Regulation
The last six months has witnessed significant growth in the number of businesses and banks launching cryptocurrency custodial services. These solutions give institutional investors peace of mind that their assets are secure, insured, and under the care of a trusted third party, freeing them from responsibility for safeguarding their cryptocurrency.
Also Read: Fidelity Launching Crypto Custody and Trading Services
Recent Crypto Custodianship Launches
The number of crypto custody solutions being launched is growing rapidly. These services are aimed at institutional investors such as hedge funds, family offices and market intermediaries.
According to research by the Bank of New York Mellon, there is increasing demand in the market for a traditional, established custodian to provide secure storage of cryptocurrencies. For many it is the bridge that will support institutional capital moving into the cryptocurrency market. There have been reports of major banks testing and in some cases rolling out crypto custody solutions.
Most recently, Swiss investment bank Vontobel launched the ‘Digital Asset Vault.’ The service allows Vontobel’s clients, which include over 100 banks and wealth managers, to issue instructions for the purchase, custody and transfer of digital assets integrated within their familiar banking infrastructure and regulated environment. The German stock exchange Börse Stuttgart has launched a custody service for digital assets. State Street, Fidelity and Coinbase also offer services.
Regulation in the U.S. requires advisers to keep client funds with a qualified custodian. Across the pond, the European Securities and Markets Authority (ESMA) has raised the issue that there is no harmonized definition of safekeeping and record-keeping for ownership of securities. This in turn makes it difficult to apply custodial requirements to a new asset class such as cryptocurrency. ESMA believes that greater clarity around the types of services and activities that may qualify as custodial under EU financial services rules, in a DLT framework, is needed.
Custodial Services Are for Traditional Financial Banks
Paul Puey, CEO of cryptocurrency wallet Edge, explained that while there has been a rapid increase in custody solutions, this trend has been limited to the traditional financial world of banks and funds that don’t leverage any of the utility and value of crypto.
He said: “This would be akin to 1990s internet companies filing for telephone regulations to build VOIP solutions to replace phone carriers. Nothing very disruptive would come from that. Crypto is unique and powerful because custodians aren’t needed to hold digital value. We can replace institutional crypto investors with non-custodial apps that hold the money for users.”
It can be argued, however, that custody services are critical to the efficient functioning of financial markets. As highlighted above by the SEC and ESMA, these often require regulation in order to protect investors from potential misappropriation of their assets.
Michael Ou, CEO of Coolbitx, explained that regulatory factors will play a big role in driving compliance efforts of digital asset exchanges, particularly those in the U.S. or serving U.S. customers, saying:
Custody providers face a simple fact: KYC/AML compliance is a major time and resource strain. In traditional finance, you will hardly see a single entity offering KYC/AML compliance, a large marketplace of buyers and sellers, custody, and all other services that a single exchange offers now.
He explained that as the market matures, so does the division of labor within the market. Therefore it is far easier for exchanges to work with entities specializing in custody. According to Michael Ou, investors can expect to see custody solutions become a mainstream component of the cryptocurrency industry in the months and years ahead.
What are your thoughts on the growth of crypto custody solutions? Let us know in the comments section below.
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