After the bear market stopped and Bitcoin had strong gains at the end of July, the market took a downturn recently. Over a span of ten days, the total market cap of cryptocurrencies has fallen by over 26%. According to CoinMarketCap, the cap of the market has fallen from $297 billion USD to $221 billion USD.
Reports indicate that the trend downwards might be happening still for some time. The chief of investment of Goldman Sachs, Mossavar-Rahamani, stated that cryptocurrencies will lose more value in the future as they do not fulfill any of the three traditional roles of a currency: they are not a medium of exchange, a unit of measurement or even a store of value.
However, Goldman Sachs considered a Bitcoin custodian at the same week of this announcement. In fact, one of the factors that made the price of the tokens rise in early July was that Coinbase announced that it solved the custody issue. In the month, press releases from the Fusang family office have announced that they were going to solve the issue.
The main problem is that it does not look that Coinbase has completely solved the custody issue. Not really. Even with the company’s media push, it looks like Coinbase is still somewhat far from solving the problem. The hiring of Jeff Horowitz as chief compliance officer after the announcement is also something that should be taken into account as a sign that the company is still looking for the answer.
What is Custody?
Custody is often described as a service in which a broker or a financial institution hold securities for a client. Why is this done? Because it reduces the risk of the client losing the assets or having them stolen as they are being guarded by professionals in the area. Also, the assets will also be available for sale whenever the client demands.
A custodian acts like a bank and provides the investor a place to store assets with little or no risk involved. Unlike banks, however, custodians are not allowed to use the items that they are storing.
When you look at how often security is breached in the crypto space, you can see how much it is important a custodian service can be for this market, as it would greatly reduce risk and store the assets, which is high in this market. $1.2 billion USD was stolen. It was recently reported that there is an estimated $20 billion in sidelined-money waiting to enter the bitcoin markets and cryptocurrency space at large once the right framework was in place.
Such a high number does not inspire a lot of confidence in an emergent market. There is also the problem of selling the assets at the client’s demand and how over the counter (OTC) trades would work in such a market.
What Custody Is Not
The main problem that is making most of the institutional investors stay away from this market at the moment is that the main products sold are still full of huge holes: exchanges, wallets and “sharding” of assets into bits of data are still full of security problems.
The exchanges, for instance, would have to be centralized in order to attend the needs of the clients. Because of this, they need to store the money well, but 75 percent of the security breaches in the past, according to www.myntum.io, have come from exchanges. There is also the issue of getting them accepted by the regulators.
Digital wallets are even more dangerous because you can easily lose your keys to them. This means that you will never have access to your money again. The same can be said about sharding. These measures are still not good enough to be custodian.
According to Coinbase, there are five categories that make up its “custodian solution”: cold storage of the assets, financial and security control, insurance provided by Coinbase, dedicated coverage and SLAs for fund transfers. Whoever, an important question remains: who will watch over the assets?
However, Coinbase’s new partner, Electronic Transactions Clearing Inc has recently paid a $80,000 USD fine to the SEC for breaking several custodian rules of the 1934 Exchange Securities Act. It used the money of the clients to cover margin accounts instead of only keeping it.
Coinbase also does not report to the public how OTC trading would be made. Having service level agreements (SLAs) to seek permission in the future when clients could transfer money to their accounts does not meet the traditional definition of selling assets at the clients’ demand. Solutions with hot wallets, however, would not be very secure in protecting the value of crypto assets.
Most companies are still falling short of solving these issues and this is the main problem of the cryptocurrency market right now – combined with the possible Bitcoin ETF approval we could see a windfall of new money enter the space in the coming months or year. It will only be able to attract institutional investors when it solves this complex bottleneck on price that is the custodian problem – but rest assured there are people, companies and organizations working around the clock to resolve this trillion dollar potential of resolving these issues that could open up the flood gates and see the crypto market cap topple $1 trillion in the future.