CCData is pleased to share its latest research, "Crypto Custody: An Institutional Primer," sponsored by Zodia Custody. This report provides readers with an overview of the digital asset custody landscape, shedding light on the challenges and innovations surrounding the custody of digital assets.
While many institutional players have entered the digital asset industry in recent years, complexities surrounding custody — ranging from potential loss of private keys to regulatory uncertainties— create additional challenges for institutions navigating this sector. In fact, 35% identify security as a significant investment hurdle within digital assets, as per Fidelity's Institutional Digital Assets Study.
In this report, we examine the crucial role of custody in the digital asset space, from the roles and various types of digital asset custodians to factors institutions should consider, criteria for selecting the best custody provider, and more.
Popular Security Methods Comes With Vulnerabilities
Prominent exchanges such as Binance, Upbit, and Bitfinex have all fallen victim to hacking operations, underscoring the vulnerabilities present even in well-established exchanges. According to Chainsec.io, the digital asset community has witnessed losses exceeding $2.4 billion due to centralised exchange hacks.
One of the most infamous incidents in this space was the 2014 Mt. Gox exchange hack. This breach led to the theft of approximately 850,000 BTC, which when valued at current prices, amounts to a staggering loss of approximately $22.4 billion. The aftermath of this exploit forced the exchange into bankruptcy and sent shockwaves through the cryptocurrency community, highlighting the need for robust security measures.
Demand Has Spurred A Surge in Crypto Custody Providers
Given the vulnerabilities of exchange and hot wallet custody, the push for secure storage has spurred the rise of about 100 custodial services in recent years. While offerings vary from Custodial Technology Providers to Hybrid and Regulated Custodians, there's a marked tilt towards regulated entities.
As traditional financial institutions explore crypto, attributes like multi-jurisdictional licensing and robust institutional backing are becoming indispensable, underscoring the importance of regulated custodians in ensuring a compliant and secure environment for institutional clientele.
Custody Standards Have Evolved Geographically
Although there are numerous custodians, one important aspect to consider is the location in which the custodian is regulated. Utilising a regulated provider has significant benefits for security and protection. However, the level of regulation to be expected is ultimately dependent on the jurisdiction in which they hold a licence.
Regulators have vastly different rules and requirements, so considering where the custodian is licensed may impact the level of security or controls one would expect. In many cases, custodians will hold multiple licences, which provides additional coverage and regulatory certainty to entities who have strict regulatory requirements. As entities scale, utilising a multi-jurisdictional custodian will ensure compliance and may facilitate expansion into new locations. Some key jurisdictions and regulators are shown below.
Custodians Are Innovating To Support Growing Institutionalisation & Demand
Tokenised assets are prime example of an emerging trend within the space. In 2023 alone, total-value-locked (TVL) in RWA protocols has increased tenfold, with investors utilising this technology on-chain to invest in alternative asset classes.
According to Citi's GPS report, they expect tokenisation to grow by a factor of over 80x in private markets, and reach up to $4 trillion in value by 2030. They also forecast that $1 trillion of the repo, securities financing and collateral market to be tokenised by 2030. The custodian's role in tokenisation is crucial, with responsibilities varying based on the assets in custody and the engaged service.
The information provided by this report does not constitute any form of advice or recommendation by CCData. Any redistribution of charts appearing in this Review must cite CCData as the sole provider and creator.
About CCData
CCData is an FCA-authorised benchmark administrator and global leader in digital asset data, providing institutional-grade digital asset data and settlement indices. By aggregating and analysing tick data from globally recognised exchanges and seamlessly integrating multiple datasets, CCData provides a comprehensive and granular overview of the market across trade, derivatives, order book, historical, social and blockchain data.
