Crypto Custody Gaining Momentum — Could Drive Billions of Inflows

Crypto Custody Gaining Momentum — Could Drive Billions of Inflows


The lack of mainstream custody solutions for crypto assets has been a major roadblock preventing institutions from entering the space. With exchanges continually the target of major hacks and self-custody introducing an array of human and technical issues, trusted third-party crypto custody solutions by a major bank is what the market needs to enable the formation of more crypto hedge funds and allow legacy managers and institutions exposure to crypto.

Refresh on Custody

A custodian is a financial institution that holds securities or assets for another party to lower the risk of theft and to guarantee the assets exist. Custodians also allow institutions and funds to focus on their core business instead of having to worry about protecting their assets. Custodians are, in essence, a third party which provides investors a level of trust that a fund manager (for instance) hasn’t run off with their funds.

The Forms and Major Problems with Crypto Custody

Custody has many forms: “exchange custody” where the exchange holds the assets themselves; “self-custody” where funds are placed on an off-line cold wallet (Ledger, Trezor); and “third-party custody”.

Crypto Custody Interest Within Major Banks Is Heating Up

Third party custody options are gaining strong momentum and are progressing faster than the market currently assumes, in our opinion. The space is split between startups innovating and offering new solutions and major banks being the 800-pound gorilla in the room, testing the waters.

Startups Are Enhancing Their Services and Safeguarding A Growing Number of Digital Assets:

Startups are leading the charge as they have been around the longest and are the most innovative in their offerings. Being able to support crypto assets beyond Bitcoin is vital for adoption in the space as investors and funds want exposure to protocols and platforms beyond Bitcoin. Crypto custody startups are aggressively expanding their services from historically only supporting Bitcoin to DACC now offering support for over 90 different digital assets and Coinbase Custody and Prime Trust stating they plan to support any ERC-20 token in the future (there are over 1,000 tokens built on the Ethereum blockchain).

Crypto Custody Costs Aren’t A Deal breaker, But Must Come Down

While the space is nascent, crypto custody costs are well above traditional custody costs. We note traditional custody costs are hard to find and could even be lower depending on whether the fund used an affiliate of the custodian for other services and many funds do not use a custodian since their AUM is low. Shown in the below exhibit, high pricing is still an inhibiting factor for funds to use these services especially since in the early days of a fund it is a major performance drag as every 100bps counts.

Solving Crypto Custody Would Unlock A Large Amount of Capital

Mainstream crypto custody offerings would unlock a large amount of capital. Whether it be a major legacy bank that leads to inflows (what will happen in our opinion) or the continued uptake of solutions offered by startups, either has the potential to lead to large institutional inflows.

The Future Argument: Security Tokens

Custody of security tokens, or tokens that represent ownership in an entity or of an asset instead of utility tokens which can be used to power a network or protocol, is the next frontier which is likely further away as many security token providers are in the early stages of rolling out their offerings. For example, Polymath, one of the leading security token platforms, has not received SEC approval for any security token listing as of this report. Other startups in the space include Templum, Vaultbank and Harbor but are beyond the scope of this report.

About The Founder:

Tom has a passion for finding the most relentless founders and disruptive protocols. Prior to 51percent, Tom was an equity research associate at Oppenheimer & Co Inc, covering cloud and communications where he researched and wrote an extensive blockchain white paper in addition to researching wireless and cloud spanning from 5G to OTT video and cloud technologies. Tom previously founded SecretCaps, a technology MicroCap research company and received his B.S. in Finance from Rutgers Business School

Co-founder of Delphi Digital