A Mordor Intelligence report on digital asset management notes,
“The digital asset management market was valued at $2,962,200 in 2020, and it is expected to reach $8,158,600 by 2026, registering a CAGR of 18.46% during the period of 2021-2026.”
Institutional investors continue to develop their craving for crypto diversity. Even former detractors, like Kevin O’Leary, are on board. However, in order for institutional investors and others in the high-net-worth individual (HNWI) grouping to remain on the crypto train, an industry shift must take place. Custody services must provide truly institutional-grade protection.
With the emergence of Central Bank Digital Currencies (CBDCs) and the continued strength of digital assets, custody providers will continue to see increased demand. However, is their current bandwidth and expertise truly enough to continue to usher in one of the greatest achievements that the financial sector has ever seen? Let’s take a look.
A 2020 Deloitte report, citing Coindesk, notes that there has been “a 13-fold increase in the amount stolen from cryptocurrency exchanges between 2017 and 2018 – a figure that stands at almost $2,700,000 per day.”
Let’s start with the assumption that allowing assets to sit in exchange accounts is simply insufficient for any worthwhile institutional-grade investment. Questions continue to swirl about, as regulators attempt to descend on compliance goalposts that shall guide the industry – though, the global nature of digital assets makes standardization difficult.
Whether exchanges will see increased regulatory scrutiny, particularly in regard to the security apparatus employed to safeguard assets – as well as whether such scrutiny would be localized to a single jurisdiction – is still up in the air.
From there, the question becomes whether custody providers themselves are up to the task at hand, and perhaps more importantly, the task which will grow exponentially over the coming months and years.
First, we must be honest about the state of the market. While much of a private firm’s technology stack is guarded by piles of lawyers and NDAs, there are some public clues already setting off alarm bells.
Fireblocks, which is among the most notable providers of custody services, is currently embroiled in a lawsuit with StakeHound, which alleges the custody company lost roughly $70 million of Ethereum after the key vanished.
As a result, StakeHound cannot access over 38,000 ETH and likely will never recover them. Even still, the company has handled more than $500 billion in assets, registering a 2,023% uptick in transaction volume over the past year – after an alleged loss of $70 million in assets.
BitGo, an institution-only provider with no focus on retail markets, was acquired by Galaxy Digital for $1.2 billion. Yet, in 2019, the company’s engineering manager was hacked for more than $100,000.
Cybersecurity risks are innate when discussing the digital assets landscape. Investors understand or should understand that based on their digital nature such assets are more susceptible to malfeasance than traditional assets.
But in the end, that’s why they’re paying a premium for a custody service. There’s a need for assets to be guarded by a company with more technical prowess than the average investor – or even than a multinational investment firm.
While custody providers are themselves being acquired for a premium, I think it’s fair to say that is based on the market opportunity rather than the sheer skillful, secure operation of these firms. The custody service space is still wide open, and it yearns for a company that can provide unmatched security apparatus – a veritable Fort Knox, if you will.
Richard Gardner serves as the CEO of Modulus, an international financial technology firm, and has been a globally recognized subject matter expert for more than two decades, offering complex insight and analysis on cryptocurrency, cybersecurity, financial technology, surveillance technology, blockchain technologies and general management best practices.
