Rumor has it vaunted, long awaited institutional money, big investment in crypto is coming. One of the many holdups involves custody regulation, as both large funds and those ecosystem companies best poised look for a smooth way to guard cryptocurrency holdings securely, alleviating whales’ greatest fears: theft and loss.
Investment Whales Want Custody Assurance
“There are a lot of investors where custodianship was the final barrier. Over the next year, the market will come to recognize that custodianship is a solved problem. This will unlock a big wave of capital,” hedge fund Multicoin Capital’s Kyle Samani told Olga Kharif and Sonali Basak by phone.
Custodial arrangements in traditional, legacy finance are well understood and regarded. Precious metals, diamonds, and even cash are carefully guarded by trusted institutions such as JP Morgan. The brave new world of cryptocurrency scares the hair off of big finance, so a regulated, risk averse arrangement, complete with liability insurance, is, some professionals feel, key to big money entering the space in a substantial way.
Popular ecosystem bank, Coinbase, is among those who’ve announced movement in this area. As these pages reported last month, it “announced a new suite of services meant to attract more big money players such as the many new crypto hedge funds that pop up all the time. It will launch a cryptocurrency custodian in partnership with an SEC-regulated broker-dealer to a group of initial clients that include 1confirmation, Autonomous Partners, Boost VC, Meta Stable, Multicoin Capital, Polychain Capital, Scalar Capital and Walden Bridge Capital.”
About the same time, Tokyo-based investment bank Nomura announced its new venture, Komainu. It was “established to help overcome barriers for institutional investment in crypto-assets with a custody solution and offering new services, standards and best practices.” Jez Mohideen of Nomura explained,“Global investment managers have long been held back from full participation in digital asset markets, limited by operational and regulatory risk. Our new partnership will set the required standards that will bring peace of mind to digital asset investors, and provide tools and products to enable better integration with more traditional investment vehicles such as mutual funds.”
Coinbase estimates $20 billion worth of crypto is sidelined until custody solutions make sense. Crypto assets will flow into custody services once they’re available, estimates Sam McIngvale, who’s leading Coinbase’s project — and that number is probably considerably higher with the ubiquity of initial coin offers, for example.
“Such projects would pave the way for vast tracts of investors to expand into crypto,” Bloomberg claims, “potentially reviving prices in markets that have tumbled in recent weeks. Regulated crypto custody would allow more institutional buyers — such as hedge funds and pensions — to invest in Bitcoin, Ether and a multitude of other coins. Retail brokerages would have a safer way to let clients add crypto to portfolios stuffed with stocks and bonds.”
Regulatory clarity in this area seems to also be paramount for future growth in professional circles. Literally hundreds of funds have popped up in recent years, touting crypto toe-dips of one kind or another, and managers worry the, at times trigger happy, US Securities and Exchange Commission could very well fire first with prosecutions, asking questions later. Coinbases of the world, pending formal approval, would go a long way toward easing those concerns.
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Author: C. Edward Kelso