Digital assets: the next generation of financial services

The inexorable rise of crypto-currencies has highlighted the growing importance of digital assets for the financial sector industry. Nevertheless, to prepare for this new offering, firms in the sector will have to train, retrain and reshape their talent base.

A fast-developing universe

The world has gone crypto-crazy. In the finance industry, not a day goes by without an established player, like a bank or a fintech start-up, announcing some new initiative or product to tap into the growing appetite from investors for digital currencies powered by blockchain such as Bitcoin, Ethereum and Ripple (the top three, according to CoinMarketCap).

Last year, six of the world’s largest banks (Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, Mitsubishi UFJ and State Street) joined a project led by UBS to create their own digital currency: a ‘Utility Settlement Coin’ (USC) to streamline payment mechanisms and make it easier in the future for central banks to use crypto-currencies.

The hedge fund industry is not immune to the trend. Late last year, fintech Block Asset Management announced it had created the first operational cryptocurrency ‘fund of funds’ (FOF), designed to provide investors with diversified exposure to digital assets and  engage in digital currency mining and lending, as well as trading and arbitrage.

Last month, eVestment, a Nasdaq-listed leader in institutional investment data and analytics, launched a digital assets universe on its hedge fund database and warned that larger financial organisations would follow suit. “We’re seeing the most interest in digital assets hedge funds among family offices, fund of funds and high-net-worth individuals right now, but it’s only a matter of time before larger institutional investors become interested in this as well,” said eVestment Vice President Chris Sparenberg in a statement.

From banking to mining

Then, the Australian Securities Exchange (ASX) announced it would open the world’s first blockchain-based stock exchange to clear and settle trades, after enlisting the help of influential US fintech Digital Asset Holdings, led by ex-JP Morgan’s ‘star’ Blythe Masters.

“After so much hype surrounding distributed ledger technology, today’s announcement delivers the first meaningful proof that the technology can live up to its potential,” Masters declared at the time. Even her former boss at the US bank, Jamie Dimon, recently backtracked after calling the blockchain-powered bitcoin ‘a fraud’ in September 2017.

Blythe Masters is not the only high-profile banker who’s left the industry to start a blockchain-based venture. Former Barclays CEO, Anthony Jenkins, joined the start-up Blockchain back in 2016 and warned during a CNBC interview that banks could endure a “Kodak moment” if they fail to keep up with technological innovations.

Careers and opportunities

The development of crypto-currencies has huge technical, security and legal implications for financial institutions. It also means redoubling efforts to recruit specialists in the field and retrain the workforce. Its new, complex and fast-evolving nature means that most workers in the sector have been caught off guard and need to do a lot of catching up to understand the intricacies of this new universe.

Brian Henderson is managing director of IDAT.TECH. The crypto-security fintech has created a proprietary method of providing secure authentication and encryption across multiple technology platforms, thus supporting the safe development and trading of digital assets. He believes that financial services firms are racing to use crypto-currencies without fully understanding the serious security risks of using these products due to innate vulnerabilities.

“The industry knows it has a problem. Banks and insurance companies do not have sufficient knowledge of how these things work. Cyber security needs a rethink that is outside of the self-imposed constraints of the current methodologies like the Public Key Infrastructure (PKI) trust chain. We need to go back to the basics.”

There is also the prospect of increased regulation. At the start of February, Bitcoin’s price slumped by nearly a third, which will undoubtedly attract closer attention from governments and financial regulators across the globe.

As a result, candidates with a solid background in security, compliance and data forensics will be welcome with open arms. As for the existing workforce: it will have to adapt quickly to the new paradigm by developing new skills in those areas – or be overwhelmed.

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