Unlike traditional custodians who take care of safekeeping physical assets, the role of digital custodians is basically to allow financial institutions to use blockchain, which is a digital book of records, and integrate digital assets into their business operations in a highly secured, scalable and compliant solution.
It used to be that banks and financial institutions ignored or did not invest in digital assets for various reasons but mainly because of their high-risk and unregulated nature.
But the financial world is changing and digital assets are increasingly becoming important as a means of diversification and generating returns. It is estimated that the digital assets market could reach US$10 trillion by 2023 and when this happens it is expected to result in a big shift in the overall structure of financial markets. Banks and other financial intermediaries will soon be forced to devise and implement new digital asset strategies.
Because digital assets are different from physical assets, the role of digital custodians is becoming more important. “We believe there are three critical responsibilities for digital asset custodians, namely safekeeping, connectivity and compliance. Digital custodians are the foundation of a successful digital asset solution. The role of digital custodians will be a critical building block for the new financial markets infrastructure and will be necessary for the widespread adoption of digital assets,” says Alessio Quaglini, chief executive officer of Hex Trust.
Unlike other fintech practitioners who come directly from a digital background, Quaglini was a telecommunications engineer who also worked at the Italian Securities and Exchange Commission, Insider Trading Office, as well as BBVA and the First Abu Dhabi Bank, before co-founding Hex Trust in January 2018. As such he is in a unique position to see asset servicing from the perspective of banks, regulators, and investors, in addition to its financial technology aspect.
For Quaglini, safekeeping means securely custodizing digital assets to protect the private keys (basically a code that grants ownership of digital assets), and developing secure workflows to support transactions in and out of custody, mainly deposits and withdrawals. In addition to storage of the private keys, custodians must build their technology architectures to manage cybersecurity risks when interfacing with a public blockchain to facilitate transfers of these assets.
“As the blockchain market becomes institutional, the current wallet (a digital code that allows storage of digital assets) implementations will not be scalable enough to cater to the requirements of financial intermediaries. A new approach will be required to offer custody solutions which can scale and process thousands of transactions per second with the necessary levels of security,” Quaglini says.
In terms of connectivity, the key responsibility of digital asset custodians lies in simplifying the underlying complexities of blockchain technologies and creating a standard access layer to connect capital and service providers across the ecosystem.
“This is a critical building block to extract the maximum value that blockchain networks can offer to its users and an opportunity to design a new financial market structure fundamentally different from the current one,” Quaglini says.
Hex Trust is licensed under the Hong Kong Trust Ordinance and, holding a Trust or Company Service Provider (TCSP) license under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, is now offering an end-to-end digital asset servicing solution.
Hex Trust is also affiliated with the SIA Group, the largest software fintech in Europe, which opens the doors for it as a digital asset service provider for EU banks.
Although based in Hong Kong, Hex Trust has for its clients a major Singaporean bank and Mason Bank, a European private bank formerly known as the Raiffeisen Privatbank Liechtenstein that was acquired by Mason Group (a corporate group listed on the Hong Kong stock exchange) in 2019.