There is a tidal wave of adoption of digital assets under way around the world, and this has set the stage to ‘rewire’ the financial services industry and its value chains. The growth potential is massive. Hong Kong’s digital assets institutional market alone could top US$100 billion in the next three to five years, according to information in recent reports from Hong Kong Private Wealth Management and KPMG. Asian markets are driving this shift. Japan was the first to regulate digital assets and now has licensed exchanges. In September, the People’s Bank of China announced plans to launch a digital version of the yuan to replace physical cash for consumer payments, while regulatory bodies in Hong Kong, Australia and Singapore have created sandboxes that encourage innovation and participation in the fintech space. Regulation has proven a boon to growth. When Japan introduced government guidance around digital assets in 2017, trading volume grew by 450 per cent in a year, compared with 18 per cent globally during the same period. Digital assets will only continue to grow. With clearer regulation coming in the near future, large financial institutions such as banks and asset managers will have the official ‘stamp of approval’ needed to participate in the market, driving tokenisation of existing asset classes and substantial capital inflows to the sector. Blockchain could ease small firms’ financing woes, HSBC says Asia is at the centre of growth in digital assets and blockchain technology. The region leads in terms of usage and investment in digital assets, blockchain job growth, and technological innovation. According to a recent report by PwC, the deal count for equity fundraising for digital assets companies in Asia grew to 26 per cent of the global total in the second quarter of 2019 – a 12 percentage point increase from the first quarter of 2019, and the highest increase of any geographic region. EMEA had the largest overall share at 41 per cent. As investment in the Asia digital asset ecosystem deepens, user demand for institutional safekeeping of these assets will also increase. Financial services providers must enhance capabilities for digital asset custody that meet regulatory and fiduciary standards in order to participate and compete. Key traditional custodial duties and capabilities are equally applicable for digital assets. For example, physical and cybersecurity, appropriate licensing, audited books and records, systems and controls, financial reserves, and deep in-house legal and compliance expertise. However, digital assets require more extensive security protocols, are traded and settled around-the-clock, and are relatively “new”. As a result, they can be more susceptible to physical loss, operational errors and cyberattacks. Increasingly complex technology and operational safeguards, with standards that are higher than traditional assets, must be deployed to protect clients (and operators) of this asset class. China’s new targets in crypto crackdown: News outlets and... hotels? Institutional-grade digital asset custody requires controls around client asset segregation, a robust cybersecurity strategy, management of complex digital wallet infrastructure (namely a network of several online and offline wallets with different security protocols), and the ability to reconcile account balances against the blockchain on a near-real-time basis around the clock. Operating under these demanding technical requirements will involve substantial investment in infrastructure, security and human capital. Effective systems must also vertically integrate different technologies and comply with evolving regulatory standards before they can be ready for handling institutional volumes. Any business that trades on the confidence and trust of its clients will need to find solutions to these problems if it wishes to capture growth in the new digital asset environment. After last week’s plunge, investors see bitcoin sinking below US$5,000 Large financial institutions, particularly in Asia, have traditionally been slow to react to new technologies. Mass adoption of cashless payments and cellular phones ultimately forced banks to change, and the convergence of the banking and technology sectors has seen tech titans, such as Tencent Holdings and Alibaba Group Holding, morphing into giants in payments, insurance and lending. Alibaba is the owner of the South China Morning Post With the advent and growing acceptance of digital assets, traditional financial service providers have been put ‘on notice’ and must adapt their core capabilities – particularly in areas such as digital asset custody – if they wish to survive and compete. The financial services industry, including big banks, insurance companies and asset managers, has the most skin in the game and must take care to prepare for this shift or risk being left on the sidelines of a quadrillion dollar opportunity with effectively the first new asset class since the ETF arrived on the scene in the 1990s. Hugh Madden became CEO of Hong Kong-listed BC Group in July 2019 and has two decades of experience in blockchain, financial markets and security. For more insights into China tech, sign up for our tech newsletters , subscribe to our Inside China Tech podcast , and download the comprehensive 2019 China Internet Report . 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