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faint hearted or those with limited resources . However , the new entrants in digital asset custody and the bank-sponsored firms will be more agile and nimble to market , but many will either be acquired by tradfi or larger decentralised finance players with more resources ,” highlights Nabi .
Is it worth the risk ? Just as nobody ever got fired for buying IBM stock , the same is true when it comes to appointing blue chip global custodians and FMIs ( financial market infrastructures ) over fintechs . The harsh reality is that a conservative institutional investor dipping its toes into the digital asset world is nearly always going to select an incumbent custodian to work with versus a standalone crypto-custodian as the counterparty and reputational risks of utilising the latter would be too great . Many institutions have repeatedly said they will only venture into digital assets once there is a large pool of quality service providers – subject to prudential regulation and endowed with sizeable balance sheets - to support them . This sentiment is echoed in a Fidelity study , which found 38 % of investors said the absence of security around asset custody was the biggest barrier precluding them from trading digital assets , putting it just
“ The digital asset market is changing at a very fast pace , and bank custodians do not have the agility to respond in good time to these market dynamics .”
ALESSIO QUAGLINI , CEO AND CO-FOUNDER , HEX TRUST
behind regulatory uncertainty and market manipulation fears .
So which players pose the most risks and why ? The litany of hacks and failures at crypto-exchanges – including those offering custody or internal safekeeping arrangements : - is too long to list here , but the unregulated nature and questionable risk controls at some of these providers means that most institutional investors will not touch them . “ Some of the crypto-exchanges have internal custody offerings but it is not real custody as we know it . There is often no segregation of assets but only omnibus accounts while there is limited transparency into the holdings . Should a cryptoexchange fail , there is a real risk that client assets will go down with it if they are co-mingled . Other crypto-exchanges will outsource their custody to third party crypto-custody providers ,” comments Quaglini . Even some of the more institutional-grade crypto-custodians have elicited criticism . Most notably , Coinbase , a Nasdaq listed crypto-exchange and crypto-custodian , informed the US Securities and Exchange Commission ( SEC ) in its quarterly revenue filing that if were to go bankrupt , then the crypto-assets held in its custody could be subject to bankruptcy proceedings and users may become general unsecured creditors . Although Coinbase reassured the market that it was not at any risk of bankruptcy , the regulatory filing caused a stir among custodian banks and institutional investors .
50 Global Custodian Fall 2022