Despite the enduring crypto bear market, some new tech launches in the space are thriving. Of note, banks and exchanges have been keenly focused on improving custodial services for digital currency investors. Many believe that if there are more trustworthy and secure options for the safekeeping of digital assets, both institutional and retail investors would more willingly diversify into this newest, and some think riskiest of asset classes.
Recent reports indicate that Fidelity, one of the biggest investment management companies globally, is preparing to launch a limited release of their own custodial service for Bitcoin and Ethereum in March. Coincentral.com writes:
"There were reports that the firm was looking to offer custodial services to institutional investors who are believed to be the required catalyst behind future upward price corrections."
The website says that Fidelity is reportedly going to offer cold storage facilities, meaning customer crypto assets would be stored offline, reducing hacking threats since the holdings wouldn't be on the internet. Though this method is considered safer, it can also be less fluid. Perhaps Fidelity's solution will provide some innovation on that front.
Fidelity's push to find ways to enable new, more lucrative investors is hardly unique. A number of high profile asset management firms are also entering the fray.
In January, Swiss investment bank Vontobel launched its Digital Asset Vault. According to the bank, its solution incorporates its own banking infrastructure, to "allow Swiss banks and asset managers to utilize the banking framework and support for their customers' digital asset purchasing and storage desires."
Germany's second largest stock exchange Böerse Stuttgart offers a custodial service called Blocknox, that's available for its users' digital funds. As well, in late October, San Francisco-based Coinbase received a license under New York State's banking law to operate as an independent custodian. The off-line service it offers is being marketed as "institutional-grade."
Given the increasing number of crytpocurrency-related hacks and attendant losses, it's obvious why this segment of the digital arena would be a growth industry. The recent headlines about Canadian crypto exchange QuadrigaCX is the freshest example to highlight the problem of who should hold digital assets, and how.
The exchange's 30-year old CEO died unexpectedly while on a trip to India. He alone knew the password to the exchange's cold storage. As a result, almost $190 million in client holdings, including fiat and cryptocurrencies, remains inaccessible.
The safeguarding of crypto assets has been overlooked up till now, says Jae Choi, CEO of Pledgecamp. In fact, it's been severely lacking and he says, quite frankly non-existent.
“In [the] current landscape two hacker groups have been responsible for stealing roughly $1 billion in cryptocurrency from exchanges. Surely that's enough to recommend the secondary option of ‘securing’ your crypto assets under cold storage (which lacks significant convenience overall) but in order for the public to recognize cryptocurrency, the industry itself needs to provide all the market infrastructure that traditional equity/currency provides. One of the key missing pieces has been a custodian service.”
Choi expands on his point: the lack of custody services has kept larger institutional players away from cryptocurrency investing, including hedge funds and family wealth management services. “If you want cryptocurrency to be treated as a traditional asset, you need to offer regulation and custody options that resemble those available for traditional financial instruments or models,” he says.
Varying Views of Custodial Requirements
Hugo May, an investment analyst at Invictus Capital points out that cypherpunks, the term for die-hard crypto fans, are all for the anonymity, privacy, and personal freedom which is at the heart of the movement and their technology.
“Custody is a contentious subject within that overall community. The cypherpunk movement has strongly rooted itself in the principle that cryptographically secured digital assets are to be kept in self-custody. The famous saying is ‘not your keys, not your coins’, but if we are to grow the market by opening the doors to institutional investors, certain criteria have to be met.
Institutional tier capital is extremely limited in terms of flexibility. Several requirements have to be satisfied by the asset class before capital could enter the space and also comply with the regulation.”
In the U.S., regulation requires advisers to keep client funds with a qualified custodian. The European Securities and Markets Authority (ESMA) recently raised the issue that right now there is no harmonized definition of safekeeping and record-keeping for securities ownership. This makes it difficult to apply custodial requirements to cryptocurrency.
Commenting on U.S. and EU regulation, May says:
“One of the most important regulatory requirements is sufficient custody solutions.The topic has been a very prominent talking point by the SEC in regards to Bitcoin ETF applications.
It has become apparent that regulators are not willing to compromise on U.S. statutes that ensure institutions store client’s assets with a qualified custodian. The EU on the other hand has slowly started to revise directives that govern crypto-assets, and this includes custodian requirements.”
Traditional players beyond Fidelity, such as Bank of New York Mellon (NYSE:BK) (NYSE:BK), JPMorgan Chase (NYSE:JPM) (NYSE:JPM), and Northern Trust (NASDAQ:NTRS) (NASDAQ:NTRS) are all exploring ways to enter the crypto arena, says Frank Wagner, CEO of crypto fund manager INVAO. This of course bodes well for the future of the asset class.
"Custody solutions are important to the growth of the crypto eco-system, especially considering crypto’s reputation as a risky investment."
It looks like cryptocurrencies have the potential to be 'tamed' as additional ways of handling digital coins take hold. That could indeed lead to a transformation with digital currencies becoming a mainstream asset class.
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