Since Bitcoin came into being, we have had a global decentralized digital cash system that can bypass the entire banking system. But like cash, it comes with its own set of risks.
If you lose the keys to your coins, you lose the coins. Seasoned Bitcoin investors know this, but it scares new users who would rather leave their money with third parties that act as custodians, keeping their assets safe for them.
Some people use hardware wallets, but their keys can get lost as well. Seed phrases can be forgotten. We are human and thus prone to error.
The Main Pressure Point
Most people, even at this stage, are not tech literate. A lot of people aren’t aware of the differences between hot and cold wallets, or the best ways 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 came up with a custodian to keep their money safe.
Bitcoin provides an open-source alternative to hard money that can’t be controlled by big banks and governments. But it is not designed to be so simple that the average person can create wallets, do transactions, and keep their funds safe.
This has given rise to crypto custodians.
What Exactly Is a Custodian?
A crypto custodian holds your cryptocurrencies and keeps them safe. Given the naivety of the general public, crypto custodial services are on the rise.
According to BNY Mellon, crypto-centric custody solutions are very popular. Experts believe that such custodians bridge the gap between the digital currency industry and institutional investment.
A number of banks have rolled out custody platforms. For example, there’s a Digital Asset Vault by Swiss bank Vontobel. Similar services are offered by Coinbase, Fidelity, State Street, and many others. This caught the attention of 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 crypto custody will help more users join the crypto world. McAfee’s tweet explains that custody is a major issue that stops fund managers from placing capital in cryptocurrencies.
Crypto custody will change the crypto space for institutional investors. Since custody has typically been managed by exchanges, it entails some security risks. These risks might not be very big for individual users but are considerable for large institutional investors.
Until a large and reliable custodian emerges, crypto custody will continue to be a big issue, and big institutional investors might find it difficult to invest in large amounts of crypto.
Crypto Custodians are Gathering Momentum, and Fast
Crypto wallets and exchanges have conventionally relied on private keys to protect users’ holdings. Such keys can be difficult to remember and can be stolen.
Crypto custody reduces the chances of losing your assets forever as it is designed to prevent wallet thefts and lost keys.
Also, custodial services are designed to comply with regulations. According to the U.S. Securities and Exchange Commission, investors who have customer assets over $150,000 need to place them with a custodian.
Major Players in Crypto Custody
Crypto custodial providers are sprouting up all over the digital sphere in 2019, with Coinbase being the leading provider. Such platforms serve as storage and security units and are mainly geared towards institutional investors. Some other names in this sector are BitGo and Xapo.
Crypto Custody Is New and Complicated
Many of us will be skeptical when we hear the word “counterparty.” Why involve third parties? Why should they know about our holdings? However, for large investors, custodians can be a blessing.
Custodians will no doubt be a target for hackers, and they will need to take strict security measures as they must protect many people’s assets. Solutions will be elusive with the lack of global regulation on the subject.
The traditional financial world doesn’t have much experience in the area of crypto custody.
Nevertheless, Northern Trust Corporation has announced that it’s working on it, and Bank of America has filed a patent. Even as large financial organizations foray into this field, a leader has yet to emerge.