Put the word out there - we back up

📰 Welcome to the Newsletter

Good morning, at Global Custody Pro we track what's happening in global custody, clearing, payments, and digital assets. Our team filters through industry news to bring you what matters most in clear language.

This week the news is that digital assets are back up. What does that mean for the global custody industry? As we indicated last week, it means that on-chain products might get some regulatory certainty in the USA in 2025.

The likely departure of Gary Gensler from the SEC and appointment of a crypto-friendly cohort of regulatory agency appointees means you need to stock up on your popcorn.

The markets are already pricing in a lot of change - whether the hype matches the reality of what ends up on the Federal Register is what we will be tracking closely.

🌏 Global Custody News

European financial markets group AFME is pushing for quick changes to rules around blockchain technology in EU financial markets, warning that Europe could lose its leading position to other regions like the UK, Hong Kong, and Singapore. The group believes blockchain technology could create new markets worth up to €16 trillion by 2030 and save about €20 billion each year in trading costs by making it easier and cheaper to process financial transactions.

AFME suggests a two-step plan to update the rules. First, they want immediate changes to make it easier for companies to use blockchain technology in trading, including removing some complex licensing requirements and allowing larger transactions. Second, they propose a complete review of existing rules by early 2025, leading to a new framework for blockchain-based markets by 2029. These changes, they argue, would help unite European financial markets, make them more resilient, and keep Europe at the forefront of financial innovation.

So what? The missing piece is the consequences of how the USA chooses to regulate. If regulatory certainty arrives in 2025, the consequences for the EU ecosystem could be serious. The response of the EU is a key thing to monitor in 2025 - 2029 might be too late.

More: AFME Submission to the EC

Banks still handle about 75% of international money transfers, but they're steadily losing ground to financial technology (fintech) companies, according to a new report from Flagship Advisory Partners. The global cross-border payments market is growing steadily, with total transactions expected to reach $44 trillion by 2028, up from $32 trillion in 2024. Fintech companies are expected to handle 37% of all international payments by 2028, up from 25% today.

Despite recent economic challenges like high interest rates and inflation putting pressure on fintech companies' profits, the industry continues to show strong growth across all segments, from consumer money transfers to business payments. The report highlights that fintech companies focusing on emerging markets have particularly good opportunities for growth, as they can charge higher fees in these less competitive markets compared to developed countries. Many fintech companies are also joining forces through mergers and acquisitions to expand their services and reach new countries.

So what? Fintech isn’t just a buzz word. The reduction in cost and margin in FX and cross-border at the retail and business level will flow through to pressures at the institutional level. There is still a lot of opacity in this space, and wholesale cross-border payments aren’t safe from competition in the next few years.

More: Flagship Advisory Partners Report

The European Central Bank (ECB) has released new guidelines for how banks should manage their same-day cash flow needs, following recent financial market stress and the collapse of Credit Suisse in 2023. The guidelines also respond to changes in banking technology, including the rise of instant payments and faster trading settlements that require banks to be more careful about managing their money throughout each day.

The ECB's new rules outline what it considers good banking practices, based on what it learned from studying how different banks operate. These include basic requirements that all banks should follow, as well as more advanced practices that some banks are already using. The guidelines are meant to help banks create their own systems for managing daily cash flows and give banking supervisors a checklist for evaluating how well banks are handling these risks.

So what? The increase of regulation since the Global Financial Crisis is not stopping anytime soon. Or is it? Risk is like a hot potato, it never goes away, it just changes where it lives. Intraday risks can be reduced through netting and central clearing, but if atomic settlement happens and real time gross settlement becomes standard, that is a big change for regulated financial services to adapt to, and it is an open question what returns investors would expect with all of that extra capital tied up in supporting that model.

More: ECB Report

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🚀 Digital Asset News

Cryptocurrency exchange Coinbase has acquired the team from Utopia Labs to strengthen its on-chain payment capabilities within Coinbase Wallet, the company announced on Wednesday. The move comes as stablecoin transaction volumes reached $8.5 trillion across 1.1 billion transactions in Q2 2024.

The acquisition follows last month's announcement that Jesse Pollak would lead both Coinbase Wallet and Base, the company's blockchain platform. The integration aims to accelerate development of low-cost global payment solutions while expanding Coinbase's blockchain ecosystem, which focuses on attracting both developers and users to its platform.

So what? The fact that Coinbase continues to invest in on-chain products is big news. Stablecoins are rapidly growing, and have arguably the best product-market fit of crypto products to date. Expanding the engineering talent working on these products is a signal that traditional financial services firms will need to take not of.

More: Coinbase blog post

Law firm Davis Polk has written a client update outlining the details of regulatory changes that might happen now Donald Trump has won the US election, and Republicans will control the Senate and House.

Leadership changes at federal banking agencies are expected to lead to a more crypto-friendly regulatory environment, shifting away from the current de-facto ban on banks interacting with public blockchains like Bitcoin and Ethereum.

The agencies are likely to revisit seven key policy areas, including risk assessment of public blockchain interaction, reconsideration of crypto-related banking activities, and the potential approval of more crypto-focused bank charters.

The changes could also include clearer guidelines for banks investing in crypto companies, a more favorable approach to tokenization of traditional financial assets, and a reassessment of whether crypto-related activities are "financial in nature" under banking regulations.

So what? The global custody industry has slowly embraced digital assets because of regulatory uncertainty. There are so many failed projects and perceptions of risk that make moving projects beyond pilot schemes very challenging for regulated institutions. If reforms like this go ahead, the “career risk” for boards and executives to move digital asset projects to the big leagues are materially reduced - incentives matter.

More: Client Update