As cryptocurrencies, such as Bitcoin, and more generally digital assets move towards mainstream adoption and the creation of an OTC Wholesale Market, a lot of attention is beginning to concentrate on post-trade solutions. While regulatory and legal issues continue to be debated and are seen by many to be slowing the adoption, discernible progress is being made. Great strides have been made for executing trades and managing the resultant risks. As posited in my blog last year – Cryptocurrencies and Digital Assets: The Coming of Age for Treasury Management Systems – discerning treasurers will ensure that their front office systems are "crypto ready".
Now greater attention is being focused on the safe custody of these "new" assets. For example, just this month, the cryptocurrency arm of Jump Trading chose to restore more than $320 million to crypto platform Wormhole (Jump Trading acquired Certus One, the developer behind Wormhole) after being hit with one of the largest crypto heists on record. This event emphasises the vital need for the robust and bomb-proof safe custody of cryptoassets. Easier said than done, but a new solution is emerging given the current regulatory environment! For instance, in the UK, the FCA recognises cryptoasset custodians but does not regulate them directly in the same way as traditional custodians. The wording on the FCA register for these entities' permissions is A firm that carries out specific cryptoasset activities under the Money Laundering Regulations". So a firm registered for certain cryptoasset activities (MLR only) does not afford the customer protections, such as The Financial Ombudsman Service and The Financial Services Compensation Scheme.
Owners (investors) of cryptoassets need to ensure maximum security of private keys as these are proof of ownership. Any security breach often results in the TOTAL loss of assets, as those that have kept the private keys in the wallet services of cryptocurrency exchanges that have been hacked can attest. Many owners are looking for new crypto custody services as a result. These services need to include –
- Safekeeping
- Analytics
- Timely access for trading
- Pricing and Position Keeping/Portfolio Management
- Payments and Settlements
Firms deploying a "crypto ready" treasury management system will already have a solution for 2 & 4 of the above list and the messaging capability to instruct payment and settlement (5). In addition, the Eurobase TMS coupled with the eTrader and Gateway modules will ensure the price engine can be configured to surface, promptly, crypto assets from a custodial solution (3 on the list), fundamental if the most secure type of custodial solution is used. Equally essential services can also be added, such as lending, collateral management and repo activities. All are seen as value adds, especially to the firms own customers. What is needed is a custody solution that enables all the above to be achieved in a technological solution rather than outsourcing to a custodian, which adds a potentially extra layer of unnecessary fees and expenses.
The most effective route to the safe custody of digital assets is to hold them in cold storage, in effect, in virtual vaults that are not connected to the internet and the outside world. However, the drawback is that you need to surface the assets to enable trading within the time parameters required. Getting your assets available in hours or days is not of much use in the cryptocurrency markets! So, many institutions (mainly banks, asset managers, wealth managers and broker-dealers), rather than totally outsource to a custody solution in the traditional mould, will consider a technology solution that allows them to be a self-custodian. This type of solution is attractive because such an arrangement can benefit from triple-AAA Lloyds of London insurance policies.
Self-custody is more than a feasible solution. However, the actors mentioned above are already regulated institutions and, as such, a digital custodian that markets itself as FCA approved/recognised/regulated is not adding much. All that the FCA recognises (as noted earlier) is the AML controls, and this is a duplication in this situation given all the KYC, KYT, and AML is performed anyway. It is relevant to those offering services to retail players but not to the institutional space. As long as your solution can create vaults on the fly, advanced post-trade services such as allocating block trades, etc., can be handled easily.
To explore this concept further, Eurobase has partnered with Custodiex (Custodiex – Fast, safe, secure digital asset custody & protection) to explore the idea of a complete cryptoasset solution. Watch out for our upcoming inaugural podcast that will feature a fireside chat between Eurobase's General Manager (Banking) Dhavarajh Frank and Martin Gymer, CEO of Custodiex. This concept of a "dream team" self-custody solution will be discussed in depth.
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