06.27.2018
By Rob Daly

Wall Street Needs to Solve Crypto Custody

For want of a nail, the kingdom was lost. Or more fitting for Wall Street, for want of a qualified custodian, the cryptocurrency market was lost.

Qualified custodians enable a cryptocurrency repo market noted James Radecki, global head of business development at OTC liquidity provider Cumberland DRW, during the Crypto Evolved conference hosted by ViableMKTS in Midtown Manhattan.

James Radecki,
Cumberland DRW

“Those are what push the capital markets,” he said. “The faster the gears can move, the more capital you can put through the capital market structure.”

However, establishing qualified custodians is somewhat a chicken-and-egg problem.

“There is very little clarity around the custody perspective of digital assets,” said David Wells, general manager at crypto exchange ItBit.

Some digital-asset exchange like Gemini do offer custody services, but the larger and more traditional asset managers have shied away from taking advantage of them.

Sarah Olsen, head of business development at Gemini, attributed this to definitions of the Investment Adviser Act of 1940’s Rule 206(4)-2 regarding the custody of funds or securities of clients by investment advisers and the guidance given by the Securities and Exchange Commission, which are not in line.

“There is very little clarity around the custody perspective of digital assets,” agreed David Wells, general manager at rival ItBit.

In the meantime, there are workarounds for those institutional investors that still want exposure to cryptocurrencies.

“Some things work, but it almost like fitting things in so that you can get exposure opposed to putting on positions because you are bullish on the asset class,” Martin Garcia, managing director, co-head of sales and trading at trading firm Genesis.

One approach is to invest in a private-placement security like a bitcoin investment trust, which Genesis’ sibling company Grayscale offers.

“You can view it as a Level 3 asset, and the custody issues have been solved since it has been in business and audited since 2013,” he said.

A second approach is to avoid dealing with cryptocurrency’s underlying challenges and invest in hedgable regulated products, suggested James Featherly, trading product manager at execution platform provider Omega One.

Since the bitcoin future offered by the CME Group and Cboe Global Markets are cash settled, institutional investors would not be touching the underlying cryptocurrency, added Garcia.

Some encouraging signs are happening in the custody arena, according to Don Wilson, chairman of the principal-trading firm DRW.

“We like what BitGo is doing, but the stuff is early stage,” he said. “It’s early days, so the custody still needs to be worked out.”

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