Crypto custody solutions have grown in popularity in the digital asset markets in 2019. As a result, for a small fee, investors can now store their crypto holdings safely with controlled third parties.
Crypto Custody
A custodian is a financial institution that holds securities and other assets on behalf of institutional investors to reduce the risk of loss or theft in the conventional financial industry. Custodians used to hold piles of physical stock and bond certificates until the capital markets became digitised. The majority of shares are now held in electronic form.
State Street, Bank of New York Mellon, and JP Morgan Chase are the three biggest custodian banks.
Several crypto custody providers have risen in popularity in the last 24 months.
Professional and institutional investors' digital asset portfolios are stored by a crypto custodian. In return for a small fee, they have a safe storage facility.
Cryptocurrency custodians serve a dual purpose
For starters, they make it possible for investors who do not want to deal with the technological aspects of safely storing digital assets to participate in this new asset class.
Second, they allow institutional investors who must keep their funds in a controlled custodian to participate in the digital asset markets.
As a result, crypto custodians allow investors who were previously unable to participate in the digital asset markets to invest in bitcoin and other cryptocurrencies.
How it works
While the exact procedure varies by custodian, in general, investors register with crypto custodians, undergo AML/KYC audits, and then send their digital asset holdings to the custodians' wallets.
To ensure the highest level of fund security, crypto custodians store their clients' digital assets in multi-signature cold storage wallets.
Coinbase Custody is an example of a leading crypto custodian. The firm, which is separate from its parent company Coinbase Inc., is a fiduciary and a Qualified Custodian under New York State Banking Law. This ensures that providing custodial services is fully supervised.
To provide state-of-the-art crypto custodianship, Coinbase Custody stores its customers' funds in "dedicated on-chain addresses protected by Coinbase's battle-tested cold storage," which are insured and routinely audited. Coinbase Custody has also allowed staking for the proof-of-stake assets it manages on behalf of customers.
Why is Bitcoin Custody Important?
The advent of crypto custodians was a game-changer for bitcoin and digital asset markets because it allowed well-heeled institutional investors to participate.
Many institutional investors are expected to keep their securities and other assets with eligible custodians, which has acted as a barrier to entry, preventing further capital from flowing into cryptocurrency.
We should expect more institutional capital to flow into blockchain assets now that there are a wide number of controlled custodians from which to choose.
While the big wave of institutional capital that has been spoken about in the crypto sector for years has yet to reach bitcoin, the rising crypto investment ecosystem, which includes crypto custodians, is making it increasingly possible that this would be the year.