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.”

Bitcoin goes mainstream as institutions hold 3% of BTC’s circulating supply

Institutional investors are rapidly gobbling up Bitcoin, and at the time of writing, nearly 3% of the Bitcoin (BTC) in circulation are locked up in long-term holdings by these investors.

Data shows that 24 entities have amassed more than 460,500 BTC, which is equivalent to $22 billion at Bitcoin’s current price.

According to Michael Novogratz, this figure excludes the 3 million BTC forever lost, who estimates that a supply shortage could occur shortly if institutions keep up their current buying spree.

The current list of holders includes MtGox K K, which has close to 141,690 BTC ($6.6 billion). Next is Block.one with an estimated 140,000 BTC $6.5 billion). MicroStrategy also has about 71,000 BTC ( $3.3 billion) and this week Tesla bought 38,500 BTC (about $1.8 billion).

Analysts now expect that holding Bitcoin in treasury will soon become a corporate standard as there are multiple technical reasons for viewing Bitcoin as an inflation hedge.

First, BTC has a finite supply in circulation, mimicking gold’s store of value use. Furthermore, there is no way to accelerate Bitcoin’s new supply through additional mining.

Large holders further reduce the circulating supply by buying significant quantities from the market and placing them in cold storage. This long-term holding culture among most crypto participants reduces the already small supply, creating a vicious circle.

For savvy chief financial officers, having a portion of Bitcoin’s treasury provides some regulatory hedge and arbitrage as governments cannot freeze funds.

What is surprising about Tesla’s decision to buy Bitcoin is the timing, as the decision happened after the BTC price hiked 250% in four months.

This week’s move caused BTC’s market capitalization to surpass Tesla’s, reaching the ninth position among all tradable assets.

In the past, buying Bitcoin may have been viewed as an incredibly bold move, but now it’s becoming common sense for institutional investors.

With about a rough estimate of $10 trillion of corporate treasury worldwide, even a 3% allocation into BTC represents $300 billion, which is about a third of Bitcoin’s aggregate value in liquid cash.

Considering that over 60% of the Bitcoin supply hasn’t moved in more than a year, a $300 billion inflow is nearly unimaginable for an asset with a $355 billion free float.

Moreover, newly minted BTC by miners adds up to 341,640 annually, a mere $16.3 billion. Therefore it is safe to conclude that the steady allocation of BTC to corporate treasuries could more than double the current price of Bitcoin.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.