How do crypto custodians make money?
Until recently, one of the missing pieces of the broader crypto ecosystem was an institutional-level crypto asset protection solution. In 2019, that piece of the puzzle has finally collapsed and the crypto security services industry is thriving, And The importance of the Coinbase custody flourished.
Institutional investors now have access to the market and can choose from a variety of solutions that allow them to secure crypto assets in a safe, reliable and regulated manner.
Who are the players and what is the impact on the industry?
In traditional financial markets, a custodian is a financial institution that offers a secure custody service for financial collateral to minimize the risk of loss or theft. Custodians hold securities in physical or digital form and are commonly referred to as custodians.
In addition, custodians perform administrative tasks such as daily valuations, collecting dividends and interest payments, and tracking expenses, among others.
The largest custodians in terms of assets under management are Bank of New York Mellon, State Street, JP Morgan, Citigroup and BNP Paribas.
What is crypto custody?
In the blockchain space, custodians offer the same services but are tailored for institutional crypto investors. Crypto custodians keep crypto assets safe for investors who want to minimize the potential loss of funds due to a lack of technical expertise or who are required by law to use a qualified custodian. Due to the technical challenges involved in securely storing and managing crypto assets, crypto custodians provide an extremely important service.
Although the specific list of services varies from provider to provider, crypto custodians offer an enterprise-class cold storage solution, fork management, wealth insurance, an easy-to-use dashboard, and 24-hour customer service. Some custodians, like Coinbase Custody, also offer stack support and participation in chain management. The Coinbase solution shows where the near future of the industry is headed. Proof-of-interest blockchains have a powerful impact on investments as they provide passive income for conducting simple tasks like online voting.
Barriers to participation include technical skills and asset preservation considerations. Coinbase's solution serves risky institutions that want access to stake-driven crypto networks like Tezos, Decred, or Augur without wanting to worry about storage or staking obligations themselves. Coinbase Custody offers its customers stack services as a non-discrete trust activity. Currently, most cryptocurrencies support bitcoin and the largest high coins by market cap. BitGo, Kingdom Trust and Coinbase Custody support a wider range of digital assets.
How does cryptocurrency work?
Institutions looking to buy and hold crypto assets lack the expertise to do so safely and at scale, and are legally unable to take that level of risk. Instead, they will use a regulated, insured, and trusted professional crypto custodian. Each station uses their own custom institutional-grade airspace solution for cold storage. Cold storage protects the private keys that allow access to cryptographic assets.
Cold storage adds a manual step to the asset access process but provides another layer of security. Most custodians also use a multi-signature approach, meaning that many parties holding different parts of the private key must sign the transaction together to access and move assets. This mitigates a single point of failure.
Who Uses Cryptocurrency Managers?
Custodians are used by financial institutions such as hedge funds, mutual funds, and RIAs that are required by regulation to keep their assets with a professional custodian. For example, US-based funds with more than $150 million in assets under management are required by law to hold their clients' funds with a qualified custodian.
High net worth individuals and family offices may also use custodians to ensure the safety of their investments, while individual investor funds are usually held in segregated accounts under the name of the investment adviser or broker.
In the crypto asset markets, SEC-registered crypto hedge funds, blockchain venture capital firms, RIAs, and family offices account for the majority of clients for crypto asset custody. Investing in pension funds and mutual funds remains low as regulatory barriers to investing in alternative risky assets remain significant for these types of funds. As cryptocurrencies are increasingly recognized as a legitimate asset class and the regulatory framework is established, this is likely to change over time.
The crypto custody market is booming
In the first five months of 2019 alone, six new custodians launched, while several existing crypto custodian providers announced new features, such as an expansion of supported assets.
There has even been M&A activity in the crypto custodian market, with BitGo attempting to acquire Kingdom Trust in early 2018, Bakkt acquiring Digital Asset Custody Company earlier this year, and Coinbase and Fidelity Digital Assets reportedly vying to buy Xapo.
Additionally, several exchanges, including Coinbase, Gemini, and itBit, have launched custodial services to introduce more institutional investors to Bitcoin and other digital assets.
Given the activity in the cryptocurrency custody market, this is an optimistic sign that there is significant demand from institutions for this type of service.
Meet the crypto guardians
Today there are over two dozen crypto custodians around the world. The twelve most notable existing and soon-to-be-launched crypto asset custody service providers are:
Anchorage is a recently formed crypto custody company backed by Andreessen Horowitz and a number of other top blockchain-focused VCs. The company bills itself as “the leading cryptocurrency-owned digital asset custodian for institutional investors.”
Bank Frick is a Liechtenstein-based private bank that offers a variety of blockchain banking services, including token launch support, cryptocurrency trading, and custody of digital assets. The services of the regulated bank are aimed at professional market participants and financial intermediaries in Europe.
BitGo is a Bitcoin storage solution provider that launched a qualified custody service in 2018. Based in California, the company leverages its six years of experience as a security-as-a-service provider to offer custody of digital assets to financial institutions and fund managers.
Bakkt, the ICE-backed crypto asset startup set to go live in July, will provide a gateway for Wall Street investors looking to start trading Bitcoin in a regulated environment. In April, Bakkt acquired the leading digital asset custody company for crypto asset custody and partnered with the leading custodian Bank of New York Mellon for geographically distributed private key storage to expand its custody offering for the next digital asset trade strengthen. ecosystem.
Fidelity Digital Assets is the Bitcoin-backed crypto company recently founded by Wall Street giant Fidelity Investments Inc.
San Francisco-based digital asset exchange and wallet provider Coinbase added a crypto custody service to its offerings in 2018. Coinbase Custody is a qualified custodian, enabling institutional investors to securely store over 30 digital assets with insured and regulated third-party storage. solution provider. Additionally, Coinbase recently launched a crypto asset staking service for its institutional custody clients.
Regulated digital asset exchange Gemini launched its qualified custody service for institutional investors in 2018 to combine secure custody of digital assets with its popular trading platform.
The New York-based virtual asset exchange launched its cryptocurrency protection service itBit last year to complement its over-the-counter and exchange businesses. As a trust company regulated by the State of New York, itBit ensures that all customer assets and funds are fully backed by the required capital reserves.
Established in 2017, Alternative Asset Custodian Kingdom Trust was one of the first custodians to offer crypto asset storage solutions. Today, the Kentucky-based company is a market-leading qualified crypto custodian with asset insurance from insurance giant Lloyd's of London.
Koine, due to launch in June, will offer institutional clients custody and settlement of crypto assets. The London-based startup is aimed at trading platforms, institutional investors, digital issuers and market infrastructure providers. As part of its quest to become a leading cryptocurrency custodian, Koine has acquired pre-launch fintech company Recruitable Ltd (trading name “hireabl”) to strengthen its customer onboarding capabilities.
Prime Trust is a Las Vegas-based qualified crypto custodian supporting Bitcoin, ETH and ERC20 tokens. In April, Prime Trust secured a new round of funding led by bitcoin exchange OKCoin and began serving as a US dollar gateway for OKCoin users.
Xapo is one of the oldest Bitcoin storage solution providers. Over the past five years, the Hong Kong-based company has grown its storage assets to over 700,000 BTC (about $5.6 billion), making it the largest cryptocurrency custodian in the world. Coinbase and Fidelity Digital Assets are said to be in talks to acquire Xapo.
Additionally, major financial institutions such as Bank of New York Mellon, State Street, Northern Trust and Goldman Sachs have been exploring crypto custody as a potential addition to their existing service offerings.
Northern Trust, for example, began working with three major hedge funds investing in crypto assets since early 2018, according to a Forbes report, while BNY Mellon, as noted above, has partnered with Bakkt to provide key storage. Private.
Currently, however, specialized crypto custodians dominate the market due to their ability to adapt to market and regulatory changes faster than large Fortune 500 companies, while having the necessary in-house technical expertise. provide secure storage of crypto assets.
How Do Crypto Custodians Make Money?
Like custodians in traditional financial markets, crypto custodians generate revenue by charging a percentage fee on the assets held.
Most existing crypto custodians charge each customer a custom fee that is not shared publicly. However, several providers share their fee structures online and offer an approximation of the fees incurred.
Prime Trust has a zero AUM fee model for its crypto custodian business and instead makes money by earning interest on the fiat currency it holds, as well as other services.
Why cryptocurrency custodians matter
The crypto custodian market has become a hot topic in the crypto space as custodians are one of the final pieces of the puzzle needed to attract new institutional capital to crypto.
Mutual funds and insurance funds, which have some of the strictest investment restrictions, may soon start venturing into digital assets as the technical and cybersecurity risks of holding assets are no longer an issue.
While bitcoin has already become a mainstream asset for young retail investors, it's not quite there for institutional investors. Crypto administrators will help change that. And as a result, we may soon see the long-awaited flow of institutional capital into Bitcoin.
With $100 trillion stored in traditional assets and a market cap of just $155 trillion, there may not be much standing in the way once the old Wall Street money finally acknowledges bitcoin and starts taking a stand. Bitcoin surpassing its 2017 all-time high to finally “go to the moon.”