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State Street

[ MUSIC ] Welcome to Balancing the Ledger where tech and finance intersect. I'm Jane Viachna. And I am Robert Hacket. And today we are joined by Jay Biancamano the Managing Director of Digital Assets for State Street. Thanks so much for being here Jay. Thank you, pleasure to be here. So State Street does not currently hold Bitcoin or trade Bitcoin or some of the traditional cryptocurrencies that we've heard of. Tell us what you mean by digital assets and what you're working on there. We're not focused really on the cryptocurrencies, the Bitcoin, the Litecoins that are in Vogue right now. We really forward facing and we're thinking about what does the future hold for Assets as the hold. We're one of the largest global custodian banks. So we hold over 30 trillion of the world's assets, over 10 % of the world's assets. And all those are electronic or other traditional forms. Now we services assets, were able to provide services around these assets for our customers. So As digital assets start to gain a foothold in the asset management industry. We need to be prepared of what that means for statute and how we can service those assets for our clients. When is that going to happen? That's a great question. So if you think about where we are right now, everybody knows about Bitcoin, right? We talked about Bitcoin and I use the B word. Really, we're thinking about, what does a stock in digital form what does a bond in digital form and And there's a lot of proof of concepts out there going on looking to digitize certain assets. What we're really starting to see right now is it's gaining traction [ UNKNOWN ] liquid assets, so real estate. There had been a number of digital [ UNKNOWN ] of real estate. When we talk about gold. There's a digital form of gold. People are talking about intellectual properties, paintings, other things like CryptoKitties, right? People [ UNKNOWN ] So we're seeing Assets start to become digital, trickle, trickle, trickle, and then we believe that they're flop. When that happens, I will let them host our president. You think about thirty years ago when asset prove from materialization to dematerialization. We will know from Coupon clipping to stocks and stock certificates to electrification. We believe the same thing will happen with digital assets. But we think it's going to be a little bit of a slower process because back then it was less about what form it was and how you could hold things and more about Okay, we're just going to make things faster and increase scale here. It's a little different digital assets are not That easy to define and defining custody and who holds them is a lot harder and there's a lot of new technologies out there. So I think it'll probably require us to work with third parties to figure out a way to service assets, just like we have sub- custodian relationships for a number of assets that we hold We don't physically hold gold however, are we service assets for our customers that hold gold so there's a lot we can do around that. And we're actually investigating number of proof of concepts in that space. If you're talking about partnering with other organizations that may be already do cryptocurrency custody and custody of digital assets what would state streets role be in that situation? What would be a service provider? So, we do, the thing I like to tell people, there's nothing really unique about custody, right? it's a vault or a drawer. But it's really what we do around that, we loan security. Loan our clients securities, we price them, we serve it we do a number of services around them. And by regulation, they have to have a third party custodian holding their assets most large. So it's what we do with the assets, and we'd wanna continue to do that. And what we really wanna do is to make sure our clients experience doesn't change. Whether we're holding a digital asset, whether we're the holding a traditional asset, or we're sub custodian some material asset The end to the client. The end game should remain the same. It should be seamless, it should be transparent, and they should be able to rely on us to do what we've always done. How lucrative do you expect the custody of cryptocurrencies and digital assets to be compared to traditional assets? Think about real estate right now. Real estate, when you buy real estate, it's very Draconian. It takes days, weeks, sometimes months to settle a transaction. Being able to do that on the blockchain could take as little as ten minutes. Right. So that democratize it. If you're able to price those assets, that means those assets become very liquid. So you can actually have a market for real estate that is unlike anything we've seen right now, which replicate what we're doing the equities markets. So I believe that will actually incent portfolio managers to start modeling these new you know, I wouldn't say I'll be a new assets but assets are. Weren't really democratizing easy to trade. So, if you look at a portfolio now. Portfolios are there 35 % stock, 45 % pounds, 10 % cash maybe 5 % something else. Thinking about 10 years from now, you'll have real estate in there. You might have intellectual property or you might have wine or some other asset holding that we don't know about right now. So i think. Assets under management will increase. And I think that's the unique opportunity for us. Just recently we saw a basketball player is securitizing his contract and actually selling shares in that to other people as sort of tokenized form of equity in his contract. That will be interesting. I believe that will be part of it as well. I mean, if you think about video games [ UNKNOWN ] character in the video game That becomes valuable and people build up on that. So it's an exciting world. And I think the other part of that as you think about, my background was building new products around new technologies. Certainly building algorithms and [ INAUDIBLE ] pools back in the 90s came out of the eletronification of the markets. Digitization is also gonna create opportunities as well. I like to use the term digicaps, these unique assets Are going to require new ways of looking at them. There's gonna be asset intelligence built into them. So portfolio managers a good lead somebody like a State Street, who has a front end model with our alpha model. We were Charles River about a year ago, which is an order management system to provide traders and Portfolio Manager with ideation with unique data sets around these digital assets which will be unique around these assets themselves. So that's Really exciting I think for us. I know State Street is big in ETFs as a firm and a bitcoin ETF is something that people have been wanting for a long, long time they haven't yet gotten SAC approval. Do you think, I mean based on the state of the technology and what your seeing that that is something that could be feasible in the next few years. Absolutely. Absolutely. Yeah, I think you have to have the same clarication, regulatory clarification and same risk assessment that the regular just want. I think they're kind of about ignostic about what the underlying piece of that is whether it's a bitcoin or some other crypto asset. And they really wanna ensure that the custody is what they understand and the protections out there for the end user. Do you think the regulators' concerns around the current state of custody are founded, in terms of the roadblocks to actually getting something like that approved? Are they founded? I don't think they would actually say that there's any one thing they're pointing to but I do think the scrutiny of digital assets revolves around the idea of hacking. And hack ability. I think people have been focused on that probably too much. And certainly in the era of digitalization of traditional assets, much less of a concern, but I think the regulator's really wanna understand what does custody mean because we talked about that because it This really is something that exists unlike anything else and therefore how are we protecting it? That does a private key holder mean? What does a public key holder mean? Who has the private keys, what does that mean are you custodian? If you ever so there's a lot of like you know elementary questions i think still has to be clarified A lot of the cryptocurrency custodians out there right now they call themselves qualified custodians but we haven't actually heard from the SEC or other regulators as to what really constitutes a qualified custodian in this new world And earlier this year, the SEC came out with some guidance, some preliminary guidance around, being a custodian what it means. But my read on that they basically were just like don't lose your customers money, which sort of obvious. Yeah, customer protection report. what they said was, you know, here's the customer protection rule, you still have to abide by it and with digital assets, it probably isn't as easy as you think. But one of the things I think they really came out of that they did say that They're actually looking. Some people have suggested that transfer agency could play a role in protecting the holders of digital assets. So for example, a transfer agency could have a traditional record and you're able to publish it on the blockchain. But that is not the actual official record. Then therefore, if somebody was to hack all your holdings of Apple Right for example, the transfer agent would still BB the oracle of the holder of those assets and therefore, they could destroy the old assets and issue a new tokens. In that case, you'd have to be able to unwind records that were transactions that were done on the blockchain, You'd have to have some edibility, [ INAUDIBLE ] to the ledger. Correct. Yes. And that's one of the, one of the things the SEC is, is actually looking at closely. And there's a number of firms that are capable of doing that, so it's very- the technology's there to do that, getting the regulators comfortable Trouble with how they approach that and how they do that is really where, you know, the next few months, few years is going to be focused on State three one of those firms that has that capability. We don't have that technology capability. But we've been talking to a number of firms that have it's one of the, i think, very interesting pieces of technology out there. In addition to interoperability which interoperability is allowing people who trade in a theorem coin could trade on a another. Hypoledger type, you know, launching, and that's another piece of technology that we're focused on to understand how that works. Give us your best guess for how soon State Street could be moving onto digital assets. I really can't. But I will say as an industry as a whole we are already moving in that direction. What I like to tell people if this is a baseball game, we probably haven't even started the first [ UNKNOWN ] yet. I think there's a lot that's gonna happen in next year. But like anything, it could happen very quickly. And you're ready even if it happens soon, matter of months, a year or less. It could be. It could happen a few months. You could have either a very high quality assurance that A lot of institutions are looking to invest in and you know, we would we should be prepared to move in that direction if our clients want us to custom those assets. Great. Well, we'll be watching. Great. Thanks so much for being here, Jay. Appreciate it. Thank you. I'm Jen [ UNKNOWN ]. I'm Robert Hackett. For more balancing the ledger go to fortune. com. We'll see you next time. [ MUSIC ]

Balancing the Ledger: State Street is Preparing for the Rise of Digital Assets

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State Street manages a tenth of the world’s assets.

State Street

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World's Most Admired Companies
As of 2/1/2023

State Street

Company Information

World's Most Admired CompaniesAs of 2/1/2023

World's Most Admired Companies
As of 2/1/2023