Insured Crypto Custody Services: Key to Institutional Investment Growth?

Registered custodial services, which are common in traditional investment classes, have been on the rise in the digital asset sphere, including for cryptocurrencies.

Branding China Group (BC Group) has recently unveiled its plans for an insured custody service specifically for cryptocurrencies. A conglomerate with a diversified portfolio of blockchain-focused businesses in marketing communications and technology, believes its custody service removes one of the key barriers that have prevented professional traders and institutions from adding digital assets to their portfolios to date.

Leading United States crypto exchange and wallet provider Coinbase launched its custody services for institutional investors in July 2018. In an apparent effort to expand on these services, Coinbase is currently in advanced negotiations to buy custody provider Xapo, one of the largest custodians of bitcoin in the world, in a deal reported to be worth $50 million.

Crypto hardware wallet producer Ledger partnered with a Hong Kong trust company, Legacy Trust, to offer insured cryptocurrency custody services.

A number of regulated financial institutions have also opened up digital custodial services, including Kingdom Trust, Germany's second-largest stock exchange Börse Stuttgart, Swiss private investment bank Vontobel, and major investment management company Fidelity.

What are crypto custody services?

Private investors typically have their crypto stored in an exchange wallet, an online digital wallet or an offline hardware wallet. For institutional investors, these storage options are too risky and put too much responsibility on the investors themselves to ensure that the large amounts of funds are stored securely.

Insured cryptocurrency custody services, much like traditional investment custody services, are third-party providers of storage and security facilities with the main purpose of safeguarding investor assets. These services are aimed specifically at institutional investors — such as hedge funds and other investment funds — and hold the digital assets on behalf of the investor in secure storage locations.

Typically, the custodian would be a bank, trust or other regulated financial institution and would also insure investor funds up to a certain amount. However, because of the inherent perceived risk with cryptocurrencies, up until recently, there has been a lack of regulated, insured custodians for cryptocurrencies.

Why do institutional investors need custodial services?

The two main reasons are risk reduction and regulatory compliance.

Typically, the amounts involved in institutional investments are much larger than with private investment. Uninsured online storage, such as exchange and other digital wallets, pose too much of a risk for institutional investors. And while offline, “cold” storage options — such as Trezor and Ledger — are deemed to be more secure, there’s a risk of forgetting passwords or physically losing the device.

With a regulated custody service, the onus to keep funds secure will move from the investor to the specialized custodian. In addition, should anything go wrong, funds will also be insur