Asset custody in the crypto world is evolving rapidly and is emerging as the most striking business in this sector. From being an activity considered monotonous in the traditional financial sector (TradFi), in cryptocurrencies it is a vibrant sector full of opportunities. Thus, experts estimate that its growth potential is approximately 30% annually.
In the context of a Cryptocurrency market worth over $2 trillion, custody of digital assets is crucial. It also represents a significant challenge due to the inherently risky nature of the environment.
The custody business in the crypto world
Hadley Stern, current chief commercial officer at Marinade, a custody tool on Solana, notes that the costs associated with cryptocurrency custody can be considerable, up to ten times higher than those of safeguarding traditional assets such as stocks and bonds.
According to him, this difference in costs is due to the unique risks presented by the digital space, where hackers and fraud are a constant threat. Despite this, the cryptocurrency custody market, currently valued at approximately $300 million, is growing significantly. According to experts, the annual growth is approximately 30%.
Unsurprisingly, this growth potential is attracting the attention of both startups and traditional banks. This rise is more than convincing and attracts global financial institutions such as BNY Mellon, Citigroup and State Street. These and other firms are exploring their own cryptocurrency custody offerings. However, many of them are still in an exploratory phase due to regulatory uncertainty.
In any case, the custody business is advancing rapidly in the crypto sector despite being in the early stages.
Custody has been controversial since the earliest days of crypto, when “not your keys, not your coins” was the rule of thumb. Wall Street is seeking to change that https://t.co/nA9vPerY9o
— Bloomberg (@business) September 14, 2024
Regulatory challenges and opportunities
Legal uncertainty is one of the main obstacles faced by traditional financial institutions when considering cryptocurrency custody. The SAB 121 rule imposed by the U.S. Securities and Exchange Commission (SEC) complicates the ability of these entities to offer custody services for digital assets.
Although some institutions have exemptions, many are awaiting regulatory changes that could facilitate their entry into the market. It is worth bearing in mind that the political climate also plays a crucial role.
With the US presidential election looming, some market players are keeping an eye on how the regulatory approach to cryptocurrencies might change. However, this largely depends on the election outcome. For example, if Donald Trump returns to the White House, he is expected to replace the SEC chairman with someone more crypto-friendly.
In this hypothetical scenario, working in the crypto sector would be less burdensome, allowing for the accelerated growth of the custody business.
The “not your keys, not your coins” philosophy
A key part of the custody debate in the crypto world is the mantra “not your keys, not your coins.” This phrase resonates deeply with cryptocurrency enthusiasts. They firmly believe that only those who possess the private keys can be considered true owners of their digital assets.
Centralized entities are dangerous for privacy and property itself, according to crypto enthusiasts. Hence, one of the main recommendations among them is that each person should manage their own assets. In fact, they emphasize that Bitcoin and cryptocurrencies were born precisely under the excluded third party scheme.
On the other hand, despite the rise in custodial services designed to mitigate the risk of theft and cyberattacks, errors and failures persist. Recently, Robinhood Markets and Galois Capital reached agreements with US authorities over problems related to their custody protocols.
Companies like BitGo and Coinbase dominate the crypto custody sector. Source: Ledger Insights
Innovations and new players
The competitive landscape is changing rapidly. Crypto-native companies such as Coinbase and BitGo currently dominate the custody market. However, new firms are emerging with innovative offerings.
Marinade, for example, is focused on providing solutions specific to the Solana Blockchain. Additionally, initiatives such as JPMorgan Chase’s Onyx are facilitating blockchain payments between customers, indicating a growing interest from traditional financial institutions in integrating digital technologies.
As more banks begin to experiment with services related to digital assets, we are likely to see even greater diversification in the offerings available. This crypto custody business is thus gearing up for a big takeoff.
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