The crypto market is not only composed of exchanges, but also houses an essential sector: custody.
The crypto market is not only made up of exchanges, but also houses a sector that for the traditional asset market is essential: custody.
There is an account by a major Wall Street investor, who at the height of the Bitcoin rally in 2017 was shouting down the bank’s corridors, asking, „What about custody? Who controls custody?!„.
Basically, cryptomote custody solutions are solutions from third-party storage providers and cryptomote security services. Solutions typically incorporate a combination of hot storage, or crypto-custody with an Internet connection, and cold storage, or crypto-custody disconnected from the Internet.
The business opportunities presented by crypto-custody models are significant. The wave of institutions that have entered the market will need a reliable partner to keep their crypto assets secure, minimising the risk of theft or loss while ensuring that they are available and accessible for quick transactions over networks.
However, the technical and operational requirements for custody, security and exchange of cryptoactives create unique challenges for companies and financial services institutions, including traditional institutions and cryptoactive startups.
The size of this market
In April 2019, the size of the digital asset market jumped by about 25 percent, from a market capitalization of US$147 billion to US$185 billion. By the end of May, it had risen to US$268 billion. According to data from OSL, one of the largest Hong Kong-based companies in the sector serving the largest Asian exchanges.
With the arrival of the coronavirus pandemic, there has been a decline in that growth, but according to data released by Deloitte, commercial activity is on the rise, evidenced by a recent 60-70% increase in OTC client deals, and institutional interest remains strong, which would give the necessary boost to products and services.
Major players are operating in this market, among them heavyweights from the cryptoactive market, such as Bitcoin Billionaire, Gemini and Bakkt.
Coinbase Custody’s assets comprise funds belonging to more than 120 customers (in 14 different countries). In addition, in May of this year, Coinbase’s custody service passed the $1 billion mark.
Coinbase showed a huge gain in the industry, following the purchase and absorption of Xapo’s business and customers, who were mainly active in Europe. As a result of this acquisition, Coinbase’s custody business doubled in size with the incorporation of Xapo’s associated infrastructure.
Some of the main reasons why digital asset custody is becoming increasingly important:
- Reduced risk and complication: From an investor’s point of view, storing your assets with a custodian can be significantly easier than taking care of your own assets. All investors, regardless of the amounts invested, can benefit from the ease of use, greater security and overall reduction of risk that the use of a custodian provides.
- Increased security: The online nature of digital assets presents a number of security risks, not just a vulnerability to hackers.
- Resource for investors: If investors hold assets privately or with unlicensed custodians, they increase the risk of losing asset value in the event of hacking or other major loss events. Meanwhile, licensed custodians can provide a level of certainty of value through recourse in the event of a custodian failure, and are also more likely to have access to insurance companies, helping to provide greater comfort to investors.
- Safer than exchanges: The alternative of storing digital assets in an exchange presents greater risks due to the greater possibility of exchanges suffering from hackers, as most combine assets and store those with higher value. Exchanges are also more susceptible to bankruptcy or closure by the authorities.
- Operational efficiency: potential investors in digital assets may be hampered by the perceived complex nature of the market.
According to data from CoinTraderMonitor, Brazil has 32 exchanges and only one custodian solution provider recently operating, the Bitrust Crypto and Digital Asset Custodian. Although it is still an incipient market in Brazil, there is still great potential for growth to be tapped.