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Custody services for institutional clients

05/16/2019
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An important problem when trading cryptocurrency is the difficulty of storing assets. For large investors, custodial services are a prerequisite for work. Therefore, most crypto exchanges began to massively launch them in 2018-19. One of the first to start doing this was Coinbase, which reported on the results for the first year of Coinbase Custody.

The first billion of funds raised

In just 12 months, Coinbase Custody was able to attract more than a billion dollars. This result was achieved through cooperation with 70 institutional investors. Moreover, the head of the exchange, Brian Armstrong, notes that it is these customers who make more than half the turnover on the Coinbase Pro trading platform. From this we can conclude that the custody service for cryptocurrency is a necessary condition for cooperation with major players.

The custodial cryptocurrency service ensures their storage in hot or cold wallets. For digital financial assets, the problem of token security is one of the most difficult.

Experts point out that institutional investors should not include giants like JPMorgan Chase or Goldman Sachs. As a rule, these are investment, insurance and pension funds, which are primarily concerned with the problem of capital savings. And for them, safety issues come first.

Custody Services and SEC

One of the most important reasons why the SEC rejected applications for the launch of Bitcoin-ETF contracts in 2018 was a complaint about the lack of safe storage of cryptocurrency. Holding funds on the blockchain is really too risky. Hot wallets do not provide an absolute guarantee against hacker attacks. Illegal withdrawal of large sums can lead to unpredictable consequences for the entire market.

Hot cryptocurrency wallet provides access to assets through specialized software. Its advantage is the ability to quickly access funds.

Cold storage can solve the problem. However, there are also some difficulties. To gain access, you must manually type some combination of characters. But their loss makes it impossible to receive cash. Only in 2018, companies began to actively implement custodial services, which are built on a combination of different methods of access to wallets. Therefore, now the SEC has no reason to refer to the problem of cryptocurrency storage as a significant obstacle.

Dynamics of custodial services on the example of Coinbase Custody

Now a large number of trading platforms proposes to use custodial services, but the openness of Coinbase makes it possible to use its example to assess the dynamics of the demand for this service. So, it was launched in May 2018. But it was only in October that the company received permission from the New York State Department of Financial Services (NYDFS).

During the first five months of active work, Coinbase Custody was able to raise $ 500 million. It took the same amount to double this amount.

At the moment, the company is talking about a monthly increase of $ 150 million. This suggests that the service continues to gain popularity. Despite the “pent-up demand” and a growing number of competitors, companies continue to gain volume. This suggests that institutional investors are increasing their interest in digital financial assets.

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