Coinbase is vying for US regulatory approval of its digital asset custodianship services. If they meet the strict guidelines, they may attract a wave of new institutional investors to the industry. Competitors who are also in talks with regulators include Circle and BitGo.
The investment bank, Nomura Holdings Inc. joined Ledger and Global Advisors in creating a custody consortium, Komainu. In addition, three companies that already act as traditional asset custodians, namely Bank of New York Mellon Corp., JPMorgan Chase & Co. and Northern Trust Corp., are also exploring the possibility of offering digital asset custody services.
There is always a risk that cryptocurrencies will be stolen, in the same way that the assets in a bank account may be stolen by hackers. Custody services must reduce this possibility, in order to offer a hedge against theft. Kyle Samani, a hedge fund manager, faces this risk every day with multimillion-dollar bets on cryptocurrency price action.
Samani is an institutional investor, serving as managing partner at Multicoin Capital. He, and several other institutional investors have been testing Coinbase’s new cryptocurrency custody service, according to an article in Bloomberg. In the interview, Samani said, “There are a lot of investors where custodianship was the final barrier. Over the next year, the market will come to recognize that custodianship is a solved problem. This will unlock a big wave of capital.”
If this statement by Samani is true, then the tremendous influx of capital into the cryptocurrency market may translate into higher valuations for the coins chosen by the new investors. Although regulations create a barrier to entry for retail investors, and new digital startups, they can also serve as a magnet for larger investors, which may benefit the retail investors who have had the fortitude to hold onto their digital assets. New investors may include hedge funds and pensions.
Most professional investment advisors must keep all client funds with qualified custodians. This requirement generally prevents them from investing their client’s money into over 250 cryptocurrency funds that exist today. With this change, we can expect some $20 billion in crypto assets to get picked up by custody services, according to Sam McIngvale from Coinbase.
Institutional investors keep their assets with large banks, as well as custodian services that store their gold, silver and other physical assets. While physical assets may only be stolen through physical means, digital assets may also be stolen through malicious software attacks.
With their technological capabilities, Coinbase may potentially bring value to traditional custodians. Such partnerships could open the floodgates to institutional investments in cryptocurrencies. Their competitor, Trustology, has also had conversations with traditional custodians. Still, regulators have been moving slowly until now. BitGo acquired the custodial service, Kingdom Trust, and CEO Mike Belshe stated that he filed “some time ago.” If BitGo is approved, their pipeline of several hundred hedge funds and wealth managers may flood the market with additional demand for digital assets.
Major things are happening on the institutional side of crypto-investing. Coinbase, BitGo, and their competitors will control the gateways for this wealth to enter the market, and there is the strong possibility that all will benefit.
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