What Are Cryptocurrency Custody Solutions?

What Is a Crypto Custody Solution?

Cryptocurrency custody solutions are third-party security service providers for crypto-assets. Their services are mainly aimed at institutional investors, such as hedge funds, exchanges, or exchange traded funds, who hold large amounts of bitcoin or other cryptocurrencies. The solutions generally incorporate a combination of hot and cold storage, which are crypto custody methods that are connected to or disconnected from the Internet, respectively.

Why Does Crypto Need Custody Solutions? 

The main utility of cryptocurrency custody solutions lies in safeguarding cryptocurrency assets. Private keys, which are alphanumeric strings used to conduct transactions or access crypto holdings, are the target of crypto-asset thieves because they provide access to the assets.

People have developed many ways to store private keys offline—on paper, hard disk, or in commercially available electronic wallets manufactured for security. However, these devices can be lost or stolen, and in some cases, they can be hacked, so recovery may not be an option.

For individual and institutional cryptocurrency holders, the possibility of losing private keys is a risk; however, institutions like large cryptocurrency exchanges are liable to their customers for the assets they hold, so they go to extreme lengths to guard against losses.

The other important reason for the existence of cryptocurrency custody solutions is regulation. According to the Investment Advisers Act of 1940 (amended), institutional investors with customer assets are required to store their holdings with a "qualified custodian." The definition of qualified custodians includes "...federal or state-chartered bank or savings association, certain trust companies, a registered broker-dealer, a registered futures commission merchant, or certain foreign financial institutions."

Big Players in Cryptocurrency Custody

Within the cryptocurrency ecosystem, very few mainstream banks offer custodian services. The task of holding cryptocurrencies and crypto-assets has fallen to businesses already involved. Coinbase Custody is the custodial services provider for the popular exchange Coinbase; Gemini Custody is the custodial solution provider for Gemini Exchange. Both are licensed by the New York State Department of Financial Services (NYDFS) as qualified custodians.

The BitGo Trust Company is another popular and large qualified custodian. It received its license from the NYDFS in 2021.

The Future of Cryptocurrency Custody

Cryptocurrency custody solutions have become popular as analysts and institutional investors have increasingly viewed them as a bridge between the traditional institutional investment market and the shifting cryptocurrency space. Several developments are expected to affect the future of cryptocurrency custody.

The first one is the entry of well-established financial institutions, such as Goldman Sachs (GS). Goldman has been conspicuously absent from the list of names offering cryptocurrency solutions, but this doesn't mean they are not involved. The financial giant has been quietly working behind the scenes on cryptocurrency and blockchain solutions, which may, in time, include crypto custodial services. Another large financial services provider, Fidelity, created its Digital Assets Services for cryptocurrency custody.

When the Securities and Exchange Commission authorized Bitcoin ETPs, crypto custody became even more important. More brokers acquired crypto assets to create cryptocurrency exchange traded products, and they will need to be secured. If approvals continue, custody needs will keep growing.

Another development is regulatory clarity. Some countries have finally implemented regulations regarding crypto assets, and others are closing the gaps that exist by enhancing their existing regulations. U.S. regulators continue to update their authorities and publish protective changes as they build their knowledge of the predatory practices people are engaging in regarding cryptocurrency. As the regulatory environment catches up with cryptocurrency, custody solutions will become more important.

The Bottom Line

Cryptocurrency custodial solutions are businesses that hold cryptocurrency or other crypto assets for investors or users. These businesses must be licensed by an approving authority and be qualified custodians under the Investment Advisers Act of 1940.

The crypto custody solution industry has become popular as the crypto industry expands, and it is likely to continue growing as more institutions become involved in the crypto space. Even governments have recognized the need for crypto storage solutions.

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