A Look Into Cryptocurrency Custody Solutions

What Do You Mean By A Cryptocurrency Custody Solution?

In this age of technology, cryptocurrency custody solutions refer to independent storage as well as security systems used for holding large quantities of tokens. Being the latest innovations coming out of the cryptocurrency ecosystem, it is expected to herald the entry of institutional capital into the industry. Below is a brief primer on the need for custody solutions and the types being offered in the market. 

What Is The Need Of Custody Solutions?

Safeguarding the cryptocurrency assets is the main utility of cryptocurrency custody solutions. The private keys being used for transactions as also accessing crypto holdings comes as a complex combination of alphanumerics that can be stolen or hacked, online wallets come as a potential solution but proven to be susceptible to hacks. This is true for cryptocurrency exchanges as well. 

This calls for alternate solutions mainly storing private keys offline, on paper or a hard disk, not connected to the internet. Losing physical custody is a possibility and the recovery of holdings can be impossible. The individual holders of Bitcoin come with the possibility of losing private keys posing a risk for institutional investors representing an even more significant risk. To guard against this danger, the latter goes to extreme lengths. They have even been known to distribute portions of paper wallets across numerous storage units in different locations.

Regulation is another factor that led to the existence of cryptocurrency custody solutions. The SEC regulation insists institutional investors having customer assets worth more than $150,000 requires to store the holdings with a qualified custodian. It defines entities including banks and savings associations along with registered broker-dealers. Also included are futures commission merchants and foreign financial institutions. But within the cryptocurrency ecosystem, very few mainstream banks offer custodian services. 

What Are Cryptocurrency Custody Solutions Defined To Be?

As third party providers who give storage and security options, these cryptocurrencies come with the services that are targeted at institutional investors like those of hedge funds holding large amounts of Bitcoin and other cryptocurrencies. With the solutions come different types of storage options like a combination of hot storage or crypto custody with connection to the Internet and cold storage or crypto custody disconnected from the internet. 

There are benefits as well as drawbacks for both types of storage. As an example, hot storage is connected to the Internet as a result of offering easier liquidity but prone to hacks due to online exposure. Whereas in the case of cold storage, it offers greater security but difficult to generate liquidity from crypto holdings on short notice due to the online nature. In this scenario comes vault storage a combination of both types of cryptocurrency custody solution where the majority of funds are stored online and accessed only using a private key. 

Who Are The Big Players In Cryptocurrency Custody

Coinbase, the popular digital currency exchange has emerged as the major player in cryptocurrency custody space. It entered the institutional-grade custody solutions area recently and buying up acquisitions like California’s Keystone Capital a registered broker. Recently Coinbase acquired the institutional business storage provider Xapo as well. The Swiss bank Vontobel has launched a Digital Asset Vault aiming institutional investors in the crypto space. 

What Is The Future Of Cryptocurrency Custody

As it has grown in popularity, with expert advice from analysts and institutional investors cryptocurrency custody solutions are viewed as a bridge between the traditional institutional investment market and the shifting cryptocurrency space. The future of cryptocurrency custody is set to be affected by two developments. 

The First Is The Entry Of Big Players

While established leaders like Goldman Sachs are conspicuously absent from the list offering cryptocurrency solutions, the entry could probably shake up the nascent market. This is already happening with Coinbase and Fidelity Investment is taking the lead in offering or designing cryptocurrency custody services. 

The Second One Comes As Regulatory Clarity

While the fact is that providing security provisions about cryptocurrency storage is absent from regulation as also businesses are still unclear about the regulations about cryptocurrencies themselves. Even as the industry evolves only after regulators step in and set rules for the playing field. 

As A Conclusion

Cryptocurrency custody solution is important in determining the future of the cryptocurrency market. Safe storage is something that cannot be ignored. Whether it be hot storage or cold storage, the experts are out there to find the best method under the regulatory advice of SEC. So it is something to be looked forward to.