Unlike fiat currency, Bitcoin and other cryptocurrencies are unique in that you can engage in self-custody of your digital assets. This utility enables it to compete with traditional monetary systems. If you’re able to maximize this advantage, you can protect your own crypto assets as you accrue digital wealth. When world powers are using different economic systems that may change the future of the world monetary system, asset protection is a must.
Financial markets need custodial solutions regardless of whether it is innovative or traditional. In the past, institutional investors have stayed away from the digital market, partly because of a lack of options for asset custody. That component is no longer missing from the crypto ecosystem, making it more attractive for traditional investors.
Custodial Services Are a Must for Institutional Investors
Custodial services are needed by institutional investors, primarily to reduce risks and to ensure regulatory compliance.
By making sure that the entity that manages assets are separated from the entity that stores the assets, financial organizations are able to focus on what they’re good at. The possibility of having an employee take off or leave with all the funds is also greatly reduced because of this separation. Most well established financial institutions who have many reputational risks that hinder them from taking actions against the interest of their clients are called custodians.
Regulatory agencies demand that all institutional investors keep their customers’ funds with regulated custodial services. Normally, broker-deals and banks are regulated custodians. Among these agencies are:
- U.K. Financial Conduct Authority (FCA)
- Monetary Authority of Singapore (MAS)
- U.S. Securities and Exchange Commission (SEC)
Bitcoin Custody: Known Challenges
Having a custodial service for a traditional financial instrument is already challenging enough, not to mention cryptocurrencies, especially Bitcoin shows more difficult problems. When it comes to storing Bitcoin, challenges are faced by both professional investors and retail investors.
Cryptocurrencies are also called bearer assets, which means that whoever controls the asset is the owner of the asset. So if the owner loses Bitcoin or if it is stolen, there is no way to retrieve the funds. It’s not like a credit card account or a bank account where funds can easily be returned by simply reversing a transaction.
Many new retail investors store Bitcoin in hot wallets or exchanges that have been hacked in the past. It is not ideal for professional investors. Some retail investors are smart enough to utilize hardware wallets which allow them to store Bitcoin offline, which is a lot safer than a hot wallet or an exchange.
On the other hand, institutional investors are likely to believe that a single USB device is still very risky for handling client assets. If one employee leaves and takes the hardware wallet and all the funds in it. What can be done? Alternatively, the investor can separate access so that nobody would be able to steal it.
Cryptocurrency Custody Solutions
Third-Party Custody Solutions
- OnChain Custody
- Kingdom Trust
- Swiss Crypto Vault
- Digital Asset Custody Company
- Coinbase Custody
- Fidelity Digital Assets
Exchange Custody Solutions
The cryptocurrency custody space is getting bigger very fast, although it is still new and not as experienced as traditional finance. The issue with Bitcoin Custody must be addressed first before the large financial institutions can even consider Bitcoin investments. Other than custody, they would also require insurance products to be available to protect cryptocurrencies from being stolen.
Institutional Custody Services
Professional investors require Insurance products from reputable companies and cold storages that are regulatory compliant. There are various crypto solutions available however, they are not enough for the biggest investors.
Custody options available for cryptocurrencies include numerous providers. These companies are successful in providing custodial services so far, although they have limited scope since only the smaller investors use them. Though Fidelity launched its institutional custody solution, major institutional investors are still slow to adopt the technology.
Another trending topic in the crypto world is Bitcoin ETF. They say ETFs are easier and more likely to provide Bitcoin exposure to investors. As an example, if Bitcoin ETF is possible, anyone with a Fidelity, e-Trade or any broker can buy Bitcoin with ease.
As of now, the United States SEC hasn’t approved Bitcoin ETF or any digital currency ETF, and the reason is that the SEC doesn’t trust any third-party custody services. However, the launch of Fidelity Bitcoin Custody and the next series of institutional custody could possibly help get the approval of digital currency ETF in the time to come.
The cryptocurrency space is still very new and there are many challenges to overcome. Fortunately, the number of users who utilize cryptocurrencies like Bitcoin is rapidly growing. An established fiat ecosystem that has insurance and custody can give hedge funds and family offices the ability to allocate some funds to Bitcoin conveniently and give them peace of mind at the same time.
Aside from institutional custody, retail investors continue to search for improvements in managing and securing their Bitcoin assets. Hardware wallets are a great solution, but they require personal responsibility and a safe storage environment.
Previously, Bitcoin private keys storage was very challenging to investors, the majority of its users are ones the ones who are technically minded. Although, the custody options and services for retail investors also improved remarkably.
There are several options for custody solutions, one example would be Coinbase. It is crucial that the investors are aware of the technical capacity as well as the risks of whatever custodian they would choose.
Another popular topic in the Bitcoin world is the possibility of having a Bitcoin Node in every home that trusted users can refer to. Every user would have their own unique hardware wallet to manage their Bitcoin private keys. This may sound very complex, but it simply means having another device or hardware next to their Wi-Fi modem.
This would help users to easily validate all transactions made using Bitcoin without having technical issues or problems. Having this in the future would make it very easy for users to manage their digital assets.
After having a Bitcoin Node setup, the next action to take for personal custody is to complete a multi-signature account. It may not be required but it will definitely increase account security.
Users who are tech-savvy can create their multi-signature account using tools such as Bitkey and Glacier Protocol. Such multi-signature accounts are also available for Litecoin and other crypto assets. But most users would probably use a service that helps them handle a multi-signature account easily. As an example, a multi-signature solution named Keymaster and a home node were both created by Casa, they currently provide free two out of three multi-signature tools for users who want to play around with a more up to date security model. Another option would be Unchained Capital’s multisig vault solution. Financial services company, Unchained Capital provides financial services like lending and offers a software for self-sovereign custody which also helps with Bitcoin security.
Being a cryptocurrency investor, it is very important that you identify your security requirements and choose the best solution to meet those requirements.
Custodial services may not be an exciting topic to talk about, it is a very important part of having a financial system that is successful. We are now looking at more possibilities for Bitcoin and other digital currencies because of these new custodial services that are being offered to help both the institutional and retail investors.
Adrian Gabriel is a contributing writer for Cash Tech News who enjoys writing about crypto trading and the market.
The views and opinions expressed here are for informational purposes only, and should not be confused with professional financial advice. These opinions are solely those of the author and do not necessarily reflect the views of CashTechNews.com. Every investment and trade involves risk. You should conduct your own research, and contact your professional financial advisor before making any investment.
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