Northern Trust Gets Ready To Serve Cryptocurrency Hedge Funds

Financial services firm Northern Trust, which manages assets worth $10.70 trillion, is executing several projects related to blockchain and cryptocurrencies across multiple business units.

Established in 1889 in Chicago, Northern Trust has also established fund administration services to a hand-picked group of hedge funds trading on Ethereum and Bitcoin. This is in addition to a range of blockchain features being added to its private equity management platform.

These projects reflect significant work done by a traditional financial institution in the field of blockchain and cryptocurrencies. In an interview with Forbes, Pete Cherecwich, president of Northern Trust’s corporate and institutional services, provided the reason behind the 129-year-old institution’s entryinto the blockchain technology sector.

Cherecwich, who has more than a decade of experience in the company, said

“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. We have to be able to figure out how to hold those tokens, value those tokens, do those things.”

Cherecwich also revealed that the company’s recent blockchain project involves three mainstream hedge fund clients who wish to spread their risk by diversifying into cryptocurrencies.
The Forbes report says:

Since the first quarter of this year, Northern Trust has been helping the hedge funds by comparing the numbers they report with the actual amount on record at the customer’s cryptocurrency custodian. The firm further helps value the investment as part of its fund administration services, and records the value for its clients. Many of Northern Trust’s fund administration services were 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.

Despite these developments, Northern Trust Hedge Fund Services, which acts as custodian for $370 billion worth assets as of March 31, 2018, do not intend to offer direct custody of cryptocurrencies. Furthermore, Cherecwich does not expect the company to enter into crypto custody business any time in the near future.

Cherecwich underlined that the company offers services to cryptocurrrency investments to prepare itself for the day when central bank digital currencies become the norm.

Cherecwich, who worked at State Street for two decades before joining the asset management firm, said

“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 U.S. dollar — but the U.S. dollar [would still be] in a vault somewhere, or backed by the government. How are they going to do that? I don’t know. But I do believe they are going to get there.”

Apart from the work commenced in cryptocurrencies, Northern Trust is also planning to shift its $77 billion private equity business on blockchain. The blockchain platform to which new features are currently added was actually built for a Swiss financial service firm named Unigestion. The platform was later acquired by Northern Trust and upgraded it to the first enterprise-level platform of Hyperledger Fabric. The upgraded platform will not only support transaction settlement, but also Capital Call functions.

The firm has already provided a demo of the platform to over 100 potential clients. Presently, Northern Trust is working with some clients to completely automate middle-office services.

In the future, Cherewich expects the transparency and tamper-proof nature of distributed ledger could be of great interest to regulators and auditors. To meet the demand, Northern Trust and PwC have developed a suite of auditing tools that provide real time financial reports, which are usually sent on a periodic basis.

Presently, Northern Trust is working on two patents that have the potential to transform the financial institution into a software provider. The first patent, which was filed in early 2017, uses biometric data of a client to grant permission to perform various tasks. The second patent, which was filed late last year, is mainly intended for hosting an investors meeting using Hyperledger Fabric, Openchain or Ethereum. However, the system partly relies on the proof of identity provided by the first patent.

According to Bloomberg report, Northern Trust has also started building an institutional-grade crypto custody solution, which will offer the service at a competitive price than existing crypto custody providers, such as BitGo and Coinbase. Notably, Coinbase Custody service costs $100,000 to setup.

Cherewich said

“The fees right now the custodians are charging are pretty high, not the same fees that we get –- ultimately, I believe unsustainable, because it needs to be an efficient model.”