Anyone who stays in the crypto-space long enough begins to recognize the familiar mantras.
“Don’t invest more than you can afford to lose.”
“We’re in the early days of the internet.”
“Adoption is coming.”
They’re all valid points, and currently the latter is being held back by lack of regulation and typical financial services, keeping cryptocurrency on the sidelines of the global financial markets as a fringe space, a risky investment with no guarantees and no oversight or protective measures.
Hedge fund managerKyle Samani told Bloomberg in a phone interview:
“There are a lot of investors where custodianship was the final barrier. Over the next year, the market will come to recognize that custodianship is a solved problem. This will unlock a big wave of capital.”
Samani has been testing Coinbase Inc’s new custody service, one of many being launched throughout the ecosystem. The Korean authorities recently admitted to delaying crypto-regulation simply to avoid further legitimizing the movement, but regulation is on the way and the financial services and so too are the protections and safety mechanisms enjoyed by those in the traditional banking system.
Global financial services group Nomura recently launched institutional-grade custody services for cryptocurrency assets, and earlier this year BitGo acquired Kingdom Trust, a $12 billion asset manager to act as custodian for their assets with talks of BitGo even becoming an independent custodian in future.
While these services may be seen by some as centralized and/or requiring trust, the kind of phenomena many turn to the crypto-space to avoid, these optional safeguards are necessary for increasing the level of institutional investment.
Bringing in the Whales
Regulated custody services allow institutional traders to open huge positions on the stock market without having to take personal responsibility over the custody of the funds. This allows hedge funds to give their traders millions of dollars without risking them flying to the Bahamas with it, and it helps prevent outside theft and accidental losses as well, essentially acting as an insurance policy for the millions and billions being traded every day.
Similar options are currently limited in the cryptocurrency space and institutions wishing to send their traders into the fray have to accept major risks in doing so. It’s difficult to track crypto assets, even more difficult to return them, and sending funds to the wrong address will usually result in their permanent loss, all of which is new and unfamiliar territory for some. Traders from major firms operating in the crypto markets are currently in personal control of huge amounts of money in a space rife with hacking and phishing scams with little to no regulatory oversight to protect investors.
With high levels of security come high fees – Coinbase charges $100,000 for setting up custody services at the moment along with 10 basis points per month and a minimum balance of $10 million. The funds are held in cold storage and require up to two days to remove due to the various security protocols that need to be bypassed, a far sight from simply storing funds on a paper wallet. However, once major firms begin to trust the new and secure infrastructure being developed, major investments will follow.
The cryptocurrency market cap is currently $275 billion compared to a global stock market cap of approximately $100 trillion. In order to grow the cryptocurrency space, institutional investment is needed. With crypto-startups exploring custodianship along with existing Wall Street custodians like Jp Morgan, Northern Trust, and Bank of New York considering expanding their services to the world of crypto, it seems like a matter of time before the level of investment in the space changes dramatically.