Blockchain security startup Bitgo has announced that it has received regulatory approval in the U.S. to offer cryptocurrency custody services. With the move, BitGo becomes the latest company to throw its hat into the crypto custody ring as the market prepares to welcome large institutional investors who have previously been put off by crypto’s substantial custody risk.
BitGo announced on Thursday, Sept. 13, that it had received this regulatory approval in the form of a state trust company charter from the South Dakota Division of Banking. With the move, it now becomes the only regulated custody service available on the market that is offered exclusively for digital asset storage.
While the crypto market has been in a downturn for much of 2018 and BitGo is potentially opening itself to a level of regulatory scrutiny that other cryptocurrency startups do not face, co-founder and CEO Mike Belshe believes that the market reception for a regulated crypto custody offering will make any sacrifices worth it.
In his words:
“This is the missing piece for infrastructure — it’s a treacherous environment today. Hedge funds need it, family offices need it, they can’t participate in digital currency until they have a place to store it that’s regulated […] This is early stages in an industry that’s volatile right now. We’re in a down cycle in terms of where we’re going, but the institutions see an opportunity. It’s going to progress quickly.”
With the approval, BitGo is now required to regularly file financial audits and comply with AML and KYC regulations in addition to monthly disclosure filings. According to Belshe, the plan is for BitGo to eventually become a broker-dealer, but at the moment there is no set timeframe for this to happen.
Cryptocurrency Custody is a Growing Opportunity
BitGo joins a growing number of companies with cryptocurrency custody offerings including Citigroup, Coinbase and Gemini, all of whom are targeting the same institutional investment market ahead of the expected entry of traditional investment. Bernstein analyst Christian Bolu belives that there is sufficient space for new market entrants to operate.
Quoted by CNBC, he said:
“As the crypto-asset class seasons and institutional demand builds, there are a plethora of opportunities for traditional firms to engage in the eco-system. These include the provision of custodial and asset management services as well as traditional brokerage functions like market-making.”
In January, CCN reported that BitGo acquired the $12 billion digital asset management firm Kingdom Trust, which at the time was at the time one of a small number of regulated custodians offering digital asset custody to institutional investors.
Two US-based crypto behemoths, Coinbase and BitGo, will continue to facilitate growing demand for Bitcoin from institutional investors by operating as trusted custodians.
Earlier this week, BitGo was approved by South Dakota regulators to create and operate a crypto custody solution, while Coinbase established a new office in New York exclusively to handle institutional demand into the market.
Bitcoin Needs Fresh Capital, Institutional Demand Will do it
In an interview with CNBC Fast Money, BitGo CEO Mike Belshe stated that the cryptocurrency market needs fresh capital to initiate a new mid-term rally and properly recover from its 80 percent correction in 2018.
Belshe said that the market has not seen many new buyers emerging in the past eight months. But, with the introduction of several crypto custody solutions offered by BitGo, Coinbase, and potentially regulated financial institutions like Goldman Sachs, Citigroup, and Morgan Stanley, billions of dollars in new capital will hit the Bitcoin market.
“What Bitcoin needs is fresh capital coming in, so we haven’t seen a lot of new buyers coming in. So to the extent that Wall Street represents that, yes, Bitcoin needs that, and I can tell you anecdotally that the institutional herd is starting to move their feet a little bit, but they have been taking much longer than I expected… This [custody product] is making me much more optimistic, and this [may be] the solution [that institutional investors have been waiting for].”
Initially, in 2013, BitGo was launched as a blockchain security system, providing multi-signature security services to protect large-scale exchanges like Kraken, Korbit, and UPbit, the biggest cryptocurrency exchange in South Korea.
As the cryptocurrency market started to evolve, BitGo acquired Kingdom Trust, a trusted custodian that oversees more than $12 billion in assets, to facilitate the demand from institutions for Bitcoin. At last, in September, BitGo received the approval from the US government to operate a crypto custody, and is now preparing to serve institutions.
The entrance of BitGo into the institutional market of Bitcoin and the expansion of Coinbase’s crypto custody service which was launched back in July are expected to eliminate the final barrier between institutions and the crypto market that prevented large-scale investors from committing to the new asset class.
$20,000 in 2017 Without Institutions
In his interview, Belshe emphasized the necessity of a new wave of capital hitting the cryptocurrency market. But, in 2017, Bitcoin achieved an all-time high of $19,500, with the price of BTC surpassing $24,000 in South Korea, without the involvement of institutions.
Investors remain highly optimistic in the long-term growth of the market and what the cryptocurrency market would be like with the participation of pension funds, hedge funds, and a wide range of institutions.
At this rate, as billionaire investor Mike Novogratz previously said, the next rally of crypto could be fueled by fear of missing out (FOMO) amongst institutional investors, as long as the infrastructure is robust enough to handle the demand.
The wider world of crypto tokens is becoming a bit more accessible to institutional investors.
The security startup BitGo exclusively told CoinDesk on Tuesday, July 10, it will expand its suite of custody products and services to support 57 new ethereum assets, a move driven by demand for services that safeguard private keys – the alphanumeric strings that act as passwords for crypto assets – and that, once lost, are gone forever.
As such, the move is a telling one for the blockchain security sector, one that showcases how it’s in the midst of a changing competitive landscape.
Founded in 2013, BitGo has become an industry leader managing wallets at crypto exchanges, but to date, its service has been limited to larger protocols like bitcoin and ethereum. (Indeed, the overall lack of options has even led traditional custodians like BNY Mellon, JPMorgan and Northern Trust to consider the business, sources told Bloomberg in June.)
The startup is hardly the only industry upstart rushing to debut institutional custody services – U.S. exchange provider Coinbase, the Swiss startup Smart Valor and Japanese bank Nomura are just three of the companies rolling out licensed crypto storage solutions.
Yet the addition of ethereum tokens could be a key first-move advantage. According to BitGo CTO Benedict Chan, there has been a surge in demand for custody solutions for alternative crypto assets such as the kind it’s now adding.
Benedict Chan, CTO of BitGo, told CoinDesk:
“These institutions, they generally don’t want to self-manage their coins. They are looking for someone that can support multiple coins.”
Timothy Furey, CFA and head of banking at Satis Group, a firm focused on advising institutions on ICO investments, described this blockchain industry trend as an “arms race” to offer institutional-grade custody solutions for a spectrum of assets.
That’s why VP of product marketing, Robin Verderosa, said BitGo is now looking to obtain a BitLicense in New York and a qualified custodian license in South Dakota. BitGo aims to offer even more custodial services, adding more than 100 cryptocurrencies by the end of 2018.
Verderosa said courting institutional investors has become BitGo’s priority, adding:
“What we’ve learned is that they’re interested in investing in a basket of coins and tokens that kind of help hedge the market and give better returns.”
Equally notable to the potential industry impact, though, is how BitGo is taking steps to ensure the quality of its service given the risks inherent in dealing with smaller cryptocurrencies.
When BitGo debuts support for dozens of cryptos today, it will include those offered by Kin by the chat messaging app Kik, several native tokens for decentralized crypto exchanges and the blockchain identity crypto Civic, a startup BitGo began experimenting with in 2017.
It’s a reality that’s had an impact operationally, as product manager Isaac Eleftheriadis now heads an 11-person BitGo team focused on rising cryptocurrencies and tokens.
According to Eleftheriadis, every token added in this first batch was explicitly requested by BitGo’s institutional clients. Once there’s an obvious demand for custody options, the team researches this token to make sure its issuers and founding team are reputable.
Long after adding basic storage features, support for crypto tokens requires ongoing vigilance.
“An added challenge for custodians who are coming to market is figuring out how they will handle issues like airdrops, hard forks, etc, and which ones they will support. This presents real technical challenges in addition to regulatory and tax-related ones,” said Arianna Simpson, former BitGo employee and current founder of the crypto investment fund Autonomous Partners.
Speaking to this point, Eleftheriadis told CoinDesk his team actively monitors whether token issuers are planning code changes, in addition to quarterly security evaluations.
Some token issuers themselves have also become BitGo clients.
“There’s been cases were customers asked us to support their ERC-20 token,” Eleftheriadis said. “They don’t want to do the ICO yet until all their tokens can be held by BitGo.”
Other security efforts
Aside from BitGo, there are several startups in the race to serve institutional crypto investors.
Smart Valor CEO Olga Feldmeier spearheads one such provider, a licensed investment platform which also offers custody and management services. She agreed with Chan that many high net-worth individuals and institutions would prefer a licensed expert handle storage and security.
That’s why Smart Valor is partnering with the hardware wallet maker Ledger to offer on-site storage of private keys and other services comparable with deposits at a bank. This Swiss platform for managing and trading tokenized assets is scheduled to launch in September, around the same time as Smart Valor’s ICO.
“A lot of family offices are starting to think about investing directly in ICOs and protocol tokens,” Feldmeier said. “The custody solution is extremely important because all the hacks so far, everything that happened until now, it was all hacks of exchanges.”
Chan said ethereum tokens, in particular, are prone to issues caused by bugs in smart contracts. Regardless of Feldmeier’s point that most breaches involve exchanges, hackers exploited such a smart contract bug in 2017 to steal $30 million worth of ethereum tokens from Parity wallet users.
A seasoned investor, Simpson referred to security practices for crypto tokens as “a moving target.” Especially in this space, the devil hides in those details.
Luckily for institutional investors, startups like BitGo and Smart Valor are prioritizing secure custody for tokens, not just bitcoin.
“There’s a lot of different events that have happened because of smart contract bugs. So, we try to be on the safer side there.”
Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!
In January, BitGo, a Silicon Valley bitcoin wallet startup, announced plans to acquire Kingdom Trust, a Kentucky company that has quietly become a leading player in a thriving market serving cryptocurrency funds.
Join In The Fun And Play On The World’s First Hybrid On-Line Casino With BTC And Fiat Currency Payments. Check On-Line For The Latest Promotions.
The move would have positioned BitGo to compete with a small but growing pool of players offering custodial service—in essence, storage of crypto assets—to high-net-worth individuals, institutions, and funds. It was designed to merge BitGo’s tech products, which offer a secure way for individuals to store bitcoin and crypto assets, with Kingdom’s custody services, which serve institutions. Having a trust charter, as Kingdom Trust does, would have given the combined entity a leg up on competition from Coinbase, Gemini (an exchange run by the Winklevoss twins), Ledger, ItBit, and Nomura, the Japanese bank which in May announced plans to offer crypto custody.
But the charter wasn’t enough to make the merger of a risk-averse financial trust in Kentucky with a venture-backed startup in Silicon Valley work. Kingdom gained regulatory approval for the change of control in April, but a month later, the companies dissolved their merger plans.
According to Kingdom CEO Matt Jennings, the deal fell through in final negotiations. “As with all mergers, there were many details that had to be negotiated and worked through. We simply could not work through the final details,” Jennings said. Jennings said disagreements were not specific to crypto, but “the typical final negotiations between two companies in these sorts of deals.”
BitGo CEO Mike Belshe did not elaborate on the reasons for the merger ending beyond a blog post announcing that the company has applied for a trust charter to build its own custodial solution.
As a result of the splut, BitGo and Kingdom find themselves in competition with each other, as BitGo builds its custody offering. “We have worked closely with customers to understand their custodial needs and have realized that to offer the best custodial solution, we needed to build our own qualified custodial offering,” BitGo product marketing executive Robin Verderosa wrote.
Kingdom continues to offer its custodial services from Murray, Kentucky. Jennings says the split changes nothing about Kingdom’s plans to expand and upgrade its products. “We were the leader in digital asset custody long before any merger was contemplated and plan to keep pressing forward as the leader in the market,” he says.
Meanwhile, Coinbase, the largest and best-known digital currency exchange and wallet in the US, has launched its much-anticipated custody option, and Nomura’s announcement shows that some traditional banks also want a piece of the crypto action.
Institutional custody is a small but important part of the movement to legitimize crypto investing. Crypto hedge funds have proliferated over the last 18 months, with an estimated 100 new ones launching in 2017. A late-2017 surge in the price of bitcoin and other crypto assets meant lots of small funds found themselves suddenly managing large portfolios of crypto assets. Hedge funds with more than $150 million in assets are required to store their assets with a qualified custodian. In a February interview, Belshe estimated that two dozen hedge funds crossed that threshold last year, but were not complying with the rule. This year’s slump in crypto prices may have solved the problem for many.
Here at Dollar Destruction, we endeavor to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research! Source
Author: Erin Griffith Image Credit