To invest in DLT or not invest in DLT – that is the question custodians are now asking, write Etay Katz and Simon Helm of law firm Ashurst. In the first installment of a series on digital asset custody, the co-authors share their opinion that it is only a matter of time before most custodians would bite the bullet on acquiring the technology to support a variety of digital assets. Those who fail to do so risk not moving in step with their clients.

“Custodians are coming under pressure from their clients to support a variety of digital assets,” the article states. It identifies this growing momentum behind digital assets as the main force pushing custodians towards digital transformation.

But that’s not to say that there is no longer value in supporting traditional assets. “There is limited demand for custody of exclusively digital securities,” claims the article. “Sophisticated market participants need services for diverse portfolios, and focusing on only legacy or DLT systems could be a disadvantage.” It points out that hedging arrangements can involve multiple asset classes, so it is likely that “one-stop shops” will be embraced as the more efficient solution for such portfolios than separate service providers that are responsible for different asset classes.

A line drawn

The article makes a distinction between “native” crypto assets such as bitcoin and ether, and tokenised forms of established traditional financial instruments. The distinction is made clearer when one notices that regulators have sent these different assets down two different tracks. In the EU, volatile cryptocurrencies are under the Markets in Crypto Assets regulation (MiCA), while tokenised securities are the responsibility of the Markets in Financial Instruments Directive (MiFID II). According to the article, when it comes to investing in infrastructure to support DLT transition, it is the latter that institutional actors are more interested in.

The main obstacle for custodians in taking up DLT is regulatory issues. “Custodians of digital securities cannot be complacent”, the article warns. Those who wish to expand their services to include digital securities will have to adjust risk management frameworks, resiliency policies, and transparency arrangements. The regulatory landscape is constantly developing, and more changes are likely to come.