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Regulation

BRD’s enterprise banking blockchain boosted by new compliance strategy

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In July this year, the Office of the Comptroller of the Currency granted permission for federally chartered banks to provide custody services for cryptocurrency. While significant, the need for enterprise-grade infrastructure to securely deploy custody solutions has become crucial. 

Adrien Treccani, CEO of METACO — a technology partner for institutions entering the digital asset ecosystem — mentioned in a report published by Cointelegraph, PwC and CV VC that the institutional adoption of custody solutions for managing digital assets has clearly entered a new phase:

“Greater regulatory clarity on digital assets in many jurisdictions, as well as adoption by large global institutions such as Libra and PayPal, are highlighting the need for trusted, secure, and flexible infrastructure to manage such assets.”

Crypto wallet provider enables enterprise custody as interest grows

To cater for this, crypto wallet provider BRD has launched Blockset, a real-time data integration platform used by financial institutions and large crypto firms looking to provide custody solutions. Adam Traidman, CEO of BRD, told Cointelegraph that enabling the enterprise space is key for the digital asset industry to grow. As such, Blockset serves as a digital asset toolbox that uses a single-source API to allow financial institutions and banks to build scalable custody solutions.

Traidman mentioned that SBI Holdings, one of the largest investment banks and digital brokers in Japan, is currently using Blockset. He further noted that Big Four firm KPMG and financial services giant PayPal were part of Blockset’s early pre-release program, noting that both are currently undergoing proof-of-concepts.

While Blockset had been in use months before the OCC announcement, Traidman shared that there has recently been a huge influx of inbound interest in the enterprise blockchain solution. “Much of the interest initially has been regional banks that typically have more progressive views of banking for the ‘under 40’ age segment,” he said.

Yet with more traditional banks entering the digital asset space, the need for enhanced capabilities around Know Your Customer measures became more apparent, as Traidman explained: “Requirements for anti-money laundering, anti-fraud, key management/security, and on-chain analytics will ultimately enable the enterprise space to bridge the emerging digital asset industry with the existing financial services infrastructure.”

To cater to these requirements, BRD announced a major partnership with Ciphertrace, Elliptic, Unbound Tech and Chainalysis. According to Traiman, these collaborations represent BRD’s commitment to expand Blockset into a set of end-to-end solutions to support a wide range of enterprise blockchain initiatives.

Important compliance requirements for financial institutions

BRD’s new partnerships will enable Blockset to provide banks and financial institutions with custody solutions that have a high level of market readiness, catering to today’s stringent compliance requirements. John Jefferies, chief financial analyst for blockchain intelligence firm Ciphertrace, told Cointelegraph that Ciphertrace provides predictive risk scoring and streaming of real-time attribution intelligence to Blockset’s blockchain feed enabling cryptocurrency threat protection, transaction tracking, risk monitoring and compliance reporting.

Ciphertrace recently announced that the firm is capable of tracing Monero (XMR) transactions, while notably, the United States Internal Revenue Service has offered a bounty of up to $625,000 to anyone who can break untraceable privacy coins like Monero.

Blockset will also integrate Chainalysis’ “Know Your Transaction.” This Anti-Money Laundering compliance solution is used for monitoring cryptocurrency transactions. Chainalysis will enable Blockset’s clients — namely financial institutions, government agencies, and cryptocurrency businesses — to monitor large volumes of cryptocurrency activity and identify high-risk transactions on a continuous basis. This will allow compliance teams to focus on suspicious transactions that need to be reported.

In addition to KYC measures, Blockset will incorporate multi-party computation from privacy firm Unbound tech to secure keys on any device.

Will financial institutions adopt third-party custody solutions?

While enterprise-grade custody solutions like Blockset represent important developments to the ecosystem, whether traditional banks will implement these solutions in the near future remains questionable.

Kara Kennedy, custody product manager at Bank of New York Mellon, stated in a 2018 research article that although there is increasing demand in the market for a traditional, established custodian to provide custody of cryptocurrencies, some significant hurdles need to be overcome first. Kennedy mentioned that challenges include operating models, technology, risk, compliance and legal and regulatory frameworks. Although these concerns remain true today, the OCC acknowledging that federally chartered banks can provide custody for cryptocurrency is a significant development.

Caitlin Long, former Wall Street executive and founder of a U.S.-based crypto native bank, told Cointelegraph that traditional banks will indeed use third-party custody solutions for digital assets, but as sub-custodial relationships. A sub-custodian is an institution that provides custody services, with respect to securities traded in a particular market or jurisdiction. Sub-custodians operate on behalf of another custodian who may not have an operation in that jurisdiction, according to Long:

“Sub-custody is very common among the large banks. It’s already in progress among large banks for digital assets, and yes Wyoming SPDIs have an advantage because they’re banks — and banks have several regulatory advantages over non-banks as sub custodians.”



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Regulation

New York authorizes first Yen stablecoin operator in the US

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New York has given the first authorization to a stablecoin backed by the Japanese Yen to operate in the U.S.

Per a Dec. 29 announcement, the New York Department of Financial Services has granted Japanese firm GMO-Z.com a charter to handle U.S.D. and Yen-backed stablecoins in New York. 

Given New York’s status as a global center, the NYDFS is the most prominent state financial regulator in the U.S. It is also one of the most aggressive. A pass to operate in New York often opens up the rest of the country. 

GMO’s charter is as a limited liability trust company rather than a full bank, the principle difference being in authorization to handle deposits. While a stablecoin operator typically needs the ability to hold reserves of the pegged asset, GMO’s charter limits its rights to hold other kinds of deposits not central to its ability “to issue, administer, and redeem” its stablecoins. 

The right to issue such non-depository charters has been a bone of contention between state regulators like the NYDFS and national banking regulators in the U.S. 

GMO president and CEO Ken Nakamura said: “We’re breaking ground with our move to issue the first regulated JPY-pegged stablecoin, which many see as a safe haven asset.” 

The NYDFS recently made changes to its famous BitLicense, including a conditional format that buddies up newly licensed firms with existing licensees. The first conditional BitLicense went to PayPal, facilitating the launch of its new crypto services earlier this fall with the help of longstanding licensee Paxos.