Hackers and fraudsters are attracted to crypto like flies to honey. This makes custody of cryptocurrencies a high-stakes endeavor, unlike custody of traditional assets such as stocks and bonds, which is considered a crucial but fairly simple task.
The high stakes come with the high risk of protecting cryptocurrencies, which in turn makes custody of cryptocurrencies an expensive proposition. According to Hadley Stern, Chief Commercial Officer of Solana Custody Tool Marinade, it costs up to 10 times more to hold crypto compared to traditional assets, Bloomberg reported.
According to Stern, who previously led digital asset custody at Bank of New York Mellon Corp, the higher costs make cryptocurrency custody a key growth area for both traditional Wall Street banks and startups.
Currently a $300 million market, the crypto custody business is growing at a rapid pace – at a rate of about 30% per year, according to Fireblocks estimates.
Campbell Harvey, a professor of finance at Duke University, told Bloomberg that newcomers to the industry are “betting on this market to grow significantly.”
Traditional banks have started looking into crypto
Currently, cryptocurrency custody is dominated by Coinbase and BitGo. This is because traditional companies are hesitant to delve into crypto given the regulatory uncertainty.
Banks like BNY Mellon, State Street Corp. and Citigroup, however, have either entered cryptocurrency custody or announced plans to do so. But players have mainly taken small steps.
For example, BNY Mellon launched a digital asset custody platform in October 2022, but it only supports Bitcoin and Ethereum custody and has yet to be expanded to other cryptocurrencies. Nasdaq, on the other hand paused its plan to launch a crypto custody business in July 2023, citing the “changing business and regulatory environment,” after announcing it in September 2022.
Crypto custody is controversial
Third-party custody services have long been frowned upon by the crypto community. The long-standing crypto mantra of ‘not your keys, not your coins’ continues to cast a shadow over custodial services. This sentence emphasizes the importance of owning one’s own encryption keys to maintain control over assets.
Crypto custody companies have strived to reduce the risks of hacks and thefts, but their data is far from squeaky clean. Earlier this month, Robinhood, a popular retail broker, and investment firm Galois Capital settled with the U.S. Securities and Exchange Commission (SEC) over deficiencies in its custody protocols, at least in part.
The US SEC remains the biggest obstacle
One of the main regulatory hurdles is the SEC’s rule, SAB 121, which places restrictions on financial companies offering crypto custody services. While President Joe Biden vetoed a congressional effort to overturn the rule, some banks have been granted exemptions.
In a September 9 speech, an SEC official explained with examples the specific cases in which banks have been granted relief from the SAB121 rule and why. Yet uncertainty continues, with many in the industry waiting for possible changes depending on the outcome of the US presidential election.
The crypto community is waiting with bated breath for former President Donald Trump’s victory in the November elections. Trump has promised to replace SEC Chairman Gary Gensler with someone who would embrace crypto instead of suppressing it.
David Portilla, a partner at Davis Polk & Wardwell LLP who represents banking and crypto clients, told Bloomberg:
“While the SEC has begun to provide relief under SAB 121 for banks, it has not done so in a transparent manner that applies across the board… The technological, legal and regulatory risks raised by SAB 121 are significantly limited by existing and extensive legal risks. and supervisory framework applicable to banking organizations, but the SEC’s policies do not reflect that.”
Some foreign players, such as London-based Copper, are waiting for Trump’s victory to refocus on the US market.
“It’s just, depending on the election outcome, it could happen faster or slower,” said Bobby Zagotta, CEO of crypto exchange Bitstamp USA, which uses BitGo for custody. He added:
“Key Wall Street players will not miss an opportunity, especially if it signals an evolution of the traditional services market.”