Addressing Crypto's Custody Challenge: Institutions Inflow and Regulatory Unclarity Persists

Crypto's Custody Issue Hinders Growth and Maturity

The Importance of Custody in the Crypto Market

Crypto has made a strong recovery in 2022, with Bitcoin up more than 80% for the year. However, the industry still faces challenges, particularly in terms of regulation and custody. Institutional investors are hesitant to enter the crypto space due to concerns over the safety and security of their assets. Companies like Franklin Templeton recognize the need for trusted custodians in the crypto industry and believe that the presence of reliable custodians will play a significant role in the future growth and maturity of the industry.

Lessons Learned from Industry Failures

Over the past year, the crypto industry has experienced the failure of several major entities, including Three Arrows Capital, Terraform Labs, Celsius, FTX, and Genesis. These failures have highlighted the need for the industry to mature and address basic customer needs. The recent institutional announcements, such as the launch of EDX Markets exchange backed by Schwab, Fidelity, and Citadel, demonstrate the growing demand for reliable custody solutions in the crypto market.

Challenges in the Current Custody Model

Crypto exchanges often play multiple roles, including matching trades, acting as custodians, and market makers. This creates a conflict of interest and raises concerns about the security and integrity of customer funds. Additionally, there is a lack of dedicated custodians in the crypto industry. While traditional players like Fidelity, Nasdaq, and Bank of New York Mellon have shown interest in crypto custody, their offerings are still in the early stages of development. This lack of custody options makes it difficult for traders to easily access and trade their assets, especially when they are held in offline storage.

Opportunities for Improvement and Innovation

The custody void in the crypto market has created opportunities for companies from both traditional finance and the crypto industry to step in. BitGo, a prominent crypto custody firm, has launched its Go Network, which allows partner firms to execute and settle trades between crypto assets and fiat currencies while keeping assets in qualified custody at all times. This innovative solution addresses the need to de-risk trading systems and provide access to liquidity without compromising the security of assets. Other players, like EDX Markets, are also exploring non-custodial exchange models to provide secure and reliable custody options for customers.

In conclusion, the custody issue in the crypto market is a significant hurdle that needs to be overcome for the industry to grow and mature. The demand for trusted custodians is evident, and companies are actively working on innovative solutions to address this need. As the industry continues to evolve and attract institutional investors, improving custody practices will be crucial for the mainstream adoption of crypto.

Conclusion: The Importance of Custody for New Businesses in the Crypto Market

The custody issue in the crypto market holds immense implications for new businesses entering the industry. As the demand for crypto assets continues to rise and institutional investors show interest, providing reliable custody solutions becomes a crucial factor for success.

The existing challenges surrounding custody, such as the lack of dedicated custodians, potential conflicts of interest, and concerns about the security and integrity of customer funds, can deter both individual and institutional investors. This poses a significant barrier for new businesses aiming to attract and retain customers.

However, these challenges also represent opportunities for innovation and improvement. Companies like BitGo and EDX Markets are spearheading efforts to address the custody issue through technologically advanced solutions. This includes offerings like qualified custody models that maintain the security of assets while facilitating trading and settlement processes.

For new businesses, taking advantage of established custodians or partnering with reliable custody providers can give them a competitive edge. By ensuring the safety and security of customer assets, businesses can build trust and attract investors who may have previously been hesitant to engage in the crypto market.

Overall, the custody issue is a critical consideration for new businesses venturing into the crypto market. Understanding the importance of reliable custody solutions and actively seeking partnerships or technological solutions that tackle this challenge can significantly impact their potential for growth, maturity, and long-term success.



Article First Published at: https://www.cnbc.com/2023/06/29/crypto-is-trying-to-fix-its-custody-problem-as-regulatory-uncertainty-lingers.html