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Banks must establish infrastructure for digital assets before it’s too late



The adoption of digital assets in traditional legacy systems is moving fast. In the middle of the year, the digital asset custody industry saw welcome developments when the Office of the Comptroller of the Currency officially announced that all nationally chartered banks in the United States can provide custody services for cryptocurrencies.

The move, while positive for the ecosystem, is yet to be accompanied by a rigorous assessment of its technological infrastructure, like asking questions such as: Where are these newly acquired digital assets stored?

One thing is clear: We have entered a new paradigm of finance that requires a different approach to securing assets.

Digital assets offer great wealth potential, but asset custody providers have a responsibility to prevent their clients from becoming another figure of global crypto attacks, which reached a value of $1.4 billion in June this year.

According to the Financial Action Task Force’s yearly report, the industry’s lack of infrastructure is limiting compliance and safe storage of assets. As traditional financial markets begin to embrace the space, they must develop robust, tailored technology solutions with the strength of a legacy system.

Banks custodying crypto is a positive step in the maturation of digital assets

When the senior deputy commissioner stated in a letter that banks can hold cryptographic keys, it was clear banks were paying attention. It is a key sign of the industry maturing and that assets are being better understood and utilized. The OCC’s move will accelerate the confidence and development of regulators in the industry.

Banks have a unique opportunity with this move to dramatically increase wealth opportunities for millions of people across the globe through custodying digital assets. They could boost financial inclusion or prevent national economic collapse.

But they must do it correctly; they must understand how to effectively manage risks, how to comply with local and international laws, and how to be responsible for their customers’ assets.

Traditional banks are the pony express — and they must invest in telegraph wires

The story of traditional banks and new fintech digital asset providers can be compared to the old story of the Western Union and the pony express. In the Wild West of the U.S., messages were sent via the pony express, from one horse station to another. Riders carried letters on horseback for thousands of miles, passing messages from coast to coast. When Western Union came along and installed telegraph poles, suddenly, the pony express became obsolete.

The traditional financial system and the new financial system will run in parallel but with two different systems opening at one time. We’ll still call payments payments, and investments will still be investments. But the overarching infrastructure it runs on will be vastly different, like horse carriages and cars.

Technology has the power to be disruptive in a fast and transformative way — and banks need the right wires. This is a critical time for fintech actors to step up and usher banks in the right direction on their digital asset journey.

The future of finance is moving fast, and if banks do not incorporate the correct protective and regulative mechanisms, assets are at great risk.

In a new paradigm of finance, banks must understand new requirements

The first challenge for banks is understanding how the new industry works; they need to understand the implementation of atomic swaps and the development of smart contracts. This technology doesn’t play well with the traditional space.

We foresee a parallel system running in which players will use infrastructure that works significantly differently from traditional payment networks or settlement flows. There are many existing counterparties in the middle of those systems, and this is a status quo that won’t change. So, the only option for banks is to adopt these new technologies.

If banks move too quickly to capitalize on the booming space and do not incorporate the correct protective mechanisms, they may fail. The reputation of digital asset potential will be damaged, and the livelihoods of millions converting fiat may be lost.

The biggest loss to assets in the new world of digital finance is the theft of cryptographic access to keys. Custodians must learn how to better safeguard these from cyberattacks, which have been on the rise — up by 75% during the COVID-19 outbreak.

Many banks have yet to find ways to cost-effectively service and protect themselves from such attacks. They must also understand that digitized securities differ from traditional securities because they are essentially representations of value or contractual rights or real-world assets.

Digital assets are fraught with risks if not settled correctly, and qualified custodians will eliminate the risk of counterparties failing to fulfill a transaction.

To build or to buy? Banks offering custody will need to decide urgently

While the move of the OCC is positive, it’s important to recognize that the majority of banks simply do not possess the correct infrastructure to provide safe and compliant custody solutions.

Banks can facilitate exchange transactions, settlements, trade executions, record keeping, valuation and tax services, but the question lies in how they will be able to deliver these services while managing the risks. You cannot scale crypto asset markets or have traditional institutional adoption without the elimination of trading counterparty and settlement risk.

Banks entering crypto custody will need tried-and-true crypto asset technology developed specifically for the industry and will inevitably face the build-versus-buy decision. So, unless they’re planning to build from scratch, banks will need access to the right technology that can safely secure digital assets.

The implementation process is not easy, nor is it cheap. They cannot cut corners. Banks will need to develop a team to research and make recommendations, seek approvals, build a team, test prototype technology and conduct regular cybersecurity assessments.

This, in and of itself, can take years. Rushing the process will be detrimental to customers’ assets. Banks have an option to integrate with the existing infrastructure that niches specifically in the protection, regulation and security of digital assets with whom digital asset protection is a number one priority, not their second.

The cost to develop crypto-tailored infrastructure is expensive — but the cost to not include it will be worse.

Moving forward without risks for customers

Banks and financial institutions are notoriously slow at innovating, but customers should not have to suffer.

The fintech and crypto space moves at the speed of light, with even the most intelligent and forward-thinking leaders in the space stating they can’t keep up. Banks must find the capacity to consider the development of the necessary secure and compliant infrastructure.

The solutions need to come fast. As global markets begin to recognize that the existing financial infrastructure is on the brink of failure, banks must follow the digital asset industry to protect the future of the financial industry.

New on-boarders embracing the digital asset space must understand how to effectively manage risks, comply with local and international laws, and be responsible for their customers’ assets.

This article was co-authored by Gunnar Jaerv and Glenn Woo.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Gunnar Jaerv is the chief operating officer of First Digital Trust — Hong Kong’s technology-driven financial institution powering the digital asset industry and servicing financial technology innovators. Prior to joining First Digital Trust, Gunnar founded several tech startups, including Hong Kong-based Peak Digital and Elements Global Enterprises in Singapore.

Glenn Woo is the managing director of APAC (Asia Pacific) at Ledger — an industry leader in developing security and infrastructure solutions for cryptocurrencies and blockchain applications. He has an extensive career in the financial services and technology industry, working for S&P Global Market Intelligence as the head of Hong Kong, Taiwan and Korea, and Shinhan AITAS as a consultant in financial asset custody.

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Is DeFi technology easy enough to adapt to non-finance industries?




Decentralized finance is far and away the hottest topic in crypto, touted as a way to make a fortune by backing the right token, but also a tool for taking the crypto you were hodling in a cold wallet and set it to work earning interest at extraordinary rates.

There’s a reason DeFi has grown so large so quickly that it has slowed the Ethereum blockchain where most of the projects live to a crawl, and sent gas prices for transactions soaring to $10, $50, even $100 at times.

DeFi is mostly talked about in terms of taking over the banking and brokerage functions that big finance thrives on, but the technology can be used to revolutionize many other businesses, from energy to e-commerce.

That reason is simple: At its core, decentralized finance is about eliminating the middleman.

Why give a bank your money — for a paltry fraction of 1% interest — for it to loan out, when you can loan it out for orders of magnitude more through a crypto lending site?

Or invest it in a liquidity pool that uses an automated market maker to create a shared pot of tokens that cryptocurrency traders can sell to or buy from, rather than waiting to find a trader who wants to buy what they’re selling at the price they want. The way liquidity pools work is that liquidity providers lock funds into pools in exchange for fees paid on each transaction — which are usually paid in an exchange’s native token.

All you’re doing, really, is replacing the institutions facilitating those transactions —the man in the middle of taking it from Jane and giving it to John — with smart contracts that automate both the introduction and the exchange of currency. In other words, it turns a peer-to-business-to-peer transaction into a peer-to-peer transaction.

The difference is blockchain’s immutable nature, which makes it impossible for either side to cheat. Because it is trustless, you don’t need to pay a trusted intermediary to do that for you.

Beyond finance

Financial transactions are the low-hanging fruit for DeFi, as they are very frequent and the value of the currency being traded is so large. That said, DeFi in its trading, staking and yield farming formats can get pretty complex. But, that’s mostly because people are willing to do very risky things like betting on margin with borrowed money.

However, DeFi works for pretty much any data you need to transfer from one party to another. That can be e-commerce, insurance, digital identity, and even electric power — the possibilities are endless. And in most cases, they are fairly simple.

Decentralized energy is raising enough interest that it’s been given its own nickname — DeEn instead of DeFi — even though it also uses DApps and smart contracts, and generally lives on the Ethereum blockchain. Other than removing the middlemen — brokers and utilities — the only real difference is kilowatts instead of kilobytes.

A year ago, German sustainable energy firm Lition launched its blockchain-based, decentralized peer-to-peer Energy Exchange, which lets individual consumers choose exactly which source to buy their energy from inexpensive or green or local power producers — whatever they choose.

It’s up and running, and according to a power industry publication consumers are saving an average of 20% on utilities while power producers are seeing revenue go up 30%.

Decentralizing ecommerce

E-commerce is another field ripe for disruption by DeFi, and one of the companies doing it is Uquid, which is aiming to build a bridge between DeFi and e-commerce.

One way it is doing this is through its Defito Finance arm, which concentrates on shopper loyalty programs using tokens earned with every sale or purchase.

The site pulls in three techniques commonly used in DeFi trading, loaning and mining operations and adapts them to the needs of an e-commerce site.

Shopping mining is a loyalty program that creates and awards newly mined tokens with every purchase from Uquids many online stores, which offer everything from video games and music to subscriptions for streaming services like Spotify and Xbox Live. This uses one of Defito’s native tokens, the DeFi Shopping Stake (DSS). Once mined, these tokens are loaded into a smart contract that lets them be used for future purchases from the Uquid sites, or for staking in the liquidity pools.

Defito’s other token is the DTO, a governance token which can be earned by contributing liquidity to the shopping liquidity pool. Instead of making it possible for cryptocurrency traders to buy and sell tokens, the Defito pools represent digital goods on Uquid’s ecommerce sites ranging from games and business software to gift cards and mobile top-up cards. An automated shopping maker connects pools of goods from different suppliers, allowing token holders to search for and track the best prices for the amount of those goods they wish to buy. These sites accept cryptocurrency in payment.

Both DTO and DSS can be used for staking and payment, but DTO brings governance voting rights, including on whether DSS tokens should be burned to increase their value or used to develop the rewards system.

Another DeFi token is Uquid (UQC), a decentralized ERC-20 token that can be used for a variety of more traditional DeFi services including staking, lending, borrowing and token swaps, as well as goods including utility, grocery, and pharmacy vouchers from chains around the world.

Finally, Uquid has recently added a fourth token for its new NFT marketplace, NFTD. The non-fungible tokens are at the heart of a digital products marketplace where they can be used to provide buyers of digital goods clear ownership rights. It’s a Binance Smart Chain utility token aimed at things like social media content from TikTok and YouTube videos to photographs and music, as well as Uquid’s other digital content.

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China debuts blockchain-based digital yuan salary payments in Xiong’an




China is progressing with its central bank digital currency (CBDC) tests, debuting blockchain-enabled salary payments in the digital yuan.

According to the official website of the Xiong’an New Area, the People’s Bank of China (PBoC) has successfully completed the nation’s first on-chain wage payouts in the digital yuan.

Announcing the news on Saturday, Xiong’an authorities said that the pilot involved guidance and support from the Shijiazhuang-based PBoC branch, the Bank of China Hebei Xiong’an branch, as well as the National Development and Reform Commission.

The new CBDC pilot used a blockchain-based payment platform to distribute salaries to workers on spring afforestation projects in Xiong’an. Engineering subcontractors made payments directly to builders’ digital wallets from a public wallet and recorded the relevant data on a blockchain.

According to the announcement, blockchain-based salary payouts significantly simplified the wage payout process. The implementation reportedly marks the first combination of blockchain technology with the digital yuan.

Related: China’s blockchain project BSN to pilot global CBDC system in 2021

Xiong’an was one of the first four regions to pilot China’s CBDC in April 2020. In February, the Xiong’an branch of the Agricultural Bank of China in Hebei produced the first digital yuan-designed hardware wallet. The product was developed by the Party Working Committee of the Xiong’an New Area and the PBoC’s branch in Shijiazhuang.