Perspectives

Texas Banks, the Crypto Transition, and How Ledger Enterprise Can Help – The Case of Bank Frick

August 06, 2021 - 9 min read

Key takeaways:

  • The latest pro-crypto legislation in Texas, the ninth-largest economy globally by GDP, will have a notable impact on the digital asset industry all around the world;
  • The regulatory developments, alongside the bullish sentiment towards digital assets in the state, present Texas private banks with an enormous horizon of opportunities and growth potential;
  • Ledger Enterprise has years of expertise in helping financial institutions burst onto the crypto scene and ensure optimal position for business expansion.

In an official notice from June 2021, the Texas Department of Banking authorized state-chartered banks to provide customers with cryptocurrency custody services as long as they have adequate risk management protocols in place. The state’s pro-crypto policy is a major boost for the Texas banking sector. Institutions can now ensure better service to their clients, while the most proactive ones can seize tremendous growth opportunities.

Yet, according to Marcus Adams, the state banking department’s assistant general counsel, just because local banks can now take on this new role doesn’t mean they will. The reason is the need to ensure they have proper risk management procedures in place.

However, dealing with risk management in a crypto-native environment had long been a stumbling block for traditional banks. According to Deloitte, institutions are wary of entering the cryptocurrency niche because they struggle to fully understand the security risks. For a swift transition, KPMG advocates for traditional bank custody frameworks, processes, and technologies to evolve and align to the crypto ecosystem’s requirements.

This is precisely what Texas banks would have to address to capitalize on the niche’s immense potential and the state’s appetite for the new asset class. While this position might be new for them, it is a field of expertise for Ledger Enterprise.

For years, Ledger Enterprise Solutions has been the trusted partner of leading banks, custodians, and investment firms, looking to enter the digital asset niche. Through enterprise adoption of our core custody technology platform, Ledger Vault, alongside advisory services, partnerships, and provision of technical know-how and education, we help our institutional clients address technology implementation, security, and governance for their digital assets.

The case of Bank Frick – one of Ledger Enterprise’s success stories in the banking sector

In 2017, Bank Frick became the first European bank to offer access to an in-house digital asset custody solution through a tracker certificate.

Before entrusting Ledger’s expertise to revamp and future-proof its custody services, the bank relied on its own in-house cold storage custody solution, built primarily around people and processes. While secure, the setup presented various limitations.

The challenges

Bank Frick’s case was similar to the position many Texas banks are now in. Being among the first to allow customers to securely deal with digital assets without exposing them to the technical and legal risks means the responsibility would be very high. To handle the process seamlessly and build a sound service offering, institutions have two main options: buying or building the custody technology.

While a case can be made for both, years of market experience have proved that buying is the better choice in terms of cost-efficiency, reliability, and flexibility.

In the case of Bank Frick, the continuous pushing of the boundaries of secure asset custody brought several unexpected challenges, highlighting the need for further professionalization and expansion of the existing solution. Alternatively, the bank had to shift away from a reliance on people towards state-of-the-art technology.

“It was clear that we needed to work with the best to cope with the ever-expanding market demand and provide our clients with the peace of mind that Bank Frick is renowned for.” - Stefan Rauti, Head Private Clients & EAM’s at Bank Frick

Inflexibility and governance concerns

Bank Frick’s original custody architecture was based on cold storage - the process of storing the sensitive cryptographic material in a secure offline environment. As a result, the operational security restricted any attempt to streamline the access to each customer´s private keys.

Furthermore, aspects of independent blockchain platforms, such as the irreversible loss of a book-entry due to an incorrect address when depositing, withdrawing, and transferring funds were entirely out of the scope for the bank’s capabilities at the time. To address this, enforce clearly defined governance rules, and eliminate the risk of human error, the legacy setup required multiple manual checks at every step, reducing efficiency and increasing the time for transaction processing.

Usability issues and process difficulties

The architecture and operational model of Bank Frick’s initial custody solution presented some significant usability challenges.

First, the access to client funds was much slower and required active participation from various operators. This goes against the core idea of digital assets to ensure quick and easy transactions.

Furthermore, it is very labor-intensive because trusted personnel require extensive training and a keen understanding of cryptocurrency security to manage, set up, and safely process requests. All this created a bottleneck.

Limited scalability capacity

Chief among the challenges in growing the bank’s business was also the question of scaling its system. The fast and secure processing of transactions — something that had previously been a lengthy procedure due to the cold storage arrangement, needed a redesign.

This wasn’t only an operational matter but also a question of reputational risk and a potential barrier to the bank’s early market growth.

All these challenges led to slower customer onboarding, harder-to-execute client orders, complicated withdrawal management, and more. The looming risk at the time was for the bank to be perceived as a slow and expensive incumbent.

Bank Frick’s case proves that even financial institutions who had spent significant efforts in designing their own digital asset custody architecture to be ahead of the market can still face numerous challenges and struggle to successfully execute their growth strategies.

For banks with no existing infrastructure, standing at the door of digital asset adoption barefoot, the case would be much more complicated. And the barrier isn’t only technological. Implementation, continuous development, professional expertise, and guidance are equally critical. Without a trusted partner to take the burden off their shoulders and hold their hand through every step of the transition, banks risk taking the bumpy road towards digital asset adoption.

Ledger Vault and the value delivered for Bank Frick

Ledger Vault is Ledger Enterprise Solutions' state-of-the-art crypto custody technology that helps banks and financial organizations overcome the complexity of digital assets custodianship by taking the burden off their shoulders and allowing them to focus on core operations. The product brings plenty of advantages, allowing organizations to easily keep their client funds safe without needing to radically shake up their existing operational flows.

Improved flexibility and resilient governance workflows

Features like whitelists, multi-authorization schemes, approval groups, conditional workflows, and segregated governance roles allow Ledger Vault to eliminate all potential failure points as no single user can subvert the system.

The administrators on the bank’s team can generate a practically unlimited number of individual accounts and define the governance rules for each one, as well as the operators with access. That way, Bank Frick was empowered to enact strict operational controls over the assets under custody.

Furthermore, the system drastically reduced the time needed to execute client requests, allowing transfers to be created and broadcast within just minutes without sacrificing security.

Streamlined procedures and complete transparency

The system made digital asset management an intuitive process that granted the bank the power and flexibility to meet the growing demands of regulators, their customers and also future-proof their custody offering. Ledger’s training and technical guidance ensured that Bank Frick’s team is well-prepared to handle all digital asset operations without any bottlenecks.

The Vault digital asset custody solution provides Bank Frick with an intuitive reporting system capable of generating detailed reports for record-keeping and accounting purposes with just a few clicks. The reports are exported as a .CSV file, which can be imported into the most popular spreadsheet and accounting software for easy auditing.

Scaling benefits

By transitioning from a legacy cold storage-based system to Ledger’s secure digital custody solution, Bank Frick unlocked a great deal of value for its clients. Furthermore, it significantly reduced the workload for its employees — all without compromising on simplicity or security.

This is a benefit that Texas banks can be looking forward to. Upon the new guidance, state banks can choose the specific custody and storage solutions they want to offer their customers and are free to act in either a fiduciary or non-fiduciary capacity. In a nutshell, banks would have different legal obligations to the client, including to "keep the asset safely and to return it unharmed upon request."

Ledger’s extensive set of security features proves to be an ideal fit for Texas banks looking to ensure their and their clients’ peace of mind. The platform’s capabilities give financial institutions the freedom to choose a personalized solution that best fits their individual expertise, risk appetite, and business model.

Ledger Enterprise’s mission to ease Texas banks’ quest to digital asset adoption

The latest crypto-friendly go-ahead move from the state of Texas is what many banks have long been waiting for. Now that regulations are welcoming, financial institutions can push ahead and take advantage of the bullish crypto sentiment taking over the state.

Trusting Ledger’s years of experience is pivotal for the seamless penetration of the digital asset space as it unlocks a plethora of advantages, not only on the technical but also on the business side.

First is the short time-to-market. Being among the first-movers in a crowded niche (Texas has the second-most banks in the country, behind California) that is only poised to grow can be an immensely lucrative opportunity. However, to gain a competitive advantage, banks need professional guidance and a solution that can be rapidly integrated into the organization.

“The integration of the Ledger Vault was first even for the experienced IT Staff of Bank Frick. However, Ledger was very responsive and was regularly on-site to make sure every aspect was addressed.” - Martin Stolze, Business Analyst at Bank Frick

That way, banks’ teams need less training and can reduce friction, allowing them to get up and running with their new digital asset custody solution quicker than they might expect. Ledger Vault provides a flying start from the get-go, with a complete setup and integration possible in as little as two weeks.

Ledger Vault also brings down all barriers to business scaling, something vital in a state aiming to become a magnet for the industry. The platform’s flexibility and speed guarantee that business can continue as usual even if the bank grows to a point where it deals with hundreds or thousands of transaction requests per day.

To ensure our clients’ peace of mind, all Ledger Vault customers are covered by a $150 million insurance plan from Lloyd’s London syndicate Arch. Clients also have the option of extending their insurance coverage even further through Ledger’s easy upgrade process. This saves Texas banks from the complicated practice of insuring their own digital asset custody solution.

Leading the pack comes with responsibility. At Ledger Enterprise, we know how it feels, and we are here to help you make the next step to growing your banking business.

If you are interested to learn about the possibilities that Ledger Enterprise can open for your organization, get in touch with us at [email protected]