So what is this crypto custodian?
Crypto custodian partnership is a term used to describe the process of protecting assets from theft. Custodians – third parties who may be engaged to hold your crypto act as custodians for your money, including cash, securities, bullions and virtual assets. Custodians have existed since the 1960s and are one of the pillars of the traditional banking system.
Crypto custodian is a little different. Digital asset managers technically do not store assets because all data and transactions reside in a public ledger called the blockchain. Instead, they protect the user’s private key. This is an essential part of the crypto wallet that allows access to internal funds. The crypto custodian is necessary for the widespread adoption of digital assets. To date, many institutional investors are refraining from buying digital assets due to a lack of security. Institutions that manage large amounts of money, such as hedge funds, pension funds, investment banks, and family offices, are required by law to have a management partner to keep their clients’ money safe.
As more than institutional investors began to consider digital assets and companies like MicroStrategy started to add laren or mousounts of cryptocurrencies to their balance sheets, the demand for cryptocurrency services surged. According to a Block data report, the size of digital assets in storage increased seven-fold from $ 32 billion to $ 223 billion between January 2019 and January 2022.
Simply put, cryptocurrency means protecting the private key that proves ownership of the funds held in the crypto wallet. In traditional banks, all custodians are financial institutions, as the law requires. However, with cryptocurrencies, owners have the opportunity to become their administrators. Using a gold stick as an example, you can keep it under your bed for your protection or pay an outside caretaker to lock a safe protected by security guards.
There are two main types of Crypto custodians you should know with that in mind.
As mentioned earlier, self-management is the personal retention of your wallet’s private key. If the physical device (cold wallet) becomes inaccessible or the private key is forgotten, the encryption can be permanently lost.
Third-Party Custodian –
This type of crypto custodian holds clients` private keys to their wallets safely and ensures the security of their holdings. If you store your cryptocurrency with a third-party custodian, you are expected to perform the same type of check to ensure that your cryptocurrency has not been illegally obtained.
There are three different third-party cryptocurrency administrators, depending on the financial institution.
- Exchanges can result in potential losses if the exchange is hacked or extinguished with your funds.
- Digital Wealth Manager – As cryptocurrencies have matured as an asset class in their own right, digital wealth managers have emerged that act like banks for crypto holders.
- Custodial banks – As of July 2020, all custodians in the United States may also retain cryptocurrencies after the Office of the Comptroller of the Currency (OCC) has cleared the way all domestic licensed banks provide cryptocurrency management services. This has opened the door for custody giants such as BNY Mellon, Citibank and Fidelity to enter the cryptocurrency custody market.
Cryptographic management strengths and weaknesses;
When considering which crypto custodian solution to choose, first consider your needs. The right option depends on what type of investor you are, how much you own, and how familiar you are with the technology.
- Your Key, Your Coin: Only you can access your account.
- There is no counterparty risk.
- If you lose your key, you will not access your coins.
- Your property is not insured.
- If hacked, you can say goodbye to your holdings forever.
- Third-Party Custodian
- The admin takes care of everything.
- Easier access for beginners.
- Custodian banks are insuring the assets they manage.
- In some cases, you can get interested in the deposited cryptography by staking or lending them through a third-party custodian.
- The administrator manages the coins.
- It can freeze your funds, block access to your wallet, or limit withdrawals.
- Third-party risk: Custodians can be hacked or go bankrupt.
- Charges may be added.
Some third-party management providers (Fidelity, BitGo, Bakkt) are only available to institutional investors. Others may require high minimum balances that prevent most ordinary holders from accessing their services. For example, Coinbase Trust, Coinbase’s dedicated cryptocurrency storage service, requires a minimum balance of $ 500,000 in digital assets to qualify for a storage system.
Where the technical sector clashes with the financial industry.
Moving forward, traditional finance institutions must collaborate with technical sector institutes such as crypto custodians, sub-custodians, and service providers.
According to Grayscale Investments ‘ recent study ” Reimagining the Future of Finance, the digital sector is labelled as “The juncture of technology and finance that`s increasingly defined by digital spaces, experiences, and transactions.” according to Grayscale Investments` recent study “Reimagining the Future of Finance.”
Considering this view, it is not bizarre that several financial organisations have started to provide services that allow users to obtain Bitcoin (BTC) and other digital assets. In addition, financial institutions expanded assistance for crypto-asset custody in immense numbers last year.
For example, Bank of New York Mellon disclosed plans in February 2021 to retain, trade, and issue Bitcoin and other cryptocurrencies in favour of its clients as an asset administrator. According to Michael Demissie, head of digital assets and intelligent solutions at BNY Mellon, as of December 31, 2021, BNY Mellon has $46.7 trillion in assets inside custody and administration and $2.4 trillion in assets under supervision.
Banco Bilbao Vizcaya Argentaria (BBVA) announced in June 2021 that it would offer Bitcoin trading and storage services in Switzerland modelled after the BNY Mellon. Meanwhile, the United States, the fifth largest retail bank in the country, announced the debut of a cryptocurrency custody service for institutional investors last October last year.
According to Alex Tapscott, Ninepoint Digital Asset Group CEO, US banks have been competing to adopt crypto asset custody since 2020. “Cryptocurrency is a $ 2 trillion asset class, and crypto-asset storage is a big business,” Tapscott explained last year as a diversion for some financial institutions, and on July 22, 2020, the US currency. He added that the regulatory agency issued a letter. Allows officially licensed banks to provide cryptocurrency storage services. As a result, many traditional banks began offering cryptographic storage services in 2021.
Steps to crypto custodian partnership,
Though this is important, it is also worth noting that traditional banks have started cooperating actively with crypto custodians and sub-custodians to offer custody for digital assets.
According to Ramine Bigdeliazari, director of product management for Fidelity Digital Assets, bearing in mind the increased demand from users, discovering crypto solutions via custodial connections with digital asset service providers is the right next move for traditional financial institutions.
He stated: “While there are a handful of ways that banks could enter the digital asset market, like building an end-to-end solution or acquiring existing providers, sub custodial relationships with existing and trusted service providers could provide a superior alternative that allows for a quick and proven path to market to meet clients` needs.”
Bigdeliazari noted that Fidelity Digital Assets offers sub-custody services to client organisations such as banks, who interact with their clients in return. “These engagements showcase the potential for digital assets sub-custody to allow institutions to provide their customers access to digital assets through the same interface and experience they use to access other asset classes without having to build any infrastructure.”
So, in context, New York Digital Investment Group (NYDIG) is a sub-custodian that has teamed with US Bank to offer a Bitcoin custody solution to its “Global Fund Services” customers. The collaboration among traditional banks and sub-custodians is crucial. For example, Tapscott stated that, though crypto asset custody represents an excellent opportunity for banks, it`s not without threat.
He added: “Keeping your private key secure can mean the difference between happy customers and bank money, or class action and handcuffs. So, of course, many big banks are already in the industry. I prefer to work with companies that have expertise. “
After all, that’s exactly what happened. According to NYDIG Chief Marketing Officer Kelly Brewster, the United States may be one of NYDIG’s most well-known banking partners, but it’s not the only bank. “NYDIG has already partnered with more than 35 banks and credit unions to bring Bitcoin to the main street,” she said. While the sub-custodians help traditional financial institutions join the digital asset ecosystem, Tapscott believes that cryptocurrency custodians such as Gemini and Coinbase also play an essential role. For example, Tapscott said he thinks the “white label” service will be preferred for traditional banks seeking to set up their cryptocurrency storage service.
“Banks will eventually label it as their solution operated by Gemini, Anchorage, BitGo, or other established cryptocurrency custodians,” he said.
In addition, digital asset infrastructure providers are bridging the gap between traditional banking and the crypto sector. For example, Fireblocks has partnered with BNY Mellon to provide digital asset storage services. According to Stephen Richards, Vice President of Fireblocks and Head of Product Strategy and Corporate Solutions, BNY Mellon will leverage Fireblocks’ technology stack, which includes other internal elements, to enable users to retain their digital assets.
Demissy further stated that BNY Mellon is developing its digital asset management platform. This was made possible by the bank’s technology investment in this sector. In March 2021, BNY Mellon invested in Fireblocks as part of the Series C round.
“Our digital asset management platform is currently under development and testing and will be launched later this year, awaiting regulatory approval,” said Demissy, and BNY Mellon is already a digital asset like Grayscale Investments. He added that he offers fund services for products linked to, The world’s largest digital wealth manager. “We also serve 17 of Canada’s 18 active crypto funds.”
Do Large Banks Threaten Cryptocurrency Decentralization?
Demissy stays here because he believes that digital assets are becoming an increasingly mainstream part. “Our clients expect BNY Mellon to be a trusted service provider and extend our core services to this new asset class,” he said. However, while integrating digital assets into traditional finance may be a significant step in the crypto ecosystem, some may wonder if large banks threaten the decentralised nature of crypto assets.
This is a related concern, but Tapscott said that many institutional investors and private crypto-asset holders prefer to own custodians and assets. “It doesn’t matter if it’s an encrypted custodian like Gemini or a big bank. However, Tapscott said the concept does not prevent millions of other crypto holders from becoming their banks and storing coins in their hardware wallets.
To further shed light on this issue, Anthony Woolley, Head of Business Development for market digitisation company Owner, said that regulation is always responsible for keeping a record of ownership of B. Securities. As a result, Woolley does not believe that digital securities can be fully decentralised while complying with regulations.
However, Woolley suggested that it might be possible to imagine a world where regulated digital securities are traded peer-to-peer with immediate payments, transfer of ownership, and settlement. “We believe this is a kind of decentralisation that investors and society as a whole need.”
Despite the concerns, the growing demand for digital assets from institutional investors will lead traditional financial institutions to join forces with crypto custodians and service providers. Matt Zhang, a past trading executive at global bank Citi and the creator of Hivemind Capital Partners, a $1.5 billion multi strategic fund, envisioned to assist “institutionalise crypto investing”, clarified that banks face a much rising supervisory benchmark when it comes to developing new products and services. Crypto custody is among the most complex:
“That being said, the client request is there, so banks need to find ways to partner up with sub-custodians to bundle the service in the short term while figuring out the road map to change it in house. Certain banks are ahead of the others, but, as an industry, Wall Street is playing a catchup game right now coming into crypto custody.”
Regarding Zhang`s point, findings from NYDIG’s Bitcoin Banking survey conducted last year exposed those customers and clients who would favour obtaining Bitcoin through an offering via their current bank that fulfils current security and risk control needs. According to NYDIG’s results, 71% of Bitcoin owners would move their primary bank to one that provides Bitcoin-related products and services. “Banks that are not prepared to offer these products and services risk falling behind,” Brewster added.
Zhang further stated that he has confidence that many central banks will provide access to crypto assets in the future and make the market more competitive. As a result, he believes that the most successful financial institutions will be those that can provide highly integrated services. “Please consider custody alone.”
Regarding Zhang’s claims, the results of NYDIG’s Bitcoin Banking survey conducted last year show that customers and clients are current banks that meet current security and risk management requirements. Furthermore, we have shown that we prefer to buy Bitcoin through offers. According to NYDIG survey results, 71% of Bitcoin owners will switch their central bank to a bank offering Bitcoin-related products and services. “Banks that are not equipped to offer these products and services are at peril of being late,” added Brewster.
Zhang further stated that he believes that many central banks will provide access to crypto assets in the future and make the market more competitive. As a result, he believes that the most successful financial institutions will be those that can provide highly integrated services. “Independently consider custody.”
These are purely the opinions of the author based on observations of financial platforms and a study of public reviews and ratings on the crypto custodian partnership with the US banks, which hopefully will change the future of the finance sector. Excerpts from various sources have been used to clarify the facts of this article. A glossary of all sources can be found at the end of the article. This article is for educational purposes only and is not financial advice.