Custody is the latest buzzword in the crypto space. But it’s not a new concept – at base it is all about who holds the asset and what responsibilities come with holding that asset.
Are you a trader who always leaves your crypto on the exchange? Or are you a HODLer who withdraws to your own wallet as soon as you’ve purchased it? If you are leaving it on the exchange, you may want to consider how that exchange deals with custody.
Let’s start with a simple definition of Custody from Investopedia:
“Custody. A service in which a brokerage or other financial institution holds securities on behalf of the client. This reduces the risk of the client losing his/her assets or having them stolen. They are also available to the brokerage to sell at the client’s demand.”
Ok, so if you are the latter type of crypto investor, you are the holder of the asset and responsibility for hacking, password protection and everything else resides with you. If you hold it on the exchange, the concept of custody will apply to the exchange and how they manage the assets that you hold through them.
Your exchange will have a responsibility to safeguard the crypto assets and to protect the private keys involved in keeping the crypto in storage.
Just recently, the Chairman of the Securities and Exchange Commission (SEC), Jay Clayton, cited custody as being one of the barriers to the SEC allowing bitcoin ETFs. Safeguarding client’s assets needs to be above reproach before the SEC can consider allowing the products into the traditional financial markets. When an exchange also acts as a trustee of custody, this can present a conflict of interest in some cases, depending on how the exchange separates the two businesses.
One exchange that jumped on the concept is Coinbase. Their product offers cold storage held to high regulatory standards, in a regulated body separate from its other operations and of course holding the appropriate insurance. While NDAX has not yet been approved as a custodian, the exchange has been working toward this framework as well. Taking into consideration the efforts of other institutional models, NDAX holds client’s assets offline in accordance with the highest industry standards and insurance for the crypto assets.
On the more traditional side, banking giant Citigroup and financial services major, Fidelity Investments, have also moved into the crypto asset custody product service. Citgroup’s Digital Asset Receipt service is being targeted to institutions and understands their needs for security and adherence to regulatory requirements. Fidelity is levering its experience managing $7.2 trillion in assets for their Digital Asset Services product and will be making the service available to hedge funds, endowments and family offices right away, but not to the retail investor at the moment.
Options are becoming more readily available with exchanges now developing options and large financial service providers opening their doors. It will just be a matter of time before the asset class is ready to show off.