The Importance of Digital Asset Custody for Investment Professionals

Despite significant headwinds in 2022, digital assets remain poised for strong growth in the years ahead. 

According to a recent survey by Bitwise, over 90% of financial advisory clients have inquired about digital assets in the past 12 months, and over half of these advisors see this interest persisting or increasing in the near future.

However, 59% of advisors reported that some or all of their crypto-investing clients were doing it alone, using exchange platforms or self-custody wallets. This is partly due to the fact that only 29% of financial advisors are able to purchase cryptocurrencies for client accounts. 

A crypto-friendly custody solution can assist advisors willing to serve an emerging investor segment. However, this new opportunity for professional investors also brings challenges in the form of greater technological, operational, and regulatory complexity. Core to these challenges is the question of how to handle digital assets in a safe, compliant, and efficient manner.

Benefits of Working with a Digital Asset Custodian

Choosing a regulated digital asset custodian is one of various options for managing digital assets. Let’s explore the benefits that a regulated custodian can offer in more detail.

Understanding compliance risk

Compliance problems at a platform provider can disrupt your trading and potentially put your assets at risk. Concern about compliance is a reason professional investors hesitate to enter the digital asset space. Given the fast-changing regulations of the crypto industry, one course of action is to minimize your exposure to regulatory risk, as far as possible. By utilizing the services of a regulated custodian, you can assist in minimizing risks associated with any sudden regulatory changes.

Top-tier security measures

Technology is continually progressing in the crypto industry, and keeping up with the latest developments is a necessity, not an option. Your custodian will have teams working to help secure client assets and transactions. Not only can you expect bank-grade security measures, but also other features that you are unlikely to find at alternative providers. With these cutting-edge security measures, potential security threats are minimized.

Not limited to asset custody

Digital asset custodians do more than just minimize risk. Just like traditional custody offerings, you will gain access to a comprehensive suite of services that help streamline the management of your digital assets, allowing you to focus on your business and investment goals with greater peace of mind. These services include transaction execution, trade settlement, and account administration, all of which will continue expanding as the industry matures (although trading and lending entities will - and should - remain separate from custody operations).

Better, faster operations

As the worlds of fiat, crypto, and tokenized real-world assets converge, the difficulty of managing digital assets will inevitably escalate, and failing to address this issue could result in inefficiencies and losing your competitive edge. By relying on the infrastructure, network, and relationships of a custodian (e.g. FX partners, sub-custodians), you can save time, money, and stress. Not only that, but you will have customer support when you need it. Providers will be looking to retain your business, so will be interested to hear from you about new features and services that would make your business even more efficient.

Maximum flexibility

While the “cold versus hot wallet” debate is frequently framed as a binary choice, the truth is that different solutions suit different situations. A custodian can provide you with a full spread of options to match your specific requirements. Since not all assets require the same level of custody, you can co-design a solution that meets both your trading and your security needs. 

Dedicated leadership

Custody is a complex area even in traditional finance, requiring its own management team and business model. Offering custody as an add-on service, or even as a product, can result in suboptimal management and resource allocation. To effectively manage digital assets, professional investors need a team with hands-on industry experience, who can navigate both traditional finance and cryptocurrency. This is because an effective digital asset strategy involves frequent interactions with traditional financial systems and foreign exchange markets. While being 'crypto-native' is an interesting concept, having a team that can confidently operate in both worlds is essential.

Conclusion

The early hype around cryptocurrencies painted a picture of a new financial world that was entirely peer-to-peer, intermediated only by code, and with the financial institutions of the past consigned to history. This vision has been exposed to the stress-testing of reality, and the true picture appears to be one in which traditional models must evolve, rather than dissolve.

Just as traditional custodians emerged in an age when investors would ‘self-custody’ their own stock certificates at home under lock and key, the emergence of the modern-day digital asset custodian model represents a step forward for the digital asset ecosystem.

As this process of evolution continues, the role of custodians will only become more critical, and partnering with a reputable provider will be essential to achieving long-term success.