The term “custody” in finance means when an institution holds on someone else’s assets in lieu to protect them. The institutions that provide custodian services cannot in any way whatsoever lend the assets to anybody else to earn interest therefrom; they are only to store and secure assets on their behalf. They provide the custody services in exchange for certain fees that the depositors need to pay them in exchange for the custodian services. The custody provider is also responsible for any kind of loss in the event of custodian theft or loss of papers of the bearers. In fact, the custody providers have very stringent insurance policies to protect themselves from any kind of loss. Likewise, there are cryptocurrency custodian services that are offered by some companies that protect your crypto assets on your behalf in exchange for a fee that can, at times, be quite hefty.
Need for Cryptocurrency Custodian Services
The main focus of cryptocurrency custodian services is to safeguard the cryptocurrency assets. Private keys that are used to access crypto holding transactions are complex alphanumeric that is hard to memorize and thus can be easily stolen or hacked. Online wallets, crypto games, Bitcoin casino, or cryptocurrency exchanges can provide a temporary solution to this, but they too are susceptible to hacks and frauds. Here comes the importance of cryptocurrency custody services.
Cryptocurrency custody solutions are third party solutions that provide storage and security services for cryptocurrencies. Institutional investors and hedge funds holding large amounts of cryptocurrencies like Bitcoins, find these cryptocurrency custodian services very useful. The crypto custody solutions incorporate both the hot and cold storage that are associated with connection with the internet. Both the hot and the cold storages have their own set of pros and cons.
Hot storage involves internet connection and thus offers liquidity, but due to the massive online exposure, hot storages are susceptible to hacks. Cold storage, on the other hand, though offers greater security, has lesser liquidity offerings due to its offline nature.
Importance of Crypto Custody Regulations
The emergence of cryptocurrency custodian solutions has become prompter due to the cryptocurrency regulations made mandatory by the SEC (Securities and Exchange Commission). According to the regulation, institutional investors holding customers’ assets worth more $150,000 are required to store their holdings of crypto assets with a “qualified custodian.” Banks, savings associations, and registered broker-dealers fall under the category of institutional investors who are required to call for crypto custodian services.
How do Crypto Custody Services Work?
There are two ways in which crypto custody services work.
- Direct Ownership: Here, the custody of the cryptocurrencies lies on the holder himself without any interference from any third-party associations. The fact that the traders can custody their own cryptocurrencies sets it apart from other classes of assets. The traders can hold their assets by using cryptocurrency wallets, which are yet again of many types. The positive trait of direct ownership is that the investors have full control, whereas, on the negative side, the investors need to shoulder all the responsibilities.
- Indirect Ownership: Contrary to the direct ownership of crypto assets, indirect ownership involves third parties to hold the assets of the investors. However, the traders should keep in mind that indirect ownership has its own costs and benefits; that is to say, if an investor holds digital assets on an exchange, that marketplace takes care of its administration in exchange for a fee.
Future of Crypto Custody
Institutional investors view crypto custody solutions as a bridge between the traditional institutional investment market and cryptocurrencies. Two things, namely the entry of big players like Goldman Sachs and the clarity in the custodian services regulations, are expected to affect the future of the crypto custody. These big market players are taking the front seat in designing cryptocurrency custody services.
Therefore, crypto custody solutions are one of the latest innovations to take place in the cryptocurrency ecosystem that has been expected to improve the use of cryptocurrencies in the mainstem.