Digital Custody Remains a Wait and See
For institutional investors that need to select a custodian to hold their digital assets, winnowing the best candidates from the rest proves challenging for many. Historical custodian banks compete with native-crypto startups, with each having their strengths and weaknesses.
Two-year-old crypto hedge fund BlockTower Capital spent the past 12 months interviewing all of the major custody firms.
“As we were doing due diligence, we realized that there was not a real framework that exists where institutions, such as ourselves, can have something to look at and build on top of when evaluating a custodian,” Corey Miller, an investment analyst at BlockTower Capital, told Markets Media.
The digital custody space has grown significantly in the last years regarding the number of providers and their offerings, according to Miller.
“When we first started due diligence, there were not that many custodians who were live,” he said. “For those that were live, their services were very primitive. Since then, there are a bunch of viable custodians that offer a good amount of coverage when it comes to how many assets they have onboard to their platforms.”
During its selection process, BlockTower considered the security, usability, native crypto-services provided by perspective custodians as well as other considerations.
The areas in which the digital custody industry needs the most considerable improvement are insurance and regulatory certainty.
“The insurance industry is still trying to figure out how to underwrite policies in this space,” he said.
In the meantime, Miller found the SEC’s Division of Trading and Markets and FINRA’s joint-guidance on digital custody, which the regulators released on July 8, a step in the proper direction.
“I don’t think it was groundbreaking, but it was good to see that they certainly are thinking about it and thinking about how to provide guidance,” he said. “It was definitely positive, and it wasn’t necessarily groundbreaking was said or written in the notice. Any time the SEC says something along those lines, we listen closely.”
Despite all of the advances in digital custody, the industry will need to wait for the appropriate legislation to define what digital custody is and what it entails, he added.
Institutional investors are expecting more services from digital asset custodians.
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Fireblocks allows traditional financial institutions to plug into the decentralized finance ecosystem.
CoinShares has gone public and Komainu, a digital asset custodian, has closed a financing round.