In 2019, the digital asset markets witnessed a boom in crypto custody solutions offerings. As a result, investors are now able to store their crypto holdings securely with regulated third parties in exchange for a small fee.
In this guide, you will learn what crypto custody is, how it works, and why it is such a big deal for the digital asset markets.
What is Crypto Custody?
In the traditional financial industry, a custodian is a financial institution that stores securities and other assets on behalf of institutional investors to minimize the potential risk of loss or theft. Before the digitization of the financial markets, custodians held piles of physical stock and bond certificates. Today, most securities are kept in electronic form.
The largest custodian banks are State Street, Bank of New York Mellon, and JP Morgan Chase.
In the last 18 months, we witnessed the rise of several crypto custody providers.
A crypto custodian stores digital asset holdings on behalf of professional and institutional investors. They provide a secure storage facility in exchange for a small fee.
The raison d’être of crypto custodians is two-fold.
- Firstly, they enable investors who do not want to deal with the technical aspect of securely storing digital assets to still invest in this new asset class.
- Secondly, they enable institutional investors who are required to store their investment at a regulated custodian to enter the digital asset markets.
Crypto custodians, therefore, allow investors that previously were not able to enter the digital asset markets to invest in bitcoin and co.
How Does Crypto Custody Work?
While the exact process differs from custodian to custodian, generally speaking, investors register at crypto custodians, undergo AML/KYC checks, and then send their digital asset holdings to wallets operated by the custodians.
Crypto custodians hold their clients’ digital assets in multi-signature cold storage wallets to ensure the utmost fund security.
An example of a leading crypto custodian would be Coinbase Custody. The company, which operates independently of its parent company Coinbase Inc., is a fiduciary under NY State Banking Law, and a Qualified Custodian. That means it is fully regulated to provide custodial services.
Coinbase Custody stores its customers’ funds in “dedicated on-chain addresses secured by Coinbase’s battle-tested cold storage” that are insured and regularly audited to provide state-of-the-art crypto custodianship. Additionally, Coinbase Custody has enabled staking for proof-of-stake-based assets it holds on behalf of customers.
Other leading crypto custodians include BitGo, Gemini, itBit, and Kingdom Trust.
Why Crypto Custody is Big for Bitcoin
The primary reason why the emergence of crypto custodians is such a big deal for bitcoin and digital asset markets is that it enabled well-heeled institutional investors to enter crypto.
Many institutional investors are required to hold their securities and other assets with qualified custodians, which has been a barrier to entry that has prevented potentially more money flowing into crypto.
Now that there are a large number of regulated custodians that investors can choose from, we can expect more institutional money to start flowing into blockchain assets.
While the big wave of institutional money that the crypto market has been talking about for years is yet to hit bitcoin, the growing crypto investment ecosystem, which includes crypto custodians, is making it increasingly likely that this could be the year.