BNY, one of the world’s largest custodian banks, is taking a major step toward blockchain-based financial infrastructure by moving fund ownership records onchain. The New York-based institution will launch a blockchain-based version of its transfer agency business, which manages fund ownership records and investor transactions, the Financial Times reported Wednesday.

“We think of BNY as modernizing a function that sits behind every single fund transaction by bringing the books and records on-chain,” Carolyn Weinberg, BNY’s chief product and innovation officer, reportedly said. The move follows BNY’s broader digital asset expansion, including its European regulatory progress under the EU’s Markets in Crypto-Assets (MiCA) framework, as the bank positions itself for the next phase of institutional blockchain adoption.

What are transfer agency records?

Transfer agents are financial service providers that maintain official records of who owns shares in investment funds. They handle tasks such as processing investor transactions, issuing and redeeming fund shares, updating ownership records and supporting communication between funds and investors. These records form part of the behind-the-scenes infrastructure that allows investment funds to operate. Traditionally, ownership information is stored across multiple systems used by fund managers, custodians and other market participants, requiring frequent reconciliation.

According to the report, BNY’s transfer agent services cover roughly $8.6 trillion in assets across 7.6 million accounts. The company, which oversees more than $59 trillion in assets under custody and administration, will reportedly maintain its traditional transfer agency operations alongside the new digital platform.

BNY’s vision and infrastructure

By moving transfer agency records onchain, BNY aims to create a shared source of information for market participants, reducing reliance on separate databases and manual reconciliation processes. The move is not just about adoption for its own sake; it addresses a real pain point in the asset management industry. Reconciliation of ownership records across multiple systems is costly, time-consuming, and prone to errors. A blockchain-based ledger can provide a single, immutable, and auditable record that all authorized participants can access in near real time.

BNY has been steadily building out its digital asset capabilities over the past several years. In 2022, it became one of the first major custodian banks to offer custody services for Bitcoin and Ethereum exchange-traded funds following regulatory approval. The bank has also participated in various blockchain pilot projects, including tokenized deposits and cross-border payments. The transfer agency platform represents a deeper integration of blockchain into the core infrastructure of traditional finance.

The bank’s choice to maintain both traditional and digital operations is significant. It acknowledges that a complete transition to blockchain will not happen overnight. Many asset managers, funds, and other market participants still rely on legacy systems. By offering both, BNY provides flexibility and allows clients to choose their preferred method of record-keeping while gradually transitioning to more modern infrastructure if they wish.

Early adopters and tokenized funds

Early users of BNY’s digital transfer agency reportedly include Edinburgh, Scotland-based asset manager Baillie Gifford, which plans to use the platform for what it described as the first “fully native” United Kingdom-regulated tokenized fund. BlackRock and BNY Dreyfus money market fund and cash management business are also expected to use the service for upcoming tokenized funds. The firm has roughly $261 billion in assets under management, according to its website.

“What we have in the blockchain is a shared source of record-keeping between the participants,” Theo Golden, Baillie Gifford’s head of digital assets, said. “We agree that this is the source of truth when people are dealing with the asset that this is monitoring,” the executive said.

Tokenized funds represent one of the most promising use cases for blockchain in traditional finance. By issuing fund shares on a blockchain, asset managers can reduce settlement times, increase transparency, and potentially lower costs. For investors, tokenization can enable fractional ownership, programmatic compliance, and easier secondary trading. The interest from major players like BlackRock and Baillie Gifford signals that tokenization is moving beyond experimental stages into practical implementation.

Broader blockchain adoption in banking

BNY’s move comes amid a broader wave of blockchain adoption by financial institutions. Banks across the globe are exploring ways to use distributed ledger technology to improve efficiency, reduce costs, and create new products. Central banks are also investigating central bank digital currencies (CBDCs), which could interface with tokenized assets and blockchain-based transfer agency systems.

The European Union’s MiCA regulation, which came into force in 2023, provides a comprehensive regulatory framework for crypto assets. BNY’s progress under MiCA positions it well to serve European clients who wish to tokenize their funds or invest in tokenized assets. Regulatory clarity is essential for institutional adoption, and MiCA is seen as one of the first major jurisdictions to offer a clear legal foundation for blockchain-based financial services.

In the United Kingdom, the Financial Conduct Authority has been exploring a digital securities sandbox, allowing firms to test tokenized securities within a controlled regulatory environment. Baillie Gifford’s planned “fully native” tokenized fund would likely operate within such a framework. The UK has ambitions to become a global hub for crypto asset innovation, and developments like this are important steps toward that goal.

Challenges and considerations

Despite the potential benefits, moving transfer agency records onchain is not without challenges. One major issue is interoperability. There are multiple blockchain platforms, and a transfer agency record on one network may not be easily accessible or verifiable by participants on another. BNY has not disclosed which blockchain network will support the new platform, which raises questions about accessibility and integration with existing systems.

Another challenge is data privacy. While blockchain is often praised for its transparency, fund ownership records contain sensitive investor information. A public blockchain would not be suitable for such data, so BNY and its partners will likely use a permissioned blockchain or a private network where access is restricted to authorized entities. This requires careful design to ensure that the benefits of transparency and shared record-keeping are not undermined by privacy concerns.

Legal and regulatory issues also remain. Transfer agency functions are often subject to strict regulations regarding record-keeping, reporting, and investor protection. Regulators will need to provide guidance on how blockchain-based records are treated. BNY’s experience and existing regulatory relationships may give it an advantage in navigating these complexities.

Operational risks cannot be ignored either. Blockchain technology is still relatively new, and the potential for smart contract bugs, network outages, or cyberattacks is real. Financial institutions moving critical records onchain will need to implement robust security measures, including multi-signature wallets, hardware security modules, and continuous monitoring.

Despite these challenges, the momentum behind blockchain in traditional finance is undeniable. Major custodian banks, asset managers, and exchanges are investing heavily in digital infrastructure. Tokenized funds are gaining traction, and the concept of a “source of truth” for financial records is appealing to institutions that spend billions on reconciliation and data management.

Implications for the asset management industry

The move by BNY could have far-reaching implications for the asset management industry. If successful, it could set a precedent for how transfer agency records are maintained and shared. Other custodian banks and transfer agents may feel pressure to adopt similar technologies to remain competitive. This could lead to a broader transformation of back-office operations in finance.

For fund managers, the ability to access a real-time, shared record of ownership could simplify reporting, reduce operational risk, and enhance investor experience. For investors, it could mean faster transaction processing, greater transparency, and potentially lower fees. The tokenization of funds also opens the door to new business models, such as automated dividend distribution, programmable compliance, and seamless cross-border investing.

The involvement of Baillie Gifford, a respected asset manager with a long history, is particularly notable. The firm has a reputation for long-term investing and cautious adoption of new technologies. Its decision to use BNY’s digital transfer agency for a “fully native” tokenized fund suggests that blockchain is being taken seriously by some of the most conservative corners of the financial industry.

BlackRock’s anticipated use of the service is another strong signal. BlackRock is the world’s largest asset manager, with trillions of dollars in assets under management. Its previous forays into crypto, such as filing for a Bitcoin ETF, showed a willingness to embrace digital assets when regulatory conditions allow. A tokenized money market fund could offer investors a stable, liquid, and easily tradable instrument that settles instantly on blockchain.

BNY Dreyfus, which is part of BNY’s own family of funds, also plans to use the digital transfer agency. This internal adoption is a vote of confidence in the platform and will provide valuable real-world testing data.

What’s next for BNY

BNY has not disclosed which blockchain network will support the new platform. Cointelegraph approached the company for comment regarding the report but did not receive a response by the time of publication. The choice of network will be critical. Some possibilities include a public network like Ethereum, a permissioned enterprise blockchain like Hyperledger Fabric, or a custom-built solution. Each has its own trade-offs in terms of scalability, privacy, and interoperability.

Looking ahead, BNY’s foray into blockchain-based transfer agency services could serve as a template for other financial institutions. As more asset managers and funds embrace tokenization, the demand for robust, regulator-friendly infrastructure will only grow. BNY’s traditional strength in custody and administration gives it a solid foundation to become a leader in this space.

The bank’s continued expansion under the MiCA framework in Europe also positions it to offer these services to a global client base. With a presence in major financial centers and a deep understanding of regulatory requirements, BNY could help bridge the gap between legacy finance and the emerging tokenized economy.

Ultimately, the move to bring transfer agency records onchain represents a significant milestone in the digital asset journey. It demonstrates that blockchain is not just for cryptocurrencies, but can be used to modernize core financial services. While challenges remain, the involvement of major institutions and the clear benefits of shared, immutable record-keeping suggest that this trend is here to stay.

Source: Cointelegraph News