Since Bitcoin came into being, we have a global decentralized digital cash system that can bypass the entire banking system. But like cash, it has its own set of risks.
If you lose the keys to your coins, you lose the coins. Bitcoin investors know about it, but it scares new users and they’d rather leave their money to third parties that act as custodians, keeping their assets safe for them.
Some people use hardware wallets but again, their keys can get lost as well. Seed phrases can be forgotten. We are humans and thus, prone to error.
The Main Pressure Point
Most people, even at this stage, are not tech literate. A lot of the people aren’t aware of the differences between hot and cold wallets, as well as what’s the best thing to do to keep their Bitcoin safe.
People cannot handle all this technology. And isn’t this the reason why banks came into being? People could lose their money to theft so some people thought of coming up with a custodian to keep their money safe.
Bitcoin provides an open-source alternative to hard money that doesn’t fall in the political control of big banks and governments. But it is not designed to be so simple that the average person can create wallets, do transactions, and keep it all safe.
This has given rise to crypto custodians.
What exactly is a custodian?
Crypto custodian holds your cryptocurrencies and keeps them safe. Keeping in mind the naivety of the general public, crypto custodian services are on the rise.
According to the Bank of New York, crypto-centric custody solutions are very high. Experts believe that such custodians bridge the gap between the digital industry and institutional investment.
A number of banks have rolled out their custody platforms. For example, there’s a Digital Asset Vault by Swiss bank Vontobel. Similar services are also being offered by Coinbase, Fidelity, State Street, and many others.
This caught the attention of the legendary entrepreneur and popular cryptocurrency commentator John McAfee.
“Custody of Funds” will be the fulcrum than defines “good or bad” in any future Crypto exchange, Futures Market or new coin offering. If you don’t have custody, then any crypto offering is no different from a bank, that holds your money, reports on it, follows it and controls it.
— John McAfee (@officialmcafee) September 23, 2019
In the comments, he added that it will help more users join the crypto world. McAfee’s tweet explains that custody is a major issue that stops fund managers from adding capital in cryptocurrencies.
Crypto custody will change the crypto space for institutional investors. Since custody has typically been managed by exchanges, there are some security risks. These risks might not be very big for individual users but are considerable for large institutional investors.
Until there is a large and reliable custodian, crypto custody will continue to be a big issue and big institutional investors might find it difficult to invest large amounts in crypto.
Crypto Custodians are Gathering Momentum and Fast
Crypto wallets and exchanges have conventionally relied on private keys to protect holdings. Such keys can be difficult to remember and can be stolen.
Crypto custody reduces the chances of losing your assets forever as they are designed to avoid wallet thefts and lost keys.
Also, crypto custodies have a regulatory compliant design. According to the U.S SEC (Security and Exchange Commission), investors that have customer assets over $150,000 need to place them under a custodian.
Major Players in Crypto Custody Sphere
Crypto custody providers are coming up all over the digital sphere in 2019, with Coinbase as the leading provider in the sector. These platforms serve as storage and security units and are mainly geared towards institutional investors. Some other names besides Coinbase in this sector are BitGo and Xapo.
Crypto Custody is New and Complicated
Many of us will get skeptical when we hear the word “counterparty.” Why involve third parties? Why should they know about our investments? However, for large investors, custodians can be a blessing.
Custodians will easily be a target for hackers and they need to take strict security measures as they have to protect assets of several people. Solutions will be difficult with the lack of global regulation around the subject.
The traditional financial world doesn’t have much experience in the crypto custody sector.
Yes, there have been some changes as large financial organizations foray into this field. But there still has to be a decisive leader.
Meanwhile, Northern Trust Corporation has announced that they’re working on it and Bank of America has filed a patent in the field. We might see some positive changes soon.