Story highlights
- Cryptocurrency custody costs 10 times more than traditional assets due to the industry’s heightened risk of fraud and hacks.
- The crypto custody market is growing at a 30% annual rate, attracting startups and established Wall Street banks despite regulatory hurdles.
- SEC’s rule SAB 121 remains a significant barrier for financial institutions offering crypto custody, with limited exemptions so far.
The world of cryptocurrency custody, once a niche area, is now gaining attention from Wall Street banks and fintech startups. Unlike traditional asset custody, safeguarding digital assets like cryptocurrency has become a high-cost, high-risk business, given the industry’s susceptibility to fraud and hacking. While the traditional asset custody business has always been steady, digital asset custody is evolving rapidly due to the growing crypto market.
The cryptocurrency market, now valued at roughly $2 trillion, presents significant challenges for custodial firms, making custody up to ten times more expensive than for traditional assets such as stocks or bonds. According to Hadley Stern, Chief Commercial Officer at Marinade, the rising demand and complexity in digital assets create opportunities for both fintech startups and established financial institutions. Companies like Coinbase and BitGo have taken the lead, but large banks are gradually exploring the sector.
Crypto Custody Market Grows at 30% Annually
Despite only being a $300 million market at present, the growth potential is evident. According to Fireblocks, the crypto custody market is expanding at a rate of 30% annually. This growth has attracted interest from established financial giants such as BNY Mellon, State Street, and Citigroup, which are keen to diversify into the digital asset market. However, many are treading cautiously due to regulatory uncertainties surrounding crypto assets in the United States.
Besides, the regulatory environment has significantly slowed Wall Street’s progress in this sector. For example, Nasdaq halted its crypto custody plans, citing unfavorable conditions. Nonetheless, companies continue experimenting with trials, particularly around tokenized assets, indicating a steady upward movement. JPMorgan Chase’s Onyx project, which facilitates blockchain payments, is just one example of how the financial industry gradually moves toward blockchain and crypto integration.
Challenges from Regulatory Barriers
One of the main barriers to crypto custody adoption in the US is a Securities and Exchange Commission (SEC) rule known as SAB 121. The rule makes it impractical for highly regulated institutions to offer cryptocurrency custody services. Though President Joe Biden vetoed a congressional attempt to overturn the rule, a few banks have secured exemptions. However, as David Portilla, a partner at Davis Polk & Wardwell LLP, pointed out, the SEC has yet to apply these exemptions across the board, creating further delays in market entry for financial institutions.
Moreover, recent settlements involving Robinhood and Galois Capital underline the importance of strong custody frameworks. Failures in crypto custody led both companies to face penalties from US regulators, with Robinhood confirming corrective actions in its custody systems.
A Global Perspective on Crypto Custody
Even outside the United States, firms are strategizing around the potential changes in US regulations. Copper, a London-based firm, has expressed renewed interest in the US market, depending on the outcome of the upcoming presidential election. Many industry experts speculate that regulatory shifts could accelerate progress for companies if Donald Trump returns to office, given his promise to replace SEC Chair Gary Gensler.
As crypto custody continues to evolve, the industry is witnessing a balancing act between market potential and regulatory compliance. Traditional Wall Street firms are expected to seize the opportunity once the regulatory environment becomes clearer, but the uncertainty remains a significant obstacle for now.
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