Institutional infrastructure for crypto - where are we standing?
Updated: Jan 23, 2019
The aim of this write up is to provide an overview of where institutional crypto asset management currently stands. It is an explorational study of the institutional infrastructure arena to get a better understanding of the different players and their services for institutional grade investors. I will explore different areas within the arena; custodians, exchanges, products and administrators. In this first part the focus is on custodians.
Custody service providers
One of the missing pieces for institutional investors to start investing in crypto assets, was a safe place to store the assets. For institutional investors a ledger nano s (which is perfectly suited for retail investors) just doesn’t meet the requirements for safekeeping of those funds after purchasing. Aside from just safekeeping assets, in the conventional financial world we have seen custodians offering services that reduce the operational burden of owning an asset. In digital asset management you could think of handling forks, staking returns, voting, dividend on security tokens, and so on. For larger investors safekeeping of these digital assets feels better with trusted companies who proved themselves over the years, than with those who just started but in the mean while those same small startups gear up for competition with major Wall Street firms now. Let's have a look at which companies are currently involved.
Overview of traditional financial institutions entering the arena
Fidelity: Fidelity announced in October 2018 they start with a new and separate company called Fidelity Digital Asset Services. The new company, which has about 100 employees andwill be headquartered in Boston, is in the process of onboarding its first clients now and will be in the market sometime in early 2019. More about their services on a institutional level can be found here.
ICE: The Intercontinental Exchange announced BAKKT in August 2018; a secure global platform that will connect investors, merchants and consumers, making it easier, faster and more cost-effective to buy, sell, store and spend digital assets. Bakkt’s open-source, neutral platform will be designed to meet applicable regulatory requirements, and to support innovation around digital assets and blockchain applications.
Nomura: In cooperation with Ledger and Global Advisors, Nomura established Komainu in May 2018. Komainu will pave the way for secure, compliant institutional investment in digital assets. At this moment there is no guidance on when we can expect their initiative to go live.
Goldman Sachs: There were plenty of rumours this year on how Goldman would get involved in crypto. There is no official confirmation of Goldman working on custodian services, but there are rumours circulating that Goldman is mainly looking at creating their own bitcoin derivative and setting up custody services because of client demand. Goldman cofounded Circle in 2013, and invested in BitGo very recently which confirms their interest in the space.
Overview of new companies offering custody solutions
Xapo: First company focussing on custody solutions for bitcoin. According to estimations Xapo are keeping roughly 6% of the entire bitcoin supply in storage. . Xapo is solely offering bitcoin custody services.
Coinbase Custody: offers custody services for Bitcoin, Ethereum, Litecoin, Ethereum Classic, Bitcoin Cash, and all other ERC20 tokens are work in progress. Polychain Capital and Multicoin Capital (well known hedge funds in the space) are happy clients and Coinbase is best known in the retail market because of their retail application that let consumers trade in the aforementioned currencies which was the number 1 download in app stores in 2017. Coinbase is based in San Francisco. Coinbase launched the custody service for institutional clients in 2018.
BitGo: offers custody services for Bitcoin, Bitcoin Cash, Bitcoin Gold, Litcoin, Zcash, XRP, and all ERC20. BitGo just had a series B fundraising in which both Galaxy Digital and Goldman Sachs took part. BitGo started in 2013 and offers multi signature wallets and offline vault services.
Gemini offers services for Bitcoin, Ethereum and Zcash. They offer two types of custody; a depository service and a segregated account service. With the depository service client digital assets are commingled. With their segregated Custody Account service, client digital assets are segregated, using unique digital asset addresses in Gemini’s Cold Storage System, which are independently verifiable and auditable on their respective blockchains. All digital assets are custodied and secured offline in Gemini’s proprietary Cold Storage system
DACC was built from the ground up to custody over 90 different digital assets on behalf of institutional clients. The management is an interdisciplinary team of people with backgrounds in technology, finance, prime brokerage, regulatory compliance, national security and fintech.
Ledger initiated Ledger Vault for institutional investors in May 2018. Genesis Trading, Global Advisors, LCX, IronChain Capital, XBTO, and Smart Valor were the ones to participate in Ledger Vault early access program. Ledger Vault offers a bit more than just custody and therefor likes to call it a security solution theirselves.
Kingdom Trust provides storage services for over 30 digital assets and managed to obtain insurance through Llyods. Kingdom Trust offers custody services for a wide range of products and now offers crypto custody as well.
ItBit offers also custody solutions next to their exchange service. For institutional purposes these two services should be separated.
The introduction of BAKKT in November and the announcement by Fidelity in October 2018 of an entire new venture focussed on digital assets will probably lead to institutional fear of missing out on offering services in the field. Crypto enthusiast were long waiting for larger institutions to step up, and especially the announcement by Fidelity might be the news that ignites the spark that other more conventional institutions were waiting for.