Custody Battle Brewing Over Crypto Assets, and That’s a Good Thing

Jeff Bergstrom

Jeff Bergstrom

CIO

It was just a few months ago that the cryptocurrency markets were bemoaning the lack of institutional-grade custody services. Without them, no right-minded fund or asset manager was going to get anywhere near this market.

And if they did, they had already written their firm’s obituary and put it in a drawer just in case. It reads something like this: “Thank you, dear customer, for investing your hard-earned fiat currency into our kick-ass digital asset fund. Unfortunately, someone in the Seychelles, Pyongyang, Kiev, Tehran or all of the above has stolen our crypto assets. With regret, we will be liquidating the fund. With no crypto assets left, there will be no repayment. Please come back and invest more hard currency in this space when we launch our next and hopefully more secure fund.”

This narrative is changing rather quickly. In the past several weeks alone, tier one names have announced plans to offer custody services that may add yet another key piece of infrastructure to the crypto markets. A Bloomberg report just over a week ago said Goldman Sachs is working on a custody service for crypto funds with other familiar names as potential players, such as Bank of New York, JP Morgan and Fidelity. It’s unclear if Goldman’s investment into Axoni may play into this or not. Axoni, part of Nex Group’s fintech suite (soon to be CME Group), is backed by several big players and is working on delivering  custom blockchain technology for its information warehouse to the Depository Trust and Clearing Corporation, also an investor.

Meanwhile, custodial giant Northern Trust Corp. [[https://bloom.bg/2L1xwBz|announced that it too]] is developing a custody service for cryptocurrency holders. This is notable because Northern Trust isn’t exactly known for being an early disruptor. It’s been a steady-as-she-goes behemoth that does its thing, a strategy that has served it well over its 129-year history.

Nomura bank announced a joint venture called Komainu in May with Ledger, a cryptocurrency wallet, and Global Advisors, an investment firm focused on bitcoin.

Last month, Coinbase Custody began accepting deposits from institutional customers and it has applied with the Securities and Exchange Commission for broker-dealer, alternative trading system and investment advisor licenses. All of this is part of the infrastructure build-out to attract institutional investors, perhaps adding another $10 billion worth institutional cash by Coinbase’s estimate.  

Meanwhile, BitGo announced it would expand its custody services to 57 new ethereum assets. In July, it announced a [[http://bit.ly/2L8Z34d|partnership]] with Cinnober to provide an “end-to-end secure, institutional-grade digital asset exchange solution.”

And with the Intercontinental Exchange’s announced Bakkt earlier this month, the exchange plans to deliver a regulated market that includes physically-settled bitcoin futures. That too  

Involves institutional-grade infrastructure to make it all go. Bakkt is much more than that, however. It is a self-described “global ecosystem for digital assets.”  While much attention has been given to one of the partners, Starbucks, and just how we’ll be able to buy coffee with it, the other partnering names are more important: Susquehanna, Eagle Seven and Microsoft.

Attend any crypto event and two common barriers are discussed early and often – custody and regulation. If firms like these can get warehousing, custody, reporting, accounting and other essential bridges, roads and railroads built, this will certainly change the way institutional investors think about this space. It is also possible that solid custody services from the likes of Goldman, Northern Trust, Nomura, Coinbase and others will move the regulatory clarity along more quickly for the SEC and Commodity Futures Trading Commission.

It is still early days in this building project. What is different now is that the names are looking familiar.

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