Cryptocurrency custody gives commercial banks a foothold in the market


Custody isn’t the most compelling corner of the crypto ecosystem, but 21st century solutions for the storage and custody of digital assets are essential if cryptocurrencies are to be adopted at scale.

For this reason, the recent announcement by Cowen Inc. that the 103-year-old U.S. investment bank wants to hold cryptocurrencies on behalf of asset managers and hedge funds is noteworthy, especially when is associated with similar statements from traditional banking giants such as Bank of New York Mellon and Deutsche Bank earlier this year.

Is it too early to speak of this as a movement? “It’s absolutely a trend,” Raphael Polansky, managing director of Boerse Stuttgart Digital Ventures GmbH, told Cointelegraph.

Traditional banking giants like Wells Fargo – which have also announced that they will start offering crypto services to its wealthier investors – are being pushed into the business by their clients keen to increase their crypto and token business. “These customers are not yet willing to trust these pioneering fintech companies with triple-digit millions,” Polansky explained, adding, “They want a reliable and trusted partner that they have known for decades, and it’s still traditional banks. “

“Yes, more [traditional] banks will provide custodial services, ”predicted Michael Gofman, assistant professor of finance at the University of Rochester. It’s like building a house, where “custody is the foundation,” he told Cointelegraph. Most users are barely aware of the guard function, but it is essential for the house to continue.

Matthias von Hauff, CEO of TEN31 fintech Bank, told Cointelegraph: “These jurisdictions with strong financial regulatory regimes are generally beginning to appreciate the importance of providing a strong regulatory framework for the custody of cryptocurrencies.” He too expects more traditional banks to enter the custody space.

A door opener?

The interest of traditional banks in the custody of cryptocurrencies may at first glance seem surprising. The fees aren’t lucrative, after all; Coinbase’s custody fee, for example, is around 50 basis points on an annualized basis. “It won’t do them [i.e., the banks] a lot of money, ”observed Gofman. But banks can see it as a sort of lead product, allowing institutions to sell additional – and more profitable – services like crypto trading to new custodial clients.

Until now, many providers have offered virtually free services, von Hauff noted, while crypto custody “is a perfectly logical ‘door opener’ for a wide range of cross-sell opportunities,” adding: “C It’s a bit like offering free account verification to bank customers. You lose money at first, but you have a customer to whom you can offer all kinds of financial products.

Additionally, banks have surely been keeping a close eye on Fidelity Investments, the mutual fund colossus that pioneered institutional crypto custody in 2019 and, in October, expanded its digital asset coverage to Asia. Its Bitcoin (BTC) custody activity has been “an incredible success,” Fidelity CEO Abigail Johnson told Barron’s in December, adding:

“If you had asked me at the beginning if we or someone else were going to prioritize bitcoin custody, I would have said, ‘not at all, I mean, it’s kind of the opposite of what it is, “but the reality is you need it because if you’re an individual hiring an advisor and want to set up an estate plan, you actually need someone to keep your Bitcoin .

Will banks supplant fintechs?

With the exception of Fidelity, an outlier, the cryptocurrency custody business really started to flourish in 2019, spurred on by fintech companies. But now, with more established banks entering the arena, its center of gravity may shift.

“I wouldn’t say that fintech’s primary interest in this industry will invariably be replaced by traditional financial institutions, but that by entering this space competition for clients will certainly increase,” Sean Stein Smith, Assistant Professor of Economics and commerce at Lehman College, Cointelegraph said. It is possible that some demographics actually prefer dealing with fintechs rather than traditional commercial banks, he added.

There should be room for partnerships between banks and fintechs, Polansky said. “We anticipate a lot of strategic moves in the market where traditional banks will invest in crypto custodians instead of creating their own solutions.”

Banks are generally not at the forefront when it comes to adopting new technology, von Hauff noted, so it is “not surprising that most banks have let go first. that playing field for fintech companies. Now it looks like they are starting to catch up.

The nature of crypto custody may also change soon, particularly as the crypto industry moves from proof-of-work transaction validation protocols to proof-of-stake transaction validation protocols and staking becomes more current, Gofman told Cointelegraph. If a user bets on a cryptocurrency, such as Ether (ETH), which helps the network validate blocks on their protocol, that investor can expect a return on their investment, say 6.7% on a 365 day period.

But who is going to track, secure, and document all of these additional funds? “In the future, everyone will have to provide staking,” Gofman predicted, but “not all custodians will be able to do it.” It could become the province of small companies specializing in crypto-custody.

Meanwhile, events are moving rapidly and Polansky expects crypto custody activity to become largely commoditized over the next three to four years. “The speed at which different companies are putting together a common infrastructure is incredible. Besides all the new entrants to the market, regulation could also shape future curation activity, he told Cointelegraph, adding:

“Combine these effects and we will see a network of big players with similar prices sharing the market and making it difficult for new competitors to enter.”

This should be a plus for crypto users, who will get accessible and affordable services. Additionally, Polansky provides for “custodian interoperability” allowing customers to “more easily move tokens and cryptocurrencies between ecosystems”.

What about custody services for ordinary investors?

Recent announcements have focused on crypto custodial solutions for institutions, not individual investors, but this is not so surprising given that institutional players and private banking clients simply have more assets. to deploy, said Stein Smith, adding, “From a business model perspective, it makes sense to deliver services to the most valuable customers first.

“Retail customers don’t need it,” Gofman added. They can write their private key down on a piece of paper and put it in a safe. It is not even necessary for the tax return. But that’s another story for institutional investors. Indeed, in the United States, qualified investors with assets of $ 150,000 or more must keep them under the control of a “qualified custodian”.

It makes sense, Gofman continued. You really don’t want the CEO of a company to hold the private keys to the company’s $ 1 billion BTC investment. While the CEO is unlikely to flee to the Cayman Islands with the private key, it is best to keep it in a safe place with an established financial custodian.

Retail custody solutions are lagging behind in terms of use and functionality, Polansky said, and he doesn’t expect that to change. “They will remain a valid option for those who want to use them but will not take over the market.”

Crypto in retirement funds?

Overall, the fact that financial heavyweights like Fidelity, BNY, Deutsche Bank, Northern Trust, DBS Bank and others want to offer digital asset custody could be a landmark event for the world of crypto, and one would expect that even pension funds could soon hold crypto assets.

“The inclusion of Bitcoin and crypto in retirement planning is actually already underway through the use of self-directed IRAs,” Stein Smith told Cointelegraph. “With the increased interest and integration of crypto into traditional custodial and other financial services, it makes sense that Bitcoin and other cryptos are becoming an integral part of the retirement planning process. ”

Related: Bitcoin on balance sheet draws negative attention from anti-crypto banks

Custody is a big deal, said Gofman, the foundation of the cryptocurrency edifice, and even though custody fees remain relatively low, “1% of $ 1 trillion is still a lot of money. ‘money”. Meanwhile, nonprofits, pension funds, and other institutional investors must have secure and trustworthy custodianship services if they are to invest in cryptocurrencies.

“One of the main reasons institutional investors have avoided crypto so far is the custodial issue,” Duke University’s Campbell Harvey told Cointelegraph in April, adding: “They had no mechanism to store private keys. They did not want to assume the risk of custody. “But now, several solutions are appearing at hand.

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