What Is Crypto Custody And Why Is It Such A Big Deal?
Currently, one of the hottest topics in the cryptoasset markets is crypto custody. As institutional investors are becoming increasingly interested in investing in bitcoin and other digital assets, crypto custodians are popping up left, right and center to provide a much-needed service for institutional investors who are brave enough to dive into this new digital asset class.
In this guide, you will discover what a crypto custodian is and why they are such a big deal.
What is a Custodian?
A custodian, or a custodian bank, is a financial institution that safeguards financial securities on behalf of institutional investors to minimize the risk of loss or theft. For this service, custodians charge a small fee. Leading custodians in the established financial markets include State Street Bank and The Bank of New York Mellon.
Crypto custodians hold institutional investors’ private keys to their digital asset investments to ensure the utmost security of their holdings.
The most notable new entrants unto the crypto custody space include Wall Street’s Fidelity Digital Assets and Bakkt while the likes of Coinbase, Gemini, and Digital Asset Custody Company have already started to offer custodial services for bitcoin investors.
Why is Crypto Custody a Big Deal?
One of the biggest hurdles for the institutionalization of bitcoin is the technical difficulties that investors encounter when buying and storing digital currencies.
Even in 2019, most digital asset exchanges are not safe — as seen during the recent Bithumb hack — which means large holdings cannot be held on exchange accounts. Moreover, even the most popular hardware wallet provides Trezor and Ledger Nano have had security issues that suggest that they are not ideal solutions for institutional investors who want to invest millions in cryptoassets. Additionally, many institutional investors are required to hold their securities at regulated custodians for regulatory reasons.
As a result, there is an increasing demand for crypto custodians from Wall Street, which explains why the likes of Fidelity and ICE have moved into the sector.
For bitcoin HODLers, the institutionalization of bitcoin — partially driven by the new crypto custody offerings — will likely mean a boost for the price of bitcoin.
Most bitcoin experts agree that once Wall Street starts to fully embrace bitcoin as an alternative asset that can act as a diversifier and a potential returns booster, the price of bitcoin has the potential to soar to never-before-seen highs.
If multi-billion dollar asset management companies start to invest in bitcoin and other digital assets, they will be buying hundreds of millions worth of coins and tokens. Once, this starts to occur, there is no reason why bitcoin should not be worth a multiple of where it is trading now.
The Future of Crypto Custody
Looking into the future, crypto custodians could play an even more important role in the cryptoasset investment ecosystem as tokenized securities become more and more popular on Wall Street.
In a world where security tokens will become an accepted part of the global financial industry (or perhaps even the standard), institutional investors will require the services of secure, regulated custodians to safeguard their digitized assets.
Before the first wave of digitization of the financial markets, which came with the Internet in the mid-90s, investment management companies had to make sure that their paper-based share and bond certificates were held in a safe to protect them from physical theft. In the tokenized investment market of tomorrow, ensuring that private keys are being kept in a secure place will be the equivalent to holding certificates in a safe.
Therefore, we can expect crypto custodians to go beyond offering to hold bitcoin, litecoin, and ether to provide full-service institutional custody solutions for the storage of all types of digital assets, including security tokens, tokenized real estate, and tokenized commodities.
