Rising Institutional Investment is Fueling a Crypto Custody Boom
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Now that Federal Reserve Chair Jerome Powell has ruled out a China-style blanket crypto ban, the floodgates appear to be opening to serious institutional capital.
Of course, this trend has been evident for a while. Indeed, a recent study by Fidelity Digital Assets found that 70% of institutional investors anticipate purchasing or otherwise investing in crypto-assets in the near future, with over 50% saying they had already done so. When the final figures are calculated, 2021 will likely see between $30-40 billion of venture capital investment in the digital asset space – a significant increase on the previous record of $7.4bn in 2018.
The Crypto Custody Arms Race
It is certainly not a given that institutional dominoes will continue to fall until every publicly-listed company holds crypto on its balance sheet. But Powell’s reassurances must be music to the ears of crypto-curious hedge funds and money managers, the sort whose knees knock every time policy-makers issue a doom-laden statement or hint at a crackdown.
SEC Chairman Gary Gensler confirmed that the Commission was focused on improving investor protection and regulation in the crypto space. But as anyone who’s paid attention will know, the free market doesn’t patiently wait for policies before putting its best foot forward. Instead, multiple firms have been busy building sophisticated solutions to assuage the concerns of institutions eyeing investment.
They aren’t always crypto-native either: U.S. Bank – the country’s fifth-largest consumer bank – launched custody services, enabling institutional investment managers with funds in the U.S. and the Cayman Islands to securely store private crypto keys for their clients.
The concerns of corporates contemplating a move into crypto are not inconsiderable, but generally speaking, they revolve around security and infrastructure: how can digital assets be protected against theft and seizure? How can a crypto balance sheet be intuitively managed? Such dilemmas have given rise to a fierce arms race between custodians, each of them professing to represent a veritable Fort Knox.
One of the major players, Gemini, recently surpassed $30 billion in crypto-assets under custody, serving a slew of hedge funds, corporate treasuries, and asset managers.
As well as deploying next-gen security measures (multi-party computation, military-grade encryption, etc), crypto custodians often specialize in compliance, and in so doing give financial institutions peace of mind about both the safety of their funds and their own regulatory good standing. Coinbase Custody, for instance, has completed both SOC1 and SOC2 compliance certifications, highlighting the procedures and security underpinning its custodial services.
Security Specialist Bets Big on Advanced Custody Solution
Into this ultra-competitive milieu comes Prosegur Crypto, a custody solution that is, according to CEO Raimundo Castilla, “probably the most advanced and comprehensive on the market.” Prosegur is already an established giant of the private security industry, of course, having crafted advanced solutions for banks, businesses, and households since 1976. Headquartered in Madrid, the publicly-traded company operates in 26 countries and secures over 400 billion euros of assets, and is now looking to leverage its experience and know-how in the crypto field.
The company’s custody division unveiled its flagship product in July. Crypto Bunker is marketed as a “multi-layer defense mechanism that keeps customer holdings completely tamper and hack-proof,” deploying over 100 protective measures across half a dozen security layers in two inaccessible environments: cold storage and cold space. The former refers, naturally, to the storage of client assets offline (rather than in a hot wallet) while the latter describes armored storage facilities complete with round-the-clock surveillance.
Prosegur’s cold storage protocol involves the use of an air-gapped Hardware Security Module (HSM) to safeguard clients’ private keys. Ostensibly, the HSM allows for the transference of funds directly from a wallet without the need for an internet connection. As for signing transactions, the multi-party computation means that private keys are shared out among up to 15 co-signers – eliminating a single point of failure.
The ‘cold space’ component, meanwhile, calls to mind a Bruce Wayne lab complete with armed personnel, closed-circuit cameras, biometric access, and high-security vaults. Perhaps it’s this sort of impregnable physical-digital fortress that institutions are looking for when they commit billions of dollars to crypto, an industry that rightly or wrongly struggles to shake off its risky reputation.
Prosegur is not going it alone, incidentally: Crypto Bunker was developed in collaboration with cybersecurity firm GK8, an enterprise-grade platform responsible for creating the world’s first truly air-gapped Cold Vault. The need for a Cold Vault is, according to GK8, irrefutable – since any internet-connected device can, theoretically, be hacked. Like Coinbase Custody, GK8 has completed a SOC2 assessment.
If Prosegur’s sophisticated custody solution is as robust as advertised – and there’s every reason to believe it is – the multinational is likely to carve out a niche for itself, particularly since the Bunker also features KYC (Know Your Customer) and PML (Prevention of Money Laundering) compliance processes. Of course, crypto custodians such as Proesgur, Coinbase, Gemini, and others must continually evolve to face down the threat posed by attackers. The continued influx of institutional capital may depend on their victory in this never-ending battle.