How Public Key Infrastructure Will Revolutionize Custody and Fund Management

How Public Key Infrastructure Will Revolutionize Custody and Fund Management

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Stefan Loesch is a director and board member of a tokenization firm. He used to serve as a consultant at McKinsey, and as a banker at JP Morgan. He is the author of a book on financial services regulation and a lecturer at the University of Nicosia. The views expressed here are his.

The widespread use of public / private key pairs will greatly change the world of custody, and, I will argue here, those changes will be passed through to the world of fund management. 

On the custody side, I have summarized the argument . 

The essence is simple. In the traditional world, firms identify their customers with a shared secret, typically a username / password combination. As the word “secret” implies, third parties need to take a firm’s word on trust as to whether it acts on behalf of the customer. There is no means for anyone to independently verify whether any given instruction has been given by the customer, or whether the firm or one of its employees went rogue. 

In the world of securities custody, there are typically at least two firms involved. This mirrors that financial services has two sets of customers, the issuers and the investors. So in custody there is the investor’s custodian, and the issuer’s depositary. For  investors to put funds into an  issuer’s asset, there must be a link of trust between their custodian and the investor’s depositary. 

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