Over the past year or so, cryptocurrencies have soared in both popularity and value. That is unsurprising, seeing as they present an attractive alternative to the banking and fiat transfer systems. This increasing value and popularity are drawing interest from intuitional investors. That said, these seasoned investors are keen on finding an institutional standard, scalable, safe crypto asset custody solution.
What are Custody Solutions?
Cryptocurrency custody solutions are third-party providers of storage and security services for digital assets. Although self-custody solutions for individual investors are sufficient, suffice to say, these methods are not adequate for institutional investors. The necessity for institutional standard custody solutions is paramount, especially as more security conscious players are entering the crypto market.
Hot Storage
This custody solution is connected to the internet, and thus, offers easier liquidity of crypto assets. However, the online component does increase security risks from hackers, breaches, or internal theft.
Cold Storage
This crypto custody solution is not connected to the internet. Because cold storage operates on a platform offline, it is less susceptible to potential hacks or other security issues. Several types of cold storage methods are available.
From a security perspective, cold storage is advantageous. Because of the offline nature, this method makes it impervious to hacking. However, the major drawback is the is the difficulty in generating liquidity from digital assets on short notice.
Vault Storage
Vault storage is a custody solution that incorporates both hot and cold storage. Most often, the majority of assets are stored in some form of cold storage, with access only via private keys.
Custodial Exchanges
Custodial exchanges are in possession of users crypto assets, and custodians of private keys. These exchanges have huge amounts of digital assets moving through their respective platforms. Transactions occur “off-chain”, meaning that trading is followed on the respective exchange’s balance sheet, outside of the blockchain. Because of the swift, low-cost transactions, custodial exchanges are gaining in popularity, in particular with institutional investors. That said, some exchange custodians are tailoring their custodial services for availability only to institutional investors with a minimum of eight-figures in digital assets.
Dedicated Custodians
These custodial bodies have no affiliation to brokerages or exchanges, dealing only with digital asset custody. The advantages of this method of custody solution include the decreased likelihood of asset loss through cyber attacks, or bankruptcy (in the event a respective exchange folds). However, dedicated custodians are the most expensive form of custody solution.
Why are Crypto Custody Solutions so Important?
On a consistent basis, there are new reports of cryptocurrency being hacked, funds being stolen, lost, or compromised in some capacity. The paramount concern for all investors is how to keep crypto assets safe and secure. With regards to fiat currency, investors are secure in the knowledge that both their funds and banks are insured. The primary rationale for crypto custody solutions is asset protection.
An increasing number of institutional investors are now investing in cryptocurrencies. This is an influx of seasoned investors accustomed to a paradigm of regulatory compliant trading. The crypto industry landscape is changing at a rapid pace, thus digital asset custody solutions must evolve. At present, there is no regulatory clarity underpinning cryptocurrency storage. As institutional investors become more prevalent, the need for institutional-standard crypto custody solutions is imperative.
Problems in the Current Digital Custody Market
Security
The most pertinent problem with the digital custody market today is the issue of security and liquidity. All current custody storage solutions offer either one or the other, not both. This poses a huge conundrum to investors, specifically institutional investors. Institutional investors are subject to stringent regulations within the framework of the fiat environment. They are accustomed to the regulatory requirement of placing clients’ assets with a “qualified custodian”, thus protecting those assets. At the beginning of 2018, the Securities and Exchange Commission (SEC) expressed interest in how to apply fiat custody requirements to cryptocurrency.
Crypto asset losses from both exchanges and trading platforms have become problematic what for the sheer prevalence. According to a recent report, since the end of June 2018, an estimated $1.6 billion in digital assets have been stolen. Suffice to say, that statistic is enough to give any potential investor (especially institutional investors) in an emerging market pause.
Fees
Within a brief timeframe, a number of companies have emerged offering third-party custodial services. Yet, the most reputable of these companies charge substantial fees for said services. For instance, Coinbase is the largest cryptocurrency exchange in the United States and a major wallet provider. Recently, the company announced the launch of its “Coinbase Custody” venture, which is a regulated storage service for institutional investors. This custodial service requires a minimum deposit of $10 million, has a start-up fee of $100,000, and a 10 basis point (0.10 percent) per month fee. Other major players such as Kingdom Trust, Gemini Segregated Custody, and BitGo Custody all likewise charge high fees for their crypto custody solutions.
Liquidity of Digital Assets
Another major problem with current digital custody solutions is liquidity. The crypto industry has been plagued with reports of customers often facing lengthy delays to withdraw digital assets. No crypto custody solution at present offers instantaneous withdrawals and payments simultaneously. Likewise, nothing available in the market today offers withdrawals within an hour outside respective ecosystems.
Given the security risks surrounding cryptocurrencies, another problem with the current market is insurance. More pointedly, weak insurance or lack thereof, offered by current crypto custody solutions. One of the main issues faced by the digital custody market is the lack of a clear regulatory framework that can be utilized by insurance providers. Seeing as the crypto industry is increasing in popularity attracting more institutional investors, thus the necessity for regulated, insured, government-licensed crypto custody solutions is essential.
Current Crypto Custody Solutions Available Today
Coinbase, Xapo, and Swiss Crypto Vault are three of the most popular companies offering crypto custody solutions today. All three offer custody solutions for both independent and institutional investors.
| Coinbase | Xapo | Swiss Crypto Vault | |
| Company Launch | 2012 | 2014 | 2017 |
| Company Location | San Francisco, CA | Hong Kong | Zug, Switzerland |
| Site Type | Largest Cryptocurrency Exchange in the U.S. | Cryptocurrency Exchange | Crypto Storage Solution |
| Available Cryptocurrencies | Bitcoin, Ethereum, Litecoin | Bitcoin | Bitcoin, Bitcoin cash, Ether, Litecoin, Bitcoin Gold, and all ERC20/223 tokens |
| Buy/Deposit Methods | Credit Card, Debit Card, Bank Transfer | Credit Card, Debit Card, Bank Transfer, Cash | Transfer Crypto Assets to the Public Address Provided |
| Sell/Withdrawal Methods | Cryptocurrency, PayPal, Bank Transfer | Cryptocurrency, Bank Tranfer | Can be Initiated Via the Swiss Crypto Vault Web Portal |
| Security | Excellent | Excellent | Excellent |
| Verification Required | Yes | Yes | Yes |
| Fees | Medium | Low/Medium | Medium |
| Site | Visit Coinbase | Visit Xapo | Visit Swiss Crypto Vault |
Coinbase and Xapo have established cryptocurrency exchanges, while Swiss Crypto Vault operates as a crypto storage solution. Swiss Crypto is the only solution of the three that provides storage for several different cryptocurrencies and tokens. However, none of these current solutions allow clients to store multiple currencies, offering instant withdrawals and payments simultaneously. Nor do any of the solutions deliver swift withdrawals outside their respective ecosystems.
