Custodianship is still a stumbling block to institutional investors preventing them from confidently entering the cryptocurrency space. As more crypto-oriented custody ventures take actions toward being a qualified custodian, the near future will probably witness huge amounts of institutional capital flowing into the asset class.
Speaking of the lurking risk of hacks associated with digital currency investment, Kyle Samani, a managing partner at Multicoin Capital — a crypto-focused hedge fund — explained to Bloomberg that making sure his holdings are not stolen was a deep-seated worry that cryptofunds still have to deal with.
Interviewed on June 18, he stated:
“There are a lot of investors where custodianship was the final barrier. Over the next year, the market will come to recognize that custodianship is a solved problem.”
However, he added that should this happen, a huge wave of institutional money will flow into the asset class, where many Wall Street based financial institutions have already been showing interest in entering the market once enough guarantees are confirmed.
What’s Custodianship in the Crypto Space?
The concept of custodianship within the cryptocurrency realm is still being theorized and taking shape. It, however, would be a qualified type of financial institution that holds customers’ digital assets to minimize the risk of theft. A regular custodian would hold clients’ securities in either electronic or physical form and offer related services like account administration, dividend and interest payment collection and distribution, transaction settlement processing and so on. Custodians charge a fee depending on the type of services a client asks for and the value of assets being held in custody.
Moreover, holding billions of dollars’ worth of assets is a significant responsibility that usually requires reputable firms to be up to the task. And this task is made even more challenging with the fact that cryptocurrencies are merely digital assets that can’t be safeguarded in any physical form and thus vulnerable to hackers.
The Bank of New York Mellon, the world’s largest custodian bank and asset service company, with $33.3 trillion worth of assets under its custody as of December 2017, was reportedly showing interest in offering custody services to crypto funds and investors. The bank was reportedly exploring cold storage concept and how to keep private keys to crypto assets out of cybercriminals’ reach.
The Race Toward Custody Services
According to the same post, Coinbase was still in the process of getting approval as a qualified custodian by the US regulators to safeguard digital assets, a spokesman of the company revealed. Earlier this year, while speaking at Fortune’s Balancing the Ledger in May 22, Adam White, vice president of Coinbase, claimed that by the company’s best estimate, no less than $10 billion of institutional capital were still waiting on the sidelines just to move in for a safe custodianship product.
He explained that his company has already launched and was still developing a set of institutional grade products intended to attract institutional capital and provide the type of services this kind of investors look for.
Moreover, Sam McIngvale, the product lead behind Coinbase Custody, claimed that about $20 billion worth of crypto assets would flow into custody services once the right product exists. He added that Coinbase held discussions with well-known Wall Street custodian banks without providing more details.
On the other hand, other Coinbase competitors have made similar moves. Circle and BitGo have also been working with regulators to launch a custody service. Besides, JP Morgan and Northern Trust Corp were believed to be either working on or exploring crypto custody. In fact, BitGo revealed in January 2018 that it has already sealed an agreement to acquire Kingdom Trust Company, a regulated and qualified trust company managing over $12 billion worth of assets under its custody. The acquisition was pending regulatory approval. And BitGo is reported to be still working to get the South Dakota state-chartered trust company as held by Mike Belsh, the company’s CEO.