The significant lack of cryptocurrency custody services has prevented institutional investors from diversifying their portfolios to include this volatile asset class. Currently, only Coinbase and Kingdom Trust provide custodial services.
Custodial Services are services for storing and disposing of the client’s assets and property based on his orders. Assets most often mean securities, financial instruments and cash. Accounting for assets and transactions with them is maintained separately from the accounting of the company providing custodial services for each client individually.
Lack of trust
On July 9, 2018, Pension and Investments claimed that market makers and billionaire investors prefer international custodial institutions and banks with a good long history over cryptocurrency startups and mid-sized corporations when it comes to investing in digital assets, presumably due to the role that trust plays in billion-dollar investments.
While Goldman Sachs, J.P Morgan and several public banks work with cryptocurrency businesses and offer trading platforms, they shy away from providing custody services for crypto assets. Others such as Bank of New York Mellon Corp., State Street Corp. and Northern Trust Corp., while some of the world's most trusted custodial institutions, still do not engage in any cryptocurrency activities. Blake Estes, head of blockchain technology at law firm Alston & Bird LLP, explained:
"For investment officers, cryptocurrencies have only one risk. There must be another round of trust in new asset custodians who do not yet have a recognizable brand. This is what poses a risk to them."
Investing in cryptocurrencies has not yet been tested by time
In the traditional financial sector, trillions of dollars in investments are made by hedge funds, family offices, pension funds and investment offices, which are currently absent from the digital asset market. The cautious stance towards cryptocurrencies can be attributed to their investment ethos, which focuses on long-term assets that provide less risk to clients. In comparison, cryptocurrencies are very volatile and far from ideal long-term investments. With the exception of Bitcoin, most cryptocurrencies appeared after 2015; more than 1000 tokens are completely “dead” at this time...
Matthew Hougan, vice president and global head of research at Bitwise Asset Management, Inc., a cryptocurrency index fund founded in 2016, believes index investment portfolios are the safest method of investing in cryptocurrencies without exposure to the market. Bitwise, based in San Francisco, tracks the market capitalization of the top 10 cryptocurrencies and creates a low-risk investment plan for interested parties. Despite the security offered by an index fund, the underlying assets remain volatile. This makes Hougang's approach a speculative measure for traditional investments rather than a real strategy.
The guardians will eliminate the doubt
Jonathan Benassaya, founder and chief executive of San Francisco-based IronChain Capital, believes traditional custody services will alleviate any fears surrounding cryptocurrencies. Benassaya, whose company provides a similar model for tracking cryptocurrency indices for its clients, noted:
"You're reading about crypto custodial services because of a lot of news about hacking and security. Investors want their funds to be safely stored in a safe, like gold. But who will have the key to that safe? The level of security for storing crypto assets is the same as for other assets, except that cryptocurrencies provide their transparency through the blockchain. So, custodians are not far from working with cryptocurrencies."
Meanwhile, trusted institutional custodian Northern Trust continues to make cautious moves towards cryptocurrencies. The company indicated its interest in the sector in May 2018, but cited the lack of a robust regulatory framework as a limiting factor in shaping the future of the industry.
Three questions
Despite the obvious regulatory and trust issues raised by financial authorities, John Lore of New York-based Capital Fund Group points to a third factor that is contributing to the continued lack of institutional investors in crypto: liquidity.
Lore said that custodians will have to cash out cryptocurrencies for their clients upon request.. Since they are not brokers, there may be risks involved when a digital asset is removed from a cold storage wallet. There is always a danger of hacking or simple computer failure. This is the most serious risk.
The fund manager added that the cryptocurrency sector is still in its infancy and it is too early to “determine what cybersecurity risks will need to be addressed.”
According to BTCManager
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