Crypto custodians play a major role in the development of crypto markets. Especially institutional investors need a regulatory compliant storage solution that keeps their clients’ money safe.
Some crypto enthusiasts may be put off by the word “custodian.” Third-parties? No thanks. Getting rid of intermediaries is why we use cryptocurrencies in the first place. However, while it might be acceptable for retail investors to store their cryptos on a hard drive at home, it doesn’t work like that in the institutional sector. Investors like hedge funds, mutual funds, and in particular pension and insurance funds have to meet strict regulatory requirements.
The need for secure storage of financial securities is nothing particular to digital assets. In traditional financial markets, securities are stored by legally authorized custodian providers, too. Such “Custodian Banks” do not only store assets but also handle daily asset pricing, dividend and interest collection, expense tracking, and more. Some of the largest custodian banks are JP Morgan, Citigroup, and BNP Paribas.
Custody isn’t really something we worry about when buying stocks, because the infrastructure and regulations have been in place for a long time. Crypto markets are still in their infancy, thus, custody solutions are not as well developed yet.
The market for crypto custody service providers is growing
In the crypto space, custodians play the exact same role as in traditional finance, just that assets are stored in digital form. The exact list of services may differ depending on the provider, but basically they all offer the same: an enterprise-grade cold storage solution, asset insurance, fork management, a dashboard, and 24/7 customer service. Most crypto custodians currently support Bitcoin and the most significant altcoins.
The market is still rather small but getting increasingly crowded. The currently most popular crypto custodians are Anchorage, Bank Frick, BitGo, Bakkt, Fidelity Digital Assets, Coinbase Custody, Gemini, itBit, Kingdom Trust, Koine, Prime Trust, and Xapo. Some banks, for example the Bank of New York Mellon or Goldman Sachs are also exploring offering crypto custody services.
The business model of crypto custodians is not fundamentally different from traditional finance. They mostly charge a percentage fee on the assets held. Coinbase Custody, for instance, charges 0.50 percent but at least $5,000 and an implementation fee ranging from $0 to $10,000. Gemini Custody charges 0.40 percent plus an administrative withdrawal fee of $125.
Institutional investors are required to work with regulated custody providers
Ensuring regulatory compliant custody is particularly crucial for institutional investors. In most jurisdictions it is legally required that institutional investors hold their assets with an officially approved custodian. Family offices and High-Net-Worth-Individuals also often use third-party custodians to store their holdings.
As more institutional investors are breaking into the crypto space, regulatory compliant custodians have become more critical. Crypto is increasingly recognized as a legitimate asset class, and lawmakers are introducing the regulatory framework.
Crypto exchanges that want to offer regulated security token trading will eventually have to comply with the same standards as traditional stock exchanges. That also includes custody requirements. Some exchanges offer regulated custody services as well, such as Coinbase or Gemini. However, it is likely that regulators will put a stop to that in the long term. In traditional finance, the role of the exchange and the custodian have to be separated, why should that be any different when trading digital securities?
Thus, there is a clear need in the crypto industry for custodians that are laser-focused on just that: custody and security of digital assets. Some of us may not like having third parties in the value chain, but the reality of institutional investing, especially where other people’s money is involved, is that regulations will always require a third-party custody solution.