One of the challenges preventing the large institutional money managers from taking part in the crypto asset space has been the absence of a fully regulated custody service. For example, for these type of assets, a custodian would look after and manage the wallet (private keys), preventing them from being lost. At the moment if you want to hold crypto assets you have two basic options: Self Custody which means you look after the keys or an Exchange holds them on your behalf. Neither one of these are ideal as with self custody you may lose the keys (see https://www.wired.co.uk/article/bitcoin-lost-newport-landfill ) and with the exchanges you are running uncertain counter-party risk. There is concern that some of these exchanges may be underfunded and thus susceptible to everyone withdrawing their assets at the same time. There are also many stories of exchanges being hacked and wallets being “stolen” (see https://blockonomi.com/mt-gox-hack/).

So what specifically does a custodian do for holders of crypto assets?

A traditional custodian holds shares, for example, on behalf of an owner and provides the following services:

• Asset Registration - so the company knows where the shares are

• Asset Transfers - when the assets are bought and sold

• Asset Servicing - when there are dividends and corporate actions

• Agency Lending - makes the shares available to 3rd parties who have short positions or want to use them as collateral in return for fees

• Regulatory services - handling any regulatory reporting requirements

For crypto assets there are direct parallels

• Asset Registration - managing the wallet and the identity of the owner

• Asset Transfers - receiving new assets and sending assets to other wallets

• Asset Servicing - when there are forks and obligations due to the nature of the coin (this gets more interesting with some of the utility coins)

• Agency Lending - this is a new area for crypto assets but is a natural evolution of the market

• Regulatory services - obviously a nascent but very hot topic as the regulators decide how to approach these assets

Now you could argue that a custodian is not required as exchanges fulfil some of the major activities above. But this is exactly the point, as a market becomes increasingly valuable it is more important to have separation of roles: the execution venue should be a separate organisation to the caretaker of the underlying assets to provide sufficient resiliency and checks and balances.

Why are the traditional custodians not providing these services for crypto assets?

Quite simply it is down to regulation. While some countries have been very clear (e.g. Switzerland, Malta, Bermuda) on how these assets will be regulated, others (e.g. US) have been less so. The US is a particular case in point due to the presence of multiple regulators and the state and federal system, all working out their position on these assets independently. Unfortunately, most of the traditional custodians are situated in countries that have not made up their mind. The UK is somewhere in the middle and it is evolving all the time with the recent publication of the Treasury Committee’s recommendation on crypto assets and the indication that it will, regardless of Brexit, implement the 5th EU Anti-Money Laundering Directive which now covers virtual currencies.

Until the regulations are clear regarding these assets, we will not see extensive custody services from the established players. As a side note one might almost say that regulators are deliberately dragging their feet on the regulation as a way of putting a brake on the crypto asset bandwagon. As a comparison, the global equity market alone is approximately 100 times the crypto asset market cap.

But the direction is clear, trading volumes of these assets are increasing, and in spite of all this there are established players dipping their toes into this space, for example Bakkt from ICE and others.

It is unlikely this genie will be put back in the bottle - the question is much more around timing.