Germany’s DZ Bank to offer custodial services for the digital euro, other virtual assets

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DZ Bank, the second largest commercial bank in Germany in terms of assets, has announced that it is working on providing custody services for digital assets. The financial institution stated that the plan stemmed from “massive” client demand as adoption rates reached frenetic levels.

The bank disclosed through Holger Meffert, head of the security’s management division, that the offering of custodial services is tilting toward security settlements rather than virtual currencies. The services will most likely cater toward a wholesale central bank digital currency (CBDC), which it expects to be issued by the European Central Bank (ECB) in the coming years.

While the easiest route for DZ Bank will be a partnership with some of the leading custody providers in the ecosystem, the bank appears to be building its service from scratch. Initial reports suggest that the new product has reached advanced stages, and the bank is on the brink of appointing a consultant to help in receiving approval from the Federal Financial Supervisory Authority (BaFin), Germany’s top financial watchdog.

Meffert noted that the technological push comes from the investment bank’s clientele, particularly Union Investment, with assets of nearly $500 billion under its control. Meffert said that since DZ Bank houses the bulk of Union Investment’s funds, his bank “should be able to cover most of their needs.”

Union Investment’s top brass had shown support for distributed ledger technology (DLT), saying that they expect “blockchain in combination with tokenization to become a game changer for the industry.” Given their stance, analysts are confident that DZ Bank will leverage DLT to create its custodial service.

DZ Bank itching for a wholesale digital euro

DZ Bank notes that its custody service will be closely affiliated with digital currency used in security settlement. The investment bank has since been involved in several experiments to test the payments on distributed ledgers using CBDCs.

Meffert argues that a wholesale CBDC is a way forward, as it can potentially change financial institutions’ landscape and “ensure replacement or support for reserves in the central bank” while reducing transaction costs.

Creating its own DLT solution for custodial services will not be easy because of the inherent problems, like participants having 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,” said Meffert on ways around potential stumbling blocks.

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