The 129-year-old Chicago-based company & financial services giant, Northern Trust, has begun developing a way to secure digital assets held in custody while seeking to charge lower fees than existing crypto custodians, according to Pete Cherecwich, head of corporate and institutional business.

With almost $10.7 trillion in assets under custody and administration, Northern has also opened its fund administration services to a few group of hedge funds betting on bitcoin and ethereum.

This could be one of the most significant pushes into cryptocurrency, and other digital assets by a traditional financial institution.

As reported in an exclusive interview with Forbes released this morning,  Pete Cherecwich provided an unprecedented look into the breadth of his company’s work with blockchain. But perhaps more importantly, he explained why the 129 year old institution was committing so many resources to the technology.

 

“You can take anything today. You can take movie rights, you can take all sorts of entities, and you can create a token for those,” said Cherecwich who has been with the company for 11 years. “We have to be able to figure out how to hold those tokens, value those tokens, do those things.”

The newest of Northern Trust’s blockchain efforts is a previously unreported project with three “mainstream hedge funds” that Cherewich says are diversifying their portfolio with cryptocurrency investments. While he was unable to share the names of the clients due to non-disclosure agreements, he described his company’s new cryptocurrency services in detail.

Since the first quarter of this year, the company has been helping the hedge funds by comparing the numbers they report with the actual amount on record at the third party custodian. The firm further helps value the investment as part of its fund administration services, and records the value for their clients. Many of the fund administration services were originally developed for traditional assets. But others, including new risk and control frameworks for anti-money laundering, asset existence validation, crypto-trade reconciliations and the ability to handle new net asset value pricing arrangements, were developed specifically for cryptocurrency.

While Northern Trust Hedge Fund Services had $370 billion in assets under administration as of March 31, 2018, the financial institution is not currently taking direct custody of cryptocurrency. Nor does Cherecwich expect the company will custody cryptocurrency anytime in the near future. Instead, he says that helping the company’s customers account for their cryptocurrency investments, is part of a larger effort to prepare for the day when fiat currencies themselves are also issued on a blockchain.

“I do believe that governments will ultimately look at digitizing their currencies, and having them trade kind of like a digital token — a token of the US dollar — but the US dollar is still in a vault somewhere, or backed by the government,” said Cherecwich, who worked at State Street for 20 years before joining Northern Trust. “How are they going to do that? I don’t know. But I do believe they are going to get there.”

Beyond the new work with cryptocurrency, Northern Trust is moving to significantly integrate blockchain into the life cycle of its $77 billion private equity business.

Launched into alpha in February 2017, the private equity prototype was initially built for Switzerland-based Unigestion using an early version of the open-source Hyperledger Fabric. Just a few months after the launch, the rudimentary private equity platform was upgraded to the first enterprise-grade version of Hyperledger Fabric, and is now adding a number of new features.

The upgraded private equities blockchain is moving beyond just settling a transaction, to a more automated process by which a general partner and a limited partner exchange ownership of an asset. Further, capital call functionality has also been built into the system, with the hope of reducing the role of middle-office middlemen and accelerating the time to receive funds.

To build the series of new blockchain services, Northern Trust initially established a team of 12 technology and private equity specialists working over six months, and has since supplemented the working group with additional product managers and operations and regulatory compliance specialists in the markets targeted for implementation.

While pricing for the software solution has yet to be determined, Cherecwich says Northern Trust has already demoed it to “well over 100 clients,” and is now working with some of them to more fully automate costly middle-office services.  “We have determined that we will be able to go out and sell it,” he said.

“When I do a capital call, I will get my money faster than if I had to do it via emails and paper and everything else. So, my time to market, and therefore when I’m going to get paid, is shortened,” said Cherewich. “The more automated that process becomes, it’s just less costly to run a fund.”

But cryptocurrency administration and private equity workflows are just a small piece of Northern Trust’s larger blockchain plan.

Initially, the relatively low transaction rates of the $2.5 trillion annual private equity industry were seen as an ideal place to target blockchain solutions that historically had difficulty handling high volume. Going forward, however, Cherecwich believes the transparency provided by using a shared, distributed ledger, could end up of interest to auditors and regulators across industries.

To help prepare for that demand, Northern Trust and ‘Big Four’ accounting firm, PwC earlier this year revealed a suite of auditing tools designed to give real-time access to financial reports that are otherwise only sent on a periodic basis. Already, the Guernsey Financial Services Commission has access to a node on the blockchain designed to grant them real time access to some of the data.

“Since blockchain has an immutable record, you put a robot as a node on that immutable record, and I don’t care whether it’s private equity or anything, then that robot can audit those transactions, and make sure everything syncs automatically,” said Cherecwich.

At the core of Northern Trust’s blockchain work are two patents that could eventually help transform the legacy financial institution into a software provider. The first patent, filed in early 2017 uses physical traits of a user to confirm he or she has permission to perform various tasks. A second patent, filed late last year is for hosting an investors meeting using Hyperledger Fabric, Ethereum or Openchain, and relies in part on the proof of identity provided by the first patent.

“What we’ve done is not only developed a patent that enables you to have the identity management that enables you to do transactions,” said Cherecwich. “But extends the transactions beyond buying and selling of the security to actual board meetings and votes.”

Slowing down some of the progress being made by Northern Trust is an ongoing sense of regulatory uncertainty, according to a position paper on the potential role of cryptocurrencies, published by the firm in June. Citing measures taken by Bank of America, Citi and Lloyds to prevent customers from buying cryptocurrency using credit cards, the report further noted that very few major banks have launched any crypto-related services and most are awaiting more complete regulatory oversight.

Among the most notable exceptions to this apprehension is Goldman Sachs, which is opening a bitcoin trading desk, and Bloomberg, which earlier this year helped launch the Galaxy Crypto Index with support from hedge funder, Mike Novogratz. While Northern Trust’s June report characterized the firm’s reaction to the changing cryptocurrency landscape as “cautious,” the work being done by the financial services giant places it among the most ambitious of these efforts.

“It’s just something I’ve not seen from custodians in my 30 years” in the industry, said Cherecwich. “And I’m pretty proud.”

 

Cherecwich notes, Northern won’t be releasing a custody product for digital assets for at least another 12 months. But, with companies like Coinbase charging a $100,000 setup fee and a minimum of $10 million, this will be a win for smaller institutional investors.