Cryptocurrencies are an important and rising element in today’s digital economy. In fact, the market value for digital coins briefly topped $3 trillion in November 2021, with Bitcoin and Ethereum also hitting all-time highs. The previous year’s bull run can be largely attributed to growing investor appetite for this asset class, with companies like MicroStrategy, Tesla, and Block (formerly Square) adding large amounts of cryptocurrency to their balance sheets.
As the cryptocurrency market expands, so does the value of crypto assets, making it an attractive target for hackers. Exchange hacks that occurred in August (Liquid) and December (BitMart) 2021, and January 2022 (Crypto.com) totaled $280+ million in lost funds, further underscoring the importance of safe and secure storage options. This is where crypto custody comes into play.
The Need of the Hour
The primary utility of crypto custody lies in the need to safeguard crypto assets from theft. In traditional banking, all custodians are financial institutions, as the law requires. They provide various financial services, such as trade settlement, exchange, clearing, and corporate action execution. But one of their most notable roles is in the safekeeping of investors’ assets. In crypto custody, however, custodians do not technically store any of the assets because all data and transactions exist on a public ledger called the blockchain. So instead, what they guard are users’ private keys. A private key is used to sign transactions and prove ownership of a blockchain address and is usually represented as strings of alphanumeric characters.
Although holders can become their own custodians (self-custody) with complete control over their wallets, it also means bearing all the risks. Losing access to the physical device (cold wallet) or forgetting private keys are real possibilities, and recovery of crypto holdings can be impossible in such instances. On the other hand, third-party custodians hold clients’ private keys to their wallets safely and ensure the security of their holdings. They are registered, regulated financial institutions that have acquired a state-level or national license to act as custodians. Their solutions are mainly aimed at institutional investors, such as hedge funds, which hold large amounts of Bitcoin or other cryptocurrencies.
Addressing the Demand of Institutional Investors
Typically, crypto investors use the wallet services of cryptocurrency exchanges to store their private keys. But with exchanges mostly unregulated and often technology startups with poor risk management practices, such services put private keys at a high-security risk. Institutional investors, therefore, are looking to their banks for safe custody and management of their crypto holdings.
Keeping in mind that institutional investors want to have a single consolidated portfolio view of all their financial assets in different classes and that they also expect their portfolio to be up to date with price and analytics information, custodian banks can leverage these business drivers to foray into the digital asset custody space. By introducing crypto custody services, such as safekeeping, analytics, asset servicing, lending, pricing and valuation, trading, payments and settlements, and collateral, along with traditional custody services, custodian banks can create a complete portfolio of solutions for their institutional customers and deliver exponential value.
The Competitive Edge
With the increasing focus on regulation and rising interest from mainstream institutional investors, investments in cryptocurrencies are poised to become even more popular.
Given the industry expertise and built-in systems of financial institutions providing custody services for traditional financial assets, they are uniquely positioned to offer additional crypto asset-specific services, which can help them gain a competitive edge over other non-custody service providers, such as retail banks or technology service providers. However, to effectively compete and succeed in this space, they will need to have a deeper understanding of the technologies required to offer scalable crypto custody services, including the risks in ensuring regulatory parity and potential large-scale fraud or loss of private keys.
Discover how Teleperformance can support your journey and help you deliver robust, secure, and technology-driven crypto custody services. Read our latest white paper to further explore the business opportunities you can capture in this evolving ecosystem.