Caroline Butler, CEO of custody services at Bank of New York Mellon, joined the Wall Street giant two years ago to ensure that the assets of the country’s oldest bank’s clients are safe and secure.
Her job is about to become potentially more challenging. Two weeks ago, BNY Mellon announced that it will begin holding crypto assets for select clients. It marked a major move by a financial services giant into a fast-moving and controversial market, one notorious for breaches and hacks and still reeling from a major crash.
But the crypto meltdown, which wiped out $2 trillion of value, has not dampened the interest of institutional investors in digital assets. BNY Mellon said its decision was based on strong customer demand.
“We were getting a lot of demand from our clients to be able to, as a trusted provider, be able to service them,” Butler told Protocol. “Custody was really the first capability that was paramount for our clients.”
In an interview with Protocol, Butler, who spent nearly 20 years at J.P. Morgan before joining BNY Mellon, explained how the bank decided to dive into crypto.
This conversation was edited for clarity and brevity.
How did BNY Mellon reach the decision to support crypto?
We started on this journey in earnest about two years ago. We expressed our intention, as you probably read about, in February of last year.
Really, it wasn't led by crypto. It was to create a digital asset platform. We look at digital assets across three large spectrums: There's cryptocurrencies, I put those in one bucket. Traditional tokenized assets are in a separate bucket. And then natively tokenized assets will be the third.
We wanted to make sure that we were bringing a product to market that had the ability to service [customers] across those different types of digital assets. We started with crypto because that's where our client demand was.
Custody was really the first capability that was paramount for our clients. It sets the foundation for the full platform.
We'll add on different capabilities as we see more demand. And we'll start to go across the different asset types as well, pending where clients need us to go, and where the regulators permit us.
What were some of the most contentious issues?
The biggest challenge in this space is without consistent regulations globally, we really had to bring our highest institutional-grade standards to bear into the market. We know how to keep clients’ assets safe. We've been doing that for a very long time.
Obviously, there are unique risks in this type of asset class. Making sure that we brought those higher standards to bear into the market to protect both the client and the investor in ensuring that we added safety and soundness to protect the assets was paramount, but also doing it in a way where the clients’ experience is front and center.
If you think about the types of institutional clients we service, a vast majority of them have a percent of their investments in digital assets. For them, it was very important to be able to go to a provider who could offer services across the different assets in their investment portfolio, whether it was traditional assets or a combo of digital assets.
That experience was very important. Not having a player like ourselves in the market, the reality was they had to go to a digitally native custodian for their digital assets, and then a traditional custodian for the rest of their portfolio.
That puts a real burden on the clients to be able to do things like reconstruct a portfolio to enable compliance reporting, tax reporting, or various different things like that.
So the client experience was also a key driver for us in how we designed the product. Obviously, risk, first and foremost: That's how we design all our product offerings. It’s particularly important for this asset class.
Can you go deeper into that? What were some of the risks and concerns that came up in the conversations?
When you look at digital custody, [what’s] very important is cyber risk. If you think about what we do as a bank, we custody somewhere around $43 trillion worth of client assets. Clearly, we have very thorough and robust cybersecurity departments that manage all the protection of those assets. We also deal in the trillions when it comes to payments.
[There are] unique risks you have in this asset class, the primary one being, unlike the traditional space, if you lose the keys to digital assets, you effectively lose the assets. So heightened cybersecurity is very, very important.
Implicit in that is wallet management. What we've done and what's been very important for is we looked across the industry at specialized firms. So you would have seen that we made an investment in Fireblocks. It takes the best of what they do very well, which is wallet management and infrastructure.
The other area that was a challenge was interoperability across the digital and the traditional space. It goes back to that client experience. What was very important for us was to make sure that we actually took the digital asset platform that we've built and had it fully interoperable with the traditional platforms. That is not an easy thing to do.
You made this decision at a time when crypto is reeling from a major crash. Is there a story or a conversation you had with a client in terms of concern that stands out for you?
The consistent story we hear from clients is they want to know that they have a trusted bank that's highly rated, who knows how to protect clients’ assets, who would bring those institutional-grade standards that don't necessarily exist consistently in this particular market. That they can also marry that trust with a bank who has proven that they can innovate in an agile form.
One of the criticisms that you will see from the fintech world or the digital world of the traditional world is the pace at which we move. One of the things we're seeing more and more from our clients is they're appreciating that we have the ability to innovate in a very measured and prudent fashion.
Where we are slower is because we're being measured and purposeful, bringing our capabilities to market in a very disciplined form. Again, that speaks to trust and risk management.
We're really seeing even across the diverse types of clients that we have, there's a real appreciation now of bringing those risk management principles into this market. I don't know how many times we’ve heard the word “trust” used by our clients.
Our clients, they're always thinking about the next step. What’s important for our clients is not just the custody element of what we're doing. It's [also] the ability to add even more services as we start to see the market open up a little bit more.
We will meet that demand, whether it's execution, or other capabilities, driven by our clients and driven by our regulators. Clients don't want that bifurcation and the operational burden on them. But they also want to make sure that the basic principles of trust are in place and those are the guardrails we build on.
Crypto, of course, is a broad industry. Can you walk me through some of the assets your clients are interested in?
Specifically, what we're aligned with now is the ability to custody bitcoin and ether for a select number of U.S. clients. That's where our client demand is. The clients we’re partnering with to deliver this service had already made investments in those currencies and just needed a service provider.
We will be very, very disciplined on the expansion of currencies outside of those two. Each currency brings its own unique risk profile. So we will be putting [those] through our protocols internally to assess if we feel like those currencies can actually meet the standards that we would expect, and therefore that we would service.
We will expand the offering past cryptocurrencies pending demand into other types of assets. We're seeing a lot of interesting projects in the bond space. We've got a lot of clients that are discussing tokenization of real assets with us.
I would say the tokenization side of the market is less mature. There are more POCs [proof of concepts] in that space than the crypto side. There are a lot more projects that are in either an ideation space, or are narrow projects that people that are starting to work on.
Can you talk about your own personal insight into bitcoin? I see you spent nearly 20 years at J.P. Morgan before moving to BNY just recently.
You're trying to age me. I was with J.P. Morgan for 18 years. I moved here over two years ago. I like to call myself a banking veteran.
I've always been on the product innovation side, starting in the trading desks, and then moving into derivatives clearing, collateral management, and the last five years in custody. So I've always specialized in innovating new products.
DLT [distributed ledger technology] is just another technology. The ability to move assets more efficiently is always something that would be attractive just given my role. A consistent part of my role over the different areas has been learning new technologies and seeing if those technologies actually solve some of the problems that exist in the industry.
One of the more interesting things about distributed ledger technology is how much that technology could aid in making current processes in the traditional space more efficient.
There's a segment of crypto that rejects the role of centralized major institutions like BNY and other banks. How do you plan to navigate that?
We're the world's largest custodian so we represent a large number of institutional clients. Our institutional clients are asking us to come into this space as a trusted provider with a track record of innovating and leveraging new technologies. So they're needing our institutional-grade standards to come into this market to help mature it in a safe and responsible way.
This asset class has become mainstream already, and we'll do our part to make sure it does so safely for our clients.