Custody Services for Digital Assets have been quite restricted despite the number of crypto-related companies increasing rapidly.
Why are custody services needed for cryptocurrencies
Cryptocurrencies such as Bitcoin have a unique feature that is self custody. Traditional financial systems do not have such a feature and have to depend on intermediaries. Bitcoin can use this to gain an edge over the conventional financial system.
Regardless of the type of financial system, custodial solutions are essential for financial markets. However, custodial solutions have been limited to Bitcoin.
Custodial solutions are mainly needed by institutional investors that need to reduce risk. By differentiating the entity holding the assets from the company that manages them, the institutions can keep things more smooth. It also reduces the risk of one employee running off with the company’s assets.
Furthermore, custodial solutions assist in dealings with regulatory agencies. In both the UK and the US, the financial watchdogs require companies to keep users’ funds with regulated custodians. Most of these custodians are either banks or broker-deals.
Challenges faced by custody services
Custodial solutions are already facing challenges in traditional financial markets. With Bitcoin its a whole other level of complicated. Holding custody of cryptocurrencies is not an easy task for either retail investors and institutions.
Cryptocurrencies are bearer assets meaning whoever has it owns it. This also means that once stolen or lost, they can never be retrieved unlike a bank account or credit card that can be recreated or the bank can simply reverse a transaction.
Retail investors turn to cold storages in order to secure their assets. Cold storages are offline wallets present of hardware. Although users can store cryptocurrencies in USBs, these are still unreliable solutions from the view of an institution.