Justin Chapman, global head of market advocacy & innovation research at Northern Trust, said the firm is building a product store for digital assets with some capabilities going live every week.
Northern Trust said in a report, Mega Trends That Are Accelerating Change in Institutional Investing, that the continued growth of alternative and digital assets, an increased focus on achieving cost efficiencies and the influence of data science to shape decision making will all be important in the coming year.
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Chapman was one of the authors of the report 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 moving to private and alternative assets, and their growing interest in digital assets.
The report said asset allocation by global institutional investors to real estate, private equity, and infrastructure in a 20-year period has moved from about 7% to above 26% according to the Thinking Ahead Institute Global Pension Assets Study 2021. Chapman said many Northern Trust clients have indicated that they will make allocations to crypto assets within the next three to five years.
“We are working on the hypothesis that this may be between 5% and 10% of the assets that we look after in that space,” he added. “We sit on about $15 trillion of assets under custody so that is not an insignificant number.”
Digital capabilities
Chapman continued that the firm is getting lot of questions around cryptocurrencies and is also working on stablecoins, central bank digital currencies and infrastructure plays for the digital issuance of securities.
“If we create a tokenization capability or a smart contract capability that sits within our product store,” he added. “As these products and markets mature we look to go live."
He gave the example of Northern Trust providing asset servicing for Singapore-based fintech BondEvalue when it completed the first trade of a fractionalized blockchain-based bond, known as BondbloX, on its platform in 2021. Northern Trust communicated cash and securities settlement reporting directly to BondEvalue’s distributed ledger technology using an API.
Chapman explained that issuing traditional securities digitally creates more high quality data at source - such as environmental, social and governance data or pricing information over the lifecycle of an instrument - which is of real value for making an investment decision. His hope is that, eventually, data will have the attributes of the issuer built in so that annual reports, accounts, diversity and inclusion, the carbon footprint can be reported directly from the digital asset.
He said digital issuance services could be offered to companies within the next 24 months if they want to go down that route.
“We have a suite of capabilities and need to find the right things to deploy them to the right clients in the right markets at the right time,” added Chapman. “Capabilities are going live in every asset class on a weekly basis although some volumes are currently very small.”
A number of projects are expected to go live over the next six to 12 months and Chapman believes there is enough traction to start to see some digital asset marketplaces attracting liquidity.
Roadmap to 2030
Northern Trust is focussed on its digital asset strategy and building capabilities for its roadmap to 2030.
“We have seen more traction in digital assets in the last 12 to 24 months than we had previously,” added Chapman. “We are resetting our view and halfway through this year we will review which areas need investment.”
He continued that Northern Trust aims to be in the forefront of offering digital asset capabilities as the regulatory environment evolves, so that clients can go live quickly once they have authorisation.
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Therefore it is important for the the team to prove the value of capabilities they have built by pushing out viable products that demonstrate real transactional flows and compliance with regulatory requirements.
He gave the example of Northern Trust and SC Ventures, the innovation and ventures unit of Standard Chartered, launching Zodia Custody, an institutional-grade custody solution for cryptocurrencies. In November 2021 Invesco launched a bitcoin exchange-traded product which is 100% backed by physically held bitcoin held by Zodia Custody. Cryptocurrencies are not regulated and so cannot be held by Northern Trust’s traditional custody arm.
“At institutional level Zodia looks like a fintech but is has all the audit, legal, and infrastructure capabilities of a bank,” he said. “The mixture of both of those flavours helps our clients to make investment decisions as their assets will be in a safe environment.”
Northern Trust also developed a DLT platform for private equity servicing that the firm has transferred to Broadridge Financial Solutions.
“2022 will continue to see regulations develop, and investment managers and asset owners will have to start deploying solutions,” said Chapman. “Managers who have lost market share to alternative players will need to look at their value proposition, while those who fail to embrace digital assets may struggle to compete, not only with their current peers, but with new entrants in the future.”
