Have your clients asked you about Bitcoin? Perhaps they’ve asked how to buy Bitcoin or another cryptocurrency. Maybe they’ve asked about signing up for a MetaMask wallet. Perhaps they have been confronted with choosing a centralized exchange (e.g., Coinbase) or a DEX (decentralized exchange—e.g., UniSwap). Diving into cryptocurrencies requires learning a new language involving terms like public and private keys, hot and cold storage, Ledgers and Trezors, and seed phrases. Beyond the jargon, the market is finding many ways to buy, trade, and hold crypto, and innovation is accelerating
As with any market advancing this quickly, the infrastructure is also progressing to confront issues such as evolving regulations, young technology, unfamiliar risks (potential for hacks, lost keys, etc.), and the need for operational and IT security. It is a diverse and complex market, and it can sometimes be difficult to navigate.
One particular logistical challenge is cryptocurrency custody. For institutions, choosing a fit-for-purpose custody solution is paramount to their success and competitiveness in this space.
Some financial institutions choose to avoid the cryptocurrency custody (and, more broadly, the infrastructure) challenge altogether. Concerned about the regulatory impact of holding Bitcoin or other cryptocurrencies outright, these institutions look toward products such as ETFs or futures that give exposure to cryptocurrencies without directly holding them.
For those who do want to hold cryptocurrencies directly, there are several alternative approaches.
While we see the occasional firm that wants to build its own custody (i.e., Standard Chartered building Zodia), an increasing number of top custodians, banks, and asset owners are starting to integrate with digital native custodians (e.g., firms that were created specifically to service the blockchain infrastructure). This may allow the traditional firms to manage operational complexities, navigate regulatory gray areas, and to get to market more quickly. As an example, BNY Mellon is planning to use Fireblocks for digital custody.1 Other known digital custodians include Anchorage, BitGo (which is being acquired by Galaxy), and Kingdom Trust.
Other digital market players are also adding custody. For example, some of the largest digital exchanges such as Coinbase and Gemini offer custody. Also, in the U.S., new guidance from the Office of the Comptroller of the Currency (OCC) opened the possibility of crypto custody at national banks. Avanti Bank and Anchorage Digital Bank are among the first to receive approval. In Europe, Sygnum, a Swiss digital bank, is now offering regulated custody for DeFi (decentralized finance) tokens to address this booming part of the market.
Seeing the market demand, firms offering institutional-grade custody for digital assets have grown quickly over the last few years, and new solutions continue to enter the market. These custodians help secure funds, protect against cyberattacks, apply robust cryptography, and create redundancies and checks to avoid human error and behavior. For custody, and other services, a firm that has SOC 1 Type 2 and Soc 2 Type 2 certification to validate institutional-grade operations is a key differentiator.
These new developments highlight an increasing institutional demand and focus regarding the growing cryptocurrency asset class. They also provide better quality services for large institutions such as banks, hedge funds, and asset managers.
Centralized liquidity and custody seem to contradict the decentralized thesis that underpins cryptocurrency and blockchain in general, but as the market shifts from early adopters to a broader reach with more mainstream and institutional players, the quality and convenience of centralized, sophisticated services appear to be gaining traction.
Stay tuned as this market develops!
Next up in Digital Asset Infrastructure: Institutional trading and exchanges – CEXes, DEXes, and more.
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