Cryptocurrency Custody Services & Institutional Investors: Who Needs Who?


Institutions Want Crypto Custody In Order To Invest

Digital currency analysts are raising the issue of poor custody services as the principal reason most institutional investors are still not in cryptocurrency markets. They point out that a dearth of services from leading players from within the finance industry presents a big barrier to institutional interest. While there could have already been widespread institutional investment in digital currencies, a lack of custodial services is a serious inhibitor.

Blake Estes Bird LLP said he noted that, for the average chief investment officer, cryptocurrency comes with but downside risks. He said it would take “a leap of faith” for a company to enter the market with a new custody partner, lacking brand recognition. “That presents a real risk for them,” he said.

Custody Services Will Bring Big Hitters On Board

Estes confirmed the obvious, noting that much of bitcoin’s security, for example, hinges on who stores the private key, controlling the vault. While by default no blockchain can be hacked, institutional investors still need to know who’s holding the keys. To corroborate his point, Estes said that he tends to think that pension funds, for one, wouldn’t venture into the uncharted territory of cryptocurrencies until such companies with tremendous fiduciary obligations are confident about custodial security.

Various analysts have argued that the cryptosphere is not yet mature enough to attract institutional custodians. The senior VP of Callan LLC, Mark Kinoshita, feels that the digital coin arena is still far away from seeing institutional custodians offering their services to digital currency investors. Interestingly, he did note that although custodians aren’t looking at cryptocurrency, they are certainly interested in distributed ledger technology, as applied to business.

They are frequently found in consortia developing solutions for cross-border services, as well as clearing, and settlements.

“Rather than comment on crypto-custody,” Kinoshita said, “they’re working with partners in fintech and insurance to develop applications of blockchain’s  DLT to streamline clearing and settlement processes.”

He added that they are still “at the exploration stage,” but it seems that his point stands: big business is partaking through third parties. And not partaking of digital exchanges, but rather seeking value in blockchain technology applications.

The managing partner of Capital Fund Law Group PC, John Lore, agreed that the crypto sector is still not sufficiently developed for institutional custodians. While saying that at this stage it’s too soon to predict exactly what kind of cybersecurity risks will call for remedy, he added that there weren’t yet “enough custodians who are capable of handling that risk.” Lore said that the longer-term storage of assets in a typical digital wallet is now formalized and regulated too. This is, however, not good enough for major players.

The current state of affairs is insufficient to address institutional investors’ concerns. Noting that no current crypto storage protocols “are recognized across the large custodians,” he also said that stored funds succumbing to computing failure or theft was a major risk consideration for reputable players with lots to invest “At the core,” he said, “that’s a major risk issue.”

Cycle Of Repeated Hesitance In Crypto Custodianship

Jonathan Benassaya, IronChain Capital’s founder and current CEO, assigns the persistent lack of institutional custodianship in the industry to a “vicious cycle.” The cycle sees investors looking for the necessary infrastructure from their usual custodians, yet “custodians want investors before they build the infrastructure.” It’s impossible to say what kind of dollar value is kept from the crypto markets on a daily basis because of the current malaise, but it would be substantial to the still-growing asset class.

In spite of this, Benassaya did predict that custodians are going to emerge shortly, and enter the market with intent. Noting that most people see “general news about data hacking and security,” he pointed to why crypto-custody becomes paramount. He said that users – particularly institutional ones – want their digital assets stored securely in a real-world vault scenario, “like gold.”

He added that, for all intents and purposes, the demands made of crypto custody are essentially identical to those made when other assets are at play. The difference is that blockchain ledgers are validated through the blockchain. He also said that “Custodians are not so far away from making this happen.”

Read more at:  Bitcoin Exchange Guide

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