Custody services are not the most attractive corner of the cryptocurrency ecosystem, but 21st century solutions for storing and preserving digital assets are crucial if crypto is to be achieved. wide acceptance.
For that reason, the recent announcement by Cowen Inc. that the 103-year-old U.S. investment bank wants to hold crypto on behalf of asset managers and hedge funds is notable, especially when accompanied by similar claims from the likes of Traditional banking giants like Bank of New York Mellon and Deutsche Bank earlier this year.
Is it too early to say this is a movement? “This is absolutely a trend,” Raphael Polansky, managing director of Boerse Stuttgart Digital Ventures GmbH, told Cointelegraph.
Traditional banking giants such as Wells Fargo – which also announced that they will start offering crypto services to more affluent investors – are being bullied by their clients, who are eager to raise money. boost crypto and token activity driving into business. “Those customers are also not ready to trust the pioneering fintech companies with three million figures,” explains Polansky, adding: “They want a reliable and trustworthy partner.” that they’ve known for decades, and these are still traditional banks. “
“Yes, much more [traditional] Banks will offer custodial services,” predicts Michael Gofman, assistant professor of finance at the University of Rochester. It is like building a house, where “custodial custody is the foundation,” he told Cointelegraph. Most users are barely aware of the custodial function, but what matters is if the house suffers.
Matthias von Hauff, CEO of Fintech Bank TEN31, told Cointelegraph: “Jurisdictions with sound financial regulation in general are beginning to appreciate the importance of providing a framework. reasonable regulation for the custody of cryptocurrencies”. He also expects more traditional banks to enter the custody space.
The interest of legacy banks in crypto custody may seem surprising at first glance. After all, fees are not profitable; For example, Coinbase’s custodial fees are around 50 basis points annually. “It won’t make them [i.e., the banks] a lot of money,” Gofman commented. But banks can see it as a sort of lead loss, allowing institutions to sell more custodial clients — and more profitably — services, like cryptocurrency trading.
Many of the providers have so far offered the service virtually for free, von Hauff noted, while crypto custody “is a perfectly reasonable ‘door-door’ to a wide range of cross-selling opportunities.” added: “It’s like offering free checking accounts to bank customers. In the beginning, you lose money, but you have a client that you can offer all kinds of financial products to. “
Additionally, banks have certainly been carefully monitoring Fidelity Investments, the mutual fund that pioneered institutional crypto custody in 2019 and, in October, expanded its reach of digital assets. to Asia. Its Bitcoin (BTC) custody business has been “extremely successful,” Fidelity CEO Abigail Johnson told Barron’s in December, adding:
“If you had asked me in the first place if we or anyone would prioritize Bitcoin regulation, I would say, ‘no way, I mean, that’s the complete opposite of what it says’, but the fact is that you really need it because if you are an individual in consulting and you want to make an estate plan, you really need someone to manage your Bitcoins. “
Will banks replace fintech?
With the exception of Fidelity, an exception, the crypto custody business really started to blossom in 2019, led by fintech companies. But now, with more established banks entering the arena, its focus may change.
“I won’t say that fintech’s primary interest in the sector will always be superseded by traditional financial institutions, but by entering this space, the competition for customers is certainly there. will increase,” Sean Stein Smith, assistant professor of economics and business at Lehman University, told Cointelegraph. It is possible that some demographics may actually prefer dealing with fintechs over traditional commercial banks, he added.
Polansky said there should be room for partnerships between banks and fintechs. “We foresee a lot of strategic moves in the market where traditional banks will invest in crypto custodians instead of building their own solutions.”
Von Hauff notes that banks are often not at the forefront of adopting new technologies, so “it is not surprising that most banks initially left this playing field for fintech companies. Now it looks like they are starting to catch up.”
The nature of crypto custody may also change soon, especially as the crypto industry moves from proof-of-stake transaction validation protocols to proof-of-stake trading, and as staking becoming more popular, Gofman told Cointelegraph. If a user bets on a cryptocurrency, like Ether (ETH), that helps the network validate blocks on its protocol, that staking can expect a return on investment – for example, 6.7 % for a period of 365 days.
But who will track, secure, and record all those extra funds? Gofman predicts: “In the future, everyone will have to offer staking services, but “not every custodian can do that”. It could become the province of smaller crypto-custodial companies.
Meanwhile, events are moving fast and Polansky is expected to see the crypto custody business largely commoditized within the next three to four years. “The speed at which different companies are building shared infrastructure is astounding.” Besides all the new market participants, regulations could also shape the future of custody business, he told Cointelegraph, adding:
“Combine those effects and we should see a large network of players with similar prices sharing the market and making it difficult for new competitors to penetrate.”
This will be a plus for crypto users who will get affordable and accessible services. Additionally, Polansky predicts “custodian interoperability” allowing customers to “easily move tokens and cryptocurrencies between ecosystems.”
What about custodial services for everyday investors?
The recent announcements have focused on crypto custody solutions for institutions, not individual investors, said Stein Smith, but this is not too surprising since institutional players and guests alike Private banking simply has more assets to deploy. , it makes sense to first provide services to the most valuable customers. “
Gofman added: “Retail customers don’t need it. They can write their private key on a piece of paper and put it in a safe deposit box. It’s not even necessary to file a tax return. But that’s a different story for institutional investors. Indeed, in the US, qualified investors holding assets of $150,000 or more must keep them under the control of a “qualified custodian”.
This makes sense, Gofman continued. You really don’t want the company’s CEO holding the private keys to the company’s $1 billion BTC investment. While the CEO probably won’t run to the Cayman Islands with his private key, it’s better to put it on for safekeeping with a reputable financial custodian.
Retail custodial solutions are lagging behind in usage and functionality, Polansky said, and he doesn’t expect that to change. “They will remain a valid option for those who want to use them but will not take over the market.”
Cryptocurrency in retirement?
All in all, the fact that financial heavyweights, such as Fidelity, BNY, Deutsche Bank, Northern Trust, DBS Bank, and others, want to offer custody of digital assets can be a surprise. important event for the crypto world and one can expect that pension funds could soon take hold of crypto assets.
Stein Smith told Cointelegraph: “The real inclusion of Bitcoin and crypto in retirement planning was done through the use of a self-directed IRA. “Given the growing interest and integration of cryptocurrencies into other traditional financial and custodial services, it makes sense that Bitcoin and other cryptocurrencies will become an integral part of retirement planning process”.
Related: Bitcoin on balance sheet draws negative attention from anti-crypto banks
The crypto base is a big deal, Gofman said, and even if custodial fees remain relatively low, “1% of $1 trillion is still a lot of money.” Meanwhile, nonprofits, pension funds, and other institutional investors must have secure and reliable custodian services if they plan to invest in cryptocurrencies.
“One big reason institutional investors have stayed away from crypto until now is custody issues,” Duke University’s Campbell Harvey told Cointelegraph in April, adding: “They don’t have a chance. private key storage. They don’t want to risk being detained. “But now many solutions appear within reach.