The market for the secure storage of digital assets has grown exponentially in the past few years as more and more institutional investors begin to get involved in the industry. While European legislators have been slow to develop a regulatory framework around the provision of secure digital asset storage, many companies in the U.S. are forging ahead with necessary developments to meet regulatory requirements.
However, despite improvements to technology for the secure storage of digital assets being made on an almost weekly basis, there remain many risks related to third-party storage. Thefts, hacks, and other cybersecurity issues are an ever-present threat to companies that provide digital asset storage and seldom a month passes without a new weakness being exposed.
For this reason, reliable digital asset custody is now more pertinent than ever.
Advancements within the industry
Many U.S.-based digital asset service providers like BitGo and Coinbase have recently expanded the scope of their custody services to meet the growing demand for modern services like digital asset staking. Coinbase Custody recently reported holdings of up to $1 billion worth of digital assets under management as of May this year.
Even traditional financial service providers like Wall Street giant Fidelity Investments have begun adding digital asset custody to their list of services. The newly launched digital asset exchange Bakkt - developed by NYSE parent company Intercontinental Exchange (ICE (NYSE:ICE)) - acquired the Digital Asset Custody Company (DACC) this past April in order to meet its regulatory requirements.
These developments have put a spotlight on the need for improved regulatory measures and compliance procedures that meet with the demands of government agencies like the U.S. Securities and Exchange Commission (SEC). Many traditional financial institutions don't have the expertise required to sufficiently manage custody of emerging asset classes, creating a need for bespoke solutions to serve hedge funds, mutual funds, and RIAs.
Nowadays, a growing body of institutional-grade custody solution providers is developing high-class processes that meet legal and regulatory requirements. These include air-gapped cold storage and multi-signature methods that ensure private keys are held by several different parties and secure against single points of failure.
South Dakota: a safe-haven for custody solutions
The U.S. state of South Dakota has become increasingly popular amongst custody solution providers due to its fine balance of strict regulatory procedures and progressive stance towards modern financial technology. The state benefits from an open-minded and innovative approach towards trust and security within the emerging digital asset and fintech industry while still maintaining a conservative legal position.
Due to the South Dakota Trust Charter, companies working with SD regulators are able to conduct business on a national level. Chris Dixon, a partner at investment firm Andreeson Horowitz, recently spoke of the advantages of South Dakota in an article regarding the launch of custody solution Anchorage Trust. “South Dakota is a leader when it comes to thoughtful, forward-looking regulation. The entire ecosystem benefits when rigorous regulation meets an open mind for new technology and industry," he said.
The new company is being overseen by the South Dakota Division of Banking, a regulatory body that is becoming increasingly popular within the custody solution industry. The organization also provides high quality regulatory and monitoring services to popular and long-running alternative asset custody provider, Kingdom Trust., which is based in Kentucky.
Just this month, offshore digital banking hub EQIBank announced a new strategic relationship with Kingdom Trust for the provision of custody services to its clients. Launched in October last year, EQIBank was one of the first licensed and regulated offshore banks to offer support for both traditional and digital currencies, now serving over 100,000 clients throughout 180 countries. In an official press release, EQIBank CEO Jason Blick spoke of his enthusiasm for the new relationship:
“We’re proud of our growing operational and technology relationships, of which Kingdom Trust is a welcomed addition,” stated Mr. Blick. “We are constantly seeking ways to improve our services to clients, and a secure and transparent approach to digital asset exposure has been something funds and asset managers have demanded.”
Looking Ahead
The digital asset market is currently worth an estimated US$258 billion, which is minimal when compared with the US$100 trillion worth of value held in traditional assets. Issues with compliance as a result of immature custody solutions are often cited as a reason for the reduced flow of capital into the market.
Many of those involved in the industry believe there is a considerable amount of capital waiting to enter the market if compliance can be met. The potential profit this represents is a huge driving factor in the improvement of technology, with many companies like Coinbase Custody and Gemini generating revenue through a percentage-based fee structure. However, some providers like Prime Trust are able to offer zero fees by simply turning a profit through interest earned on the assets held.
As the provision of custody for digital assets improves, we will likely see an increasing interest from large financial bodies which require a higher degree of legal compliance in order to enter the market. Companies that offer mutual and insurance funds often have some of the strictest compliance procedures, so many custody providers are working hard to create a secure enough environment to support these services.