Crypto Solutions for Investment Professionals: A Quick Checklist
As the digital asset economy continues to flourish, the complexity and risks associated with doing business in it are also growing rapidly. Such a dynamic environment requires new solutions and a constant reassessment of existing ones. Digital asset custody is an investor’s primary tool to reduce crypto counterparty risk, as well as a means of mobilizing assets efficiently across borders. For institutions with fiduciary responsibility, selecting a regulated custodian is a vital first step in securing a foothold in the early-stage crypto-economy.
Using a full-service custodian offers many benefits, including insurance coverage, wide market access (fiat + digital), strong security protocols, and cost-effective trade settlement. Just as all crypto custody solutions differ in terms of what they offer, not all investment professionals require the same features and services.
In this article, we’ll be looking at five dimensions you should consider as you evaluate the mission-critical services provided by a qualified cryptocurrency custodian.
Does the custodian support the assets you want to trade in?
The decentralized development of crypto or ‘web3’ means that the digital asset space is highly fragmented. Not only are new blockchains, scaling solutions, non-fungible assets, and other classes such as tokenized equity emerging on a regular basis, but the number of exchanges and other service providers (e.g. tokenization engines) is also multiplying.
As an investor, you will likely end up with a diverse portfolio that crosses many boundaries. Furthermore, you are likely to continue to adapt to and explore new areas as the market evolves. Knowing what assets a custodian supports or can accommodate, and how frequently they add to or update these capabilities, is key to determining whether they are a good partner for your strategy. For example, as crypto is borderless by design, you should also consider your partner's fiat capabilities and their ability to deal across borders (e.g. G10) in a low-cost, timely manner that fits your trading strategy.
A provider with a strong, established, and international network of partners will be able to provide the optimal combination of flexibility and minimal 3rd party risk.
How easily can I keep track of my assets and get hold of them when I need them?
Crypto settlement, crypto clearing, and other digital asset custody services are important, but only part of the solution. Given the speed with which events often move in the digital asset world, the ability to monitor and manage your digital assets can be critical, particularly if you have an active trading strategy.
Detailed, real-time reporting capabilities on asset levels, transaction status, and settlement details are important not only for informed trading but also for compliance purposes.
You should consider not only the quality of data but also the ability to integrate the data with other providers or internal systems (e.g. administration, tax, compliance).
What measures are in place to keep client assets safe?
Security - the ability to manage and store assets safely - is the most basic, and ultimately, the most crucial aspect of the custodian offering.
Digital asset protection boils down to the ability to create, store and manage private keys. Problems can arise through human error or deliberate fraud (whether internal or external).
Responsibility for transactions should be shared amongst individuals - not only within the custodian itself but ideally your organization as well - to avoid a single point of failure. Custodians may well offer you different levels depending on your desired ease of access. The trade-off (e.g. hot wallet vs cold wallet) is one you must be comfortable with.
It is a good start to narrow your list to regulated trust companies with SOC 2 certification, as these entities are subject to stringent security audits on a yearly basis, which will likely identify and eliminate any major areas of concern.
What happens if your assets are lost or stolen?
With the best crypto security in the world, data breaches and hacks are always a possibility. A good provider will have a disaster recovery program in place to minimize the damage in case of a natural event, cyber-attack, or other security malfunction. This could be achieved either through a combination of continuity planning, additional redundancies in the security system (e.g. multiple backup locations), or counter-hacking capabilities.
Preferably, however, a digital asset custodian will have an adequate insurance program in place as the last line of defense. As usual with insurance, it is your duty as the buyer to ascertain the nature of events covered, the liability limits, and any options you have to extend or tailor the coverage.
How are the fees structured?
Just as custodians differ in what they offer and whom they serve, there are numerous approaches to pricing. For example, fees can be calculated as a percentage of assets under custody, based on users (# of wallets), usage (# of transactions), or as a fixed fee based on the desired level of service. This heterogeneity means that a straight ‘price level comparison’ is not possible. Understanding the price structure and your own usage profile is key to understanding whether a service is within your budget and reasonable for the value being provided.
The key point to remember is that ‘fee structure’ is more important than ‘fee level’, and that while it is possible to pay too much for a poor result, good results seldom come cheap.
Evaluating digital asset custodians is an important task for institutions with fiduciary responsibilities, and also a potentially complex one. It is important to consider the breadth and depth of the offering, additional services that can support your activities, and the measures to ensure your client funds are kept safe. The reason that the custodian landscape is so varied is precisely because there is no ‘standard’ investor. Therefore, there are no substitutes for proper research and due diligence to understand the specific features and services offered by a custodian before choosing one.
Shopping for a crypto custodian is as much a process of understanding yourself and your needs as it is about comparing vendor features and price points. Rather than seeking the perfect provider, it is a question of finding the set of trade-offs (e.g. functionality and ease of use) that make the most sense given your objectives.
The good news? The sheer level of activity and competition in this space means that options will only increase and service levels improve from here on out.
Stay vigilant, and enjoy the ride!
Click here to learn more about securing your digital assets with Etana Custody.