Hackers and scammers are attracted to cryptocurrencies like bees to honey, which makes storing cryptocurrencies a risky business, as opposed to storing traditional assets like stocks and bonds, which, while important, is seen as a fairly menial task.
The high risks also mean high risks to safeguarding crypto assets, making storing them an expensive business: According to Hadley Stern, chief commercial officer of Solana custody tool Marinade, storing crypto assets can be up to 10 times more expensive than storing traditional assets, Bloomberg reported.
Stern, who previously headed digital asset custody at Bank of New York Mellon, said rising costs will make crypto custody a major growth area for both traditional Wall Street banks and startups.
Fireblocks estimates that the cryptocurrency custody business, now worth $300 million, is growing rapidly at about 30% per year.
Campbell Harvey, a finance professor at Duke University, told Bloomberg that new entrants to the industry are “betting that this market is going to grow significantly.”
Traditional banks are moving into cryptocurrencies
Currently, cryptocurrency custody is dominated by Coinbase and BitGo as regulatory uncertainty has made traditional companies hesitant to branch out into crypto.
But while banks including BNY Mellon, State Street and Citigroup have entered or announced plans to enter the crypto custody business, most of the entrants are only taking small steps.
For example, BNY Mellon launched a digital asset custody platform in October 2022, but it only supports the storage of Bitcoin and Ethereum and has not yet expanded to other cryptocurrencies. Meanwhile, Nasdaq suspended plans to launch a cryptocurrency custody business in July 2023 after announcing it in September 2022, citing “changing business and regulatory environments.”
Storing crypto assets is controversial
Third-party custody services have long been frowned upon by the crypto community. The long-standing crypto mantra of “no keys, no coins” continues to cast a shadow over custody services. The phrase emphasizes the importance of holding your own encryption keys to maintain control over your assets.
Crypto custodians have tried to reduce the risk of hacking and theft, but their records are far from perfect. Earlier this month, popular retail brokerage Robinhood and investment firm Galois Capital settled with the U.S. Securities and Exchange Commission (SEC) at least in part over flaws in their custody protocols.
US SEC remains biggest obstacle
One major regulatory hurdle is SEC rule SAB 121, which places limits on financial institutions that offer crypto custody services. President Joe Biden vetoed a congressional attempt to overturn the rule, but some banks have received exemptions.
In a speech on September 9, SEC officials provided examples of specific cases where banks have been exempted from SAB 121 and the reasons for their exemptions. Still, uncertainty remains, and many in the industry are waiting to see if that changes depending on the outcome of the U.S. presidential election.
The crypto community is waiting with bated breath for former President Donald Trump to win the November election, vowing to replace SEC Chairman Gary Gensler with someone who would embrace cryptocurrencies rather than suppress them.
David Portilla, a partner at the law firm Davis Polk & Wardwell, which represents banks and cryptocurrency clients, told Bloomberg:
“The SEC has initiated relief actions against banks under SAB 121, but has not done so in a manner that is across the board and transparent…. The technical, legal and regulatory risks cited in SAB 121 are significantly mitigated by the existing extensive legal and supervisory framework that applies to banking organizations, but the SEC's policies do not reflect that.”
Some international companies, such as London-based Copper, are waiting for Trump to win to refocus on the U.S. market.
“It could happen sooner or later, depending on the outcome of the election,” said Bobby Zagotta, CEO of Bitstamp USA, a crypto exchange that uses BitGo for storage. He added:
“Major Wall Street players are not going to miss out on this opportunity, especially if it signals an evolution of the traditional services market.”
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