Regulations in different countries treat custody services differently: in some cases, custody services are required to register and adhere to specific guidelines and laws but not in other cases where there may still be recommendations to safeguard assets. Given security concerns, on an international level, there are suggestions for instance by the Financial Stability Board for regulators such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) to coordinate on issues such as transparency, custody and settlement, trading and cybersecurity and systems integrity around cryptocurrency operations.
For instance in Europe, exchanges and custody wallets have to adhere to the Fourth Anti-money Laundering Directive. In Australia, crypto custodians are subject to the ASIC regulation under the Corporations Act 2001 and require an Australian financial services license (AFSL) to operate. In Canada, recommendations from the Canadian Department of Finance are that any crypto business needs to register with the Financial Transactions and Reports Analysis Centre of Canada. Finally, in the U.S., custodians are subject to the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) for all regulatory purposes.
Nevertheless, in many other places, clear guidelines and regulations for custodians do exist.
Crypto custody services mainly target institutional investors and crypto businesses because these types of clients need to securely store a large number of funds belonging to their customers or to them without say, leaving them on exchanges or individual wallets.
Although quite a number of institutional investors have self-custody services, many opt for third-party solutions to compliment their custody service for a number of reasons. These include: increasing their overall storage options, increasing the overall security of the funds they take care of, or taking advantage of attractive features that third-party services offer like insurance of all held assets.
Again, a third party custody service may happen to be regulated compared to most individual/self custody solutions run by crypto exchanges and businesses. Depending on what they may wish to provide to clients and the areas said clients operate in, crypto businesses such as ETF funds and other similar structures may also be required to organize custody with a third party in order to comply with regulations like those from the U.S. Securities and Exchange Commission (SEC), the United Kingdom’s Financial Conduct Authority (FCA), and the Monetary Authority of Singapore (MAS). Typically, this would apply when said businesses or funds are planning on launching products that require custody.
Below, we've compiled a list of some of the existing crypto custody services for you:
Bakkt will now launch physically-delivered daily and monthly bitcoin futures contract on September 28; as well as a cryptocurrency and fiat custody service and have been cleared to do so by CFTC.
After one year of waiting for clearance, Bakkt, in partnership with ICE Futures US and ICE Clear US, will finally launch their physically-delivered daily and monthly Bitcoin futures contracts according to an announcement yesterday. Bakkt Warehouse will also be providing custody services for physically delivered futures. Overlal, the Bakkt group says they have received a green-light to do all of this from the CFTC through a self-certification process and have started testing user acceptance as a result.
Alongside the provision of custody services, Bakkt, is also positioning itself as a solution for institutional investors who want to sell, buy, and exchange cryptocurrencies in a regulated environment, with regular, trustworthy liquidity. With the platform, institutional investors can handle crypto and fiat interchangeably with liquidity, without fear of loss of value due to high volatility. Usually, that has been a hindrance to institutional investors entry into the market.
Coinbase Custody is Coinbase's answer to constant search by institutional investors, cryptocurrency businesses, hedge funds, mutual funds, and exchange-traded funds looking for custody services.
This service is regulated under the New York State Banking Law and the digital assets it supports are segregated and held in trust. Customers' on-chain addresses are secured by way of cold storage and also professionally insured and audited. Their current customer plans include audited statements and financials, multi-user accounts, and ERC-20 support.
An announcement from Coinbase Armstrong this week said that Coinbase Custody was receiving $200-400M per week in new crypto deposits from institutions. Further, he confirmed that Coinbase had acquired Xapo’s institutional custody business for $55 million.
According to their website, Coinbase Custody is the first custodian to offer to staking from the safe, offline storage of assets, which means customers can passively earn from the assets they leave in custody. The service also grants special rights in which customers can vote on protocol measures.
Overall, Coinbase Custody currently supports 90+ percent of crypto by market capitalization and it also adds more assets based on client requests. Coinbase Custody's implementation fee ranges from $0 – $10,000 depending on the use-case, while its custody fee is 50 bps annualized and minimum balance is $1,000,000.
The Gemini cryptocurrency exchange has been offering a custody service for digital assets since 2016 and this custody service, like their exchange services, is regulated by the New York State Department of Financial Services (NYSDFS). Gemini's custody accounts are ideal for customers like hedge funds, mutual funds, and exchange-traded funds required by law to secure their digital assets with a licensed custodian.
Gemini offers two variants/types of custody solutions: a Segregated Custody Account which is more suitable to institutional customers and in which digital assets are segregated using unique digital asset addresses in Gemini Cold Storage System. The assets are independently verifiable and audit-able on their respective blockchains. The funds in custody are secured offline in Gemini's proprietary cold storage system. Customer accounts do not have any minimum balance or setup fee but the custody fee is 0.40% per account, the withdrawal fee is $125 per account, and the liquidity window is typically 1 business day.
itBit is a New York State Trust Company regulated by the New York State Department of Financial Services and all fiat and crypto deposits from customers are backed by mandatory capital reserves as a regulated entity.
With itBit, customer assets are stored in a cold storage and can be verified by their owners who are clients of the company, on a 24/7 basis through the service's personalized access into custody. Customers also receive regular and auditable reporting, including on market performance valuations for the crypto assets or portfolio. Reports are done every month, quarterly and annually.
Besides custody services, ItBit also provides services such as OTC trading, escrow, exchange services and consistent crypto market data.
Dedicated Custody Solutions
Apart from custody services provided by the above exchange or other similar firms that double as custody providers, there are other custodians who do not act as exchanges or brokerages. This means the service’s business is not tied to the performance of any other exchange, although again, those exchanges with custody sometimes specify that the custody is completely a separate business and in many cases is.
A clearer separation between trade execution and the custody process is more desirable scenario for a custody service, for both investors and institutions although again the experience of handling cryptocurrency may be a plus for exchanges and brokers doubling as custodians. Again, it's often true that dedicated custody services are more expensive than those combining them with other services, with the differences in price ranging from fees of 0.50 percent -1.00 percent of assets under management.
Aegis provides a combination of cold storage hardware, multi-sig wallets and policy-based approvals. In order to increase the security of its customers crypto assets, they offer a distributed and tiered key management system. Here, it's also important to note that they currently provide support only for Bitcoin, Ethereum and ERC-20 tokens for custody.
The service features five approval layers for withdrawals as well as on-chain transactions and it provides a corporate-specific wallet in order to better serve customers looking for custody solutions. Ideally, this sort of feature should be used in addition to or alongside hardware devices and software solutions to improve the overall security of a customer's funds. Adding to this service's uniqueness is its management and policy based protection that helps prevent all sorts of internal and external threats.
Their multilayer security system includes a principle manager, an operator, the ability for client and the customers can set asset transfer policies, a distributed key management structure, they ability for customers to create approval layers and identify key holders, and the ability for customers to transfer digital assets to whitelisted addresses.
Anchorage recently secured $40 million funding round from Visa for their planed custody services for institutions. Other investors in the funding rounds include venture capital firms Andreessen Horowitz and Blockchain Capital. Based on their website, the custody product is based on a security model that uses quorum-based approvals, behavioral analytics review, and storage of all keys in hardware to eliminate vulnerabilities. The company is licensed to provide the services.
Quorum-based approvals refer to those in which two members of an organization will need to approve transactions. Inside of this, it's also important to note that the organization will be able to designate the right to do this to certain members as well as decide how many approvals are required for different types of transactions. Therefore, a single person cannot move the funds. Behavioral analytics review means Anchorage will apply a range of signals to review validity of a transaction when it has been approved. Thus they can flag any abnormalities for further scrutiny to protect assets against efforts of collusion or compromised devices. They will use Hardware Security Modules or HMSs which process transactions after they have been approved by the owners, otherwise the transactions involved do not go through. Assets that are stored with Anchorage will also be fully insured, including against hacks and theft.
According to their website, the solution will remove single points of failure, allowing for real time access and auditability of all stored assets, while also offering tiered service levels with guaranteed SLAs. Availability of funds all the time will see users/customers participate in staking, for instance.
Anchorage plans on supporting an array of digital assets but they will go beyond just the safekeeping of assets by helping clients participate in governance decisions and to earn returns through staking of the assets with the custody.
The plan is to offer a modernized crypto custody beyond physical cold storage with advanced security engineering according to Blockchain Capital co-founder and managing partner Bart Stephens. Bart said that a number of crypto networks will depend more and more on asset holders' active participation in staking and governance as the industry evolves. Thus their solution is geared towards helping investors "keep up with the future direction of crypto networks."
Anchorage is currently on-boarding institutional investors for the custody service. Further, the company platform will be accessible on desktop and mobile.
BitGo Custody custody is built on BitGo multi-signature security and the funds are secured by BitGo Trust Company, which is a qualified custodian focused exclusively on digital assets. The funds are secured using 100% cold storage technology in bank grade class III vault and using institutional grade policy controls. It can enforce controls and policies including multiple approvals, spending limits and whitelists.
Besides the funds being secured in cold storage, clients can use paired hot wallet to easily move funds based on predefined whitelists, velocity limits, and administrative approvals. Customers can also add intermediary wallets in order to secure moving of funds between cold and associated hot wallet. Further, customers can move funds directly out of cold storage to one or more whitelisted external wallets, exchanges, or secure accounts.
Customers are able to secure or custody 100+ coins and tokens in multi-user accounts and also to customize user roles and controls to align to their organizational structures. Even during transfer of cryptocurrency or fiat funds, transactions have to be verified, signed and approved before they can be transferred.
Besides, the funds put in custody are insured and with $100 million insurance The digital assets are insured against third party hacks, copying, or theft of private keys. Coverage is also given for insider theft of dishonest acts by BitGO employees or executives; as well as loss of keys.
Last year, Fidelity announced Fidelity Digital Asset Services which will provide custody services to institutional investors. They say a future world where all types of assets are issued natively on blockchains or presented in a tokenized format, will logically begin with a full-service, enterprise-grade platform for securing, trading, and servicing all investments in digital assets or cryptocurrencies.
With Fidelity's service, assets are secured in an offline, deep-vault cold storage system with physical cyber and operational controls and multi-level safeguards. Their custody service also provides multi-venue trade execution capabilities, which are powered by a proven order routing and matching technology.
The firm says they have seen a steady evolution of institutional demand for custody and trading services since they started the research and development of blockchain and digital assets in 2014, started bitcoin mining in 2015; and tested their first wallet and storage solution with employees in 2016.
Kingdom Trust is a South Dakota-based public trust company that specializes in customized and innovative custody solutions for institutional clients. These can be investment funds, advisor and broker-dealer platforms, family offices, funds of funds, investment advisors, and investment sponsors. It's qualified as a custodian under the Investment Advisers Act in the country. With this, it's important to remember that a custodian is required to have a strong disaster recovery program such that operations will continue even in the event of a catastrophic event. They also have a key compromise protocol that outlines the internal processes for the regeneration of keys and wallets if a key or operator becomes compromised and as a qualified custodian, they have a strong, documented and well-tested cybersecurity policy in place.
For Kingdom Trust clients, all wallets are multi-authentication cold storage, which means that all transactions require multiple authenticators and whitelisted addresses, and clients have 24/7 access to their accounts. In addition to this, clients can also receive email notifications when transactions are processed as well as monitor and review the user keys that have been used with their wallets. Furthermore, with Kingdom Trust, all transactions are first verbally verified with the client and then cross-referenced with a documented transaction request.