Ultimate Resource On Crypto Custody (#GotBitcoin?)
Cryptocurrency custody provider Legacy Trust is launching one of the first digital assets-based pension plans. Custody Provider Legacy Trust Launches Crypto Pension Plan (#GotBitcoin?)
The Hong Kong-licensed firm announced on Wednesday that the scheme will be on offer to both employees of participating firms and the self-employed, and will offer an underlying portfolio that includes cryptos as well as fiat currencies. It’s also expected to appeal to crypto investors.
Legacy Trust CEO Vincent Chok Said:
“We envisage that this will appeal to businesses who are active in the digital assets space, and who want to offer additional benefits to their employees to retain talent and recognise achievement. What better way to drive employee loyalty while allowing valuable staff to participate in the growth of the company and the digital asset space?”
The plan will be funded by either voluntary contributions or deducted directly from an employees salary. The pension will be paid out after retirement of the scheme member, or to beneficiaries in the event of their death.
Legacy Trust said the plan “addresses various tax concerns for digital assets holders,” though it did not offer any details.
In March, the firm partnered with hardware wallet maker Ledger to offer “institutional-grade” cryptocurrency custody.
By utilizing Ledger’s multi-signature cryptocurrency wallet management product Ledger Vault, Legacy Trust said at the time it would be able to “securely and efficiently” custody clients’ digital assets, such as bitcoin and ethereum-based ERC-20 tokens.
Winklevoss’ Gemini Crypto Exchange Launches Custody Service
The New York-based cryptocurrency exchange Gemini, founded in 2014 by twin brothers Cameron and Tyler Winklevoss, has launched its own custody service, Gemini Custody.
In a press release shared with Cointelegraph on Sept. 10, Gemini states that the newly launched custody solution will allow its customers to check balances, download account statements, initiate withdrawals, and grant auditors view-only access to confirm balances, transactions and activity.
Customers will also be able to trade their assets in custody on the Gemini exchange without waiting for them to be transferred from cold storage.
18 Supported Assets
Gemini Custody reportedly supports 18 cryptocurrencies including Bitcoin (BTC), Bitcoin Cash (BCH), Ether (ETH), Litecoin (LTC), Zcash, as well as the following ERC-20 tokens: 0x (ZRX), Augur (REP), Basic Attention Token (BAT), Bread (BRD), Dai (DAI), Decentraland (MANA), Enjin (ENJ), Flexacoin (FXC), Gemini dollar (GUSD), Kyber Network (KNC), Loom Network (LOOM), Maker (MKR) and OmiseGo (OMG).
CEO of Gemini Tyler Winklevoss said that the much-needed maturation of crypto as an asset class depends on custodial security. He added,
“From day one, Gemini recognized the need for a world-class custody solution that is secure, compliant, and easy to use for individuals and institutions around the world.”
Jeanine Hightower-Sellitto, managing director of operations at Gemini explained that institutional investors have demonstrated a clear and growing demand for crypto, but that some struggle to find a solution that fully meets complex regulatory and security requirements.
Tyler and Cameron Winklevoss recently said that they are open to partnering with Mark Zuckerberg on Facebook’s Libra stablecoin project. Cameron argued that Libra represents a step forward in the mass adoption of cryptocurrency.
Beyond Storage: How Custody Is Evolving to Meet Institutional Needs
The last few years have seen the formation of many crypto-focused hedge funds and venture capital funds, whose collective assets under management total in the billions of dollars: institutional investors including Blockchain Capital, BlockTower, Paradigm and Polychain, among others. These funds know the blockchain ecosystem as well as anyone in the world.
We’re grateful institutional investors who know crypto best are helping to inform the development of our custody product. Clients tell us what they need, and we partner with them to build what they require. Through this process, we’ve learned some lessons worth sharing because they offer meaningful insight into the crypto space and how it’s evolving.
1. Institutional Investors Want More From Their Custodian
Because digital assets are bearer assets, most investment activities involve handling the underlying private keys. This means custody plays a much bigger role in crypto investors’ day-to-day operations than in traditional finance. Whatever investors want to do with their assets – buy and hold, exit a major position, actively trade, participate in staking and governance – the custodian will be involved.
As such, institutional investors want custodians to make buying and selling digital assets as easy and painless as possible. What’s typically a multi-step process, including navigating exchanges and OTC dealers, finding the best price, manually transferring crypto from or to custody, is ripe for disruption by custodians. Regulated trading involves custody and custody relies on technology, which means providing even simple financial services (like the ability to buy, hold and sell an asset) requires highly advanced underlying infrastructure in the custody function.
Funds and institutions should be able to focus on their investment strategies without having to worry about security or moving millions of dollars in crypto between addresses. The onus is on custodians to enable their clients to sell or buy directly through custody.
2. Cold Storage Isn’t Working For Institutional Use Cases
Institutional investors are painfully aware of the major hot wallet breaches our industry has suffered and the chilling effect they’ve had on the whole ecosystem. To counteract the risks of online exposure, custodians have attempted to secure assets by generating and managing keys entirely offline through a manual human process called “cold storage.” Holding assets offline is necessary for security purposes, but institutional investors are frustrated with cold storage as it has traditionally been implemented.
Questioning the practicality of cold storage is not something we at Anchorage take lightly: As project leads for the Glacier Protocol, my co-founder and I helped develop a step-by-step method for bitcoin self-custody that relies on cold storage. Cold storage has been instrumental for the broader adoption of decentralized currencies, allowing people with non-technical backgrounds to safely store their crypto assets offline. It was and continues to be a sensible custody solution for many retail investors.
But cold storage comes with serious usability constraints, and institutional investors have complex usability needs that cold storage simply cannot satisfy.
For one, institutional investors have an obligation to their LPs to generate as much yield as possible on their behalf. Cold storage is an impediment to institutions’ ability to quickly execute trades. When a time-sensitive trading opportunity arises, custodians must be able to ensure that a client’s assets are readily accessible for trading at a moment’s notice. Traditional forms of cold storage can entail hours or even days of waiting to withdraw assets, at which point trading opportunities are lost. Institutional custody providers must develop solutions that make offline assets easily accessible and securely tradeable.
Second, institutional investors are demanding staking and governance, two forms of on-chain participation that require the use of private keys for online operations. Some cold storage custodians rely on delegation and proxy contracts, technologies that enable one key or contract to act on behalf of another. But not all projects allow delegated staking, and proxy contracts can increase surface-of-attack and introduce unnecessary risk.
As more projects come to market with mechanisms requiring active participation, institutional investors, which have a major stake in their investments’ health and success, will rely on their custodians to act accordingly and get the most out of their holdings.
3. Institutional investors require solutions designed for multi-person teams
The fact that institutional funds are managed collectively presents its own set of challenges. While “not your keys, not your crypto” has become a common refrain among adherents to the value of self-sovereignty, which individual should ultimately control crypto keys owned by an institutional fund?
We believe the keys must be controlled by a multi-person team. Providers are using different solutions to achieve this result: some use Shamir’s Secret Sharing (a cryptography algorithm that divides keys into multiple parts), others use physical controls. We at Anchorage associate a unique key with each user and require all sensitive operations to be signed by a quorum of user keys.
But multi-person approval is only part of the solution. The custodian must verify institutional intent – in other words, the custodian must ensure that a given operation represents what the client organization wants to do, and not just what a rogue individual or rogue group wants to do. We believe institutional intent is best verified by authenticating each human approver for a given operation, not just verifying possession of a shard or user key; and by enabling institutional investors to configure customizable quorums based on the nature of the operation, since different team members may have different domains of authority.
In sum, the role of custodians is evolving as the crypto ecosystem matures.
Institutional investors have different needs than retail users, while new coins that offer staking and governance demand on-chain participation. If the first wave of custody solutions was designed to help individuals hold and trade bitcoin, then the second wave will be trained on satisfying the needs of institutions and enabling full participation in all cryptocurrencies.
Hawaii Introduces Bill Authorizing Banks To Offer Crypto Custody
The Hawaii State Senate has passed the first reading of a bill authorizing banks to hold digital assets in their custody.
The bill was introduced on Jan. 17 by five state senators, including the only Republican member of the Senate, Kurt Fevella. It passed the first reading on Jan. 21 and was then referred to the committees on Judiciary and Commerce, and Consumer Protection and Health on Jan. 23.
The bill specifies the set of provisions which a bank must adhere to in order to provide custodial services for digital assets. Custodial services cover “the safekeeping and management of customer currency and digital assets through the exercise of fiduciary and trust powers under this section as a custodian and includes fund administration and the execution of customer instructions.”
In order for a bank to qualify as a crypto custodian, it has to adhere to certain standards regarding accounting and internal controls, maintain IT best practices, and comply with federal Anti-Money Laundering and Know Your Customer requirements.
Attempt To Provide Legal Certainty For Digital Assets
In addition to opening up bank regulations to include cryptocurrencies, the proposed law would classify digital assets under the Uniform Commercial Code — a set of federal laws in the United States that aims to provide uniformity in legislation surrounding sales and commercial transactions in the country.
Digital assets would then further be sub-categorized as either digital consumer assets, digital securities, and virtual currencies. All are classified as intangible personal property.
Furthermore, the bill specifies the manner of perfecting a security interest in digital assets and discusses various methods such as smart contracts and multi-signature arrangements.
The proposed legislation also authorizes courts to hear claims relating to digital assets.
With digital assets, their security interest, and bank custodial services defined, the state courts are also given jurisdiction to hear claims in both law and equity regarding digital assets.
Hawaii Loosening The Reins On Cryptocurrency
Hawaii has previously imposed strict requirements on firms dealing with cryptocurrency, causing the Coinbase exchange to cease its operations in the state almost three years ago.
If passed into law, this latest bill would not only give some clarity to classification of digital assets, bringing it in line with several other states. It would also set out a framework by which any compliant bank can act as a crypto custodian, which would potentially see Hawaii take a lead over many states in regulating this aspect of the cryptocurrency industry.
Coinbase Launches International Cryptocurrency Custody Arm
Major United States-based cryptocurrency exchange Coinbase has established an entity in Ireland to expand its crypto custody services to European institutions.
According to a Coinbase announcement published on Jan. 30, the new entity is called Coinbase Custody International and is based out of Dublin.
The firm’s services will be the same as those provided by Coinbase Custody in addition to taking over all the staking activities performed by the exchange.
Coinbase Custody initially began offering staking for select cryptocurrencies in March 2019, and expanded that service to international the following November.
The Advantages Of A Local Operation
While Coinbase Custody has been serving European clients in the United Kingdom, Switzerland, Germany, Finland and the Netherlands since 2018, a new dedicated entity allows for completely localized service.
Per the announcement, this will bring the advantages of local staff, localized service-level agreements and clearer compliance with EU law:
“Europe is our fastest growing geographic segment and our international launch is a direct result of client demand. By offering our services from the same region in which our clients are located, it’s our goal that they will benefit from greater legal and regulatory clarity.”
Coinbase also said that, over the coming months, it plans to add support for more cryptocurrencies and features to its international custody service.
Furthermore, Ireland boasts some of the lowest corporate income tax levels in Europe which, despite the protestations of lawmakers to the contrary, has earned it a reputation as a tax haven. Indeed, the country has the third-lowest corporate income tax rate among OECD countries as of 2019.
Growing Demand For Custody
As cryptocurrencies solidify their position as a new financial asset class, demand for services such as crypto asset custody is increasing.
Rohan Barde, a research and innovation manager at industry expert association Blockchain Zoo, explained that custody services are needed to attract institutional investors who wish to reduce risk and comply with regulatory standards.
The ‘Great Lockdown’ Is Boosting Demand For Bitcoin Custody Solutions
Thanks in part to the uncertainty of the coronavirus crisis and rising bitcoin prices, bitcoin wallet startups have seen a sudden uptick in activity.
For example, over the past two months the Austin, Texas-based bitcoin startup Unchained Capital, with over $50 million in assets under management and $150 million worth of bitcoin transactions processed, garnered several dozen new institutional clients, representing hundreds of individuals. Will Cole, Unchained’s chief product officer, said the custody product Vault saw 340% growth in Q1 2020 as compared to the previous quarter.
“We’ve seen a big uptick in the creation of Vaults,” Cole said. “An event like that [pandemic] makes people think about how they are storing their bitcoin.”
Unchained is working on a wallet update with new privacy features. It allows users to sort UTXO (unspent transaction output) information, which makes it possible to reveal less information about oneself to an external recipient, even while using a public blockchain.
Unchained adviser Christopher Allen, founder of the not-for-profit benefit corporation Blockchain Commons, said the industry still doesn’t have clear terminology that distinguishes the Vault custody solution, where both Unchained and the client have keys to a multisig wallet versus wallets where only the user holds keys. Regardless, there appears to be increased interest in wallets where users hold keys, in some form.
“Custody requires keys that are under your control or under collaborative custody with others. But it isn’t self-sovereign if they can unilaterally block your recovery,” Allen said. “There are many other companies and teams involved who all desire to make multisig easier, more standard, and allow you to choose different approaches or implementations knowing that you are not locked into a single solution.”
Such setups, like Vaults, make sense for companies and families that want to manage significant funds without a single person being in control of the wallet.
These days many of the industry’s large wallet businesses appear to be growing, in terms of both profits and users.
For more private options geared toward individual users, ShapeShift CEO Erik Voorhees said there are far more people using his software wallet solution this year. As such ShapeShift, acquired the Israeli wallet startup Portis for an undisclosed amount in April. This decreased the company’s compliance risks and solidified its position in the industry’s self-custody sector, slightly less lucrative than custodial crypto exchanges yet growing at a comparable rate.
“This is the first recession the world has seen since cryptocurrency existed,” Voorhees said. “We want people to think of ShapeShift as the self-custody interface for all the various crypto services out there.”
Like ShapeShift, Ledger CEO Pascal Gauthier, whose startup is scaling up to meet increased demand for hardware wallets, said his wallet will also allow users to do “all the complex things you can do with a coin” directly through the Ledger Live app.
“We do see an increase in downloads of Ledger Live, our hardware wallet companion app, as we are adding more coins,” Gauthier said. “Nowadays, our main revenue comes from the hardware wallet business. … Our revenue model will evolve to one-off revenues, transactional and recurring revenues thanks to additional services.”
After several years of operation, many incumbent crypto companies now feel pressure to deliver returns for investors. It’s unclear which business models will best suit the crypto economy.
“Every day I think about acquisitions for a minute, then decide against it,” Gauthier said. “Ledger has enough money in the bank, a good business. …There’s a question about where this industry is going and what does that mean for the future.”
Unchained Capital earns revenue from clients who pay for the multisig Vaults or loan services associated with its open source wallets. The startup relies on subscriptions from a small number of wealthy clients for profits, even if it also serves less-lucrative retail users. On the other hand, ShapeShift profits from in-app referrals to exchanges and other services.
Voorhees said he acquired Portis because the startup’s tech allows for a familiar login, akin to Facebook Login, but where users need to actually remember their passwords.
Stepping back, Portis was founded in 2018 and attracted the attention of legendary Israeli tech investor Eddy Shalev. The Block reported Portis nearly shut down in Q1 2020, since co-founder Itay Radotzki quit in January and eight employees were subsequently laid off. Portis co-founder Tom Teman said the venture capital climate changed dramatically in 2020, a sentiment echoed by veterans across the industry, that investors are increasingly demanding revenue from the start.
Yet, a former Portis competitor, Fortmatic CEO Sean Li, said his user-friendly login startup isn’t taking ShapeShift’s approach because he doesn’t “think any business should see themselves as a portal that owns everything in it.” As such his revenue model is business-to-business, rather than monetizing user activity. Li estimated nearly 5,000 developers now use Fortmatic for gateways to their various projects, so his early-stage startup is still on track to make more than $500,000 in revenue this year.
“This prevents the next Facebook or Google situation where one account is associated with a lot of different applications, compromising user security and privacy,” Li said.
On the other hand, Casa CEO Nick Neuman said his subscription-based startup saw an “influx of new clients” since the beginning of March, with a “50% increase in total” bitcoin usage. Like Unchained Capital and other subscription startups above, Casa is primarily focused on bitcoin.
“We’re definitely seeing increased demand for self-custody since the coronavirus crisis began,” Neuman said.
And where there is demand, there is opportunity.
Bitfinex Launches Institution-Grade Custody Services With New Koine Partnership
Bitfinex cryptocurrency exchange has partnered with London-based digital asset custodian Koine to roll out institution-grade custody and post-trade services.
Bitfinex cryptocurrency exchange has partnered with London-based digital asset custodian Koine to roll out institution-grade custody and post-trade services.
On May 13, Bitifinex announced that Koine would be providing the exchange with a series of services that can help professional traders to mitigate the counterparty and settlement risks associated with cryptocurrency trades.
Bitfinex, which caters some of its offerings to professional clients by supporting algorithmic and over-the-counter trading, claims the new suite of services will help to encourage institutional participation in crypto markets.
Koine’s Storage Model Is Neither “Hot” Nor “Cold”
Speaking to Cointelegraph, Phil Mochan, founder and head of strategy and corporate development at Koine, explained how its security model for crypto-asset custody works.
Instead of following the established procedures for either “hot” or “cold” crypto-asset storage, its solution uses three separated pieces of technology, dubbed “Digital Airlocks” as they function similarly to physical airlocks:
“Digital assets enter an outer airlock which might conventionally be called a hot wallet but we refer to as a transit account, as the funds are only held there momentarily before moving to the second airlock, when they are dematerialized onto a separate digital ledger and then transferred into a third airlock which is the vault for assets at rest.”
Noting that the external airlock is still vulnerable to attack, just as a conventional hot wallet would, Mochan stressed that the difference lies in the fact that “the median balance held there is nil, and we are insured for when it isn’t.”
Moreover, the whole process apparently occurs within a “sub-millisecond time frame” and relies primarily on hardware, rather than software.
Blockchain’s “Single Source Of Truth” Removes The Need For Post-Trade Reconciliation
Aside from this approach to secure custody, Koine’s technology is designed to be almost wholly automated, without relying on human intervention, and can purportedly handle over 200,000 transactions per second.
Koine’s post-trade services are designed to remove the need for manual processes by removing blockchain assets from the trade cycle through a process of dematerialization.
Traditional markets — like those for equities and bonds — often dematerialize assets as well, he noted, yet they continue to use a multi-tiered trade model that demands intensive work on reconciliations.
By contrast, Koine’s delivery-versus-payment (DvP) solution uses a distributed ledger as a single “source of truth,” which Mochin likened to the model used by conventional central securities depository entities but without their multi-level custody structures.
Lastly, Koine’s service ensures continuous legal ownership of all crypto assets and (digitalized) fiat currency by custodying all assets involved in trades within a segregated ownership model:
“When a client wants to trade, then Koine locks the collateral of each side of the trade […] before trade execution occurs. This collateral locking is in a sub-millisecond time frame. Post-trade, upon receipt of the settlement instruction from the exchange, Koine conducts a DvP in sub-millisecond time frame.”
Speaking to Cointelegraph, a Bitfinex representative revealed that Koine and Bitfinex are also building an integration that would “enable Koine customers who are also Bitfinex customers to obtain a line of credit on Bitfinex using the tokens held with Koine.”
New Offerings And Old Controversies
As reported, the derivatives platform for Bitfinex has recently launched a new perpetual swaps product that enables traders to speculate on Bitcoin (BTC) dominance.
The exchange also launched its own social network last month, “Bitfinex Pulse,” to encourage communication between traders.
While these new offerings and services proliferate, Bitfinex’s parent firm, iFinex, was served a class action lawsuit for alleged market manipulation at the start of 2020.
BitGo To Provide Custody Services To Indian Crypto Exchange CoinDCX
Cryptocurrency custodian BitGo will provide its services to Indian exchange CoinDCX, offering secure storage and partial insurance for assets traded on the platform.
Cryptocurrency custodian BitGo will provide its services to Indian exchange CoinDCX, offering secure storage and partial insurance for assets traded on the platform.
BitGo — a United States-based firm that claims to process over 20% of all Bitcoin (BTC) transactions — provides an insurance policy covering up to $100 million in value through a syndicate of Insurers in the Lloyd’s of London and European Marketplace.
CoinDCX apparently already began transferring its assets to BitGo’s wallets last week.
With BitGo Custody, all cryptocurrencies on CoinDCX will be secured in omnibus and segregated hot and cold wallets with two-factor authentication for all accounts.
A fraction of funds traded on the CoinDCX exchange will be protected by BitGo’s $100 million insurance policy, including user assets held on CoinDCX’s lending service, DCXLend, and cold assets and funds.
In a statement, Pete Najarian, chief revenue officer at BitGo, noted that “with the recent uptick in trading volumes on Indian exchanges, the need of the hour is for professionalization in the form of fund security in the crypto market.”
BitGo already provides custody services to multiple crypto exchanges including Bitstamp and LGO Markets. This February, it established two separate crypto custodies in Switzerland and Germany and launched an institutional-level crypto lending service in March.
BitGo has also onboarded commercial insurance broker Woodruff-Sawyer & Co (in partnership with Paragon Brokers) to enable clients to insure their assets more flexibly and purchase an excess limit beyond its $100 million policy.
The Current Climate For Crypto In India
Earlier this year, India’s Supreme Court overturned a longstanding ban on banks’ services to crypto-related firms, promising to usher in a more positive climate for the domestic industry.
In an interview with Cointelegraph, CoinDCX co-founder and CEO Sumit Gupta pointed to the recent influx of foreign investments into the cryptocurrency industry, noting that the exchange had secured investments from Polychain Capital, Bain Capital Ventures, and BitMEX operator HDR Global Trading.
“The recent Facebook-Jio deal also signals that global conglomerates are starting to turn towards India as a potential hub to launch crypto-related projects,” Gupta said.
In the aftermath of the positive Supreme Court ruling, well-known trading platforms such as WazirX witnessed a month-on-month growth of over 80% in both March and April.
Gupta noted that CoinDCX has seen 47% growth in trading volumes in the first quarter of 2020, a 10 fold growth in user signups and a 150% growth in daily active users,
However, even after the ban on banks’ dealings with crypto businesses was overruled, some banks were reported to be continuing to deny their services in support of the sale or purchase of crypto assets.
Gupta Told Cointelegraph That:
“Despite the Supreme Court’s ruling, regulation of the cryptocurrency sector within India remains vague—with limited clarity as to what frameworks are likely to emerge in relation to emerging technologies. This has led to a degree of continued hesitancy for traditional actors to engage with actors within the cryptocurrency and digital asset space.’
Several exchanges have also been prompted to collectively pen a letter to the country’s central bank to request more clarity as to whether their operations are subject to the country’s Goods and Services Tax, or GST.
Gupta has previously told Cointelegraph that the exchange is working hard to obtain a favorable verdict on the matter.
External Custody For Crypto Derivatives Aims To Make Collateral Transfers Faster
Crypto derivatives platform Deribit launched a new external custody solution designed to reduce auto-deleveraging risks amid tumultuous markets.
Crypto derivatives platform Deribit is launching a new external custody solution designed to help with faster collateral transfers and reduce auto-deleveraging risks in tumultuous markets.
On May 14, the Panama-based exchange announced its full integration of the new solution, which was developed by London-based digital asset infrastructure provider Clearloop.
Deribit is catering the new solution to professional traders, claiming that such improvements in the crypto derivatives market structure will drive crypto adoption among institutional investors.
How does Clearloop’s custody solution work and what are the implications for traders?
The custody solution is designed to remove the need for asset managers to move their crypto from secure cold storage into hot wallets on exchanges in order to trade.
As well as introducing perceived security risks, transferring collateral between wallets and exchanges can incur delays of up to one hour, depending on the time needed for confirmation on a given blockchain network. Delays can further be compounded due to withdrawal times after the trade is settled.
Instead of this, Clearloop is offering a solution for off-exchange settlement between parties. This works by Clearloop intermediating trades — something it says removes self-custody risks — and providing asset managers with a segregated and insured custody solution.
For any position submitted by a trader, ClearLoop first ensures that both the client and the exchange have enough assets allocated to cover it before it is opened, and then instantly settles between parties once the trade has been closed.
By making the transfer of client collateral faster, Clearloop states that traders will be better protected against the risks of auto-deleveraging and other downsides associated with market inefficiencies. It points to the market mayhem this March:
“On-chain transaction costs increased up to 5 times, and wait time for rapid confirmation was approx. 20 minutes. In fast-moving markets, traders are unable to add or move their margin fast enough to meet margin calls or take advantage of arbitrage opportunities. This limits their ability to trade, exaggerates price move, and can lead to significant trading losses.”
By enabling faster reaction times, traders will ostensibly be able to execute significantly higher volumes per transaction, as well as avoid limitations on the value of the crypto that can be stored in hot wallets, which is typically enforced by exchanges to mitigate security and counterparty risks.
The company stresses that with its solution, assets never leave the custodian environment and that all off-exchange deposits and settlements are closed within milliseconds.
Auto-deleveraging Risks In The Crypto Derivatives Market
As recently reported, some traders on Binance have recently claimed that their winning short trades were unfairly cut short due to the platform’s auto-deleveraging system.
Platforms such as Binance and BitMEX have created insurance funds whose primary purpose is to prevent the auto-deleveraging of successful traders’ positions to prevent the bankruptcy of positions that get liquidated. There has been a recent controversy surrounding BitMEX’s use — or lack thereof — of its fund during a mass liquidation event on its platform in March.
Genesis Trading Buys Crypto Custodian Vo1t In Bid To Become Prime Broker
Digital currency trader and lender Genesis Global Trading is moving toward full-service prime brokerage with the acquisition of crypto custodian Vo1t, the company announced Thursday.
The New York-based trading firm, which is a subsidiary of CoinDesk parent firm Digital Currency Group, acquired Vo1t to begin developing a full suite of prime brokerage services under one roof including lending, trading and custody. The terms of the deal were not disclosed.
“We’re coming at this after having a successful business on the trading and lending side,” said Genesis CEO Michael Moro. “The goal is for clients to be able to do any and all activities with Genesis.”
In traditional finance, prime brokerage refers to a bundle of specialized services offered by investment banks and securities dealers to their hedge fund clients. This is the first time Genesis has disclosed its strategy to become a prime brokerage.
There are a few prime brokers in the crypto space, including New York-based Tagomi, which joined Facebook’s Libra Association in February. Digital asset services firm Bequant also announced a full suite of prime brokerage services and 18 sources of liquidity earlier this month.
Moro wouldn’t put a figure on the number of liquidity providers Genesis is aiming to plug into.
“The answer is as many as we can that we feel good about,” he said. “We’re trading roughly $1 billion of crypto a month, and clearly we have enough liquidity venues for us to trade that much.”
Genesis also announced plans to soon offer a derivatives trading desk, which would start with over-the-counter bitcoin options. It’s also interested in providing capital introduction for family offices that are looking for crypto hedge funds that have the strategies, fee structure and asset exposure to fit their investing needs.
“We’re curating the hedge funds worth talking to, based on the criteria you’re looking for,” Moro said.
Vo1t will also be Genesis’ first London office. The firm, whose name is supposed to remind customers of a bank vault, provides custody, lending, staking and trading products for 35 digital assets. Since 2017, Vo1t has been offering cold storage to firms listed on the Financial Times Stock Exchange, trust companies and other financial institutions around the world. It advertises a 45-minute withdrawal time for assets held in cold storage.
Moro began to pursue a deal with Vo1t last autumn after seeing how many services the startup’s team had produced with few resources. The companies are now in the middle of integrating products.
“We’re going to keep working on the acquisition integration,” he said. “There’s quite a bit of work to be done to absorb this platform and their technology.”
Genesis is also expanding into Singapore after registering with the Monetary Authority of Singapore and will send employees from New York to the new office once it is safe to do so. With 30% to 40% of the firm’s lending business coming out of Asia, the office will give Genesis more flexibility to serve customers in the region.
“Having New York, London and Singapore helps for different time zones,” Moro said. “Especially since crypto trades 24 hours a day … and our clientele is diverse across Europe, Asia and the U.S.”
Bankruptcy Law Can Be Unclear When Crypto Custodians Go Belly Up
The past few years have seen a glut of cryptocurrency exchanges becoming insolvent. But what legal rights do their customers have with regards to the return of their held assets?
A paper recently published by the Law Faculty of the University of Oxford examines the legal risks of depositing cryptocurrency with custodians in the event of insolvency. The paper, featured in a June 1 blog-post by the faculty, also suggests ways that regulation and practice can help to mitigate this risk.
Cryptocurrencies were initially created as a way to be free from the interference of governments, banks and other intermediaries. However, the reality is that a large proportion of Bitcoin (BTC) and other cryptocurrencies is currently held through custodians such as exchanges, rather than by investors themselves.
This creates significant risks related to the possible insolvency of these custodians, and the rights of customers with regard to their held assets in such an event. Exchange insolvencies are common, and it can take years before customers find out what will happen to their funds.
The paper states that customer rights ultimately depend on the applicable insolvency and property law. However a lack of international standards related to the legal status of cryptocurrency, along with the global nature of blockchain-based transactions, can make it hard to determine which laws apply.
Ideally, the paper suggests, priority would be given to the contractual law agreed between custodian and customer, with local law applying at the custodian’s place of corporation serving as a fallback. So a custodian’s terms and conditions should be essential reading before depositing or purchasing tokens.
Pooled Funds Or Segregated Addresses
Cryptocurrency custodians generally store customer assets in one of two ways: a pooled blockchain address, or segregated blockchain addresses.
The former option presents a greater risk, as it makes it more likely that the individual tokens originally deposited by or allocated to a customer will be used for the benefit of another customer.
This can often be crucial in regaining assets in the case of insolvency. If individual assets can be proven to still reside at the blockchain address of the custodian, the customer has a far greater claim to those assets in most circumstances.
Again, information on how deposited tokens may be used should be clear from a custodian’s documentation.
Regulation On Re-Use Could Protect Customers
The paper also suggests that regulation prohibiting or limiting the re-use of customer assets could further protect customers in insolvency situations. Again, holding funds in segregated addresses presents less risk that such regulation is violated.
Such regulations already exist for traditional investments held for customers by brokers or intermediary firms, which must:
“Make adequate arrangements so as to safeguard the ownership rights of clients, especially in the event of […] insolvency, and to prevent the use of a client’s financial instruments on own account except with the client’s express consent.”
Some custodians may already follow such recommendations. So ultimately, according to the paper, the safety of your tokens with an exchange or custodian depends largely on your due diligence in choosing which one to use.
Ball’s In Their Court: Crypto Custodians Waiting On Regulators To Act
Crypto custody firms are mostly treated like traditional assets, ignoring the uniqueness of digital assets and its various complexities.
The business of cryptocurrency custody is getting more competitive and lucrative by the day. The most recent announcement has come from Switzerland, where local family-owned bank Maerki Baumann announced on May 29 that it had expanded its cryptocurrency services through the introduction of crypto custody and trading. The private bank first announced its crypto initiatives in 2019 by extending business account services to blockchain companies.
Thanks to regulatory approval from the Swiss Financial Market Supervisory Authority, Maerki Baumann will initially offer trading and custody services on five major cryptos including Bitcoin, Ether, XRP, Bitcoin Cash and Litecoin. The bank’s announcement came a month after the Capital Markets and Technology Association, also based in Switzerland, published a common industry standard for the management and custody of crypto assets.
Dubbed “Digital Assets Custody Standard,” the document attempts to elucidate how the custody of digital assets differs from that of traditional assets. Having identified the differences, the CMTA then laid down foundational security and operational requirements for crypto custody providers.
Custody For All
It seems that the biggest players in crypto have now turned their attention to the crypto custody sector, as a flurry of deals and partnerships were announced during recent months. For example, crypto exchange Bitfinex announced a partnership with London-based digital asset custodian Koine, while the New York-based crypto lending firm Genesis Capital acquired custody startup Volt. Additionally, crypto derivatives platform Bakkt claimed on May 18 that it had onboarded more than 70 crypto custody clients.
Despite the growing custody-related activities, though, regulations around crypto custody remain vague across different jurisdictions. A recent study published by researchers at Leiden Law School in the Netherlands specifically points to the handling of asset retrieval in the event of insolvency as a problematic area.
While experts believe that crypto regulation is needed, given the uniqueness of crypto assets, many regulators continue to treat coins and tokens almost in a similar fashion to traditional assets.
Traditional Rules And Crypto
To understand why traditional rules are ill-suited for crypto assets, CEO and co-founder of Trustology Alex Batlin believes one should first consider why these rules were enacted initially, telling Cointelegraph:
“The main reason you have the regulations is that, at some point, a custodian made a mistake, or stole money or performed operations they shouldn’t have performed. And these mistakes are typically not easy to spot because most of the record-keeping was always internal to the company.”
For this reason, most rules talk about very stringent record-keeping and transparency, because it’s easier to resolve issues if they are spotted early enough. However, this is based on the premise that only the record-keeping companies have access to the ledgers under custody, and therefore, have to constantly provide means for clients and regulators to audit their internal accounts. “However, the blockchain technology, which powers crypto assets, isn’t haunted by this conundrum since the records are there for everyone to see,” Batlin said.
Digital assets, by design, offer better transparency compared to traditional assets. Still, it’s worth pointing out that the transparency level varies from one custody model to the other. This, along with other unique features such as ownership and immutability makes a case for purpose-built crypto rules.
CMTA’s Standard Presents A Starting Point
The digital asset standard that CMTA proposes breaks down the different models by which custodians may operate. The document focused on two institutional-grade custody models. These include pooled and allocated distributed ledger accounts, or DLAs.
In a pooled model, the custodian pulls client assets together in one or several accounts. This model is what most cold storage custody solutions employ. According to CTMA, this model could take two main forms:
Placing Client-Only Assets In One Or Several Pooled DLAs
Co-Mingling A Custodian’s Own Assets With Client Assets Across One Or Several DLAs
In an allocated DLA model, the custodian dedicates one or several DLAs to a single client. In other words, while each DLA may be dedicated to different assets, it cannot be credited to more than one client. Batlin believes these classifications provide insights into the inner workings of different models, and should help regulators develop suitable rules.
For instance, while clients may be able to track funds in pooled DLAs if they know the addresses, they lack the ability to tell whose funds are being moved and if it’s authorized. That’s different for segregated models in which clients can independently monitor their respective accounts and immediately call out any irregularities.
In addition, with segregated accounts, Anti-Money Laundering compliance is potentially more transparent than with pool accounts. “The regulatory requirements should, therefore, treat co-mingled models differently from segregated accounts,” according to Batlin.
The Risk Of Rigid Regulation
At best, the CMTA’s document can only be a starting point for suggesting how the sector should be regulated. Some industry participants believe that it doesn’t take the latest developments in custody tech (multiparty computation) into consideration. Kevin Lehtiniitty, chief technical officer and chief product officer at Prime Trust, spoke to Cointelegraph about the challenges of dealing with rules in different regions:
“Regulations are very jurisdictional. The way we operate in the U.S. is different from Europe and Japan, thanks to jurisdictional regulations. However, since blockchain assets are truly global assets, they need a global regulatory standard and not a jurisdictional standard. Regulators need to take a patient, measured approach, else they risk stifling innovation.”
An example of this problem ensued at the crypto exchange Liquid after it switched to the MPC custodian solution. The exchange said MPC allowed it to reduce its dependence on cold storage by up to 90% while maintaining a “zero-compromise level of security.” Despite the efficiency gains, the exchange had to keep 100% of the funds of its Japan-based clients in cold storage just because of local law. “This sort of disparity in regulations would make some regions less competitive than others,” Michael Shaulov, CEO and co-founder of Fireblocks — an asset transfer network provider — told Cointelegraph, adding:
“All in all, while the standard is good progress, it doesn’t push for the adoption of the newest technologies and that can leave certain custodians behind with offerings that are not as secure or operationally efficient as in other geographies.”
Current State Of Crypto Custody Regulations Across Different Jurisdictions
In general, present regulations globally treat crypto custodians in a similar manner to traditional asset keepers without taking into account the distinctiveness of crypto. The more advanced regulations only go as far as defining what constitutes crypto custody and/or setting guidelines for storage allocation between online and offline wallets.
The New York Department of Financial Services, or NYDFS, being one of the most prominent and active financial regulators in the world, was one of the first regulators to make a move to put a leash on crypto trading and payment industry by issuing a Bitlicense. Crypto giants Coinbase and Gemini currently hold the license. However, the law, for the most part, only integrates crypto companies into NYDFS’s already robust financial regulation bracket.
The Bitlicense requires custodians to maintain a USD-denominated surety bond or trust account as security against customers’ funds. The NYDFS’s superintendent determines the amount to be held as security. The law does however prohibit custodians from selling or transferring clients’ assets without their permission.
The U.S. State of Wyoming is the only known geographical region with an advanced regulatory framework for crypto custody. The state goes beyond online-offline storage requirements to purpose-built provisions that address the uniqueness of crypto assets. In November 2019, Wyoming revealed a series of opt-in custody provisions that cover crypto-specific topics like ownership, forks, airdrops and staking, which also clarified that custodians cannot use clients’ assets without their approval.
This differs from the custody of traditional assets, in which owners are de facto creditors whose custodians are surreptitiously doing business — lending and rehypothecation, for instance — with customer assets. What’s more, the rule is clear that “all ancillary or subsidiary proceeds” relating to digital assets in custody are credited to the customers, like proceeds from forks, airdrops, staking and any other event that changes the value of an asset.
The country’s top financial regulator, FINMA, is one of the world’s most active regulators in the crypto space. Last year, the Swiss Federal Council published a draft law relating to digital assets. With regard to custody, the focus is mostly on the handling of client assets in the event of bankruptcy.
The draft amends the Swiss Debt Collection and Bankruptcy Act in that insolvency proceedings should exclude client assets even if they’re held collectively across single or several accounts with the custodian’s assets. This seeks to resolve the challenge of proof-of-ownership arising from the fact that crypto assets are bearer’s assets, compared to traditional securities.
Germany egan requiring crypto custodians to obtain a license from Jan. 1, 2020, following the implementation of the 5th Anti-Money Laundering Directive legislation, which mandated EU member countries to subject crypto companies to the same Anti-Money Laundering requirements as traditional financial firms.
Germany’s crypto custody regulations are still evolving, however. The German regulatory body Federal Financial Supervisory Authority has so far only made provisions for defining a custodian and what constitutes regulated custodial activities. It remains unclear whether BaFin will develop rules to accommodate the uniqueness of crypto assets.
After finding itself right in the thick of the 2017 crypto fever, Japan swiftly moved to start regulating crypto activities after the threats of money laundering and terrorist financing became apparent. Any exchange wishing to operate in Japan needs to first obtain a license from the Financial Services Agency, the country’s principal financial regulator. The country presently has 23 FSA-approved crypto exchanges.
In 2020, the FSA expanded its crypto regulatory oversight to include crypto custody via an amendment to the country’s Payment Services Act, under which it regulates crypto exchanges, requiring custodians to register as cryptocurrency exchanges — even if they don’t intermediate the sale and purchase of crypto or buy and sell themselves.
The law also requires custody service providers to keep the majority of customers’ assets offline and in a segregated manner, with no more than 5% of funds kept in hot wallets, and even then, the provider must hold the same amount of crypto of its own in an offline environment as a guarantee.
Safety Check: If Crypto Custodian Fails, Clients May Not Get A Full Payout
Crypto exchanges — not segregating blockchain addresses — could lead to ownership disputes in the event of insolvency, research says.
A recent paper from academics at Leiden Law School suggests that if a crypto exchange or crypto custodian goes bankrupt, investors could well lose control over their stored coins. This happened in Japan’s Mt. Gox exchange collapse, and more recently with the failure of Italy’s BitGrail exchange. Thus, it could happen again.
Indeed, the paper implies that even users of United States-based exchange Coinbase could have problems reclaiming their crypto in the event of insolvency — because Coinbase doesn’t segregate blockchain addresses. So, the question still stands: “Is there a risk you could lose your Bitcoin” if an exchange or custodian goes bankrupt?
“Absolutely, there is a risk,” Edgar Sargent, a partner at Susman Godfrey law firm, who was hired by CoinLab to sue Mt. Gox, told Cointelegraph. Outcomes vary depending on jurisdictions and applicable law, but the default position is that this is a debt incurred by the exchange, and in the event of the firm’s bankruptcy, a Bitcoin (BTC) investor will have to get in line with other creditors, said Sargent.
Evan Thomas, an attorney with Osler, Hoskin & Harcourt LLP, told Cointelegraph: “In the Mt. Gox case, the remaining BTC was treated as assets belonging to Mt. Gox, not assets belonging to customers. So, the BTC could be used to pay debts to Mt. Gox’s other creditors.” However, Coinbase is different from Mt. Gox, presumably because, at the very least, it’s a U.S.-regulated entity.
Moreover, in a 2019 amended user agreement, Coinbase added rules specifically concerning property rights over crypto-assets deposited with the exchange: “Title to digital currency shall at all times remain with you and shall not transfer to any company in the Coinbase Group.”
But that may still not be sufficient to protect users, suggested the Leiden Law School paper, which generally explores the legal risks involved in depositing cryptocurrency with crypto-custodians, such as crypto exchanges, stating:
“Coinbase has full control over the private keys to deposited Bitcoins. It can effectively access crypto-wallets and their content. This may not only increase the risks of hacks or mismanagement, but also lead to disputes about the ownership over crypto-assets deposited with Coinbase, since control over the private key (and therefore the possibility to dispose of Bitcoins) may indicate that Coinbase is the owner of such Bitcoins or that ownership has been transferred to it. In the absence of proper segregation, allocation of cryptocurrencies to individual customers may become problematic.”
U.S.-based Gemini, another crypto custodian, by comparison, guarantees that the crypto assets in its custody accounts will be segregated from any other assets held by Gemini. “This segregation [i.e., Gemini’s] contrasts with the Coinbase contract, which does not promise to segregate customers’ crypto-assets with separate blockchain addresses, but instead allows shared blockchain addresses,” noted the paper.
Cointelegraph sought comment from Coinbase for this story, but the company did not respond before the time of publishing.
The Number Of Bankruptcies
Crypto exchange insolvencies are not especially rare events. “Recent years have witnessed the demise of crypto-exchanges such as Cryptopia (New Zealand), QuadrigaCX (Canada), BitGrail (Italy), Cointed GmbH (Austria) and a host of other crypto-exchanges around the world. These cases reveal that the qualification of the contractual and property law rights of crypto-investors is problematic,” wrote the Leiden Law School authors.
Thomas concurred: “If an exchange/custodian goes insolvent, customers who have crypto with the exchange/custodian may get back nothing.” Depending on the terms and conditions between the user and the exchange, as well as applicable insolvency law, the crypto held with the exchange or custodian could be considered part of the insolvent exchange/custodian’s estate.
Thomas explained further by using the Einstein exchange as an example: “In other words, some of the crypto may be liquidated to pay other debts to employees, lenders, tax authorities, etc., which reduces what’s left for the customers.” Peter Watts, a law professor at the University of Auckland and a Barrister told Cointelegraph:
“If a crypto exchange goes bankrupt, investors could well lose control over their coins — or share of pooled coins — unless the legal jurisdiction governing the exchange recognizes the concept of the trust, and the rules for trusts have been met on the facts.”
The Cryptopia Case
Watts represented account holders in the Cryptopia case. Cryptopia, a cryptocurrency trading exchange formed in 2014 in New Zealand, was placed into liquidation in May 2019 after suffering a serious hack and losing some $30 million worth of cryptocurrency.
As with Mt. Gox, the question arose: “Who owned the remaining cryptocurrency under the control of Cryptopia, estimated to be worth about $111 million (170 million New Zealand dollars).” The matter was brought before the High Court of New Zealand, a dispute that pitted Cryptopia’s creditors — 37 trade creditors and 90 shareholders — against an estimated 800,000 account holders with positive coin balances.
The Court ruled in April 2020 that the remaining crypto should be considered investor’s “property” and returned to those investors for whose benefit it was being held in “multiple trusts.”
As Watts explained to Cointelegraph: “For most of its life, Cryptopia Ltd. didn’t say anything express about a trust in its terms and conditions. But happily, we were able to persuade the Court that a trust could nonetheless be inferred from all the context, including the marketing documents and on-line instructions” — though it would have been much easier if the terms and conditions had expressly recognized the trust relationship. In February 2020, the Singapore Court of Appeal in Quoine Pte Ltd v. B2C2 Ltd ruled the other way in a similar case, as Watts added.
Thomas observed that the fact that crypto is considered “property” — and not something else, like currency — is all well and good, “but the more important question is the legal relationship between the customers, the custodian/exchange and the crypto.” Does the custodian/exchange own the crypto and the customers only have a contractual right to receive delivery of a specific amount of crypto? Is the custodian/exchange holding the crypto in trust for the customers? Or do the customers own the crypto and the custodian/exchange is merely a custodian, like a warehouse holding goods belonging to its customers?
“Depending on the answer, the ability of customers to recover anything in an insolvency could be different.”
There is no clear guidance here. “Rights of customers in insolvency proceedings ultimately depend on the applicable insolvency and property laws,” wrote the Leiden Law School authors, adding: “Determination of the applicable law is therefore critical, but complicated by a lack of harmonized private international law rules that are appropriate for the specific nature of cryptocurrencies and the relations between customers and crypto-custodians.”
The BitGrail Case
Control of private keys is often an important determinant of crypto ownership, according to the paper, and without it, a court may not allow users to reclaim their Bitcoin or other cryptocurrencies in the event of insolvency. This happened in the case of BitGrail, an Italian cryptocurrency exchange, which was declared insolvent in January 2019.
“The court noted that deposited cryptocurrencies were directed towards the main address of the exchange (one single omnibus address), controlled by its founder,” noted the paper. It was impossible to establish to which customer the disappeared crypto-assets belonged, as the paper noted:
“Because of the interchangeability within the omnibus address, the court held: ‘once the users’ cryptocurrencies were directed toward BitGrail’s main address, the currencies […] no longer bore the distinctive elements associated with ownership by a single user, thereby giving rise to a relationship of irregular deposit.”
An attorney from Italy, who wanted to remain anonymous, has been working on behalf of account holders in the BitGrail bankruptcy, which is ongoing, and has confirmed for Cointelegraph that the crypto investors in this instance were being treated as unsecured creditors, “so they won’t receive 100 percent of what they deposited — they might get 20%, or even less.”
The court held that BitGrail was acting like a bank, explained the Italian attorney, so all the deposited BTC and other crypto were regarded as property of the exchange. “It wasn’t like some other exchanges, which might keep your BTC separate, like a work of art, where you get back your BTC in full. Everything was commingled, and the bank has a debt.” The bank is legally obliged to give back an amount equivalent to the deposited BTC — not the same Bitcoin with the same addresses. The Leiden Law School authors noted:
“In the MtGox and BitGrail cases, the courts refused revendication claims [i.e., returning BTC in full to at least some investors], either on the basis that Bitcoin cannot be the object of ownership (MtGox) or due to the commingling of deposited crypto-assets (BitGrail). Under other laws, the result may be different, provided that the customer of a crypto-exchange can prove that individualized Bitcoins deposited with a crypto-custodian have not been spent or re-used.”
How to safeguard investors, then? In the jurisdictions that recognize trusts, it is fairly easy to create a trust that should work to protect investors, Watts told Cointelegraph. “Unfortunately, many exchanges don’t spell out in their terms and conditions that the exchange is a trustee for investors.” Thomas went on to add:
“Any customer who leaves their crypto under the control of an exchange/custodian is taking a risk that they won’t get the crypto back in full if the exchange/custodian becomes insolvent. Customers have to decide whether they want to take that risk.”
Exchanges and custodians would probably prefer to commingle and reuse BTC like a bank does when it loans out its fiat deposits and earns a profit, as opposed to storing it in a vault for years, noted Sargent. If custodians eventually agree to maintain segregated BTC addresses, however, investors probably shouldn’t expect to earn any interest on their vaulted Bitcoin, and on the contrary, they might even get charged for the service.
A Prohibition On Lending Out Custodial Crypto?
The Leiden Law School authors arrived at the conclusion that pooled custody may present higher risks for customers. When BTC is commingled, it suggests that the custodian or exchange is acting more like a bank — blending deposits and possibly making loans — and less like a warehouse or a safe deposit box.
Practically speaking, this means it becomes more difficult in the event of an exchange’s bankruptcy for a user to claim that the exchange is holding their “property.” The investor may have to wait in line with other unsecured creditors.
Investors should be informed ahead of time whether a crypto exchange or custodian plans to use or transfer any of its deposited Bitcoin or any other crypto, the Leiden Law School authors summarized. According to the paper, as a matter of public policy, it might make sense for regulators to “prohibit a crypto-custodian to transfer, sell, pledge or otherwise dispose of, alienate or encumber customers’ crypto-assets, unless upon explicit approval from a crypto-investor.”
With or without specific regulation, such a transfer or reusing deposited crypto is less likely to occur if the cryptocurrency is stored in segregated blockchain addresses rather than in omnibus or pooled addresses.
6M Bitcoin Are Secured by Shared Custody
Almost one-third of the entire Bitcoin supply is secured with a feature that gained adoption after the Mt. Gox heist.
Almost six million Bitcoins (BTC) are stored in multi-signature wallets — nearly one-third of the total supply.
Prevents ‘Exit Scams’
Bitcoin is generally secured with a combination of a public and private key. In order to transact on the Bitcoin network, a user needs to sign each transaction with their private key. This works fine in most use cases, but there are situations where this setup is not ideal.
For example, let’s say the founder of a crypto exchange secures all of the firm’s assets with their private key. This may lead to several problematic situations: what happens if a founder suddenly dies, gets hacked, or decides to engage in an ‘exit scam’? In all of those situations, the exchange would go belly up and users would lose their funds.
In order to alleviate these issues, a soft fork was introduced in 2012 that enabled the use of multi-signature wallets. Bitcoins could now be secured with multiple signatures, where X out of N signatures would be required to spend it. This means that wallets could now be controlled by multiple users, without any one user having the ability to spend the coins on their own.
Mt. Gox Spurred Adoption
The same exchange founder could secure all the deposits with five signatures and require at least three signatures for a transaction. These five signatures could belong to the various company executives. They could even delegate one or more of the signatures to a trusted third party.
We observe that mass adoption of this feature only began in 2015. There is a simple explanation for this — Mt. Gox. After the notorious hack, the community realized that a decentralized system should not rely on a single point of failure.
As most individual holders still do not use this feature, the number of Bitcoins stored in multi-signature wallets could also be used as a good indicator of what proportion of Bitcoin is held by businesses.
Bakkt, Galaxy Digital To Offer Joint Bitcoin Custody Solution For Institutions
Two New York-based crypto companies hope to scoop up growing institutional demand for physical bitcoin.
Announced Wednesday, Galaxy Digital’s trading arm and regulated bitcoin futures provider Bakkt said their new service – which has yet to be named – will offer asset managers and other institutional investors a new “white glove” trading and custody solution.
As part of the collaboration, Galaxy will provide all the trading services and functionalities, leveraging its existing plugins to 30 different exchange venues. Meanwhile, Bakkt will repurpose part of its Bakkt Warehouse, which it used to facilitate physically settled bitcoin contracts, as the service’s custody solution.
Designed to work around the clock, the idea, according to Tim Plakas, Galaxy Digital Trading’s head of sales, is to offer a “safe, efficient and well-regulated route into physical bitcoin access, one that has been already proven successful in the macro hedge fund space.”
“We designed this partnership to service the uptick in demand our two firms have received from traditional asset managers seeking access to physical bitcoin,” Plakas added.
While the idea of two big-name companies teaming up like this may seem like a titillating prospect, both Bakkt and Galaxy Digital have struggled to make much headway this year.
As a merchant bank that invests in crypto companies as well as trades digital assets, Galaxy Digital has failed to make much, if any, revenue since it first launched in January 2018. It reported a net loss of $32.9 million in the final quarter of 2019 and warned further losses from the coronavirus.
It was Galaxy Digital Trading, the branch now hooking up with Bakkt, that was responsible for pretty much wiping out Galaxy’s other revenue streams, losing a total $32.1 million in Q4.
Bakkt, on the other hand, has struggled to attract much footfall. Launching in September 2019 after more than a year of delays, the exchange’s volumes have remained low.
For example, there was a week in January, and two weeks in late February, where not a single one of its options contracts traded. That contrasted with a broader derivative space that reported record volumes during the same timeframes.
So far this week, for instance, Bakkt’s total volume for monthly options contracts was stuck at zero. Bakkt’s futures have seen more volume, reaching record levels last month during Bitcoin’s halving, though it’s now returning to more typical levels.
Custody Battle Pits Institutional Boomers Against Crypto Upstarts
Crypto custodians are in a race to build the next State Street or BNY Mellon.
There are only a handful of these types of large custody banks and most of them have been around for hundreds of years. But crypto is such a striking example of old world meeting new that it offers firms a rare opportunity to break into a market that would simply be impossible under normal circumstances.
“In the traditional world you can’t really build a custodian, it’s not something you can just break into,” said Diogo Monica, co-founder of Anchorage, a Silicon Valley-based custody platform specializing in crypto. “BNY Mellon has been around for 300 years and now, in crypto, we have a chance to actually build a foundational company that is potentially going to last for that long,” added Monica.
It’s an inspirational long view for sure, but how will things evolve over the short term?
Recent acquisitions in the crypto space have seen a bundling together of services such as custody, settlement, lending and trade execution. The latest push along the prime broker route came Wednesday with bitcoin futures platform Bakkt teaming up with Galaxy Digital to combine custodial and trading capabilities.
If crypto is entering a period of accelerated consolidation and following similar lines to the traditional world, firms specializing in standalone custody or trade execution may need to pivot to offer additional services or risk being swallowed up.
An evolution towards something like traditional finance is definitely how regulated crypto custodian BitGo sees it playing out.
“This space is going to consolidate very quickly around big strong reputable brands, much like what happened with State Street, JPMorgan, BNY Mellon,” said BitGo CEO Mike Belshe.
The recent unveiling of BitGo Prime allows the platform’s customers to trade directly from cold storage (where cryptographic keys are held deep inside BitGo’s offline, insured vaults) across a choice of two exchanges and two large over-the-counter (OTC) desks.
This saves firms the rigmarole of opening and funding accounts at various exchanges and moving assets around, said Belshe, declining to name the venues currently connected to BitGo’s incipient trading offering.
“All four are tier-one, top-ranked, regulated businesses you’d recognize. We will start naming them in due course. The plan is to grow that by the end of the year to more than a dozen,” Belshe said.
‘White Glove’ Treatment
Although a one-stop-shop prime broker platform seems to be what many crypto firms now aspire to, it could be about the buzzword rather than a full understanding of the services being provided.
Prime brokerage is more of a financial services function than a tech function, a fact that may be lost on the new breed of crypto pioneers, said Michael Moro, CEO, Genesis Trading, which recently acquired standalone custodian Vo1t. (Disclosure: Genesis is owned by CoinDesk parent company Digital Currency Group.)
“As well as having a large balance sheet, attention to client services is an essential aspect when it comes to choosing a prime broker platform,” said Moro. “I think everyone wants the white glove, high touch service, which is how prime brokerage works in traditional finance. But that’s very different from a tech software model.”
The latter approach is to try and scale the business through technology as much as possible, rather than hiring customer service representatives or business development staff, Moro said.
“In institutional finance, the ability to pick up the phone and speak to your coverage person is so important,” he said. “Being able to speak to a human being, as opposed to clicking a few buttons on a platform, I think will be a differentiator among what prime broker platforms are around in a year or two.”
It’s tempting to write this off as an overly cautious crypto boomer approach, pandering to traditional legacy systems. But to do so could be a strategic error.
A focus on gently transitioning traditional capital markets over to crypto is gaining traction for London-based Koine, which is offering a post-trade solution for digital assets combining custody, settlement and cash management. Koine’s solution has so far been rubber-stamped by regulators in the U.K. and the United Arab Emirates.
“The path we envisage involves the ability to transition from existing infrastructure, rather than a new model everyone must switch to,” said Phil Mochan, Koine’s co-founder and head of strategy.
Building bridges between existing market infrastructure and crypto native exchanges is something Koine is tackling in stages, said Mochan. Bitfinex was the first exchange to publicly announce an integration with Koine, and there are currently 12 other workflow models at different stages depending on the trading venue or OTC desk, he said.
“It’s not going to happen overnight,” said Mochan, framing the technological challenge specifically in terms of old-meets-new. “We find there are operational issues around API work almost everywhere, and that’s because 21-year-olds have built these platforms.”
Over the past couple of years, custody platforms have sought to differentiate themselves by offering new and innovative services such as earning yields on proof-of-stake (PoS) tokens by verifying transactions on a network or participating in governance decisions.
However, Moro of Genesis said that while this might have looked like a product differentiator at one stage, it no longer really counts – since many custodians now offer staking and even exchanges such as Binance have gotten in on the act.
“If you’ll pardon the pun, staking has become like table stakes for holding onto customers’ funds,” said Moro. “I think it’s really hard to differentiate yourself because the barrier to mimicking is not that high.”
But not all staking services are the same, just as not all custody is the same, said Monica of Anchorage, which uses a complex blend of hardware security modules (HSMs), threshold signing and multiple signatures to lock down crypto assets.
“The space is rife with people using manual operations from 10 years ago, where they have to actually go to a vault,” Monica said, adding that cold storage solutions of this type became unworkable under COVID-19 lockdown and social distancing.
On the subject of providing staking services, Monica said: “This stuff is hard to build. It may be table stakes in the sense that nobody wants to store an asset with you unless you can generate yield for it. Nobody wants to drop dividends on the floor in the traditional market so why would that be different in crypto?”
Anchorage’s strategy from day one has been to build everything in-house, said Monica, pointing to the Frankenstein-like assemblage of crypto’s recent crop of aspiring prime brokers.
“This can’t just be bolted on. Everything that touches a cryptographic private key is deserving of the ultimate security and attention,” he said. “The path to prime [brokerage] is not by bolting on different solutions built by different individuals and companies with different backgrounds and philosophies.”
The DeFi Difference
An unavoidable consequence of crypto prime brokerage is further centralization in a sector built on the premise of decentralization. While the prime broker model may bring a concentration of risk plus added costs, asking traditional players to try out new variants like DeFi (decentralized finance) is a big ask.
Nevertheless, the fast-growing world of DeFi is attracting lots of attention since it eschews traditional finance rather than simply trying to replicate it. With that, comes alternative approaches to trading, settlement and also custody.
“We have exactly the same goals but we always try to be slightly less centralized, as much as we possibly can,” said Alex Batlin, CEO of Trustology, a custody platform backed by ConsenSys and Two Sigma Ventures.
“The question is,” Batlin said, “do you wrap it all up like in the old days into a single prime broker with all the risks associated with that, or do you try achieve the same goals but with the lower prices and lower risk associated with decentralization?”
The DeFi custody hypothesis also does away with cold storage: Trustology uses HSMs for near real-time access to assets that cannot be commingled in omnibus accounts.
While the DeFi space is definitely tech-first, Trustology recognizes self-custody without controls is not fit for business or institutional contexts.
“There’s an emerging white space which we are trying to fill,” said Batlin, “We can sign any ethereum transaction or any DeFi protocol fast and segregated, and apply controls.”
Trustology sees decentralized clearing as a viable alternative option, with custodians acting as settlement agents, trying up with protocols like AirSwap. Brokers are also eyeing the billion or so dollars of liquidity locked up in DeFi, said Batlin.
“Brokers are looking to access liquidity and margin on those protocols; asset managers are looking at it the same,” he said. “There are possibly some really interesting plays around committing funds to staking, to collateralized lending, so you get the ability to do a long while being at yield that’s relatively safe.”
While Trustology is focused on Ethereum, Fidelity-backed KNØX is applying its energy towards Bitcoin.
The Canada-based custodian, which holds insurance from mega-broker Marsh, is “philosophically aligned” with Bitcoin and the technologies being built on top, according to KNØX co-founder and CEO Alex Daskalov.
“We have yet to see a custodian that has a tight integration with the Lightning Network, for example,” Daskalov said, referring to the bitcoin scaling solution built for faster payments. “We would love to be there in lockstep with a lot of the tech riding on Bitcoin and layers above it such as Lightning and Liquid.”
Cooperation And Competition
Growth in the traditional trading space is not all about competition, there’s co-operation too, which benefits the whole market. There’s also evidence of this among some crypto custodians and brokers
For example, recently launched prime broker BeQuant, which has its own custody solution, says it is open to working with other custodians in the space, as clients want to spread risk just as they do in traditional finance.
“I think you need those standalone guys,” said Richard Shade, BeQuant’s head of custody. “We are open to working and collaborating with a number of these guys and we are talking to all of them, because we realize our customers may already be using them.”
London-based custodian Copper, which raised an $8 million Series A in February, says it is also happy to collaborate, as well as compete.
“We are happy to work with people on financing and with people on clearing,” said Copper founder and CEO Dmitry Tokarev, who added that the recent funding affords the firm a further 18 months of runway.
Copper’s ClearLoop settlement solution differs from something like BitGo’s, which is geared towards everyone having a BitGo account, Tokarev said.
“We have already asked other custodians to join the network because that is the best solution for clients at the end of the day. The more exchanges and custodians that join the network, the more efficient (and secure) the entire trading ecosystem becomes. It’s better for everyone, not just Copper,” Tokarev said.
It’s not all kumbaya around the crypto-custody campfire, however. When it comes to the crypto prime broker race, BitGo likes to take a jab at arch-rival Coinbase.
Last year, when Coinbase acquired the institutional business of crypto wallet and custody provider Xapo, that brought the San Francisco exchange’s assets under custody to over $7 billion. At that time, BitGo publicly courted former Xapo clients, which were said to have expressed concern over the new arrangement.
Following this train of thought, BitGo’s Belshe said the recent acquisition of Vo1t by Genesis was probably a strategy to take back custody of about $2.7 billion worth of Grayscale Bitcoin Trust assets and bring these under common ownership. (Like Genesis, Grayscale is also a subsidiary of Digital Currency Group.)
“Grayscale was with Xapo and was sold over to Coinbase, for a pretty high premium by the way,” said Belshe. “I’m guessing that DCG, the Genesis team and the Grayscale team want to pull that custody back.”
But Michael Moro of Genesis scotched Belshe’s theory.
“As I evaluated Vo1t, that was not a consideration at all,” said Moro. “I’m actually not even privy to the contract that Grayscale and Coinbase have so I don’t know the terms or how long it lasts. My understanding is it’s longer-term so that wouldn’t be a near-term event, regardless.”
Casa Releases Self-Custody Bitcoin Wallet Focused on Privacy
Crypto custody firm Casa unveiled a new wallet that offers access without a seed phrase and gives users a way to check on their private keys.
New York-based crypto custody startup Casa has released a new wallet for Bitcoin newbies and long-term HODLers.
In a Casa blog post on June 13, the crypto firm that provides a private key management service announced it had created Casa Wallet after an investment from venture capital fund Mantis VC. A software wallet designed around privacy, Casa Wallet allows users to not provide any personal information apart from a first name and email.
In addition, unlike some software wallets like Exodus, Casa said its users do not need to set up an account with a seed phrase — usually a mnemonic phrase needed to regain access to a wallet. According to Casa, users can create a key to store on their mobile device. An encrypted backup is then split across Casa and the OS-specific cloud provider, which wallet holders can retrieve with two-factor authentication.
Casa Wallet also features ‘Key Health’, a function that gives users a way to check up on their private keys, confirms that the wallet is backed up, and checks users’ signatures are authentic.
Not Its First Foray Into Wallets
As Cointelegraph reported in September, Casa released its non-custodial mobile wallet app Sats for both Android and iOS users. Sats can be used without the company’s hardware Bitcoin (BTC) Lightning node.
Coinbase Custody To Hold Assets Backing 21Shares’ Bitcoin ETP
Crypto asset manager 21Shares will use Coinbase Custody to secure the Bitcoin backing its ETP launch on Thursday.
21Shares, an asset manager specialized in cryptocurrencies, has chosen the custody service offered by crypto exchange Coinbase for its Bitcoin (BTC) exchange-traded product.
According to a Wednesday Coinbase announcement, 21Shares will use Coinbase Custody to secure the Bitcoin backing the ETP launching Thursday. The derivative will launch on Deutsche Borse’s Xetra — Germany’s second-largest stock exchange.
The product is purportedly the first physically backed Bitcoin ETP in Europe.
Cryptocurrency Derivatives See Explosive Growth
Cryptocurrency derivatives are seeing new developments increasingly often. In late February, 21Shares also launched an inverse Bitcoin ETP called Short Bitcoin on Xetra. In January, the same ETP also began trading on leading Swiss exchange SIX.
As Cointelegraph reported, cryptocurrency exchange OKEx launched Ether (ETH) and EOS options in early June.
At the time, OKEx CEO Jay Hao said that financial derivatives “play an irreplaceable role in hedging risks and maximizing profit.”
Still, the space recently saw its share of controversy when Qiao Wang —an investor, analyst and the head of product at a crypto market data firm — criticized how the Grayscale Bitcoin Trust is set up. According to him, Grayscale Bitcoin Trust’s system could allow for it to trade at a discount compared to the net asset value of the fund’s assets.
Fidelity Digital Assets To Custody Bitcoin In Kingdom Trust Retirement Accounts
Crypto custodian Kingdom Trust is offering customers bitcoin cold storage from Fidelity Digital Assets.
The storage will be offered on Kingdom Trust’s Choice retirement account, a hybrid self-service retirement platform where investors can buy, sell or hold stocks, exchange-traded funds (ETFs) and digital assets in one tax-advantaged account.
Kingdom Trust CEO Ryan Radloff hopes the partnership with Fidelity will nudge the investment giant closer to serving retail crypto investors.
“I think having Fidelity grow is so important for bitcoin and the market’s maturity that I’m willing to sacrifice a few basis points of margin for that,” Radloff said of the new business arrangement. “We think this is meaningful for a lot of people that already have Fidelity retirement accounts but have really been waiting for Fidelity Digital Assets’ mandate to mature from just an institutional one to institutional and retail.”
While Fidelity Digital Assets continues to be solely focused on institutional customers, this is one of the first sub-custody service agreements that the fund manager has made public. In an emailed statement, Fidelity clarified that the sub-custody relationship means that customers will access the service only through Kingdom Trust.
“Since our market entry less than two years ago, we’ve seen significant progress in the infrastructure supporting investors in digital assets, and an evolution in the range of investors adopting digital assets into their portfolios,” Fidelity Digital Assets Head of Sales and Marketing Christine Sandler said in a press statement.
Kingdom Trust customers still have just three ways of handling custody: They can hold their own private keys with a solution powered by Casa, hold them in cold storage custodied by Fidelity or lend out or stake their digital assets via Kingdom custodial accounts.
Kingdom Trust also expects to work with Fidelity on other digital assets in the future, Radloff added.
“We custody 20,000 unique assets, and most of those are alternative assets,” Radloff said. “Bitcoin is the first asset that we are doing jointly with Fidelity Digital Assets, but I do not expect it to be the last.”
Since the launch of Choice in May, more than 10,000 people have joined the product’s waitlist, according to Radloff.
Standard Chartered to Launch Institutional Crypto Custody Solution
Standard Chartered’s venture and innovation arm has been working on a crypto custody offering for the institutional market and the first pilot could launch later this year.
Alex Manson, the head of SC Ventures, confirmed to CoinDesk Monday the firm is building what he claimed would become one of the most-secure crypto custody solutions on the market.
Details remain thin on the ground, but Manson said that as many as 20 institutions have expressed interest in the custodial solution. Although it will be based in the U.K., it will be open to clients from around the world. As well as assets such as bitcoin, SC Ventures is looking at also making the solution suitable for security tokens.
According to Manson, institutional adoption has been hindered by a lack of proper custodial offerings. Initially, SC Ventures had been looking at creating a market service, but realized it had to go a couple of steps back as many wouldn’t touch the digital asset space “with a flagpole” until they had ready access to an institutional-grade storage solution.
Custodial offerings currently on the market, Manson said, don’t have the proper security required for clients to store millions of dollars in digital assets. Many also lack function segregation, meaning the custody business isn’t separated from other ventures, he added.
By providing the fundamental market infrastructure, Manson said that SC Ventures saw an opportunity to kick-start the institutional adoption of cryptocurrencies.
“If digital assets more broadly are here to stay as an asset class, then you will need the infrastructure to keep them safe,” Manson said.
Based in Singapore, SC Ventures is the innovations platform for British bank Standard Chartered. Part of its role is to help create new businesses and revenue streams for the wider banking group. As well as the custody solution, the venture arm is working on bringing another nine (non-crypto-related) projects to market.
Just last week, SC Ventures participated in the oversubscribed Series A for market infrastructure provider, Metaco. At the time, Manson said in a statement that the investment would complement its own custodial initiative, which has not yet been publicly named. Talking to CoinDesk, he elaborated, saying Metaco would be one of the key technology providers.
Standard Chartered has long expressed an interest in crypto custodial solutions. Margaret Harwood-Jones, the bank’s global head of securities services, told trade publication Global Custodian that it was something the group was investigating in November 2018.
SC Ventures is still open to feedback from prospective clients about possible features, as well as the assets they would like to see supported.
Manson said the first pilot for the custodial solution could launch sometime later this year.
US Banking Regulator Greenlights Crypto Custody At Federally Chartered Banks (#GotBitcoin?)
The office of the U.S. Treasury that handles banks has issued a determination on the long-debated subject of custodying crypto assets. US Banking Regulator Greenlights Crypto Custody At Federally Chartered Banks (#GotBitcoin?)
Per a July 22 announcement shared with Cointelegraph, the Office of the Comptroller of the Currency (OCC) is granting permission to federally chartered banks to custody cryptocurrency.
The Future Of Banking With Crypto On Board
This issue has seen much skepticism, given that crypto wallets do not resemble the custody requirements of other sorts of assets. Nonetheless, in its interpretive letter on the subject, the OCC wrote:
“The OCC recognizes that, as the financial markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers.”
In the words of the announcement, the new opinion “applies to national banks and federal savings associations of all sizes.”
Acting Comptroller of the Currency Brian Brooks similarly saw the development as part of modernizing banking in the U.S., saying “From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today,”
The OCC’s letter further specifies that bank “custody” of crypto assets is dependent on their access to the keys to the crypto wallets rather than any sort of physical requirement — a confirmation of Andreas Antonopoulos’ famous line of “not your keys, not your coins.” the OCC specifies:
“That national banks may escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”
OCC’s Heightened Crypto Engagement Under Brooks
Coming from Coinbase’s legal team, Brian Brook’s tenure as Acting Comptroller has seen accelerated onboarding of crypto capabilities in the U.S. financial system.
Speaking with Cointelegraph in early June, Brooks hinted at his interest in expanding the right to custody crypto.
This follows an international trend of banks looking to incorporate the crypto asset class.
Shapeshift Launches Self-Custody Trading App For Android And iOS Users
Shapeshift have launched their new mobile trading app in over 120 countries, giving users full control of their private keys.
Self-custody crypto platform Shapeshift has launched a mobile trading app for iOS and android users to buy and sell digital assets such as Bitcoin (BTC) and Ether (ETH) without trusting their private keys to a 3rd party.
The app which only requires users to use an email address and password to sign in with currently supports BTC, ETH, Litecoin (LTC), DigiByte (DGB), TrueUSD TUSD and ERC-20 tokens. Shapeshift CEO and Founder Erik Voorhees stated the mobile app will give users self-sovereign finance anywhere:
“As traditional financial systems become increasingly tenuous, Bitcoin offers refuge and empowerment. We’re here to make it easy.”
Shapeshift States That Users From All 120 Countries, Including The U.S. Have Access To The App:
“Our new app gives you the power to trade with competitive rates & buy Bitcoin in 120+ countries, all while enjoying self-custody of your crypto.”
The app is a culmination of six years of development and also allows users to purchase Bitcoin with a credit or debit card.
It’s Not Perfect
Although the app has been launched in full, multiple users reported bugs to the company via Twitter:
Shapeshift Is Growing Fast
Shapeshift have made multiple announcements this year despite the difficult conditions created by the COVID-19 pandemic. In February this year, the company announced the hire of former Apple engineer and PayPal executive Lisa Loud to COO as part of their expansion strategy.
Two months later, Shapeshift acquired Israeli crypto wallet Portis. This acquisition, in conjunction with the mobile app, users will soon be able to log into multiple decentralized finance services from the one account.
Only days earlier, London-based bank Revolut added the ability to purchase BTC and ETH via its mobile banking app, announcing that more cryptocurrencies will be added in the future for U.S.-based customers. European users can also purchase Litecoin, Bitcoin Cash (BCH), and XRP.
Major South Korean Bank Joins The Crypto Custody Business
We’re suddenly seeing banks lining up to support crypto custody, and KB Kookmin Bank is looking to get in on the action.
KB Kookmin Bank, one of the largest banks in South Korea, has partnered with blockchain venture fund, Hashed, and crypto trading platform, Cumberland Korea, to establish “strategic technology cooperation” on the custody of digital assets.
The companies belonging to the partnership state that their inception into the crypto custody business is a response to regulatory changes. These changes encouraged them to look into new business models — specifically ones which rely on blockchain technology.
Simon Kim, CEO Of The Seoul And San Francisco-Based Firm, Hashed, Stated:
“Combining our insight in the blockchain industry and providing both technical and commercial consultations will inevitably open new doors to consumers as well as to the country in ushering the new era of digital transformation.”
The announcement from KB Kookmin Bank comes after one of its major rivals, NongHyup, or NH Bank, said early in July that they plan to create crypto custodial services as well. NH Bank’s proposed platform will only focus on institutional investors, however.
The Bank of Korea reportedly chose to establish a “Digital Innovation department” through organizational reform in the second half of this year as well, according to the local news on July 22.
US Banks May Seek To Partner With Or Buy Crypto Custodians, OCC’s Brooks Says
U.S. banks are looking at ways to handle crypto adoption in the wake of the Office of the Comptroller of the Currency’s (OCC) July decision to allow banks to provide custody for cryptocurrencies, Acting Comptroller Brian Brooks said in a podcast. That may mean partnering with or purchasing custodians, he said.
* Speaking on Laura Shin’s Unchained podcast earlier this week, Brooks said “Well, what I have heard…a number of big crypto custodians Anchorage, Coinbase, and a number of others, have been contacted by banks about whether they’d be willing to be like the third-party custody providers for national banks whose customers want to invest in bitcoin (BTC, -0.24%).”
* Brooks speculated that due to the complexity of being a custodian, banks will seek to partner with or outright buy custodians to handle the cryptocurrencies invested with them.
* “What they’ll want to do is either buy crypto custodians, or partner with crypto custodians to provide those services on their behalf and now they can legally do that,” Brooks said.
* Brooks also said the move by banks to offer crypto will increase the comfort level of retail investors with the asset and lead to further gains, saying, “I think the demand increase is going to be noticeable.”
This Crypto Custody Breakthrough Will Bring Banks Closer To Digital Assets
Stealth-mode crypto custody specialist Shard X has claimed a breakthrough, being the first company to successfully run math-heavy, multi-party computation (MPC) on hardware security modules (HSMs).
So why does this alphabet soup of security tech matter?
In summary, HSMs are a battle-tested way to store private keys, particularly popular in consumer products like Ledger and Trezor. MPC, which breaks up cryptographic keys into shards and distributes them, is growing in popularity with custody tech providers like Fireblocks and Curv. But one challenge with MPC has been where to store key shards: The whole process was thought to be too computationally heavy to run on hardware.
Solving this problem is important because banks, which are gradually edging towards crypto custody, generally like and trust HSMs. So a combination of battle-tested, bank-grade HSMs, combined with cutting-edge MPC is probably the type of tech those institutions will be looking for, says Yaniv Neu-Ner, co-founder and CEO of Shard X.
Shard X has successfully run MPC tests with Entrust, a provider of nShield HSMs to major custodians, said Neu-Ner, and is now working on running MPC with a number of firms offering HSMs, such as Utimaco.
“Our big breakthrough is that we’ve managed to compress and optimize the MPC code so that it can run on bank-grade HSMs, something people in this space never thought was possible,” said Neu-Ner. “Now, you can take an MPC key fragment and store it on an HSM to make sure you don’t get breached.”
Wallet providers, custodians and exchanges all need bank-grade security for crypto-wallets and to secure and manage multi-million dollar assets across multiple blockchains, said John Grimm, VP strategy and business development at Entrust.
“ShardX has implemented multi-party computation (MPC) technology on Entrust nShield hardware security modules (HSMs) to ensure the integrity and secure processing of private key fragments that protect the blockchain, offering high assurance secure key management and a secure, safe and simple way to access digital currencies,” said Grimm via email.
There are a lot of smart people working on MPC, so how did nobody else solve this problem?
Neu-Ner said the credit goes to his team, which managed to combine equally strong math and engineering backgrounds, in particular his CTO Nikita Lesnikov.
“[Lesnikov] is just an exceptional mind,” said Neu-Ner. “He was the one who figured it out. I imagine now that we are announcing it, the competition will start working on the same challenge, and I think they will get there. But it’s a big breakthrough to be first.”
Shard X likes to take a back seat, licensing its software to custodians. In terms of how this breakthrough is being peer-reviewed, MPC code auditor Trail of Bits has been selected to continually audit the work.
For Neu-Ner, a combination of the best of both worlds is an essential step in the evolution of crypto custody.
“As this industry grows, there’s going to be more and more value at stake, and right now we are seeing exchanges getting hacked fairly regularly,” he said. “So I don’t think one technology will be enough. The future I see is that you combine multiple technologies to create the most secure custody solutions.”
The SEC Is Still Working Out What ‘Qualified Custodian’ Means For Crypto
The U.S. Securities and Exchange Commission (SEC) is once again asking about qualified custodians and how crypto custody fits into this regulatory framework.
Last month, the Wyoming Division of Banking granted a no-action letter to Two Ocean, a wealth management firm hoping to offer custodial services for digital assets (which include virtual currencies) and call itself a qualified custodian.
In the letter, the division said it “would not pursue enforcement action against Two Ocean for holding itself out to the public as a ‘qualified custodian’ if Two Ocean operates in conformity with applicable laws and rules surrounding the safekeeping of customer assets, including both Wyoming and federal law.”
In response, the SEC published a statement asking for public input on “qualified custodians,” noting that Wyoming’s letter touched on both state and federal law, and hinting the responses it gets may inform amendments to existing guidance to provide future clarity.
The statement’s very existence is a sign the SEC is still looking at cryptocurrency issues like custody, but confirms there is much work to be done in clarifying how digital assets fit into existing regulatory frameworks, industry experts said.
“I think essentially the SEC is coming out here and saying, ‘Yes, it’s great that the Wyoming Division of Banking has issued this interpretation to you but we may have a different view and we are in the process of considering these issues,’” said Philip Angeloff, an attorney with Clifford Chance, a multinational law firm.
The regulator isn’t directly saying its view differs from the Wyoming Division of Banking. Rather, it sounds more like the agency has yet to finalize its position, Angeloff told CoinDesk. Ensuring that it’s clear which companies fall into the definition of a “qualified custodian” remains under the SEC’s purview.
Still, the very fact the SEC is bothering to respond is a promising sign for the crypto industry, said Andrea Tinianow, an attorney who runs her own consulting firm.
“This public statement reinforces the notion that digital assets are not going away, they are gaining in popularity,” she said. “Serious investors are paying attention to this asset class and they need to be protected, and that’s why the SEC is taking this up.”
The SEC move may benefit institutional investors and other parts of the investment community, she said.
The term “qualified custodians” is a legal one, defined by the SEC as a bank, broker-dealer, futures commission merchant or other entity that maintains client funds and securities in specific ways. The federal regulator can designate an entity as a qualified custodian, while state-level regulators typically cannot.
That hasn’t stopped a number of crypto companies from trying to become qualified custodians, but by and large most have given up their bids and instead focus on becoming state-chartered trust companies, which still lets them offer custody services under regulatory oversight.
While the Wyoming Division of Banking determined that Two Ocean could call itself a qualified custodian, other trust companies or entities cannot do so without receiving similar letters of their own, the letter warned.
“This is a fact-intensive analysis based on the assertions made in your letter of [July 27, 2020]. The guidance provided in this letter may no longer apply if these facts were to materially change,” the letter said.
This distinction is important. As the Wyoming letter notes, the law surrounding custody, especially for digital assets, “is not fully developed.” This means it may be difficult to ascertain which companies can provide custody for assets like virtual ones, or how these assets are treated under law.
In response, the SEC published a statement telling the general public to send it comments on how the “Custody Rule,” a part of the Investment Advisers Act of 1940, should apply to issues like digital assets.
Chris Land, general counsel at the Wyoming Division of Banking, told CoinDesk this question has hovered over the industry for a few years, noting that most crypto custodians in the U.S. currently operate as trust companies.
One of the main issues for a trust company is whether custody qualifies as a fiduciary activity, another important regulated activity that falls under the Advisers Act.
The SEC’s letter is encouraging, Land said. The SEC is highlighting that investment advisers must consider their fiduciary duties when acting as a qualified custodian, and in his view the federal agency is just laying out questions around this issue.
“The SEC letter and our letter both agree we have shared power over this area, the custody area, but I don’t think that line has been drawn with the precision that the banking industry and the securities industry might like, and I think that’s one thing we’re both going to have to work together [on],” he said.
Tinianow agreed, saying trust companies and other entities are likely to provide “thoughtful input” in response.
The move fits into a broader trend of recognizing that digital assets have value, something many states have already done by crafting laws around the space, she said.
“The SEC staff would not invest its time, resources or expertise if this was going away,” she said.
What the letter does show is the SEC is maintaining its ground in terms of being able to declare whether or not an entity is a qualified custodian, Angeloff said.
“In some cases, law firms and, as in this case, state regulatory agencies, could provide their interpretation of state and federal law, but the SEC has the final word on interpreting the Advisers Act,” he said.
In other words, while the Wyoming Division of Banking can tell entities they look like qualified custodians, those entities should still be talking to the SEC, he said.
“From my perspective, this is a sign that the SEC staff is still grappling with the notion that digital securities can be held on a distributed ledger and is still in the process of forming a definitive view as to how intermediaries that provide digital securities custody services can provide such services in compliance with the securities law and SEC rules,” he said.
The question of how digital assets are relevant to qualified custodians only applies to securities, meaning assets like bitcoin are not affected, Land said.
“I think providing further clarity around which virtual assets are securities is another issue,” he said.
Land noted the question does not apply to Wyoming’s Special Purpose Depository Institution license. So far only two entities have received this license – Kraken and Avanti – and both are operating as banks under the state law.
“I think it’s reflective of the SEC’s willingness to continue to look hard at digital assets and I’m fairly encouraged by the SEC putting that statement out. It was quite good, in my opinion. It was thoughtful and highlighted the issues well, in my opinion,” Land said.
The SEC’s statement asks whether state-chartered companies resemble qualified custodians, how their services compare, what advisers might look at when assessing custodians and if there are any qualified custodians that do not match the policy goals.
Members of the public interested in commenting to the SEC can email the agency, and the SEC will make all responses publicly available, it said.
Congresspeople Ask SEC To Verify Who Can Custody Security Tokens
Several members of the Congressional Blockchain Caucus are calling for more clarity on broker-dealer rules from the U.S. securities regulator.
Nine members of congress have written a letter asking the Securities and Exchange Commission to get its security token guidance straightened out.
In a Dec. 9 letter to SEC Chairman Jay Clayton, several members of the Congressional Blockchain Caucus led by Tom Emmer (R-MN) asked the commission to verify rules as to which broker-dealers can custody digital securities. Broker-dealer licensing is required to sell securities in the U.S.
The letter also addresses the Financial Industry Regulatory Authority (FINRA), a self-regulating body that registers U.S. broker-dealers under SEC guidelines. Currently, the rules are unclear, which has resulted in a colossal hold-up in registration. As the letter puts it:
“In the absence of guidance from the SEC, FINRA has not outright denied any brokerdealer applications that involve the custody of digital securities, which would render the applications eligible for appeal. Rather, FINRA has allowed the applications to languish—often for years—or asked the applicants to withdraw such applications.”
Many have noted the stalled ecosystem for security tokens in the U.S. Unlike decentralized cryptocurrencies like Bitcoin or Ethereum, security tokens register as securities but can trade in a more decentralized fashion thanks to blockchain technology.
Today’s letter encouraged the securities regulator to follow the lead of the Office of the Comptroller of the Currency, which this summer approved national banks to custody cryptocurrencies.
Blockstack’s STX tokens are an example of a registered security that are looking to leave that status by demonstrating decentralization of the network. That determination, too, is waiting on SEC approval.
Congressman Emmer’s team had not responded to Cointelegraph’s request for comment as of publication time.
Curv Partners With MetaMask To Help Institutions Custody DeFi Assets
Curv is teaming up with MetaMask to allow institutions to be able to invest in decentralized finance (DeFi) protocols with institutional-grade custody options.
Curv is a custody startup that specializes in multi-party computation, and the company chose to integrate with MetaMask after building an integration with lending protocol Compound in July of this year. MetaMask is a wholly owned product of Ethereum software company ConsenSys.
“You get all of the enterprise controls, security level and audit trail that you would get from Curv, but with MetaMask in one click you get integration with all of the DeFi protocols,” Curv CEO Itay Malinger said, adding:
“A DeFi protocol can become valuable in a matter of seconds or minutes from when it emerges, so you want to have the ability to access new protocols as soon as possible and not wait for your custody provider to integrate with that specific protocol.”
Curv’s customers are professional traders who want to use protocols to lend, stake and trade; and exchanges and wallet providers who want to offer retail customers integrated access to DeFi protocols, Malinger said.
Creating products for institutional customers to have access to DeFi protocols is a burgeoning market. In September, crypto custody firm Trustology announced it was offering a “DeFi Firewall” that would allow customers to set rules or filters specifying which protocols they think are kosher. In the same month, the Chicago DeFi Alliance launched a Liquidity Launchpad program to get “professional players” into DeFi.
The program is only open to a limited number of early adopters so that institutions do not overwhelm the new program, but MetaMask aims to release the program widely by the end of next year, said ConsenSys global fintech co-head Patrick Berarducci.
Curv’s MPC technology allows multiple people within an organization can approve financial decisions on DeFi protocols such as lending assets through a smart contract.
“When it comes to DeFi, there are an infinite number of interactions that you can have with a very large number of smart contracts,” Malinger said. “So an institutional investor wants to keep the operational policy that they have for their digital assets, and the flexibility to define those policies.”
Aegis Custody Clears Hurdle In Bid For South Dakota Trust Charter
Digital asset custodian Aegis Custody has received the South Dakota Division of Banking’s blessing to start forming a trust company in the state.
The full-service digital asset shop must clear a series of minor regulatory hurdles before it can secure the trust charter necessary to do business, President Michael McCarty said. He said the process would likely wrap up in weeks.
Once it does, Aegis will become the latest digital asset custodian with a foothold in Sioux Falls. BitGo and Anchorage both base their operations in the trust company-friendly city. But while those industry stalwarts cater mostly to the cryptocurrency custody market, Aegis, already partnered with a Hong Kong custodian, is looking to broader opportunities in digitized finance.
McCarty offered international supply chain financing as one target industry. Aegis would custody the contracts involving factories, companies, suppliers and banks, “digitize those and put them out for investment,” he said. Stored in Aegis’ offline custody wallet, these digital assets could raise working capital for the owners with outstanding invoices.
For example: financing the supply chain of Amazon-sold goods. Raw materials from China have a long way to go before cashing out as a finished product, even if their suppliers need capital fast. Traditional financing allows them to meet their financial obligations. With blockchain, McCarty hopes to make that process more transparent and secure.
“We’re really a full-stack custodian and digitization platform,” he said. “Because we have relationships with several financial institutions here in the United States as well as in Taiwan and in Hong Kong, we can serve as a global market.”
Trust company status would allow Aegis to custody U.S. investors “traditional assets” at home while giving them opportunities in digitized trade finance abroad, he said.
McCarty told CoinDesk Aegis already has a “backlog” of clients waiting for the trust company to launch its U.S. business. He declined to reveal their identities ahead of the full charter approval.
Traditional Crypto Custodians Ramp Up Security To Accommodate Institutional Demand
Offline storage solutions are necessary for traditional custodians and banks supporting digital assets.
Institutional investors are paying close attention to digital assets as Bitcoin (BTC) continues to soar past record-breaking levels, almost reaching the valuation of $24,000 for the first time in its history.
Recent findings from a Bank of America–Merrill Lynch survey conducted between Dec. 4 and 10 show that about 15% of fund managers with $534 billion under management believe Bitcoin to be the third-most crowded trade behind being long on technology shares and shorting the U.S. dollar. In addition, a recent Fidelity survey found that out of almost 36% of the respondents, or 774 institutional investors, own crypto assets.
Yet as Bitcoin continues to capture the attention of professional investors worldwide, security measures, along with insurance guarantees, are becoming more important than ever before. This has especially become the case as more traditional custodians and banks add support for digital assets.
Offline Security A Must For Safeguarding Digital Assets
A report released this year from Big Four firm KPMG shows that the number one key action for crypto-asset custodians looking to build a sustainable business model is enabling next-generation security and resilience.
KPMG’s report notes that this involves incorporating leading cryptographic techniques, including multi-sig, sharding and multi-party computation, and dedicated physical hardware. In other words, online and offline security measures are required for safeguarding digital assets.
Lior Lamesh, CEO and co-founder of GK8 — an Israeli blockchain cybersecurity company — told Cointelegraph that when it comes to traditional institutions with large amounts of money and reputations to manage, offline security procedures, in particular, are critical for digital asset protection:
“Since a blockchain is an immutable ledger, organizations must do everything possible to avoid hacks. When it comes to hot wallets, it’s easy to understand why these are vulnerable — they are always connected to the internet. This, however, is not secure enough for banks and traditional custodians.”
For example, Lamesh said that the team of former Israeli military cybersecurity personnel behind GK8 has developed a completely offline solution for traditional custodians and banks seeking digital asset protection. It consists of an “air-gapped” cold vault that provides the ability to create transactions on a blockchain network while operating entirely offline.
The process of executing blockchain transactions offline eliminates all potential attacks on users’ private keys, providing full protection against cyber threats, according to Lamesh.
While he couldn’t disclose all the details, Lamesh shared that this solution is made possible due to patented cryptography that enables the vault to create, sign and send blockchain transactions in a unidirectional connection, without receiving any digital input that can include malicious code. In addition, GK8’s cold vault is backed by a $500-million insurance coverage.
Traditional Players Believe Offline Storage Is A Must
One company that leverages an offline custody solution is Prosegur, a Spanish security company that serves as a custodian of physical security for traditional banks and manages over 360 billion euros annually.
Last year, the firm was attacked by the Ryuk ransomware, a Trojan virus that encrypts files on a compromised device, typically demanding payments in Bitcoin to decrypt them. This particular attack is concerning for a number of reasons, but security has become even more of a priority for Prosegur ever since the firm launched “Prosegur Crypto,” a service for custody and management of digital assets.
Raimundo Castilla, CEO of Prosegur Crypto, told Cointelegraph that Prosegur’s new service addresses growing market demand for safeguarding digital assets, especially as more institutions become involved with crypto.
According to Castilla, the company examined a number of diverse security offerings, including cloud solutions and hardware security module based cryptographics.
However, he noted that the offline solution was different in that it leaves no risk for possible external attacks due to the fact that it’s entirely offline. “It is definitely the most secure solution we’ve encountered and was exactly what we were looking for as security experts,” he said.
Yet companies like Prosegur are not the only ones opting for offline security solutions. OSL, one of Asia’s leading digital asset platforms and member of BC Technology Group, is also using military-grade offline security protocols to safeguard digital assets for hundreds of institutional clients and professional investors.
Wayne Trench, CEO of OSL, told Cointelegraph: “These include military-grade online and offline security protocols, strict Anti-Money Laundering and Know Your Customer requirements, market surveillance and client asset segregation.”
Trench further shared that OSL has a number of rigorous onboarding procedures in place, along with full insurance in the case of both hot and cold wallet crimes.
Security measures are mandatory for OSL, which recently became one of the first publicly listed companies licensed by the Securities and Futures Commission of Hong Kong to operate regulated brokerage and automated trading services for digital assets.
Is Offline Protection Enough?
While offline security procedures are necessary for safeguarding billions of dollars in digital assets from cyber threats, there are some challenges worth recognizing.
For instance, cold storage facilities are inherently less liquid than online solutions. While some investors may not consider this to be a dealbreaker, KPMG’s “Institutionalization of Cryptoassets” report notes that digital assets typically utilize public key infrastructure.
However, PKI has presented challenges in the past in terms of disaster recovery. KPMG’s report points out that challenges such as these are magnified for crypto operations, which are dependent on the availability of public and private keys to transfer assets.
The report further states that organizations managing key pairs will need to develop disaster recovery plans for securing private keys within each storage tier, for each type of digital asset. However, traditional techniques, such as the use of a hardware security module as mentioned may fall short, given its physical dependence. The report states:
“A destroyed or unavailable [hardware security module] could mean lost or unavailable cryptoassets. In addition, other traditional resiliency techniques, such as high availability, either compromise security or are simply not technically possible for an air-gapped cold wallet.”
Despite concerns, traditional custodians and banks are well aware that security is the most important feature when supporting digital assets. Yet this has been challenging to navigate, as Castilla noted that the custody market typically offers standard cybersecurity solutions that haven’t always been invulnerable against the risk of loss from undue physical access.
As such, Castilla explained that moving forward, solutions should transparently show not only the physical protection of assets and access to systems but also the cybersecurity of the space, in which the asset management occurs: “This is the way to manage secure transactions for blockchain-based assets, as this is an aspect of enormous vulnerability that institutional investors have to consider in their custody decision.”
Puerto Rico-Based FV Bank To Offer Regulated Crypto Custody In The US
A Puerto Rico-based digital challenger bank is launching a custody service for digital assets, offering clients the chance to securely store and exchange major cryptocurrencies from early 2021.
FV Bank (which stands for fintech ventures) announced Monday it has received permission from the Puerto Rico Office of the Commissioner of Financial Institutions (OCIF) to provide custody services for bitcoin, ether, EOS, XRP, and “many” ERC-20 standard tokens. It will also allow “seamless exchange to fiat [currency],” according to a statement.
“We are targeting going live in Q1 2021,” an FV Bank representative told CoinDesk via email.
Almost as if the stars were aligned, banks like DBS, BBVA and Standard Chartered have recently been making announcements about providing digital-asset services, perfectly timed with the price of bitcoin reaching all-time highs.
An announcement earlier this year by the Office of the Comptroller of the Currency (OCC) opened the door for U.S. banks to take custody of digital assets. This presented an opportunity for firms like FV Bank, a nimble innovator originally set up to provide U.S. banking services to fintech companies.
“When the OCC came out with their opinion back in July, we saw that as an opening and went to our regulator and sought clarification and permission as a bank to provide custodial services to our customers,” FV Bank CEO Miles Paschini said in an interview. “Our goal is to allow anyone, from an individual to an institution, to custody their digital assets and also have seamless banking services related to that custody.”
Puerto Rico is a Commonwealth of the United States with its own financial regulatory body, the OCIF. But all laws for banking and insurance in the jurisdiction are based on U.S. laws, such as the Bank Secrecy Act (BSA). Because Puerto Rico is part of the U.S. banking system, this allows FV Bank to hold a master account at the Federal Reserve Bank of New York.
Paschini said FV Bank has chosen a custody tech infrastructure partner, but its name has not been made public yet. In terms of liquidity, he said the bank will be working with several large over-the-counter (OTC) cryptocurrency trading desks.
FV Bank’s regulated custody offering, which uses a technique called multi-party-computation (MPC) to protect private cryptographic keys, also comes with $20 million worth of insurance cover, sourced from the Lloyd’s of London market.
“We’ll be starting out on day one with a $20 million-dollar policy and we’ll grow that policy commensurate with the assets under management,” said Paschini.
Traditional Banks Offer Digital Asset Custody Amid Compliance Legislation
Compliance and regulations become more important than ever before for banks and traditional institutions that offer support for digital assets.
More and more traditional banks have started announcing support for digital assets as the price of Bitcoin (BTC) continues to make headlines for record-breaking all-time highs. Even major banks like JPMorgan Chase, which previously frowned upon Bitcoin, have taken a newfound interest in the cryptocurrency.
Contrary to what Goldman Sachs stated recently, JPMorgan’s strategists have noted that “the price of gold would suffer from a structural flow headwind over the coming years” due to Bitcoin’s growth.
While JPMorgan Chase is clearly taking a softer stance on Bitcoin, some leading banks are going a step further by offering clients custody services for digital assets. For example, FV Bank, a Puerto Rico-based digital bank, announced on Dec. 21 that it received permission from the Puerto Rico Office of the Commissioner of Financial Institutions to provide custody services for all major cryptocurrencies, including Bitcoin and Ether (ETH), along with support for ERC-20 tokens.
Miles Paschini, CEO at FV Bank, told Cointelegraph that the bank will begin offering custody services integrated within its digital platform in early 2021. Both institutional and retail customers will then be able to open an account with fiat and digital asset balances. Paschini added:
“Banks are well-positioned to provide secure custody and to provide banking services to enable a seamless experience. Puerto Rico just happens to be a mature financial services market which is well positioned to authorize its licensed institutions to provide these services to international clientele while adhering to the requisite Bank Secrecy Act and Anti Money Laundering requirements.”
According to Paschini, FV Bank account holders will be provided cryptocurrency deposit addresses for each digital asset they wish to hold in their accounts. The digital assets will be managed in a secure and insured custodial account linked to the user’s digital bank account. Services will be accessed through online and mobile banking applications.
Nitin Agarwal, chief revenue officer at FV Bank, added that there has been great demand over the last few months from the bank’s existing customers to invest in and securely hold digital assets.
As such, Agarwal commented that digital assets are proving to be attractive investments to international business, institutional investors and retail customers alike: “I anticipate the convergence of these products will drive growth in the bank for years to come.”
Indeed, some major banks including Standard Chartered, DBS Bank of Singapore and BBVA have also added crypto services recently. In October this year, DBS hinted at three new offerings for clients: cryptocurrency trading, custody, and a platform for conducting security token offerings. Three months later, DBS established its cryptocurrency exchange division known as the DBS Digital Exchange.
Following this, Standard Chartered bank announced a partnership with United States-based investment management firm Northern Trust to provide institutional custody for Bitcoin starting next year. Spanish bank BBVA also announced in early December trials for its first commercial service for the trading and custody of digital assets. The new service will be offered through BBVA Switzerland, and will make it possible to manage Bitcoin transactions and deposits.
Moreover, Swiss banks are preparing to offer digital assets through the Swiss Stock Exchange, also known as SIX, which recently created a new program enabling banks across Switzerland to provide clients access to digital asset-related products and services, set to launch next year.
Banks Betting Big On Crypto?
Wayne Trench, CEO of OSL, one of Asia’s leading digital asset platforms and member of BC Technology Group, told Cointelegraph that major players such as DBS, alongside the likes of Fidelity Digital Assets and Standard Chartered, are just a few of the big names that have unveiled custody solutions for digital assets. According to Trench, banks will continue to offer support for digital assets due to demand from the clients of traditional custodians:
“Demand is reaching an all-time high in 2020 and we have seen relatively conservative financial institutions start to allocate investment into digital assets. One such example is MassMutual’s recent purchase of $100 million of Bitcoin.”
Trench added that there have also been major regulatory breakthroughs, such as the Hong Kong Securities and Futures Commission allowing Type 9 licensed asset managers to hold up to 10% in digital assets without additional terms and conditions.
According to Paschini, digital assets and cryptocurrencies are a growing investment asset class in addition to a payment and settlement mechanism. As such, he noted that banks would be well-advised to get involved with digital assets, with Bitcoin currently outperforming the stock market.
It’s also important to point out the growing interest in digital assets from institutional investors. Not only has this caught the attention of major banks lately, but major hedge funds are taking note. Just this week, Anthony Scaramucci’s multi-billion-dollar hedge fund, SkyBridge Capital, filed a formal application with the United States securities regulator to launch a new Bitcoin fund.
Compliance Becomes More Important Than Ever Before
While it’s revolutionary that banks and traditional financial institutions are adding support for digital assets, ever-changing compliance and regulatory challenges must also be taken into consideration. This has especially become the case as the Treasury’s Financial Crimes Enforcement Network, or FinCEN, announced a proposed rule change for virtual currency transactions with unhosted wallets.
While the rule is currently a proposal, the change would mean that banks and money services businesses would be required to verify the identity of their customers while submitting reports for CVC transactions that exceed $10,000. In addition, records of CVC transactions over $3,000 would be required when a counterparty uses an unhosted wallet or “otherwise covered” wallet, such as those held at a financial institution not subject to the Bank Secrecy Act.
John Jefferies, chief financial analyst at CipherTrace, a blockchain intelligence firm, told Cointelegraph that these proposed rules could impact banks supporting digital assets, noting that compliance should be a top priority:
“In light of the rumored Treasury Department’s plans to implement regulations on self-hosted wallet transactions and FinCEN’s proposed Travel Rule change that lowers the threshold at which reporting is required from $3000 to $250, compliance events could triple in 2021. This will increase the cost of compliance for banks, exchanges, and other financial institutions.”
Jefferies added that regulatory agencies have also suggested more extreme repercussions, including fines and jail time, for those who fail to comply with regulations: “This elevates the stakes for banks and others adding cryptocurrency services to their offerings for the first time.”
Additionally, a CipherTrace survey conducted in December found that only 22% of bankers and financial investigators feel confident detecting crypto-related payments on their networks, suggesting the need for better risk detection.
Paschini, however, remains confident in FV Bank’s newly added support for digital assets. Paschini explained that the company is already subject to strict Know Your Customer and Anti-Money Laundering requirements, along with transaction reporting.
Rather than regulations, he believes the main challenge for banks moving forward will be adopting the correct technical infrastructure and protocols.
BitGo Assets Hit $16 Billion As Institutional Adoption Grows
Digital assets under custody reached a new milestone this month, BitGo says.
BitGo, whose investors include Galaxy Digital Ventures, Goldman Sachs and Valor Equity Partners, reported Wednesday that digital assets under custody have surpassed $16 billion for the first time, offering further validation that institutional demand has arrived.
In an official press release, BitGo said institutional investors are seeking exposure to digital assets “for custody, trading and lending.”
CEO Mike Belshe Commented:
“We’re seeing unprecedented interest from institutional investors as a result of the pandemic’s economic impact, as well as Bitcoin’s extraordinary performance.”
Founded in 2013 as a digital wallet service, BitGo has expanded to provide liquidity, custody, and security solutions for institutional investors. The company claims to process over 20% of all global Bitcoin (BTC) transactions and supports over 300 digital assets.
BitGo made headlines a few months ago after anonymous sources told Bloomberg that the company had become an acquisition target of PayPal Inc. Representatives from both companies refused to comment at the time.
Demand for institutional-grade crypto has been on the rise this year, as Bitcoin’s digital gold narrative continues to attract new investors. Companies like Grayscale, PayPal, MicroStrategy, Ruffer Investment Group and MassMutual have been at the center of the adoption drive.
As Cointelegraph reported earlier this week, Anthony Scaramucci’s multi-billion-dollar hedge fund, SkyBridge Capital, has also submitted formal paperwork with the Securities and Exchange Commission to launch a new Bitcoin fund.
Goldman Sachs To Enter Crypto Market ‘Soon’ With Custody Play
U.S. banking powerhouse Goldman Sachs has issued a request for information (RFI) to explore digital asset custody, according to a source inside the bank.
When asked about timing, the Goldman source said the bank’s custody plans would be “evident soon.”
Goldman’s digital asset custody RFI was circulated to at least one well-known crypto custody player toward the end of 2020.
“Like JPMorgan, we have issued an RFI looking at digital custody. We are broadly exploring digital custody and deciding what the next step is,” said the Goldman source, who asked not to be named. (An RFI on crypto custody was issued by JPMorgan in October 2020, as reported by The Block.)
The Goldman insider said the bank’s digital assets initiative was “part of a broad digital strategy,” citing stablecoins in relation to recent missives from the U.S. Office of the Comptroller of the Currency (OCC).
A tectonic shift took place in the world of crypto custody this week, as San Francisco-based Anchorage attained conditional approval from the OCC to become a national digital bank and “unequivocally” meet the definition of “qualified custodian” in the process.
Anchorage President Diogo Mónica said in an interview this regulatory approval will invite many large and risk-averse institutional players into crypto.
When asked about JPMorgan, Goldman and Citi – the three big U.S. banks most are watching in relation to crypto custody – Mónica said: “We are talking to all these guys.”
There has been chatter about Goldman perhaps offering something akin to prime brokerage services involving crypto. However, the Goldman insider said the bank is looking at custody but not prime brokerage.
“Anchorage, BitGo and Coinbase have quite grand plans in crypto prime brokerage and we would not be looking to duplicate those,” said the Goldman source.
Nebraska Senator Introduces Bills To Allow State Banks To Custody Crypto
“We need to be a leader in FinTech,” said State Senator Mike Flood.
A Nebraska state senator has proposed new crypto-friendly legislation which could see his state become the next regulatory safe haven for FinTech firms.
Sworn in just two weeks ago, Republican Mike Flood today introduced the Transactions in Digital Assets Act and Adopt the Nebraska Financial Innovation Act to the state’s 107th Legislature.
The two bills lay out guidelines for state banks to be able to custody digital assets in addition to creating financial institutions dealing in digital assets for which Nebraska would provide “charter, operation, supervision, and regulation”. The measures would also give local courts the jurisdiction to hear claims “in both law and equity relating to digital assets.”
The proposed legislation will likely move to committee before a general file in the state legislature, where Republican lawmakers currently outnumber Democrats almost two-to-one, 32 to 17.
The proposed bills also aim to address the problem of major banks in the United States discriminating against businesses and individual customers using crypto.
“The rapid innovation of blockchain and digital ledger technology, including the growing use of virtual currency and other digital assets, has resulted in many blockchain innovators and consumers being unable to access secure and reliable banking services, hampering development of blockchain services and products in the marketplace,” states the second bill.
“Many financial institutions in Nebraska and across the United States [refuse] to provide banking services to blockchain innovators and customers and also [refuse] to accept deposits in United States currency obtained from the sale of virtual currency or other digital assets.”
Flood, who previously served as a member and speaker of the Nebraska Legislature until 2013, said he planned to introduce bills intended to make his district a FinTech hub. In a meeting of the Norfolk Chamber of Commerce’s Governmental Affairs Committee last Wednesday, the state senator described cryptocurrency as a market with “great opportunity” for Nebraska.
“This is the future,” said Flood. “To be on the cutting edge of [crypto], I think, is good for us. We need to be a leader in FinTech. We in Norfolk have as much right to this new market as any other place in America.”
Under the 10th amendment to the U.S. Constitution, state laws can often be independent of, or even contradictory to federal laws. One example of this in the crypto space is exchanges such as Binance U.S. having to go state by state to legally make its services available to U.S. residents.
Last July, the Office of the Comptroller of the Currency announced that federally chartered banks would be allowed to provide custody services for cryptocurrency. Though the measures Flood proposed would not be needed for federally chartered banks in Nebraska, the proposals seemingly attempt to extend this benefit to state-chartered banks.
Deutsche Bank To Offer Bitcoin Custody Services
Experts say building custody solutions is tricky, but will become crucially important as crypto grows more valuable
As multiple banks prepare crypto custody services, holders now have to flip an old Bitcoin saying on its head: are the banks prepared to be their own (and others’) bank?
Last week BNY Mellon, the oldest bank in the United States, announced they would be providing custody solutions, ceding to pressure from institutional investors.
Likewise, documents from December indicate that Deutsche Bank is also planning a custody solution, along with trading and token issuance services.
However, while both banks are well-established and have experience handling a wide range of assets, that doesn’t necessarily mean they’re prepared for crypto custody.
“Digital assets are totally different than traditional assets like bonds, stocks, and treasury bills. Digital assets are decentralized by design and their ownership is therefore relying on a totally different model that cannot reuse the existing centralized infrastructure of the traditional banking world.
To custody crypto assets you need a brand new infrastructure in place,” said Jean-Michel Pailhon, the vice president of business solutions at Ledger in an interview with Cointelegraph.
Even for institutions that are crypto-native, custody is extremely complex. Just last year the crypto exchange KuCoin suffered from a hack that netted the attacker over $200 million. Having custody over large sums creates an attractive honeypot for would-be attackers, and according to experts not even many major crypto exchanges approach custody security properly.
“Only a few crypto exchanges like Kraken, Gemini and Binance are investing a lot of money to prove proper internal controls over their personal private keys management protocols,” Dyma Budorin, co-founder and CEO of Hacken told Cointelegraph last year.
If the big banks want to approach security right, they effectively have three options, said Pailhon.
“They can contract with an existing regulated custodian, they can build their own custody infrastructure and get it regulated, or they can buy a custody technology from a vendor and use it and get it regulated.”
Particularly if the banks opt to build their own solutions, the expenses and time can pile up quickly. The banks will have to hire dedicated developers, “allocating large investments for infrastructure” including data centers and servers, and run the regulatory gamut — a process that alone can take “6-12 months.”
“The level of efforts and investments required to provide an institution with an enterprise-ready self custody solution is substantially higher than for an individual. It requires slightly different technologies and governance processes to secure billions of dollars in digital assets,” he added.
Regardless of the route the banks take, Pailhon says that it’s a sign of crypto’s growing legitimacy that banks like BNY Mellon want to provide custody solutions. Additionally, as crypto’s total marketcap grows and the value of assets for institutions and even some individuals soars, secure custody solutions will become increasingly important.
“You can’t protect 5, 10, or 50 billion dollars in bitcoin with a garage-based server or an air-gapped computer located in a bunker in the Appalachian mountains. You have to put in place a fully redundant, resilient, secure, certifiable, and auditable custody infrastructure that can scale and empower millions of users and support hundreds of thousands of digital asset transactions in a month.
The future success and adoption of digital assets and of the digital asset management industry will depend on this.”
ING Bank-Backed Crypto Trade Platform Pyctor Is Raising Money
The digital assets post-trade collaboration also involves Citi, State Street, UBS and others.
Pyctor, which provides the so-called “plumbing” or infrastructure that allow other platforms to handle their crypto and digital assets after trades have been completed, is in the process of raising money.
Led by Netherlands-based ING Bank, Pyctor is a collaboration involving ABN AMRO, BNP Paribas Securities Services, Citibank, Invesco, Société Générale – Forge, State Street, UBS and others.
ING blockchain lead Herve Francois, who is overseeing development of the project, said Pyctor has been incorporated and is raising external money.“I can tell that we are looking for external investors for Pyctor (be it financial institutions or Venture Capitalists) to capture the exponential growth in digital assets that we are currently witnessing,” Francois told Coindesk.
Francois said he could not comment on the amount being raised or if the project’s member banks were also taking part in the investment round.
Pyctor, which is part of the Cohort 6 of the U.K.’s Financial Conduct Authority Regulatory sandbox, is a digital asset post-trade market infrastructure for global custodians, institutional issuers and other capital market actors.
“We are moving forward. We have done a production-ready launch of Pyctor and have started onboarding clients now,” Francois said. “We are using MPC [multi-party-computation] in the Pyctor operating model and have also released the open source code.”
Osprey Fund’s Bitcoin Trust Is Now Available To Retail Investors via OTC
The fund is structured similarly to the Grayscale Bitcoin Trust, but aims to compete with lower fees.
Osprey Fund’s bitcoin trust is now available to retail investors via the over-the-counter (OTC) market, the company announced Tuesday.
The fund was formed two years ago, and Osprey applied to register the trust with the U.S. Securities and Exchange Commission (SEC) in the middle of last year, said Osprey CEO Greg King.
It joins a crop of new bitcoin funds aimed squarely at the market-leading Grayscale Bitcoin Trust (GBTC) before a bitcoin ETF is approved by the SEC. This includes offerings from Bitwise Asset Management, BlockFi and CrossTower that aim to give traditional investors exposure to bitcoin without having to touch the asset itself.
Structured similarly to GBTC, the Osprey fund has nearly $80 million in assets under management (AUM) and can be accessed directly by accredited investors and indirectly by retail investors via OTC trading desks. (Grayscale is owned by Digital Currency Group, CoinDesk’s parent company.)
Osprey boasts a 0.49% management fee compared to GBTC’s 2% annual fee, but the fund also has 0.3% in other expenses from services like crypto custody. King said he doesn’t expect those extra expenses to stick around, however.
“We expect those costs will go down both over time and as AUM grows,” King said. “Custody costs have gone down significantly over the past few years and as those changes take place those savings will flow directly to investors.”
This fee structure makes the fund cheaper than GBTC but more expensive than other new funds like CrossTower’s master-feeder bitcoin fund, which has a 0.6% management fee that encompasses other fees.
Fidelity Digital Assets is the custodian for the Osprey fund, Grant Thornton is the auditor and Coin Metrics is the index provider.
If the SEC begins to approve bitcoin ETFs, then the value of funds like Osprey and GBTC could diminish significantly. In that case, Osprey would “look very closely at converting” to an ETF structure, King said.
Legacy Banks Take Aim At New Crypto-Customers With New Crypto Offerings
Is the crypto custody market becoming too big for established banks to ignore?
Reports that legacy banks like BNY Mellon and Deutsche Bank are becoming active in the cryptocurrency space, including through custody services, should come as welcome news for crypto investors.
Lost or misplaced private keys, after all, are a bane of the crypto world — just recall the Welshman who lost 7,500 Bitcoin (BTC), worth about $400 million today, when he landfilled his PC’s hard drive, forgetting it was the sole repository of his private key.
Meanwhile, traditional banks are society’s safekeepers par excellence, so maybe they can improve the crypto user experience with regard to private keys at the very least.
But if major financial institutions are indeed getting involved with cryptocurrencies — and not just in the custody area, as investment bank Morgan Stanley signaled on Feb. 13 a future investment in Bitcoin — why now? Is it just the soaring price of Bitcoin? Or has the evolving blockchain/cryptocurrency industry reached a new level where it’s acceptable even to habitually cautious depository institutions?
It appears to be a confluence of factors. In the summer of 2020, the United States Office of the Comptroller of the Currency issued an interpretive letter permitting banks to secure their clients’ digital assets, “including holding unique cryptographic keys associated with cryptocurrency.”
This led to “a dramatic increase in demand and direct inquiries from banks,” Pete Najarian, chief revenue officer at BitGo — a cryptocurrency custodian — told Cointelegraph.
Meanwhile, the recent surge in crypto markets has attracted more traditional big-time investors who expect institutional-grade security for their digital assets. “There is real demand from end users and that is absolutely driving the legacy infrastructure toward participation in these markets,” added Najarian.
The current interest from banks has three main drivers, said Nigel Green, founder and CEO of deVere Group, an independent financial advisory organization. He told Cointelegraph: “The first is to meet demand from their institutional clients; the second is that it is becoming increasingly apparent that cryptocurrencies are the future of money; and third, is the Fear Of Missing Out or being left behind.”
Tobias Tenner, associate director and head of digitalization at the Association of German Banks, told Cointelegraph that the skyrocketing price of Bitcoin has captured German banks’ interest, as has a new regulatory framework implemented in January 2020 that cleared the way for banks to act as crypto custodians. “Banks could [soon] offer custody, trading and probably advisory services,” he said.
Are Banks Up To The Task?
But are traditional banks really ready for the cryptoverse? Can they deal with its volatility, hackers and evolving technology? Pablo Agnese, lecturer in the department of economy and business organization at UIC Barcelona, told Cointelegraph: “I think they [the banks] are learning and trying to find their role in this ‘brave new world.’ History however proves that the traditional banking sector is not precisely one prone to substantial technological breakthroughs.”
Bryan Routledge, associate professor of finance at Carnegie Mellon University, told Cointelegraph that crypto custody is not that different from what legacy banks are doing now and have been doing for years. Storing a public and private key pair is important, “but it’s not that difficult,” or shouldn’t be for most banks.
Legacy institutions would also have their business reputations at stake should they enter the crypto arena, which might bring comfort to new users who might otherwise be wary about dipping a toe into the crypto waters. Can banks manage the challenge? “Absolutely,” Perianne Boring, founder and president of the Chamber of Digital Commerce, told Cointelegraph, adding:
“As more and more companies and institutions add cryptocurrencies to their balance sheets, the demand for highly secure custody services grows. Large holders require robust multi-authentication institutional crypto-asset custody solutions and traditional banks are well positioned to provide these.”
Will Banks “White Label” Their Services?
If so, could this come at the expense of crypto-focused firms like BitGo or crypto exchanges like Gemini that also provide custody services? “We believe there is room for both traditional financial services companies, as well as crypto native companies,” answered BitGo’s Najarian, who sees new opportunities for collaboration with traditional banks.
Large institutions recognize that crypto custody is a “complex and highly-specialized” endeavor that “revolves around securing a private cryptographic key required to sign transactions,” and many will choose to engage specialty firms like BitGo as subcustodians while wrapping the custody service in the bank’s brand, a process sometimes referred to as “white labeling.”
What about the time frame — could legacy banks, or at least some of them, become major players in cryptocurrency custody, trading and/or asset management over the next year or two? “Yes,” according to Boring:
“The market for custody services is simply becoming too big for global banks to ignore. Already we see [Singapore’s] DBS and [the United Kingdom’s] Standard Chartered have launched custody solutions for digital assets, and we expect more banks to respond to the growing demand for custody from their clients who add digital assets to their balance sheets and portfolios.”
“I think it is almost inevitable that global banks become major players in the crypto ecosystem as digital currencies become ever-more dominant in the wider global financial system,” said Green. “In an increasingly digitized, tech-driven world, large banks will have no choice but to support digital, borderless currencies. They will need to adapt to survive.”
Tenner told Cointelegraph that global banks could be a big player in the business, provided they embrace euro-denominated crypto tokens — i.e., a “programmable Euro” — in accordance with the Association of German Banks’ 2020 position paper, though “It’s premature to foresee how strong a role banks could play.” For now, the crypto-asset business remains a niche product in bankers’ eyes, Tenner added.
Risk Or Opportunity?
Clearly, not all banks are ready to charge in. When asked in a 2020 survey by the Royal United Services Institute and the Association of Certified Anti-Money Laundering Specialists if they consider the use of cryptocurrency as a risk or opportunity, only 19% of financial institutions said that they viewed crypto as an opportunity.
By comparison, more than three-quarters (80%) of cryptocurrency industry respondents viewed crypto as an opportunity. When asked about specific cryptocurrency risks, the financial institutions identified money laundering as the most prominent risk (cited by 88% of respondents), followed closely by the “use of cryptocurrency on the dark web” (87%) and the “use of cryptocurrency for procurement of illicit goods and services outside the formal financial system” (87%).
Najarian, for one, deems these worries about crime and illicit goods as somewhat overdone. “We do not believe there is greater criminal risk in holding crypto vs. other assets. Statistics have shown that the volume of illicit or suspicious activity involving crypto is much smaller than that of traditional finance.”
With respect to the study, Kayla Izenman, research analyst at the Royal United Services Institute, told Cointelegraph: “It’s worth remembering that financial institutions are likely to view crypto as a risk in terms of compliance, but equally will see the opportunities from an investment perspective.”
She went on to add that the survey also asked financial institutions about crypto “use cases,” both present and future, and “They ranked investment as the top use case in both answers, but indicated day-to-day payments would be more prevalent than illicit purposes in the future. So perhaps the future is closer than we thought.”
When asked if traditional banks really understand the criminal risks in holding crypto, Izenman answered: “They’re likely to be much more cautious at the start of their crypto journey than virtual asset service providers originally were.”
Her sense is that banks are well aware of the potential pitfalls: “In fact, the reason it took this long in the first place to get here is because they do know what they’re getting into, and are worried about it.”
Meanwhile, some of the world’s prominent legacy banks still appear to be sitting on the fence. JPMorgan Chase, for example, will get into Bitcoin “at some point,” co-president Daniel Pinto said recently, adding that current crypto demand on the part of customers “isn’t there yet.”
“Banks Will Have To Recycle Themselves”
Agnese told Cointelegraph: “I keep thinking that banks and cryptos are NOT compatible as the latter implies complete decentralization of ‘banking,’ and traditional banking is anything but decentralized.”
Moreover, traditional banking is a historically protected sector that has always fought to maintain its privileges — though, “sooner or later banks will have to recycle themselves and offer something of value. Crypto custody might as well be the alternative” because it’s like what banks used to do with gold and other assets.
Routledge said that it isn’t really that surprising that some big banks are beginning to invest significant money into the crypto space. The mere fact that Bitcoin, the first cryptocurrency, is worth anything “more than zero” after 12 years in existence — i.e., that it has survived — is a “remarkable” development. It shows that decentralized finance is working, and banks now want to be part of it, he told Cointelegraph.
In sum, “We are at a critical tipping point now,” Boring informed Cointelegraph, “with more and more diversified financial service offerings being launched by digital asset companies, including crypto retirement plans, lending services, high yield savings plans and custody services.” She went on to say further:
“While the foundational technology itself becomes increasingly robust, we see 2021 as an explosive year for the expansion and rollout of the services that have grown out of technology investment.”
A Sign Of Market Saturation, Crypto Custody Platform Koine Goes Into Insolvency
The firm’s technology stack is now available for purchase.
London-based crypto custody and settlements infrastructure provider Koine has gone into insolvency.
Koine, whose clients included Bitfinex and brokerage GCEX, was helmed by CEO and chairman Hugh Hughes, the former CEO of Societe Generale Securities.
Koine had investment commitments with two parties that were due to provide a total of around £15 million (US$21.2 million) at the end of January, Koine co-founder Phil Mochan told CoinDesk via email.
“One of those parties was unable to complete on schedule and so the other party pulled out,” Mochan said. “A number of Koine’s clients offered to invest themselves but the total sums offered and timing were insufficient to keep the business alive.”
The firm told CoinDesk that any client funds it had held have been returned.
The institutional crypto space is coming of age, with banks partnering with startups and fintech platforms searching for acquisition targets. But the tech is complex and expensive to build and the coming wave of interest is breaking too late for Koine.
The administrator of Koine Money Ltd is Antony Batty & Company LLP.
Founded in 2017, the Financial Conduct Authority–regulated Koine aimed to bridge the gap involving institutions, cryptocurrency exchanges and trading platforms with an ambitious custody and settlement tech stack.
On reflection, building out the next stages of the Koine platform proved to be a heavy lift, taking longer and involving more capital than expected, said Mochan, who is now working with Penrose Digital, a neobank serving the crypto industry in the European Union and the U.K.
“Given the excellent tech and enthusiastic clients, it remains to be seen whether a phoenix will arise from its ashes or whether an investment bank decides to pick up the reins and accelerate itself into the market,” Mochan said.
Coinbase Custodies 11% Of Entire Crypto Capitalization
The custody service of leading U.S. exchange Coinbase now controls more than 10% of the combined crypto asset market cap.
Crypto data aggregator Messari has reported that the amount of crypto assets stored in custody on United States exchange giant Coinbase surged in the last quarter of 2020.
Messari Crypto has revealed that as much as 11% of the entire crypto market capitalization was held with Coinbase custody at the end of 2020. Coinbase offers custody services for over 90 crypto assets, roughly half of which are tradable on Coinbase’s exchange.
The value of assets custodied with Coinbase spiked to roughly $90 billion in the fourth quarter of 2020 as the combined crypto capitalization more than doubled to tag $780 billion by 2021.
— Messari (@MessariCrypto) March 1, 2021
Despite the wide variety of assets supported by Coinbase Custody, Messari found that Bitcoin (BTC) and Ether (ETH) account for 83% of the cryptocurrency held with Coinbase.
While Bitcoin consistently represented 70% of the assets custodied with Coinbase during 2019 and 2020, Ether increased from 9% to 13% over the same period.
The findings were published in a report examining Coinbase’s anticipated public listing that was compiled by Messari researcher Mira Christanto.
Christanto reported that 95% of Coinbase trading revenues are from retail clients, which pay 30 times more than institutional customers. She also noted a pre-IPO valuation at 7% of the total crypto market cap, which would equate to around $107 billion, according to the sector’s current market cap of $1.54 trillion.
According to the S-1 report Coinbase submitted to the Securities and Exchange Commission last Thursday, the exchange posted a direct revenue of $1.1 billion in 2020, mostly from trading fees.
In a Thursday blog post to its clients, Coinbase revealed that Bitcoin and other crypto assets have comprised a major share of its corporate treasury since the company’s founding back in 2012.
Mike Novogratz’s Galaxy Digital Said To Be In Talks To Buy Crypto Custodian BitGo
A deal between the asset manager and the crypto custodian is close to being finalized, sources tell CoinDesk.
Galaxy Digital, the cryptocurrency-focused financial services firm run by Michael Novogratz, is in advanced discussions to buy BitGo, the U.S.-regulated crypto custody specialist, according to four people familiar with the situation.
Both Galaxy and BitGo declined to comment.
Silicon Valley’s BitGo was last year reported to have been in acquisition talks with fintech giant PayPal. No deal was reached, but PayPal offered as much as $750 million in cash for the custody company, CoinDesk reported last month, citing two sources familiar with the matter. PayPal later agreed to acquire Curv, another cryptocurrency custody firm.
“Galaxy does not do custody so it makes sense to bring that in-house,” one of the sources familiar with the discussions told CoinDesk. BitGo also administers WBTC, a service with $8.5 billion in locked value that “wraps” bitcoin into Ethereum-compatible tokens.
The sustained buoyancy of cryptocurrencies since late last year has seen a marked increase in activity involving custody firms, a key component in the institutionalization of digital asset trading. (Fireblocks, for instance, raised $133 million and confirmed it is working with BNY Mellon to power the global custody bank’s forthcoming crypto service.)
Details of the deal are unclear at this stage, but a traditional financial firm may also be involved alongside Galaxy, said one of the sources.
Separately, BitGo is one of the custodians under consideration for a Goldman Sachs wealth fund, which will offer bitcoin to high-net-worth investors, according to a source inside the bank. (Goldman and Galaxy are both investors in BitGo.)
Galaxy is part of the NYDIG crypto trading consortium alongside the 86-year-old Wall Street institution Morgan Stanley. NYDIG, an emerging player among institutional bitcoin buyers, has raised $300 million since March.
Galaxy, which also conducts investment banking advisory services, recently reported that income from its trading business had increased 842% to $238.7 million in Q4. Novogratz also said the company is actively planning to list in the U.S. in the second half of this year.
BitGo has raised $69.5 million over six funding rounds, which has included investments from Galaxy Digital.
Shares in Galaxy Digital Holdings, which is listed on the Toronto Stock Exchange (TSX: GLXY), were trading at CAD$34.10 (US$27.30) at press time.
Investment Bank Cowen Set To Offer Institutional-Grade Crypto Custody
The 103-year-old bank wants to hold crypto for asset managers and hedge funds as Wall Street begins offering cryptocurrency products to institutional clients.
Cowen Inc., an independent American investment bank established over a century ago, is set to become the latest mainstream financial services company to enter the crypto custody business.
According to Bloomberg, Cowen has inked a partnership with Standard Custody and Trust Company. The collaboration will also include a $25 million investment in Standard’s parent company, PolySign Inc., which has Ripple chief technology officer David Schwartz on its board of directors.
According to Cowen, there is a growing demand for crypto exposure among institutional investors, with CEO Jeffrey Solomon stating: “We’re going to be able to help a lot of our institutional clients get over the hump and start trading digital assets in the not-too-distant future.”
Custody remains a major roadblock for institutional entry into the crypto scene, as hedge funds and asset managers are required by law to have client’s assets held by recognized custodial services. Commenting on the issue, Solomon elaborated:
“If you’re an institutional investor with a fiduciary requirement, the bar is extremely high for you to put investments in any asset that does not have a clear chain of custody that you can access at a moment’s notice. Even if you had a view on the asset class, if you can’t demonstrate custody then you can’t trade it.”
In recent times, some U.S. banks have begun to wade into the crypto custody scene. Back in 2019, Fidelity — which manages $4.9 trillion in assets — debuted its cryptocurrency custody product, and as previously reported by Cointelegraph, it has even expanded its coverage to Asia.
Cowen’s $25 million investment is part of a $53 million funding round for PolySign as it moves toward creating products that enable greater institutional adoption of cryptocurrencies. PolySign’s Standard Custody subsidiary also recently secured approval from the New York State Department of Financial Services to operate as a limited-purpose trust company.
Singapore’s Biggest Bank Launches Crypto Trust Solution
After posting tenfold crypto volume growth in Q1 2021, DBS Private Bank is expanding its crypto services with a new trust solution.
DBS Private Bank, one of the biggest wealth managers in Asia outside China, has launched a cryptocurrency trust solution amid growing demand for digital assets.
After setting up its own crypto exchange in December 2020, the Singaporean banking giant is now expanding its crypto services via its wholly-owned trust company DBS Trustee, The Business Times reports Friday.
The new crypto trust solution allows the company’s private banking clients to invest, custody and manage cryptocurrencies. The trust offering supports four cryptocurrencies including Bitcoin (BTC), Ether (ETH), XRP, and Bitcoin Cash (BCH), which are the sole digital assets hosted on the DBS Digital Exchange.
“Our trust structure allows clients to conveniently hold these assets, with a peace of mind that they will be safely managed and passed on to their intended beneficiaries,” DBS Private Bank group head Joseph Poon said. He said that more clients have expressed interest in investing in crypto or already invested in digital assets. “We expect this trend to accelerate as cryptocurrencies turn more mainstream,” Poon noted.
DBS’ newly launched crypto trust solution comes shortly after the company recorded tenfold volume growth on its cryptocurrency exchange in the first quarter of 2021. As part of its further crypto-related plans, DBS is looking to host a security token offering in the second quarter of 2021. The bank is also working with investment bank JPMorgan and state investment firm Temasek to improve cross-border payments via a new blockchain venture.
Amid growing demand for digital asset exposure, a number of major global banks have moved into the crypto industry this year. Last month, Morgan Stanley added Bitcoin exposure to 12 investment funds after announcing plans to offer crypto services to wealthy clients in March. Major investment bank Goldman Sachs also confirmed its plans to offer crypto-assets to investors starting in Q2 2021.
Olympia Financial Scraps Plans To Enter Bitcoin Custody Business
As part of the termination, Olympia ended an agreement it announced in April to use Knox Capital’s bitcoin custody system.
Olympia Financial, a Canada-based trust company, ended its plans to provide bitcoin (BTC, +0.87%) custody service citing “internal risk appetite due to current market conditions.”
* As part of the termination, Olympia ended an agreement it announced in April with Knox Capital to use that company’s bitcoin custody system to provide custody services.
* On April 21, when Olympia’s deal with Knox was announced, the price of bitcoin was in the mid-$50,000 range, a week after the leading cryptocurrency reached an all-time high of $64,829.14.
* In mid May the price started falling, briefly falling below $30,000. In recent trading, the price of bitcoin was at $37,214.99, down 3.97% in the last 24 hours after Tesla CEO Elon Musk tweeted a broken heart emoji implying he was “breaking up” with bitcoin.
Crypto IRA Integrates Coinbase Custody As Trade Volumes Top $1.5B
Coinbase Custody will be used to further secure the cryptocurrency holdings of iTrustCapital clients.
Cryptocurrency IRA and 401(k) provider iTrustCapital has integrated Coinbase Custody into its platform, offering retirement planners more robust security for their digital-asset investments.
The integration means iTrustCapital clients will have their assets secured by Coinbase Custody’s cold storage, offering another layer of protection from attacks. Coinbase Custody maintains both SOC1 Type II and SOC2 Type II certifications, which means it undergoes regular financial audits.
Assets held with iTrustCapital are also backed by a commercial crime insurance policy valued at $255 million, the company said.
The added protection applies immediately to all current iTrustCapital IRA and 401 (k) clients.
Coinbase is an industry stalwart when it comes to custodying digital assets. As Cointelegraph reported, the digital currency exchange custodied more than 10% of the combined crypto market capitalization as of March 2021.
Todd Southwick, iTrustCapital’s CEO, said his firm has onboarded “thousands of new active monthly users,” with total assets under management topping $1 billion earlier this year. Total trade volumes have also topped $1.5 billion since the start of 2021.
“Going forward we’re well-positioned to capitalize on the growing demand for investors to include digital assets and physical gold in their retirement accounts,” he said.
The iTrustCapital platform allows U.S.-based investors to incorporate cryptocurrency investments into their retirement portfolios. The platform currently supports purchases of Bitcoin (BTC), Ethereum (ETH), Chainlink (LINK), Cardano (ADA), Polkadot (DOT) and many other cryptocurrencies, as well as physical gold and silver.
Investors have seen the price of Bitcoin and other digital currencies surge to new highs this year. Growing institutional adoption and the presence of more secure onramps to digital assets mean more retirement planners are looking to dabble in the emerging asset class. This trend is likely to continue as investors explore inflation-beating strategies in the wake of the Covid-19 pandemic.
Custodian Prime Trust Cuts Ties With Crypto Lender Celsius
A source familiar with the situation said Prime Trust’s risk team was concerned about Celsius’ strategy of “endlessly re-hypothecating assets.”
Custodian Prime Trust has given cryptocurrency lending platform Celsius Network 30 days to get off its platform, citing “red flags,” people familiar with the matter said.
Prime Trust confirmed it has terminated the contract with Celsius and after the notice period will turn off API (application interface programming) access to its custodial platform, but would not specify the reason.
“We’ve terminated our partnership with Celsius Network for a variety of business factors. The relationship lasted just over 12 months. We won’t comment beyond that other than to wish Celsius well in its endeavors,” Prime Trust said in a statement.
Celsius operates similarly to a bank in that it takes deposits of cryptocurrencies from one set of customers and lends crypto and dollars to another. The borrowers pledge other crypto assets as collateral. Since March 2020, the lender has been using Nevada-based Prime Trust to store assets for some of its customers.
A person familiar with the situation, who did not want to be identified because of the sensitivity of the matter, said Prime Trust’s risk team was concerned about Celsius’ strategy of “endlessly re-hypothecating assets.”
Rehypothecation is a practice whereby banks and brokers use, for their own purposes, assets that have been posted as collateral by their clients. The re-use of collateral from one lending transaction to finance additional loans creates a somewhat obscure and potentially dangerous type of financial derivative if abused.
It’s not the first time such allegations have been made about Celsius’ practices.
A Celsius spokesperson strenuously denied the re-hypothecation claims.
“Since Celsius started offering its services to NY residents, it has never rehypothecated their crypto assets,” the spokesperson said via email. “Unfortunately, the level of service provided to our NY users through our partnership with Prime Trust was not at the level Celsius users are accustomed to, and therefore we are planning to proceed with an alternative solution for our New York state users.”
In its terms of service, Celsius states that it “may lend, sell, pledge, hypothecate, assign, invest, use, commingle or otherwise dispose of assets and Eligible Digital Assets to counterparties or hold the Eligible Digital Assets with counterparties, and we will use our best commercial and operational efforts to prevent losses.”
The terms of service also indicate Prime Trust holds assets for Celsius customers in Texas and Washington state, not just New York. The Celsius spokesperson did not respond to requests for clarification.
Still Using Fireblocks
Celsius’ other “core” custody provider is Fireblocks, the lender said when it announced the Prime Trust partnership last year.
The lender has used Fireblocks’ services since 2019, according to an October 2020 case study on the custodian’s website.
“Both Prime Trust and Celsius are Fireblocks customers,” Fireblocks’ CEO Michael Shaulov said through a spokesperson Thursday. “As a non-custodial technology provider, we don’t dictate or intervene in our customers’ businesses.”
Separately, Celsius announced Wednesday it was moving its operations out of the U.K., citing regulatory uncertainty, and is looking to move to the U.S.
Germany’s Financial Watchdog Approves Crypto Custody License For Coinbase
Since January 2020, all crypto firms operating in the German market have required BaFin approval.
The Federal Financial Supervisory Authority has issued a crypto custody business license for Coinbase’s Germany arm.
In a Monday announcement, Germany’s Federal Financial Supervisory Authority, also known as BaFin, said it had issued Coinbase the first such license for a crypto exchange related to custodying digital assets in the country.
The regulator said due to the lack of precedent, it would be forming an interdisciplinary, cross-divisional and cross-departmental team to handle any issues related to crypto custody.
Lawmakers in Germany passed legislation at the end of 2019 which requires that firms wishing to operate as crypto custody businesses receive BaFin approval. The new law went into effect on Jan. 1, 2020, but provided a transition period for crypto companies that had already been operating in the country.
According to BaFin’s notes on the aforementioned law, businesses that “offer the exchange of virtual currencies for legal tender and vice versa” or for other cryptocurrencies, are considered financial institutions subject to regulation.
However, the regulatory body has previously warned potential investors that there is little to no protection against losses for retail consumers in the crypto space — a warning BaFin reiterated in its announcement regarding Coinbase’s license.
Since going public in the United States with a direct listing, Coinbase’s stock has fallen below the initial reference price of $250 from Nasdaq. At the time of publication, COIN is priced at $239.49, having fallen roughly 30% since April 14.
ASX Sounds Crypto Exchange Custody Warning, Calls For Better Regulations
The Australia Securities Exchange says crypto investors in the country need to be mindful of the dangers of holding their cryptocurrencies on exchange platforms.
The Australia Securities Exchange (ASX) has weighed in on the issue of crypto custody amid the ongoing discussions within the country’s Senate Select Committee on Financial Regulatory Technology.
In a submission to the committee on July 16, ASX highlighted crypto custody on centralized exchanges as a significant risk factor for investors.
The ASX submission outlined the implications of crypto exchange custody arguing that investors do not have access to their private keys while their funds are domiciled in these platforms — another way of saying “not your keys, not your coins.”
According to the ASX, crypto funds left on exchange wallets are vulnerable to cybersecurity risks in the form of theft by hackers. Crypto exchange hacks used to be a regular occurrence in times past with over $53 billion worth of virtual currencies stolen from platforms between 2011 and 2020.
However, improved security measures on exchanges have stemmed the tide of these thefts significantly but the odd exchange hack still happens every so often.
Apart from cybersecurity problems, the ASX submission to the Senate committee also stated that investors who chose crypto exchange custody run the risk of their funds being handled in an undisclosed or unauthorized manner.
While noting that cybersecurity risks are not unique to crypto exchanges alone, the ASX outlined measures such as regulation, appropriate asset capitalization, and insurance as quality assurance protocols imbibed by legacy asset custodians.
As part of its submission to the committee, the ASX called for disclosure requirements for crypto exchanges as well as independent assurance protocols to better safeguard assets on their platforms. The securities exchange also recommended the introduction of core standards for digital asset custody services.
Given the absence of clear-cut crypto regulations in Australia, the ASX advised that such measures be included in a broader cryptocurrency regulatory framework for the country.
State Street-Backed Securrency Partners With GK8 For Custody And Institutional Blockchain Infrastructure
“Banks and other financial institutions are waking up to the fact that blockchain is more than crypto, and that any financial instruments can be tokenized,” says Lior Lamesh, CEO and co-founder of GK8.
GK8, a cybersecurity and digital asset custodian, has partnered with fintech company Securrency to provide banking clients with institutional-grade blockchain solutions.
The partnership centers around GK8’s enterprise-grade custody solutions, which will become available to Securrency’s clients as the fintech company builds its tokenization infrastructure. Securrency’s main focus is tokenizing real-world assets such as stocks, commodities and other securities.
Dan Doney, Co-Founder And CEO Of Securrency, Described GK8 As The “Most Secure Custodial Solution In The Market,” Adding:
“GK8’s design provides all-around protection and functionality for enterprise-grade clients. By adding the GK8 custodial solution to our network, we can now make sure that our customers’ assets are protected to the highest standards.”
Securrency is backed by State Street, U.S. Bank, WisdomTree and Abu Dhabi Catalyst Partners, suggesting that institutional players are looking at security tokenization more closely. Tokenization refers to the process of turning real-world items into digital assets through blockchain technology. In finance, asset tokenization is said to have major implications for traditional institutions. As Cointelegraph’s Expert Take series explained:
“Tokenization implies that account management and claims on assets are driven by cryptographic keys, as opposed to account management and asset management by a system operator called a bank. Though tokenization is more than just account management and claims to an asset, it enables divisibility, fungibility and disintermediated business functions, such as asset transfer.”
Major cryptocurrency exchanges like Binance and FTX already offer tokenized securities. On these platforms, tokenized shares of Apple, Tesla and GameStop log more than $1 million in daily volumes.
Demand for tokenized assets isn’t just coming from retail investors, but banks as well. Lior Lamesh, co-founder and CEO of GK8, told Cointelegraph that the banking sector is driving a significant portion of the demand for such assets:
“Banks are no longer only focusing on cryptocurrencies as an asset class, but also looking to tokenize traditional assets (Equities, Bonds, Gold, etc.), including tier one banks in the U.S. and globally.”
When asked about the biggest trends within tokenization, Lamesh said nonfungible tokens, or NFTs, were the clear leader in terms of demand and overall adoption. However, “a runner-up would be the tokenization of traditional financial assets” such as equities bonds and precious metals, he said.
Crypto ETPs’ Fees Cost Up To 6 Times More Than Third-Party Custodians’
Research from custody firm Finoa finds it cheaper for big investors to just hold crypto.
Institutional investors looking for cryptocurrency exposure should weigh the cost of remaining in their comfort zone.
German crypto custody firm Finoa crunched the numbers and found that fees for crypto exchange-traded products (ETPs) cost four to six times more than fees for custodial services. Specifically, Finoa found that single-asset ETPs had an average (mean) fee of 1.8% and multi-asset ETPs had an average (mean) fee of 2.3%.
That means the expense ratio for a single-asset crypto ETP on average is 4.6 times more than that for a custodian, and a multi-asset ETP is six times as expensive, according to Finoa. Crypto ETPs give investors the ability to access the upside of the underlying assets without having to deal with the crypto itself.
A study of 14 institutional-grade crypto custody providers, including Anchorage, Bitcoin Coinbase and Gemini, found an average fee of 0.38% on a portfolio of $23.5 million.
“We’ve looked at the prices for all ETPs that are out there, and compared those with prices of the leading custodians globally. And there is this massive price difference,” said Marius Smith, Finoa’s head of business development, adding:
“It’s a cultural preference and not about price. A lot of these institutional investors are used to dealing with the same systems, asset managers and people that service them.”
Some 53 single-asset ETPs were included in the study. Those included products from Grayscale, 21Shares, WisdomTree, VanEck, ETC (+4.76%) Group, Iconic Holding, Evolve ETFs, CoinShares, Purpose Investments, CI Global Asset Management, Bitwise, 3iQ, First Block Capital, Valour and Leonteq.
A further 13 multi-asset ETPs were included from such providers as Grayscale, 21Shares, FiCAS, Iconic Holding, Bitwise and 3iQ. (Grayscale and CoinDesk share a parent company, Digital Currency Group.)
Smith said Finoa has non-disclosure agreements with three or four large financial institutions and the mood is moving toward direct crypto exposure, given the possibility to put those assets to work on a decentralized finance (DeFi) platform, for example.
“We are definitely seeing the emergence of more index funds with multiple assets and so on, but none of them attract any real DeFi action,” Smith said in an interview. “An institution could buy a stablecoin and begin to earn interest, or get exposure to a proof-of-stake protocol. Putting those assets to work is something you can do through a custodian.”
Philippines’ UnionBank Taps Hex Trust (Digital Assets Custodian) To Test Digital Assets Custody
The bank said it is looking to tap into the digital asset market as institutional and customer interest grows.
UnionBank of the Philippines, one of the country’s largest banks by total assets, has selected Hex Trust, a Hong Kong-based digital assets custodian, to test a crypto custody service.
Hex Trust will begin by providing an internal service for the bank’s employees in a pilot run. UnionBank said it is looking to tap into the digital assets market as institutional and customer interest grows.
The next stage will involve rolling out a custody service for the bank’s customers, according to a press release shared with CoinDesk on Wednesday. The move will allow the bank to safeguard customers’ digital assets on their behalf in a regulated environment, the bank said.
UnionBank, one of the island nation’s top 10 banks by total assets, said it is fully compliant in its latest offering with the Philippines’ central bank, the Bangko Sentral ng Pilipinas (BSP).
“We are excited to be the first Philippine bank to pilot a custody service for digital assets for our own employees, overseen by the BSP so that we can prepare the groundwork for a safe and protected system for customers’ digital assets,” Henry Aguda, the bank’s chief technology and operations officer, said.
Last year, Hex Trust teamed up with enterprise blockchain company R3 to offer banking clients another option for issuing security tokens using R3’s Corda software development kit. It also said it is working with one of Asia’s largest banks.
Hex Trust, which has offices in Hong Kong and Singapore, said it is expanding to the European market this year.
Thai SEC Proposes New Rules For Digital Asset Custodians
The Thai SEC is seeking public input for newly proposed crypto custody regulations until late September.
The Securities and Exchange Commission (SEC) of Thailand continues introducing new regulations for the cryptocurrency industry, citing investor protection concerns.
On Wednesday, the Thai SEC proposed a set of additional regulations related to custody of investors’ cryptocurrency holdings held by digital asset business operators. The newly proposed rules refer to custody of fiat money for digital asset accounts as well as cryptocurrency lending, or earning interest on crypto holdings.
The SEC is specifically looking to prohibit crypto companies from using investor assets for the “benefit of another client or other persons,” or seeking benefits from both investors’ fiat money and digital assets, including digital lending to other persons.
“Seeking benefits from clients’ fiat money shall be prohibited except in the form of deposit with commercial banks,” the proposal reads.
The new rules also propose a new framework for the withdrawal and transfer of fiat money from digital asset accounts, requiring compliance with the principles of “decentralized approval authority, multi-sign approval authority, and check and balance.” According to the regulator, the rules would strengthen investor protection and the reliability of crypto service providers, ensuring that records of investors’ holdings are accurate and updated.
The SEC is now accepting public comments on newly proposed regulations until Sept. 22. The regulator did not immediately respond to Cointelegraph’s request for comment.
The Thai SEC has been actively introducing new crypto industry regulations this year amid booming cryptocurrency adoption in the country. In March, the authority proposed to impose a $32,000 minimum annual income requirement for investing in cryptocurrencies like Bitcoin (BTC). The regulator previously banned crypto exchanges from handling certain token types including nonfungible tokens in June.
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