Home Capital & Crypto Crypto Firms Turn Custody Kings to Meet Institutional Demand for Bitcoin

Crypto Firms Turn Custody Kings to Meet Institutional Demand for Bitcoin

Justin OConnell
Last Updated March 4, 2021 2:36 PM
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By CCN.com: In the wake of high-profile hacks such as the $44 million recently removed from Binance’s coffers, BitGo CEO Mike Belshe spoke at Coindesk’s Consensus 2019 on matters including security and how this is hindering the will of institutions to involve themselves in Bitcoin and other digital assets.

He told an audience at the event that “we are bringing to market a risk-less, efficient and compliant digital asset clearing and settlement” in a move that sees the security and custody solutions company stake a claim for institutional investors by moving crypto transfers off-chain.  

If a custodian settles a cryptocurrency trade on-chain, it means that users’ assets are temporarily placed into hot storage which in the process exposes them to risks of hacks or counterparty default. A level of risk that institutions are unlikely to countenance.

Belshe was not the only one pitching custody services at Consensus, with Onchain and Ledger in Manhattan to establish themselves as the best place for institutional money.

There’s a demand for reliable crypto custodians amid a growing institutional appetite for bitcoin. | Source: Shutterstock

Their target will be investors wary of security risks demonstrated in recent hacks that have seen the theft of millions of dollars worth of crypto.

Another desirable section of the market lies in crypto hedge funds with serious ground to make up following the 2018 market collapse. If that was a Crypto Winter then some bulls hope this year will be Spring, an outcome which may result in new money flowing into digital assets. A result of this is likely to be seen in a rising demand for reliable custodians.

Who Can Be Trusted?

Public trust in centralized exchanges is affected by the fact that 2018 was the worst year ever for these types of thefts. Last month, New Zealand-based Cryptopia issued a desperate plea  for users to stop deposits, after announcing on May 15 that it had gone bust following a failure to recover from a $16 million hack earlier this year. But Belshe talks positively on Binance says that when right calls are made, the impact can be reduced.

“There are bank heists, right? These things happen. As long as you’ve got the assets to cover what you’re putting at risk it’s actually okay, and that’s what has happened with Binance,” he explains, “I think they’re doing a lot in terms of transparency to make things better.”

BitGo does do some work with exchanges although its focus appears to be on providing a safe home for institutional money and hedge funds. Any exchange, it seems, can pursue a robust security protocol of their own.

What Makes a Good Bitcoin Custody Service?

Pascal Gauthier of Ledger was on hand at Consensus to offer his take and in his view, financial institutions hold one concern above all else; that is the risk of literally losing their bitcoin whether to hackers or through human error.

“The crypto market is not moving in the same way everywhere, but custodianship is the same… a security infrastructure needs to be put in place.”

Ledger, bitcoin
Offline or hardware-based crypto custody solutions are becoming more popular in the wake of several high-profile crypto exchange breaches. | Source: Shutterstock

Gauthier and co. make the Ledger Nano X, successor to the S model and with support for more coins than before. It offers a tangible way to store private keys and so offers custody through hardware. He says it is popular among investors:

“You would be shocked to see how many funds are running their security around the Nano S product. They know the technology, so they trust in it,” says Gauthier, talking to Coindesk.

The Ledger Nano X started shipping out on 15 May and is geared towards trading whereas the S model was more apt for HODLing.

Custody Solutions with a Global Outlook

While Ledger are headquartered in Paris, Mr. Gauthier was keen to stress that they have offices all over the world. The French company has been exploring custody in Hong Kong since 2017 and recently made serious inroads there.

Singapore-based Onchain may look to move on this turf; it was also represented at Consensus and announced that it would be providing custody services back at home for new exchange Wowoo, set to launch next month. This initial focus on Asia-Pacific is perhaps cemented by the first ‘big name’ to choose the custodian being The Ontology Foundation from Shanghai.

Arguably BitGo, headquartered in Palo Alto, California is the forerunner in efforts to bring in institutional investors and this is largely a result of being the first to offer settlement and clearing off-chain. It remains to be seen whether this eases security fears well enough to attract serious money; what BitGo is seeking is the kind of investment that would make the $2 billion assets currently held look relatively modest.