The mass adoption of crypto assets and rapid industry growth created the need for efficient ways to store cryptocurrency securely. Digital currency is usually stored in digital wallets that are accessed via private keys. Consequently, your digital asset will be lost forever if you lose access to your private key. Widely used by individual holders, private keys and online wallets are vulnerable to hacks, which makes these solutions too risky for institutional investors. Here’s where crypto custodian services come into play.
What is cryptocurrency custody?
The term ‘custody’ isn’t new in the financial industry. A custodian is an institution responsible for safeguarding assets on behalf of institutional investors in order to diminish the risk of loss. Traditionally, custodians stored physical stock and bond certificates. However, the increasingly digital modern world, where most securities are kept in electronic form, is marked by the development of crypto custody solutions.
In simple terms, crypto custody is the process of securely storing digital assets to protect them from loss or theft. A crypto custodian is a third party that provides a secure storage facility in exchange for a fee. While the primary goal of crypto custody was to enable institutional investors, such as hedge funds, to shift the technical burden of storing assets onto a crypto custody provider, it is now legally required in many countries.
Simply put, crypto custody means securing private keys that prove you own the funds stored within your crypto wallet.
How does crypto custody work?
Although processes might differ with different custodians, the whole thing typically boils down to the following steps:
- Registration at a crypto custody provider;
- Undergoing AML and KYC checks;
- Transferring digital asset holdings to wallets owned by the custodians.
What are cryptocurrency custody solutions?
Cryptocurrency custody solutions are autonomous storage and security environments designed for holding massive quantities of tokens. One of the most recent innovations in the cryptocurrency ecosystem, custody solutions are believed to indicate the entry of institutional capital into the industry.
Crypto custodians provide two types of cryptocurrency custody solutions: hot and cold storage.
Hot storage solutions, sometimes referred to as hot wallets, imply storing assets connected to the Internet, which means easier liquidity. However, due to online exposure, hot storage options are more vulnerable to hacks.
Alternatively, custody providers can keep their clients’ digital assets in cold storage, also known as hardware or cold wallet. This is a physical device that enables storing keys entirely offline. Removing crypto holdings from the web helps protect them from hacking and online attacks and thus ensures maximum security of the crypto funds. On the downside, it takes time to generate liquidity from a cold wallet because of its offline nature.
Why is a crypto custodian necessary?
There are two main reasons why investors turn to crypto custodians:
Security
The ultimate goal of using crypto custody services is to protect cryptocurrency assets against theft and loss.
Private keys, which are traditionally utilized to carry out transactions and access crypto holdings, are represented by complex alphanumeric combinations, virtually impossible to remember. In addition, they are prone to be stolen or hacked. Online wallets, once viewed as a potential solution, are also susceptible to hacks.
Storing private keys offline, on paper or on a hard disk, you risk losing them, which means losing your cryptocurrency holdings for good. While losing a private key is an issue for an individual bitcoin holder, it is a tremendous loss for an institutional investor.
Regulation
Another reason that triggered the rise of cryptocurrency custody solutions is regulation. SEC regulation, announced as part of the Dodd Frank Act, requires that institutional investors having customer assets worth over $150,000 store their holdings with a “qualified custodian”, defining such entities as savings associations, banks, foreign financial institutions, registered broker-dealers, and futures commission merchants.
Therefore, the primary consumers of crypto custody services are institutional investors that own massive amounts of cryptocurrencies. Let’s say сrypto custodians are the gateway for traditional financial market players to engage with digital assets safely.
How to find the best crypto custodian?
With multiple crypto custodians on the market, it’s essential to know how to identify a qualified custodian that can best meet your unique needs. A set of criteria can help you decide on the best partner to assist you in securely storing digital assets. Let’s take a closer look at them.
Regulation
There are regulated and unregulated custodians. Regulated crypto custodians are entitled to store regulated digital assets; they have more licenses and assume more responsibilities for the investment they hold.
Location
Although technology allows running operations online, entrusting digital assets to a local crypto custodian gives institutional investors extra peace of mind. However, there’s a more important reason to partner with local crypto custodians: they are familiar with local laws and regulations, which can considerably streamline the process and save plenty of time.
Insurance policy
Although institutional investors turn to custodians for extra security guarantees, the ultimate security is impossible to achieve, both in physical and digital environments. That is why a custodian must have insurance covering different scenarios.
Pricing
Crypto custody providers have different approaches to pricing. Most typically, the fee institutional investors pay for storing their cryptocurrency assets will depend upon the value of the digital asset and the features you need.
Extra services
Apart from ensuring your investment security, some custodians provide additional services to individual and institutional clients, for instance, staking to earn interest on digital assets. Analyzing extra offers and comparing them against your plans for the future will help you make a more informed decision.
Track record
Some crypto custodians can boast a more extended history in the crypto market than others and have evidence that demonstrates securing and transferring enormous amounts of cryptocurrency with no issues. It might be helpful to explore their record and find out how they dealt with the problems.
Technology
While some crypto custodians create their own infrastructure, others utilize infrastructure from external providers. As an investor, you might want to understand the technological setup and whether you are comfortable with it.
Separation of funds
For many institutional investors, it’s imperative that their cryptocurrency assets are placed in separate storage from other clients. Not all custodians offer this feature, so it’s an essential criterion for selecting your crypto security partner.
Big crypto custody players
As cryptocurrency has grown into a new asset class, cryptocurrency custody solutions have become an indispensable part of the crypto ecosystem. In this section, we’re taking a closer look at the top providers of cryptocurrency custody services.
Coinbase
One of the dominant US Bitcoin exchanges, Coinbase first offered its cryptocurrency custody services in 2012. Today, Coinbase boasts 89 million verified users, 11,000 institutions, and 185,000 partners in more than a hundred countries. The company offers superior-quality hardware wallets to securely store its clients’ cryptocurrency assets. Coinbase is recognized as one of the top cryptocurrency space players due to its unconventional approach to running regular audit operations. The platform offers its users greater flexibility in managing crypto by enabling them to stake their digital assets directly from the cold storage.
BitGo
Headquartered in Palo Alto, California, BitGo has been a world leader in crypto asset storage since 2013, when it was founded. The company deals with more than a hundred digital currencies and tokens and is a certified custodian. BitGo offers robust cold storage systems and configurable multi-user accounts that provide users with enhanced features. The platform is regularly audited by third-party auditors to maintain its high status as a first-class crypto custody provider.
Tangany
Tangany, a crypto custodian founded in 2018 and based in Munich, Germany, declares ultimate transparency as one of its core values. A full white-label provider for B2B clients and one of the top EU crypto custody providers, it is trusted by more than 25 corporates and institutions. As of 2022, the company supports Bitcoin and Ethereum, providing universal smart contract support (including ERC20 and Tether). Tangany’s crypto custody solution is based on Microsoft Azure and can be utilized through API for warm wallets (wallet as a service) and as hardware storage. For both, Tangany provides a secure node infrastructure and crypto payment processing engine.
Gemini
Gemini, a New York based crypto custodian, was first announced in June 2013 and went live on October 25, 2015. In November 2019, the Gemini Trust Co. became the owner of Nifty Gateway, a marketplace for NFTs. Gemini is known for its immense $200 million fund coverage, arguably the most prominent investment cap across cryptocurrency custody services providers. Created to ensure the ultimate security levels, Gemini’s custody solutions are designed with institutional investors’ requirements and the needs of individual clients in mind. For the latter, Gemini offers low entry barriers such as the absence of a minimum balance threshold and dynamic pricing options.
Copper.co
Copper.co is a UK-based digital asset execution company. Among the variety of services, such as institutional-grade KYC/KYB, API integrations that allow functionality to be integrated to counterpart platforms, token issuance, and sale proceeds conversion, it offers direct access to unrivalled cryptocurrency market liquidity with complete privacy. Trusted by more than 400 clients, including traders, wealth companies, private banks, crypto funds, and family offices, Copper.co is a promising crypto custody player.
Digivault
Digivault offers a digital asset custody solution that combines physical and virtual security, providing end-users with an ideal balance of adequate protection and liquidity. As part of a Nasdaq-listed company, Digivault is accountable to the SEC, meaning increased regulation. Digivault’s offline wallet, Kelvin, is held in the highly secure vaults of Malca-Amit, a pioneering vault service provider, to ensure ultra-secure, deep storage of crypto assets. Helios, Digivault’s warm wallet, comes with a seamless API for the most efficient interoperability with Kelvin.
Kingdom Trust
Kingdom Trust is a qualified custody provider of traditional, alternative, and digital assets — from retirement funds to precious metals to crypto assets. The company supports more than 100,000 retirement accounts and provides custody of over 20,000 forms of assets. As of May 2020, Kingdom Trust had $13 billion of investor assets in custody. Taking an equal approach to institutional investors and individual clients, Kingdom Trust belongs to the most secure and qualified cryptocurrency custodians. By assisting its clients with reducing risks, the platform helps with compliance, transparency, and accountability, particularly in the case of institutions.
Arkane Network
Arkane Network is a crypto custodian based in Belgium that has adopted a genuinely unique approach by providing services to the gaming and finance industries. It supports several blockchains, including gaming-related ones like Tron and GoChain. Arkane Network caters to both B2C and B2B, which means increased flexibility. Another feature that makes Arkane Network stand out is the support of non-fungible tokens.
Conclusion
Given that cryptocurrencies have already established themselves as a promising asset class, the need for professional security services is sure to grow. With more custody providers appearing in the crypto landscape, it’s safe to assume that their services will only improve due to the increased competition.
Custody solutions offer institutional investors the support they need to expand their holdings, providing new, exciting opportunities for minimizing risk and any issues related to crypto assets management.
It’s safe to assume that by opening doors to streamlined crypto asset storage and management, cryptocurrency custody will drive rapid crypto adoption in the near future. Blockchain and crypto carry on transforming the world, custody solutions being a clear sign of the emerging ecosystem.
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