New Crypto Custodial Products Aim at Institutional Money, ETFs
The floodgates are starting to open up for institutional investors allowing them to pour money into digital assets, might pave the way for crypto ETFs
Several new custodial products for Bitcoin and other digital assets emerged this week, targeting to attract big institutional investors like banks, insurers and pension funds to pour money into the crypto market. If successful, the move will help boost the liquidity on cryptocurrency exchanges, which should contribute towards lower volatility and better acknowledgement.
French hardware wallet provider Ledger unveiled on Tuesday its custodial product, developed in partnership with Japanese investment bank Nomura and investment house Global Advisors, just a few hours after US-based cryptocurrency exchange Coinbase announced a similar product as part of a suite of new services aimed at institutional investors. A day earlier, Palo Alto blockchain security startup BitGo revealed its own custodial service for cryptocurrencies, saying it addresses regulatory compliance requirements that are essential for institutional investors.
One of the big hurdles for institutional money to enter into crypto thus far has been the lack of a robust safekeeping of digital assets. Investors in digital assets have always feared hacking, lack of security, compliance challenges, and physical safety risks (kidnapping, assault). Such lack of technologically sound safekeeping solutions, paired with the lack of regulatory and compliance criteria in the ecosystem have been preventing asset managers from building efficient crypto portfolios.
However, gaining exposure to crypto assets has been on the radar of investment managers for quite some time and now this has the potential to become a reality. Notably, one of the reasons why the US Securities and Exchange Commission (SEC) denied licensing a Bitcoin ETF in March 2017 was the lack of sound custodian structures where investors’ funds are protected from theft.
Ledger’s New Product and Venture
Ledger, which is known for producing the Nano S hardware wallets, announced on the Consensus conference that together with its partners - Nomura and Global Advisors, the parent company of CoinShares – is setting up a new venture, dubbed Komainu, to allow institutional investors to manage their cryptocurrency assets by providing them with the necessary safekeeping and custody services.
Komainu, which means ‘guardian’ in Japanese, will aim to overcome the barriers to crypto market entry for institutional investors. It will provide secure, compliant investments in digital assets through new services and standards. Komainu will aim at bringing together traditional investments and digital assets. Ledger will build the necessary technological infrastructure and Nomura will take care of the operational framework. Komainu will thus provide robust safekeeping for investment houses that are looking for an exposure to different digital asset classes.
Ledger’s new product is a digital asset security solution called Ledger Vault. Some of the participants so far in the early access program are Genesis Trading, Global Advisors, LCX, IronChain Capital, XBTO, and Smart Valor.
According to Ledger’s statement, the vault enables:
- Asset security through HSMs (Hardware Security Modules)
- Support for multiple digital asset and currency types
- Multi-signature approvals, enabling compliance oversight of individual transactions with granular controls and approval options
- Rate limiting controls, providing compliance oversight of individual transaction and trading activity
Coinbase’s Custodial Program
Joining the pursuit of institutional money, Coinbase also released a solution on its own. Coinbase’s answer to institutional interest is a custodial storage solution called Coinbase Custody. The requirement to participate is to have USD 10 million in deposits and pay USD 100 000 initial set-up fee and 10 basis point fee per month. With this new product, Coinbase aims at providing investment institutions with a trusted and reliable custodian of digital assets, something that has been an everlasting problem for some big investors.
Coinbase Custody will start rolling its early access program later this year.
BitGo’s Response to Institutional Money
Californian startup BitGo’s custodial service for digital assets for institutional investors involves the acquisition of a US qualified custodian of traditional financial assets, called Kingdom Trust. However, while waiting for the acquisition to be finalized, BitGo has already started building other custodian solutions.
It will offer three types of custody, involving different tolerance of risk:
- Qualified custody – secure storage through Kingdom Trust
- Institutional custody – clients manage their wallets
- Self-managed custody
The offering spans from allowing others to manage the private keys required to access the funds to those who want to set up and manage the private keys by themselves.
BitGo is primarily focusing on Bitcoin, but it is increasing the number of supported coins as hedge funds are showing interest in holding different digital assets.
Overall, those new custodian products are a very positive news for all digital assets as they will entice big players to come at the door, seeking to store their digital assets securely.
On the other hand, BitGo, Ledger, and Coinbase are certainly trying to appeal to businesses on Wall Street. Combined with the upcoming Goldman Sachs launch of a crypto trading desk, this may be another catalyst to institutional acceptance and potentially even for the approval of an ETF for cryptocurrencies.
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