Custodial Solutions in Crypto Ecosystem
Custodial solutions are products offered by third party providers of storage and security services. This type of system has become the latest innovation in the cryptocurrency industry and its introduction is expected to lead to more institutional capital and to act as the missing link for fund managers who have been looking to enter the crypto market.
Coinbase estimates that $20 billion of crypto is inaccessible until custody solutions are available. Sam McIngvale, who is the head of the Coinbase Custody project, is of the opinion that crypto assets will segue into custody services as they become available. As he wrote in a Coinbase blog post “Coinbase Custody’s mission is to make digital currency investment accessible to every eligible financial institution and hedge fund in the world.”
Last June, Coinbase announced its own custody project at the end of its first successful deposit. The product provides proprietary cold storage-as-a-service, wrapped in a regulated entity with robust insurance and additional client services.
Citigroup also announced last week that it will offer crypto custody solutions to institutional investors through its product called Digital Asset Receipt (“DAR”). The product is intended for institutional investors to securely invest in cryptocurrencies in a fully regulated and secure manner.
BitGo, a market leader in institutional-grade cryptocurrency, also reported that South Dakota Division of Banking approved BitGo Trust Company as public South Dakota Trust Company, making the former the first qualified custodian purpose-built for strong digital assets.
According to Mike Belshe, Bitco’s CEO:
“Custody has been the missing piece of cryptocurrency market infrastructure and this gap has kept institutional investors out of the market. Traditional custodians don’t have experience handling cryptocurrency. Exchanges that double as custodians present a conflict of interest and raise regulatory concern. BitGo Trust Company is a qualified custodian and therefore the only custody offering that delivers the highest levels of both security and regulatory compliance.”
Shahla Ali, Bitgo’s COO, reported that the current state of the crypto market is broken because there is an absence of custody offerings and resemble traditional financial models. He stated:
“Currently, you have large cryptocurrency exchanges, institutions and broker dealers holding crypto assets. All of these players are acting in a centralized manner to trade, deal and advise, while holding custody of digital assets. But this doesn’t happen in today’s traditional financial market. The crypto industry is another asset class and it should fit into the traditional financial model. We need to address this problem now by allowing institutional investors an option to custody their assets in a secure environment that resembles a traditional asset protection model.”
LOBSTER, a leading wallet in the Stellar ecosystem, announced this week the launch of XDB Labs LLC, and that it will introduce the XDB wallet to support custodial and wallet storage for digital assets on DigitalBits.
Essentially, DigitalBits functions as Stellar Blockchain’s fork, and it serves as a protocol focused on becoming the transaction and trading layer of certain digital assets. The wallet itself will act as a complete solution to manage and hold the DigitalBits native token.
According to Al Burgio, CEO of DigitalBits foundation:
“We are excited to have the LOBSTER team join our partner ecosystem and build out a range of leading custodial and wallet solutions in the DigitalBits ecosystem. XDB Wallet will not only make management of digital assets, such as loyalty and rewards points simpler, but also provide incomparable levels of security for its users.”
In terms of Regulations, institutional investors who have customer assets wroth more than $150,000 are required to store the holdings with a qualified custodian. Further, investors are required to keep client funds with a qualified custodian. As a result, BitGo received approval from the South Dakota Division of Banking as a recognized public South Dakota Trust Company. BitGo Custody offerings provide strict policies, procedures, controls, and disclosures, guaranteed with a qualified custodian. Ali reported:
“Although we can’t say that the South Dakota Trust Company meets the full requirements of the SEC for custody of traditional assets, we do believe that receiving the South Dakota Trust character allows us to become the first, digital-asset custodian that is actually tailored for crypto assets. South Dakota is also the most prolific in terms of trust companies characters utilized by companies like Citibank, Wells Fargo, and other large organizations that choose to do the trust charters in South Dakota. We wanted that oversight, hence BitGo’s choice of South Dakota as a regulator.”
Coinbase’s partnership with ETC allows it to be a qualified custody offering. McIngvale of Coinbase stated:
“As Bitcoin and Ether are not defined by the SEC as funds or securities, these assets do not need to be held by a qualified custodian. Also, another question to ask is if anyone is actually able to offer qualified custody services for crypto right now? I think other than Coinbase and ETC, the answer is no, and there is a complete misunderstanding of that in the marketplace.”
As crypto continues to advance, regulatory agencies should provide clarity. For now, custody solutions are the next wake of innovation in the crypto market.