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Tailored Custody Solution for Diverse Institutions

March 27, 2024

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Tailored Custody Solutions

Ever since the commercialization of digital asset technologies took place, we have seen a meteoric uprise in institutional interest, not just partaking in the market but also building solutions for it, serving retail investors, exposing their clients to invest in it, investing a certain portion of their portfolio in them, and of course, reaping the benefits from the market. 

This interest by institutions has made the case for finding secure and compliant solutions. Who better than digital asset custodians to enable institutions to find the right solution when it comes to streamlining their custody needs? 

Considering the complexities in managing and running digital asset wallets, securing private keys, adhering to the latest compliance regulations, and finding the right opportunities to expand their stored liquidity, custodians become a pivotal point in this process for institutions. 

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Now, the problem arises when it comes to serving different institutions. While focusing on building industry-standard solutions, custodians need to cater to the individual needs of institutions and enable them with integrations and configuration on top of custody. 

Why Institutions Are Turning to Digital Asset Custodians

Institutions working in digital asset ecosystems or holding them for investment purposes increasingly trust custodians to take care of their assets, private keys to be exact, and for a good reason. Here are three key factors driving this trend:

  1. Push from Regulators: Regulatory bodies in crypto-friendly jurisdictions are raising the bar to add SOPs in place for how institutions handle their digital assets. Partnering with a custodian ensures compliance with evolving regulations, minimizing the risk of internal security breaches and misplaced assets.
  2. Bank-Grade Security: Custodians offer the highest level of security, far exceeding what most institutions can manage independently. This includes using HSM devices to store assets, multi-signature wallets, private keys in distributed locations, standard security certifications for internal and system controls, advanced encryption, and multi-layered security protocols.
  3. Building Trust: Custodians instill confidence in external parties by showcasing their use of the most advanced technology to safeguard assets. They continuously upgrade their systems and offer white-glove services, including a dedicated account manager, concierge onboarding, premium support, and tailored customization options.
  4. Governance Control: Custodians provide robust governance control features, allowing institutions to fight operational challenges and business risks. From managing wallet access or giving permissions to the right stakeholders to setting policies for teams to activating unique authentication for transaction processing, institutions have complete access to set their governance with custodial wallets. 

Understanding Institutional Needs

Just as we’ve seen the use cases of digital assets grow, we’ve seen the surge of institutions flocking to the market with different objectives, all ultimately looking to draw appreciation on their assets. 

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However, safeguarding digital assets effectively requires a custodian that transcends simple key management and cold storage. Today’s institutions entering the digital asset market need a partner offering a distinctive solution specifically designed to address their unique requirements.

Different institutions have varying needs when it comes to digital asset custody, primarily influenced by factors such as their size, sector, regulatory environment, risk appetite, and strategic objectives.

Now, each class of institution faces unique challenges when dealing with digital assets.  

  • Private Equities and Venture Capitalists: PE & VCs generally handle large sums of money to invest in up-and-coming projects and protocols in the Web3 ecosystem. A growing trend for VCs in the Web3 space is to grant the sum in digital assets consisting of stablecoins or blue-chip tokens. Hence, they require a custody solution to secure their assets inherently and activate customizable governance to provide only authorized access to operate the wallets. PE & VCs, while holding large sums of digital assets, also look to expand their liquidity by locking them in staking contracts to earn passive income and securing them with additional insurance coverage to protect their AUM.
  • HNIs and Family Offices: HNIs and Family Offices primarily are large-scale or whale investors, looking to take positions in the best of tokens for long terms, continuously rebalancing them to stay on top of market volatility and put them through additional sources to add their liquidity, while keeping their assets secure, be compliant in their processes and plan their custody with future planning for seamless transfer of assets between generations, ensuring continuity and stability in wealth management to pass on the access of wallets to the next of their kin.
  • Hedge Funds: Hedge Funds operate in dynamic market environments where speed and security are critical. Hedge Funds are hardcore traders investing in a wide range of cryptocurrencies, including Bitcoin, Ethereum, and different altcoins. Moreover, they may also be involved in initial coin offerings (ICOs), decentralized finance (DeFi) projects, and other emerging opportunities in the crypto space. With such huge bags, Hedge Funds look out for highly secure safekeeping of their assets and, at the same time, a hybrid nature, allowing them to deploy their assets in exchanges and further investment opportunities. Hedge funds are also on the lookout for third-party risk mitigation, including counterparty risk and operational vulnerabilities. 
  • Corporate Treasuries: More and more businesses have started accepting crypto as a form of payment. Recent research suggests that over 15,000 businesses currently accept crypto as a form of payment. Corporate treasuries manage large volumes of financial assets and transactions, requiring custody for both hot and cold wallets to keep up with multiple transactions and maintain the utmost security measures. They also need custody with round-the-clock service and operations help while processing transactions, reviewing their transactions for compliance checks, or identifying suspicious activity on their wallets. 
  • Government Bodies: Government bodies have unique regulatory requirements and risk considerations when it comes to digital asset custody. Usually, government bodies are able to get digital assets under their custody during a heist or a sting operation where they catch culprits behind rug pulls, online scams, or any crime involving digital assets. Once assets are under their custody, they need help to park them in distributed, compliant, and secure wallets that follow best-in-class practices. While adept in the crypto domain, government bodies lack technical know-how of custody; hence, they need dedicated support, insurance coverage, expertise, and reliability in their custody partners. 
  • Exchanges and OTC Desks: Exchanges and OTC desks operate in fast-paced trading environments where security and liquidity are paramount. Operating in consumer-facing mode, Exchanges, and OTC desks hold their users’ funds in segregated accounts to that of their own. They also process a great deal of transactions on a daily basis, needing quick settlements, low to negligible downtime, and reduced transactional inefficiencies. Exchanges require a hybrid wallet infrastructure that combines cold storage security with the accessibility of hot wallets, enabling them to facilitate seamless trading for their clients. 

Expanding Custody Solution To Meet Institutions Needs

Today’s digital asset custody solutions are defined to the boundaries, meeting the standards more than anything else. But this isn’t enough to provide value to the institutions that are deploying their solutions. 

Understanding the inherent needs of individual institutions is crucial for custodians to step outside their set parameters of security, management, and compliance to create curated features and integrations that help those running the show in these particular environments. 

For Private Equities and VCs, apart from secure custody, need flexible governance that enables them to address their complex setup and create customizable governance parameters, allowing them to adapt the custody solution to their specific needs, ensuring efficient management of their assets. Secondly, they may leverage passive yield opportunities such as staking to optimize returns on their digital assets. Custodial solutions that support staking mechanisms and enable these institutions to earn rewards on their holdings while maintaining security and control over their assets. Lastly, as significant stakeholders, they seek custodial services that provide insurance coverage based on assets under management (AUM). Insurance mitigates the financial risk associated with potential losses, providing additional protection for their investments.

For HNIs & Family Offices, custody requirements largely revolve around how efficiently they are able to manage their assets under custody, relying on custodians to manage end-to-end security. They require custodial solutions with advanced security features, such as multi-signature wallets, encryption, and secure storage facilities, to safeguard their digital assets from cyber threats and unauthorized access. Succession planning is a big factor for HNIs & Family Offices, and they prefer solutions with built-in access to transfer access rights of their wallets to the next stakeholder without much hassle. HNIs and family offices also value governance control over their digital assets to maintain oversight and compliance with internal policies and regulatory requirements; custodians working in tandem with regulatory bodies to deploy the latest compliance checks can provide a better cadence to mitigate operational risks.

Coming to Hedge Funds now, their custody objectives are inclined towards those who present them with easy fund deployment opportunities, be it PoS Staking, DeFi connectivity, Exchange trading, lending and borrowing of assets, and collateral management. They require custodial solutions that allow them to execute trades and investment strategies with confidence and agility. Hedge funds are also skeptical of custodians considering third-party risk associated with custodians. Custodial platforms that minimize third-party risk through advanced security measures and decentralized governance structures are essential for hedge funds to protect their assets and reputation.

Corporate Treasuries, particularly crypto treasuries, operate heavily on the transaction processing side of the business, managing assets for a particular project, protocol or chain. While handling millions and billions of dollars worth of assets, they must also implement custodial solutions that comply with regulatory standards and industry best practices. These platforms offer features such as anti-money laundering (AML) compliance, Know Your Customer (KYC) verification, and transaction monitoring to mitigate fraud and ensure regulatory compliance. Corporate Treasuries need prioritization in risk mitigation and maintaining the financial stability of the treasury.m Custodial solutions with advanced risk management tools, such as real-time monitoring, fraud detection, and transaction analysis, help corporate treasuries identify and mitigate potential threats to their digital assets.

Government Bodies are very differently poised in this digital asset ecosystem; hence, their ask from custodians is more towards compliance, insurance, dedicated support, and trust building. They seek custodial services that comply with regulatory frameworks and provide insurance coverage to protect public funds and assets from loss or theft. Government bodies require custodial partners with proven expertise and reliability in managing digital assets securely. Custodial platforms with a track record of serving government clients and a demonstrated commitment to security, compliance, and transparency are preferred choices for government entities.

Exchanges & OTC Desks fall into the same categories and have very similar asks from custodians. They require custodial solutions with hybrid wallet infrastructures, one that hosts both cold and hot wallet capabilities, activating a seamless transfer of assets between wallets for their daily transaction needs and securing the assets at the same time. Managing risk monitoring, eliminating the manual process of moving assets, and tracking multiple wallets with balances are niche requirements of Exchanges and OTC desks. Features such as pre-defined policies, firewall engines, and fast settlement service level agreements (SLAs) help optimize operational efficiency and reduce transactional risks for these institutions.

Evolving Role Of Custodians To Serve Institutional Needs

The custody requirements for different institutions vary widely, and robust custodians must encompass all major checkpoints to serve institutions based on a number of factors, including assets under management, security, governance, compliance, connectivity, interoperability, and external integration needs. 

Digital asset custodians nowadays are growing, adding innovation in their infrastructure alongside security and compliance norms to broaden the scope of digital asset management, changing the core functionality of custodians from the one to safeguard assets to augmenting a better framework for institutions to utilize their assets across the market. 

Building add-on integrations around core custody offerings is the first step in transforming the landscape and facilitating institutions’ custom needs. The next step in this process is to accommodate the very niche demands of individual institutions and develop products around them that go along with custody. 

Digital assets, whether liquid or illiquid, require bank-grade protection due to their aggregation from numerous small and large retail investors. Custodians play a vital role in safeguarding and enabling seamless ecosystem connectivity for institutions aiming to execute comprehensive digital asset strategies.

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