Kyle Samani, a hedge fund manager goes about his job of placing multi-million dollar stakes on the volatile cryptocurrency market, but there has been one thing he has been bugged by: safeguarding his holdings from theft.
Samani - who is a managing partner at Multicoin Capital - is of the belief that this nagging issue will be a thing of the past soon. This is because he's part of a select group of institutional investors that have been sampling the new crypto custody service of Coinbase Inc. Coinbase's crypto custody service is just one among several offerings in their developmental stages. A host of these services are on the verge of completion - bringing with them a revolution that could be massive in the market's future.
In a phone interview, Samani was of the view that custodianship was the major problem hindering a lot of investors - just like we mentioned earlier. He went on to say that within the next year, the market will come to terms and realize that the problem of custodianship has been solved - ultimately leading to more capital.
According to a spokesperson, Coinbase expects approval to be granted so that service can be granted to clients looking for a very competent custodian capable of meeting the stringent U.S. standards meant for safeguarding assets. Coinbase hasn't been the only company talking to regulators - with BitGo and Circle among the other crypto start-ups engaging in discussions. Nomura Holdings Inc. (an investment bank) joined forces with Ledger and Global Advisors - two crypto firms - to form Komainu - a custody consortium. Also, several Wall Street custodians like JPMorgan Chase & Co., Northern Trust Corp. and Bank of New York Mellon Corp. are either exploring the possibility of crypto custody services or are already working on it.
Boost in Prices
Projects like these will lead droves of investors to set their sights on crypto - which will potentially result in the revival of prices in markets that have seen better days. Regulated crypto custody will ultimately ensure that additional institutional buyers like pensions or hedge funds will invest in Bitcoin and several other coins on the market. With this, retail brokerages will be provided with a more secure method of allowing clients to add crypto to their portfolios that are already filled with bonds and stocks.
Services like these will provide some respite to Samani and other hedge fund managers like him who have delved into the market. The SEC requires most investment advisers to use a qualified custodian to keep the funds of their clients. Due to this, there's a huge possibility that regulators could clamp down on the multitude of crypto-focused funds.
According to an estimate by Sam McIngvale - leader of Coinbase's crypto custody service - around $20 billion in crypto assets is expected to be pumped into custody services as soon as they're up and running. This figure - even with the downward trend of Bitcoin - seems to be growing due to more start-ups holding ICOs and ultimately adding their own tokens to the already massive market.
Global custodians like JPMorgan and BNY Mellon have usually been relied on by institutional investors to safeguard their funds, securities and other valuables. However, cryptocurrencies pose a fresh and formidable challenge because completely digital assets are very vulnerable to hacking, with lost funds very difficult to track down.
McIngvale also said that there has been discussions with Coinbase and reputable Wall Street custodians about teaming up. Alex Batlin, Chief Executive Officer revealed that Trustology - a custody technology provider - also has fielded inquiries from orthodox custodians. These talks are, however, in their early days as Trustology plans to launch its custody service before the end of September.
Jean Marie Mognetti, partner at Global Advisors, revealed that Komainu - the brainchild of a partnership between several companies including Global Advisors - plans to begin private testing during mid-summer. In a phone interview, he said that the plan is to develop a solution before the end of the year that can be embraced by clients. Trial clients - family office, hedge funds and an investment management company all included - have been lined up.
The wait on Regulators continue
A number of start-ups have revealed that they're already in discussions with the Securities and Exchange Commission or the Financial Industry Regulatory Authority. Mike Belshe, CEO of BitGo disclosed by phone that the company is in the process of becoming a qualified custodian. BitGo acquired Kingdom Trust - a qualified custodian - but they still need to acquire a qualification for custodianship of their own.
A host of custody ventures are in the process of obtaining insurance meant to provide their customers with significant peace of mind. Some of these ventures are considering an expansion into several other Wall Street services - directing funds to particular exchanges at the request of customers and embarking on know-your-customer checks.
BNY Mellon has been considering a cold storage system that will keep the keys of crypto holdings offline - and ultimately beyond the long claws of hackers. This was disclosed by a confidential source. This will be the go-to method for custody services. Hot storage is faster but it's riskier because it is linked to the internet.
Competition
According to several people with relevant information, Northern Trust and JPMorgan are also exploring methods to provide custody, but they haven't reached any solid decision. A spokesman of Northern Trust revealed that the company employs a very meticulous approach towards cryptocurrencies, while also looking at crypto services as a vital part of an enterprise innovation meant to support its clients.
There's every indication that custody services won't come cheap. Coinbase charges a setup fee of $100,000, with 10 basis points every month, while also requiring a minimum balance of $10 million. 48 hours is sometimes needed to take money out of cold storage - which can be referred to as the crypto equivalent of a vault. However, with the number of crypto custody services growing, its prices will definitely come down.
In an e-mail, Lex Sokolin, Global Director of Fintech strategy at Autonomous Research was of the opinion that traditional ventures and start-ups are in a very competitive environment. Furthermore, he said that the technology answer would hopefully be on the market before the year draws to a close, with the traditional one following after that.