One of the most significant challenges in the world of cryptocurrencies is the safe storage of assets. On the one hand, the very nature of digital assets makes it somewhat protected from encroachment, but not completely. As the techniques and methods of hacking improve, there are more and more situations when a seemingly reliable and popular cryptocurrency exchange loses all user funds stored on it. But soon quantum computers will begin to connect to the network, for which hacking of most cryptocurrencies will become a matter of minutes. And is there at least some opportunity to ensure the safety of your assets now? There is. One option is custodians for cryptocurrencies.
What are custodians for cryptocurrencies?
In the traditional financial sphere, a custodian - aka "deposit bank" - is an organization engaged in the storage of securities or other financial assets, as well as - the management of these assets. Essentially a third party that you trust with your money and control over it. In the world of cryptocurrencies, the custodian is the same. An intermediary organization that deals with the storage and management of cryptocurrency assets.
This is an official activity that is regulated by law. Not everywhere, however - in the USA, for example, their activities are regulated by the Securities and Exchange Commission - the SEC. And in Russia and on the territory of the CIS, alas, this type of service is not additionally regulated or controlled.
Why is this needed?
Custodian is a company that is focused on ensuring the maximum security of stored funds. And it doesn't matter whether we are talking about armored fireproof safes, information security protocols or smart contracts that have been worked out to the smallest detail, excluding the misuse of funds. Yes, users donate their resources to a third party. But the third party is legally responsible for their safety, and in case of non-compliance with the terms of the transaction on its part, it is obliged to provide compensation.
But in the context of cryptocurrencies, this sounds much less attractive. As you know: "Bitcoins belong to whoever owns the private key." And when working with custodians, you either give them your private keys, or in some other way give them the right to control your assets. And here comes the problem of trust, to circumvent which, on the one hand, cryptocurrencies were developed. What prevents a custodian from abusing his capabilities? At least - to put your money into circulation without your permission? And such a picture is not uncommon among exchanges that provide users with custodial wallets.
Go ahead. In the United States, under the Investment Company Act of 1940, every company with assets in excess of $ 150 million is required to use custodians. This practice is now beginning to slowly spread to cryptocurrency exchanges that operate in the country. For example, in 2018, the major exchange Coinbase agreed with Electronic Transaction Clearing, an organization registered with the SEC, due to which it became an official custodian. A little later, she acquired the Xapo custody service for $ 55 million, due to which she was able to store funds up to $ 7 billion.
And many modern large exchanges are working to conclude agreements with custodians or to obtain the right to provide these services themselves. Just like regular fiat exchanges, where custodians, brokers/dealers, and the exchanges themselves work towards the same goal.
As for ordinary users and small investors, everything is ambiguous. The fact is that most of the official custodians work with amounts in the hundreds of thousands and millions of dollars. Which is relevant for large institutional investors, but not for ordinary people. They have to use custodial wallets from exchanges that are not particularly protected legally. Or work with non-custodial wallets and decentralized exchanges, independently ensuring the safety of your assets. However, it should be expected that soon services may appear on the market that contradict custody services on a small scale - after all, this is a rather relevant topic.
If we talk about the specific pros and cons of working with specialized custodians for ordinary users, they are as follows.
- Collaboration with an organization focused on storage security.
- No need to understand security protocols, security rules, etc., above the minimum level.
- Insurance against loss of assets, the ability to recover the private key.
- Restriction on the type of stored assets. Large cryptocurrencies and stablecoins are easy, and custodians prefer not to get involved with something less well-known.
- Lack of anonymity.
- Withdrawal delays, up to several days.
- Trust issue.
The most famous custodians and custodians
- Kingdom Trust is the first custodian platform where it became possible not only to injure the cryptocurrencies but also to insure it.
- Gemini. Large licensed exchange. It works with BTC, LTC, ETH, BCH, ZEC and has a relatively small commission.
- Coinbase. Another major exchange with the official right to provide custodian functions. Coinbase Custody, for example, operates in funds in the $ 1.3 billion.
- Fidelity Digital Assets is the official custodian for institutional investors.
- Xapo is the oldest Bitcoin wallet with official physical storage in Switzerland. It is believed that approximately 7% of all bitcoins in circulation are stored there.
- Digital Asset Vaul is a cryptoasset division of the Swiss bank Vontobel.
Many experts, such as Justin Schmidt, Head of Digital Assets at Goldman Sachs, and CEO of iComply Investor Services Inc. Matthew Unger believes that the adoption of the cryptocurrency market by institutional investors depends on the effectiveness of the integration of custodian services. And at the same time - and recognition for the cryptocurrency of the official right to exist and active use at all levels of financial interactions. On the other hand, this will drive the cryptocurrency market towards centralization and increase the degree of official regulation. So it is not yet known in which direction the situation will develop. In any case, custodian services will be in demand among large investors and those for whom security and insurance are decisive factors for cooperation.