Crypto Custody Poses Barrier to Institutional Investment

Cryptocurrency analysts are increasingly arguing that the lack of custody services provided by leading players from within the finance industry pose a significant barrier to institutional investors seeking exposure to the cryptocurrency markets.

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Lack of Crypto Custody Services Comprises Serious Issue for Institutional Investors

A number of finance professionals have argued that a lack of cryptocurrency services being offered by institutional custodians poses a significant barrier to widespread institutional investment in the virtual currency sector.

Blake Estes of Alston & Bird LLP stated “For chief investment officers, there’s only downside risk in cryptocurrency,” adding that it “would take a leap of faith with a new custodian with no brand recognition. That presents a real risk for them,” during a recent interview with Pensions & Investments. 

Mr. Estes of Alston & Bird shares this opinion, stating that “So much of the security of bitcoin and other cryptocurrency rests with who stores that private key, who controls the vault. Blockchain (the technology behind the transfer of assets) itself can’t be hacked, but it all still boils down to who ends up holding the keys. I’d tend to think that pension funds will not venture into uncharted territory until they’re certain about the security of who has custody of the keys.”

Analysts Argue Cryptocurrency Sector is Not Yet Developed Enough for Institutional Custodians

Mark Kinoshita, senior vice president of Callan LLC, believes that the virtual currency industry is still a long way from witnessing institutional custodians offering services to cryptocurrency investors.

“I don’t know that (custodians) are focused on cryptocurrency; I think they’re more focused on blockchain and distributed ledger technology and their use in operations. They’re joining consortiums that are looking at uses in things like cross-border services, clearing, and settlements. Rather than comment on cryptocustody, they’re working with partners in fintech and insurance firms to determine applications of blockchain and (distributed ledger technology) to streamline clearing and settlement processes. They’re still at the exploration stage,” Mr. Kinoshita said.

John Lore, managing partner, Capital Fund Law Group PC, New York, agrees that the cryptocurrency sector is not yet developed enough for institutional custodians, stating “it’s really too soon to determine what cybersecurity risks will need to be dealt with, there aren’t enough custodians who are capable of handling that risk yet. […] If you want a long-term storage of assets in a digital wallet, there are regulatory ways of doing that, but none that are recognized across the large custodians, Once there, it’s an asset that’s very easy to lose, through computer failure or hacking. At the core, that’s a major risk issue.”

“Vicious Cycle” of Custodianship in Crypto

Jonathan Benassaya, founder and CEO of IronChain Capital, attributes the lack of institutional custodianship in the cryptocurrency sector to “vicious cycle” in which “Investors want the infrastructure from custodians,” however, “custodians want investors before they build the infrastructure.”

Despite such, Mr. Benassaya expects that custodians “are not so far” from entering the cryptocurrency industry, stating “You read about cryptocustody because of general news about data hacking and security. They want it safely stored in a vault, like gold. […] The level of custody in crypto is the same as with other assets, except that crypto is self-cleared through the blockchain. Custodians are not so far away from making this happen.”

Do you agree that a lack of trusted custodians providing services to cryptocurrency investors poses a significant barrier to widespread institutional investment in virtual currencies? Share your thoughts in the comments section below!

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