Hackers and fraudsters are drawn to cryptocurrencies like flies to honey. Crypto custody is therefore a high-stakes activity, unlike custody of traditional assets like stocks and bonds, which is considered a crucial but relatively simple job.
With high stakes comes high risk in keeping cryptocurrencies safe, making crypto custody an expensive business. According to Hadley Stern, chief business officer of Solana’s custody tool Marinade, crypto custody costs up to 10 times more than traditional assets, Bloomberg reported.
Higher costs are making cryptocurrency custody a prime growth area for traditional Wall Street banks and startups, according to Stern, who previously led digital asset custody at Bank of New York Mellon Corp.
The cryptocurrency custody market, currently worth $300 million, is growing rapidly, at a rate of around 30% per year, according to Fireblocks estimates.
Campbell Harvey, a finance professor at Duke University, told Bloomberg that new entrants to the sector are “betting that this market will become significantly larger.”
Traditional banks are getting into cryptocurrency
Currently, cryptocurrency custody is dominated by Coinbase and BitGo. This is because traditional companies are hesitant to get into cryptocurrency due to regulatory uncertainty.
However, banks like BNY Mellon, State Street Corp. and Citigroup have gotten into cryptocurrency custody or announced plans to do so. But the players have mostly taken baby steps.
For example, BNY Mellon launched a digital asset custody platform in October 2022, but it only supports custody of Bitcoin and Ethereum and has not yet expanded to other cryptocurrencies. Nasdaq, meanwhile, has shelved plans to launch a cryptocurrency custody business in July 2023, citing “the evolving business and regulatory environment,” after announcing it in September 2022.
Cryptocurrency custody is controversial
Third-party cryptocurrency custody services have long been frowned upon by the crypto community. The long-standing cryptocurrency mantra of “not your keys, not your coins” continues to cast a shadow over custody services. This phrase underscores the importance of holding your own encryption keys to maintain control of assets.
Cryptocurrency custody companies are working to reduce the risk of hacks and theft, but their track records are far from spotless. Earlier this month, Robinhood, a popular retail brokerage, and investment firm Galois Capital reached a settlement with the U.S. Securities and Exchange Commission (SEC) over at least partial breaches of custody protocols.
US SEC remains main obstacle
One major regulatory hurdle has been the SEC’s SAB 121 rule, which imposes restrictions on financial firms offering cryptocurrency custody services. Although President Joe Biden vetoed a congressional attempt to overturn the rule, a few banks have been granted exemptions.
In a speech on September 9, an SEC official explained, using examples, the specific cases in which banks have been granted an exemption from SAB121 and why. Still, uncertainty remains, with many in the industry awaiting potential changes based on the outcome of the U.S. presidential election.
The crypto community is eagerly awaiting former President Donald Trump’s victory in the November election. Trump has promised to replace SEC Chairman Gary Gensler with someone who would embrace crypto rather than crack down on it.
David Portilla, a partner at Davis Polk & Wardwell LLP who represents banking and cryptocurrency clients, told Bloomberg:
“Although the SEC has begun to provide relief under SAB 121 to banks, it has not done so in a transparent and widespread manner… The technological, legal, and regulatory risks cited by SAB 121 are significantly mitigated by the existing and extensive legal and supervisory framework that applies to banking organizations, but the SEC’s policy does not reflect this.”
Some foreign players, such as London-based Copper, are waiting for Trump’s victory to refocus on the American market.
“It just depends on the outcome of the election, it could happen sooner or later,” said Bobby Zagotta, CEO of cryptocurrency exchange Bitstamp USA, which uses BitGo for cryptocurrency custody. He added:
“The major players on Wall Street will not miss an opportunity, especially if it signals a shift in the traditional services market.”
