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As more big banks warm to blockchain technologies, HSBC has announced its entry into the world of digital asset custody, with the launch of storage services for tokenized securities.
The move follows a similar decision by US banking titan BNY Mellon in 2021, highlighting an emerging trend among major banking institutions.
HSBC reports a growing demand for digital asset custody and fund administration from asset managers and asset owners, indicating a rapidly evolving market.
The British banking giant, currently the biggest bank across the UK-European region, is partnering with Swiss crypto custody firm Metaco, recently acquired by blockchain startup Ripple, to offer secure storage for bonds and other securities.
The service will enhance the bank’s HSBC Orion platform for issuing digital assets and a new offering for tokenized physical gold.
HSBC will utilize Metaco’s Harmonize platform which aims to unify security and management of digital asset operations.
While originally the underlying technology for cryptocurrencies like Bitcoin, banks are finding diverse applications for centralized blockchains, from payments to trading, often without involving digital tokens.
Tokenized securities, like bonds and equities, are regulated assets issued on a blockchain.
The main use for HSBC’s centralized blockchain is to create a shared digital ledger where assets are recorded.
The digital tokenization of equities, bonds, and other assets is emerging as a promising utility in the banking sector.
Zhu Kuang Lee, HSBC’s chief digital, data and innovation officer for securities services, states the bank sees increasing demand for digital asset services.
Metaco CEO Adrien Treccani reinforces this sentiment, stating financial institutions are ready to scale digital asset pilots to real use cases around custody, issuance, trading and settlement of tokenized assets.
This move marks another significant step by HSBC towards embracing digital assets, adding to their existing services that allow Hong Kong clients to trade in Bitcoin and Ether (Ethereum’s token) exchange-traded funds. Read more here.
Where Does Zucoin Differ From Banks’ Centralized Blockchains?
Think of tokenized securities as regular assets like bonds but with a digital touch.
They’re simply converted into tokens and stowed on a blockchain, a common digital ledger.
HSBC’s latest venture into digital asset custody, protecting tokenized securities, embodies this saying.
Big institutions and firms will build up services offering to hold your digital assets, as banks already do with money.
This is a clear and expected off-shoot industry that is beginning to form.
The tricky part is that holding, managing, and potentially re-investing assets given to a company falls very clearly under securities regulation.
It’s an area Zucoin isn’t focused on and works to specifically avoid, as it’s a whole different kind of ballgame.
These institutions are uniquely positioned to move into the digital asset management area, and it’s been clear for a long time this is their trajectory.
HSBC’s approach differs from Zucoin’s goals.
With Zucoin, users handle their data and digital assets using their self-managed wallets, known as “self-custodial wallets”.
The Zucoin wallet holds everything from your transaction history to cryptographic keys, and the data resides in your app.
Your private data isn’t sitting on someone else’s server.
All that emits from your wallet app to the Splitchain caching network is your latest transaction so that others you’ve transacted with can prove your claims.
By doing this, it avoids the “double-spend problem”, where you could spend the same coin twice.
Interestingly, there’s an angle to this that isn’t being considered by most media outlets.
Apart from the obvious risk of disruption, why else would banks be rushing to embrace centralized versions of blockchain?
Tokenization is the answer, but why?
Banks tend to use their assets under management to issue new or extend existing loans, hence putting more money into circulation.
Despite what most people think, much of modern banking creates deposits by the act of lending, rather than lending the deposits that have been entrusted to them.
In essence, “loans actually create deposits”.
This isn’t the only way banks create money out of thin air, but it’s certainly a common way.
If banks are focusing on holding more assets and tokenizing more things from the real and digital world, then it seems clear their goal is to vacuum up as many kinds of assets as possible, so that more loans can be created, provided they have enough reserves.
It could move all kinds of asset ownership and management into the control of the banks.
Then, banks can stake more collateral to take out bigger and bigger loans.
Future credit balance sheets on banks will grow to a size dwarfing current numbers, in far less time.
It could get to a point where banks become bigger than their parent nation.
The goal of technologies like decentralized blockchains and Splitchain is to spearhead a different approach to managing and securing the ownership of distributed data, making it harder for central control or censorship to occur, in a way where anybody can participate—making it permissionless.
These announcements from HSBC and BNY Mellon could pave the way for the banking industry to control more assets owned by individuals and corporations.
And just as money held by banks has come under tighter and more controversial, borderline-censorship rules, so too will these kinds of assets in time.
It’s one of the important reasons why Zucoin’s focus is on making self-management and participation as easy as possible.
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Disclaimer: Of course, this is not advice, financial or otherwise. It’s also important to consider the risks and challenges associated with any potential benefits.