An Introduction to Custodial Services: Goldman Sachs, Coinbase & More
Goldman Sachs announced that they are no longer pursuing their cryptocurrency trading desk. With that said, GS plans to act as a custodian for clients who are interested in Bitcoin (BTC) and other digital currencies.
This sparks an interesting question: What are custodial services and why are a number of firms entering this market? In this article, we’re going to explore holding crypto on behalf of your clients and the broader implications of custodial services in the finance industry.
Introduction to Custodial Services
A custodian, or custodian bank, is an institution that holds securities and investments on behalf of their clients for safekeeping. These securities include a wide range of items — stocks, bonds, currencies, commodities, and more — and the “holding” can be either physical or electronic.
Custodians offer a valuable service because they handle the logistics of executing trades, receiving dividends, foreign exchange transactions, and more. They can also ensure that the necessary paperwork is filed in more complicated transactions, such as a stock split or merger.
The customer solidifies their position (for instance, a $50,000,000 long position in gold) and deals will little else. In exchange for the services, a custodian will charge the customer a fee. In the traditional world of finance, companies like Goldman Sachs, Credit Suisse, Deutsche Bank, and BNP Paribas offer custodial services.
You can think of this as similar to what Amazon Web Services (AWS) does for startups and large companies. An engineer can say that they want a server with such and such processor, this much memory, and press deploy.
Behind the scenes, Amazon handles all of the physical and technical infrastructure: buying and managing hardware, updating software, upkeep on the server rooms, securing the facility, paying the electricity bill, etc.
In the same way, a financial custodian will accept the responsibility for much of the details associated with trading and holding assets.
The Implication of Crypto Custodians
Now let’s bring it back to cryptocurrencies. Lately, there have been a few announcements around crypto custodial services, including Goldman Sachs and Coinbase Custody, which provides services for hedge funds and exchanges, amongst others.
For example, it’s normal for us to read about a hedge fund that invests $5 or $10 million dollars into a token project. But how do they actually execute that trade? Where is the digital currency stored so that it is safe, private, and traceable? These are not trivial questions when dealing with these large sums of money.
Said differently, a consumer may keep $100 or $1000 worth of crypto on a hardware wallet. A hedge fund, that is both responsible to limited partners (LPs) and regulators, cannot use these consumer-grade solutions.
We believe that crypto custodians will allow larger players — including venture funds, hedge funds, institutional investors, corporations, and sovereign wealth funds — to participate in the cryptocurrency market. By handling the mechanics of trading, it allows organizations to focus on reaching their mission.
Overall, the crypto custodial services leads to more large market participants entering the space and is a positive indication for Bitcoin and altcoins.
Conclusion
The recent rise of digital currency custodial services marks a maturity point in the life of Bitcoin and altcoins. We anticipate increased adoption and interest from corporations, funds, banks, and governments around the world.
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