to push aggregated data streams about assets straight to the desktops of investment managers. Earlier in March 2019, the company spent $2.6 Billion on acquiring Charles River, a front-to-back client servicing platform, providing a State-Street powered desktop presence into the offices of thousands of investment managers.
State Street Acquired Charles River Development For $2.6bn
With Charles River, State Street has a platform on which, in the future, to both serve up data on new digital assets, but also with the capabilities to actually invest in them, giving the bank an edge in the buy side over sell side institutions.
Trend 5: Blockchain Enabled Exchange Traded And Mutual Funds
Increasingly, fund managers are looking to blockchain to automate their operations, with Franklin Templeton, Vanguard, WisdomTree and US Commodity Funds LLC all working on initiatives to digitize their fund operations. “ETF space has come up in a lot of places”, says Jay, “so we have a focus on that, for example what does fund administration mean for digital assets?”
Prepare For The Flood
While the industry is still some way away from the actualization of the world that Jay envisions, Jay is positive, stating on a recent video segment – "we're seeing assets start to become digitized. Trickle, trickle, trickle — and then we believe there will be a flood."
