DZ Bank, Germany's second-largest commercial bank by assets, has announced that it is developing custody services for digital assets. The plan was encouraged by "massive" client demand as adoption rates reached frenetic levels, according to the financial institution.

The bank revealed, via Holger Meffert, the head of the security division's management division, that the offering of custodial services is tailored toward security settlements rather than virtual currencies. The services will most likely cater to a wholesale central bank digital currency (CBDC), which the European Central Bank (ECB) is expected to issue in the coming years.

While a partnership with some of the ecosystem's leading custody providers would be the simplest path for DZ Bank, the bank appears to be building its service from the ground up. According to initial reports, the new product is going to be completed, and the bank is about to hire a consultant to assist in obtaining approval from Germany's top financial watchdog, the Federal Financial Supervisory Authority (BaFin).

Meffert noted that the investment bank's clients, particularly Union Investment, which controls nearly $500 billion in assets, are driving the technological push. Because DZ Bank holds the majority of Union Investment's funds, Meffert believes his bank "should be able to cover most of their needs."

Union Investment's top brass has expressed support for distributed ledger technology (DLT), stating that "blockchain in combination with tokenization will become a game changer for the industry." Given this stance, analysts are confident that DZ Bank will use DLT to create its custodial service.

DZ Bank is desperate for a wholesale digital euro

DZ Bank emphasizes that its custody service will be inextricably linked to digital currency used in security settlement. Since then, the investment bank has been involved in a number of experiments to test payments on distributed ledgers using CBDCs.

Meffert believes that a wholesale CBDC is a way forward because it has the potential to change the landscape of financial institutions and "ensure replacement or support for reserves in the central bank" while lowering transaction costs.

Developing its own DLT solution for custodial services will be difficult due to inherent issues such as participants needing to be on the same ledger.

“It is the right decision to ramp up our own custody solution to be able to participate in the building of networks,”  Meffert said about potential roadblocks.

Oct 9, 2022
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