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Custody solutions (products offered by third party providers of storage and security services for cryptocurrencies) have become the latest innovation to emerge from the cryptocurrency ecosystem. The introduction of custodianship is expected to herald the entry of institutional capital into the industry, acting as the missing link investors and fund managers have been seeking for entrance into the crypto market.
The largest U.S. cryptocurrency operator, Coinbase, estimates $20 billion worth of crypto is sidelined until custody solutions make sense. Sam McIngvale, who’s leading the Coinbase Custody project, believes that crypto assets will flow into custody services once they become readily available.
“Coinbase Custody’s mission is to make digital currency investment accessible to every eligible financial institution and hedge fund in the world,” McIngvale wrote in a Coinbase blog post.
This past June, Coinbase announced its Coinbase Custody product upon completion of their first successful deposit. The product is essentially Coinbase’s proprietary cold storage-as-a-service, wrapped in a regulated entity with robust insurance and additional client services.
It was also announced last week that the multinational investment bank, Citigroup, will offer crypto custody solutions to institutional investors. Citigroup launched a product called “Digital Asset Receipt” (DAR), which is intended for institutional investors to securely invest in cryptocurrencies in a fully regulated and secure manner.
And BitGo, the market leader in institutional-grade cryptocurrency security, has also revealed that the South Dakota Division of Banking has approved BitGo Trust Company as a public South Dakota Trust Company. This makes BitGo Trust Company the first qualified custodian purpose-built for storing digital assets.
Custody has been the missing piece of cryptocurrency market infrastructure and this gap has kept institutional investors out of the market. Traditional custodians don’t have experience handling cryptocurrency. Exchanges that double as custodians present a conflict of interest and raise regulatory concerns. BitGo Trust Company is a qualified custodian, and therefore the only custody offering that delivers the highest levels of both security and regulatory compliance, said Mike Belshe, CEO of BitGo.
According to Shahla Ali, Chief Compliance Officer at BitGo, the current state of the cryptocurrency market is broken due to a lack of custody offerings that resemble traditional financial models.
Currently, you have large cryptocurrency exchanges, institutions and broker dealers holding crypto assets. All of these players are acting in a centralized manner to trade, deal and advise, while holding custody of digital assets. But this doesn’t happen in today’s traditional financial market. The crypto industry is another asset class and it should fit into the traditional financial model. We need to address this problem now by allowing institutional investors an option to custody their assets in a secure environment that resembles a traditional asset protection model, Ali told me.
Other players like LOBSTR, the leading wallet in the Stellar ecosystem, also announced this week the launch of XDB Labs LLC, and will soon introduce XDB Wallet, to support custodial and wallet storage for digital assets on the DigitalBits public blockchain.
DigitalBits is a fork of the Stellar blockchain, serving as a protocol focused on becoming the transaction and trading layer of certain digital assets, including the points economy. XDB Labs’ inaugural product, XDB Wallet, will act as a complete solution to manage and hold the DigitalBits native token, XDB, as well as other assets built on the DigitalBits blockchain.
“We are excited to have the LOBSTR team join our partner ecosystem and build out a range of leading custodial and wallet solutions in the DigitalBits ecosystem. XDB Wallet will not only make management of digital assets, such as loyalty and rewards points, simpler, but also provide incomparable levels of security for its users,” said Al Burgio, CEO of the DigitalBits Foundation.
What About Regulation?
Not surprisingly, as more crypto custodial solutions enter the ecosystem, questions around regulation have also come to mind. According to the SEC regulation as part of the Dodd Frank Act, institutional investors that have customer assets worth more than $150,000 are required to store the holdings with a qualified custodian. Most investment advisers are required by the SEC to keep client funds with a qualified custodian.
For this reason, it’s particularly notable that BitGo has received approval from the South Dakota Division of Banking as a recognized public South Dakota Trust Company. BitGo Custody offerings provide the strict policies, procedures, controls, and disclosures that are only guaranteed with a qualified custodian.
Although we can’t say that the South Dakota Trust Company meets the full requirements of the SEC for custody of traditional assets, we do believe that receiving the South Dakota Trust charter allows us to become the first, digital-asset custodian that is actually tailored for crypto assets. South Dakota is also the most prolific in terms of trust companies charters utilized by companies like Citibank, Wells Fargo and other large organizations that choose to do their trust charters in South Dakota. We wanted that oversight, hence BitGo’s choice of South Dakota as a regulator, explained Ali.
Coinbase Custody is also a qualified custodian offering, through their partnership with ETC. However, according to McIngvale of Coinbase, a question that is not typically asked is whether or not all crypto investors actually need qualified custody?
“As Bitcoin and Ether are not defined by the SEC as funds or securities, these assets do not need to be held by a qualified custodian. Also, another question to ask is if anyone is actually able to offer qualified custody services for crypto right now? I think other than Coinbase and ETC, the answer is no, and there is a complete misunderstanding of that in the marketplace,” McIngvale told me.
As the crypto ecosystem continues to advance, issues around regulations should gain clarity. In the meantime, custodial solutions have become the next wave of innovation to hit the crypto market, especially as more interest is seen from institutional investors.
