Standard Kepler

Starting as Custodians, Traditional Giants Challenge Crypto Leaders

10/15 – 10/21

Standard Kepler Research Starting as Custodians, Traditional Giants Challenge Crypto Leaders
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WEEKLY RECAP

  • Total market cap. reached $211bn (a 3.9% increase), and 7-day trading volume slumped 6.1% for top 100 crypto


WEEK AHEAD

  • 26 Oct: The last trade date for CME BTC Futures
  • 28 Oct: Zcash (ZEC) to activate Sapling upgrade


THOUGHTS OF THE WEEK

Wall street giants expedited their entrance into the crypto market this week. Fidelity announced the launch of a new entity called “Fidelity Digital Assets Services”, offering custodian and trade execution services for digital assets. The new entity targets institutional investors, including hedge funds, family offices and market intermediaries. Galaxy Digital was announced as the first related customer.

Custodian services are already offered by cryptocurrency exchanges, but the custodian fees charged by these have been significant. This has opened the door for financial institutions able to offer custodian services at more competitive fee levels. Coinbase and Gemini have charged high annual custodian fees of 1.21% and 0.96%, compared to an estimated 0.016% typically charged by traditional custody service providers. Furthermore, while we currently view asset safekeeping as the primary function of crypto custodians, we do expect custodians to play a crucial role in enabling future security token offerings (STOs). In addition to the custody of client digital assets as mandated by securities regulations, this role will likely include responsibilities of fund accounting, and liaising with transfer agents & fund managers.

It is worth noting that current regulations around crypto custody are unclear. Under regulations from the U.S. Securities and Exchanges Commission (SEC), financial institutions holding customer assets worth more than US$ 150mn are required to appoint a qualified custodian for asset storage. However, such rules have not been applied to cryptocurrencies since BTC and ETH are not currently classified as funds or securities. The legal protection available to crypto custodian clients is nonexistent, and the protection of custodied assets is solely derived from the terms and conditions written by the crypto custodian.

In related news, other wall street giants including Goldman Sachs have invested into crypto custodian BitGo. Traditional security firm G4S’ launch of its “vault storage” custodian services further intensifies the space, and service providers such as these may become the go-to custodians for institutional clients looking to enter crypto markets. However, we do not believe the prestige of a custodians’ history should be treated as the decisive factor when choosing a custodian for crypto assets. Rather, experience in crypto wallet and private key management are challenges unique to the crypto market, and custodians should be evaluated accordingly.

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