7 minute read
Investing in the future
For investment banks, being digital increasingly means forming the right technology partnerships, and that’s especially so if they want to move into the booming digital asset space.
The size of this market is growing rapidly, and so is institutional interest as big banks that have been slow to catch on, realise they risk losing out on multi-trillion dollar business.
“Digital assets aren’t going to go away – it will be a 10, 15, 20 trillion dollar business in the next couple of years, driven by asset tokenisations, stablecoins, and central bank digital currencies,” says Olivier Dang, COO of the wholesale digital office at global investment bank Nomura.
Dang has a remit that spans the bank’s electronic trading platform, digital assets and new business opportunities. While partnerships are already central to Nomura’s strategy, they are critical when it comes to digital assets, he says.
“About three years ago, and before many of the other traditional banks looked at the space, we decided to enter the digital asset custody market. But we did so as a traditional bank, and there was no way we were going to build an in-house solution that would meet the needs of cybersecurity, or that could keep up with the pace of technological change. New coins that we may want to support are coming into the market every month, or even every day.”
So, instead, Nomura formed a joint venture (JV) to create a next-generation digital asset custodian called Komainu, alongside Ledger, a French fintech, and CoinShares, a large crypto firm. Ledger provides a platform to secure, buy, exchange and grow crypto assets, while CoinShares describes itself as a pioneer in digital asset investing, whose mission is to expand access to the digital asset ecosystem.
“Nomura brings 100 years of experience to Komainu,” says Dang. “We operate in regulated markets and have the institutional experience and scale. Ledger brings technology, and CoinShares has the expertise and knowhow in the crypto market.
“The Komainu JV is now fully regulated, has a few billions of assets under custody, and is live and servicing institutional clients.”
It demonstrated how a large institution can successfully partner to leapfrog into untapped markets, taking investment banking in a new direction. It was also a smart move for Nomura, fortressing its position in a segment of investment banking that Dang acknowledges today’s traditional actors may cede to new players within the next decade.
“Already, the likes of Binance, FTX, and Coinbase are generating significant revenue, and transacting massive volumes, matching the levels in traditional exchanges and banks,” says Dang.
Based on technology developed in just the last few years, commissions made on crypto provide plenty of firepower for technology investments such as into DeFi – decentralised financial – products using Ethereum and blockchain applications.
“You already see protocols using automated market makers to generate volume on certain coin pairs,” says Dang, “and there are no brokers or actors in the middle. Very few traditional banks are in that space today. It’s difficult to enter because of know-your-customer and lack of regulation, but that’s not to say things won’t change.
What will tomorrow’s investment bank look like? Olivier Dang, COO of the Wholesale Digital Office at Nomura, and Matthew Lempriere, Head of Asia Pacific at BSO, discuss digital assets, technology and industry partnerships
“In the next few years, there’ll be a massive shift towards new actors, mostly driven by the explosion of digital assets,” says Dang. “I think some of these crypto actors might attempt a reverse takeover and buy a traditional bank for its licence and institutional client base.”
In the meantime, without the right partnership and external skills, Dang says Nomura would struggle to define the scope of the product, and would not have had access to the best technology – nor, indeed, understood what’s happening in the market.
“These guys live and breathe the products,” says Dang, “but we don’t. What we bring is our client base, our knowledge of how to onboard a client, how to manage a risk framework and how to operate three lines of defence, plus all the key banking that pure fintechs may not know how to do. The synergy through a joint venture, through investment, is the right approach.”
Olivier Dang, Nomura
It’s one that Nomura has replicated in many other areas, mostly as an ‘efficiency play’, says Dang, where technology can achieve a few basis points of cost reduction. It tends to partner with well-established tech companies that have done it before, at scale, with other banks. It has no appetite to be a guinea pig, says Dang, but if there is a clear-cut revenue gain, the bank won’t hesitate to shake on a mutually-beneficial tie-up.
“We’ll put money into an early-stage company,” he says, “and get equity so that we have a seat on the board. Then we can influence the product roadmap and build something that really meets the needs of the industry. I’m convinced partnership, especially in digital assets, is the way forward.”
Matthew Lempriere, head of sales at BSO, which provides mission-critical infrastructure and network services, represents the technology side of these banking partnerships.
“Our clients depend on data,” says Lempriere, “and getting it to where it’s wanted, when it’s wanted, with the best possible technology, is what we do at BSO. Specialist companies like us, which provide ultra-low latency solutions globally, still have a serious edge, on the network side, over the Cloud providers that are doing the storage, the applications, the analytics… it’s just one-size-fits-all from most of them.”
His observation on the technology cycle presents a more unorthodox view of how the industry might evolve, with power returning to desktops, or a virtual on-premise setup.
“I take a slightly different view from other people,” he says. “If you look at where technology has gone, when I started my first job, in the late 80s, it was all mainframes and dumb terminals, then everything was PC-based, and now it’s everything in the Cloud, so my PC really doesn’t have much on it. Give it 10 years, though, and you’ll probably find that some of the technology will start coming out of the Cloud, or at least into the edge, because we’ll need the dedicated infrastructure again.”
Any evolution in investment banking and asset management will be more cautious than in other industry verticals, says Dang, due to the amount of regulation it’s subject to. But he tends to agree with Lempriere’s cyclical view.
Progress, especially when it comes to Cloud adoption, already varies from country to country. Lempriere points, for example, to a rule introduced in Hong Kong which stipulates that all data should be stored on-premise. Indeed, he was involved in explaining why this would negate the benefits of the Cloud.
“Some countries are far more conservative than others,” says Lempriere. “There are relationships between datacentre providers and local businesses where they want to keep the status quo and there is no desire to move to the Cloud.”
Matthew Lempriere, BSO
That’s not the only technology shaping investment banking, of course. AI, greater automation, and low-code and no-code, all play a part. However, the concern is that digital asset players are progressing more quickly, says Dang.
“By definition, a digital asset must be all digital,” he says. “You need a faster information flow, using your AI engine to extract insights and data, and trade in a systematic way, instead of having a voice trader passing orders. If you’re not investing in your tech, your people and your leadership, you’re not prepared for the future and the growth of digital assets.
“We need to be less conservative,” he says, “as there’s a risk of falling behind. We need to offer wide product sets and new asset classes. The institutional adoption of digital assets is almost at a tipping point, so if we’re not able to meet the needs of our institutional clients, they’ll look elsewhere. It’s critical for us to move into that space.”
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Investment banking must embrace digital assets
