Crypto Asset Custody Insurance Services May Be the Secret to Success for Institutional Investments
Of late, approved custodial services, considered typical features in conventional investment classes, have been gaining more prominence in the cryptocurrency world.
Recently, Branding China Group (BC Group) announced its newest move for an insured custody service particularly targeted at cryptocurrencies. An enterprise with a multifaceted portfolio of blockchain-dependent businesses in marketing communications and technology, BC Group has the belief that custody service does away with one of the major limitations that constituted being obstacles to experienced traders and ventures interested in combining cryptocurrencies to their portfolios till the present moment.
Prominent American crypto exchange and wallet provider Coinbase released its custody services for institutional investors in the middle of 2018. In what has been interpreted to be a clear move to launch an expansion for the services. At the moment, Coinbase has gone really far in discussions considering the acquisition of custody provider Xapo. This venture is one of the biggest custodians of bitcoin on the planet and the transaction under discussion is said to be as much as $50 million. But that is not all. Crypto hardware wallet producer Ledger collaborated with a Hong Kong-based trust company named Legacy Trust. The essence of the transaction was to give insured cryptocurrency custody services.
Several regulatory agencies have also taken up this same pathway by establishing units for digital custodial services. These include Kingdom Trust, one of the biggest stock exchanges in Germany Borse Stuttgart, Vontobel, a private investment bank in Switzerland and Fidelity, a prominent name in the investment management company.
Defining Crypto Custody Services
Those into private investments usually have their crypto assets saved up in an exchange wallet. This wallet is actually an online digital wallet or it can be an offline hardware wallet. For those who are into institutional investing, these storage devices come with significant risk and excess stress on the investors who have to make sure that huge sums of funds are stored in a way that they cannot be stolen or hacked into.
Insured cryptocurrency custody services, just like the conventional investment custody services, are actually third-party providers of storage and security systems. The primary aim of these systems is to ensure that the assets of the investors are kept safe and secure at all times. These services particularly target institutional investors like investment funds and hedge funds. They also store the digital assets for the investors at safe storage areas.
Usually, the custodian is going to be a bank, trust or other financial institution and they are tasked with making sure that investor funds reach a particular threshold. But, as a result of the supposedly inbuilt dangers associated with cryptocurrencies, there has been no solid regulation regarding insured custodians for cryptocurrencies. This has been the case until lately.
Reasons Why Institutional Investors Need Custodial Services
The two principal reasons are risk reduction and compliance with regulatory rulings. Normally, the sums that are linked to the institutional investments are far bigger when compared with those with private investment. Online storage that is not insured, like an exchange and other digital wallets, present an elevated degree of risk for institutional investors. As for offline options, there are cold storage facilities that are considered to be more secure but there is also an additional risk of not remembering the passwords or even misplacing the gadget. This is quite the case with Trezor and Ledger.
But in a case where custody service is regulated, the task of ensuring the funds are safe will be switched from the investor to the particular custodian assigned with the task. Also, if anything should go awry, there is the certainty that the funds in question are already covered by insurance. Even though this is not to say that the insurance put in place totally gets rid of the risk but it ensures that the risk is at a level that is minimized to such an extent that the institutional investors can do their transactions without worry or fear. The second primary reason why institutional investors cannot do without custody services is that they have to do so in order to ensure that they are following the rules put in place.
Across the globe, regulatory agencies like the United States Securities and Exchange Commission and the Financial Conduct Authority of the United Kingdom and even the Monetary Authority of Singapore all have requirements regarding this. The requirement is that institutional investors have to keep their client assets with a regulated custodian. Those that are considered to be regulated custodians consist of the banks, accredited broker-dealers and savings associations.
While illustrating with the SEC’s disapproval of the Winklevoss twins Bitcoin ETF, an investment expert with crypto investment venture, Invictus Capital, Hugo May, chipped in an important fact. May stated that one of the most crucial regulatory requirements is sufficient custody solutions.