Who is paving the way for big institutions? Scanning the Ecological Landscape of the Custody Industry
Text | Edited by Wang Zelong | Tong Source | PANews
Traditional large institutions are waiting at the door to enter the encrypted world, and the custody business, which is an important asset security foundation, is the first to be lively, paving the way for it.
Recently, The Block reported that Coinbase is planning to acquire Xapo, a cryptocurrency custody service provider, for $50 million. It is reported that the company's core product is Bitcoin cold storage, and its custody assets may reach 5 billion US dollars.
Coinbase side to the market"Hoster Prey"Waiting for the opportunity, on the other hand, it is focusing on strengthening its own hosting business. Two days before the news broke, its CEO Brian Armstrong disclosed the results of Coinbase’s custody business since its launch a year ago at the Consensus conference:
“Since we released custody services on May 15 last year, the assets we serve have reached a scale of US$1 billion, and 70 institutional investors have registered for our services, and they have added US$150 million in assets under management (AUM) for us a month. ), allowing us to reach a relatively large scale."
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Prerequisites for industry to mature
For a long time, custody has been regarded as a prerequisite for the maturity of the blockchain industry and an infrastructure for the booming industry. The main reasons are to establish multi-party trust, open up channels for capital entry, and ensure asset security.
The capital flow of an institution is often related to multiple subjects such as investors, exchanges, trustees, and regulators. Whether there is a sound security mechanism to prevent funds from being misappropriated or even losing money is crucial to the establishment of trust among all parties .
"Some TokenFunds in the industry may hold tens of millions or hundreds of millions of entrusted funds. In the formal financial market, it is obviously very unlikely that a large amount of funds will be entrusted to a single individual for management. Using the custody mechanism, Separating the hot and cold Tokens and keeping the keys properly can reassure all parties.” Xu Bin, founder of Invault, once said.
Frank, the founder of AlphaCoinFund, also expressed a similar view: "Compliant custody of encrypted assets is the most basic facility and prerequisite for institutions to enter the cryptocurrency market on a large scale."
Only through a reasonable trusteeship mechanism and opening up trust channels can institutional funds enter the market and run.
Compared with traditional assets, the custody of Token is actually more complicated, and ordinary users often face many problems:
Can't remember/can't remember the key, or even lost the key;
If users want convenience, they may also choose to put their assets directly on the exchange, and whether it is the recent theft of tens of millions of dollars in Bitcoin from Binance, or the theft and bankruptcy of a large number of exchanges in the past, it proves that even for individuals For users, this is not an absolutely safe management method, let alone for institutional customers;
TokenFund/Hedge Fund may lose client assets. According to Hacker Noon, in the first half of 2018 alone, approximately 466 hedge funds lost their clients’ encrypted assets.
After the introduction of custody, professional custody services can help customers reduce the risks faced by assets. For example, BitGo claims to store users' assets in cold storage and seal them in Swiss military-grade vaults.
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Industry Ecological Landscape
At present, encrypted asset custody has initially formed an ecology, which can be basically divided into: exchange wallets, software wallets, hardware wallets, paper wallets, special wallets for a certain blockchain, and custody solutions.
From a foreign perspective, the leading custody institutions include Coinbase, Xapo, BitGo and Kingdom Trust. Coinbase is said to hold $1 billion in encrypted assets, while the latter three are estimated to hold $5 billion, $5 billion, and $12 billion in assets (including digital assets and non-digital assets) respectively.
Among them, Kingdom Trust is the oldest encrypted asset custody institution. It was established in 2010 and currently holds a trust license, but has not yet obtained external financing. In January 2018, Bloomberg reported that BitGo wanted to acquire Kingdom Trust, but in May, BitGo stated that it would build its own custody channel and terminate the acquisition of Kingdom Trust.
Founded in 2012, Xapo is not a licensed custodian for the time being. It has conducted two financings and obtained a total of US$40 million in funds; BitGo was established in 2013 and is a licensed custodian. It has received a total of US$84.5 million in four rounds of financing. Funding, it is worth mentioning that its B round of financing was led by Goldman Sachs.
In contrast, domestic counterparts entered the hosting business relatively late, basically starting after 2016. It has the characteristics of late start, small scale and insufficient compliance. At present, relatively large institutions include Invault, Cobo, Jade Pool and other institutions.
Invault is one of the earliest institutions in China to participate in the custody of digital assets, and currently supports the custody of Bitcoin, Ethereum and ERC20 series tokens. In 2018, it received an angel round investment of tens of millions of RMB led by Matrix Partners China. It is worth mentioning that the institution holds a Hong Kong trust license and is one of the few licensed encrypted asset custody institutions in the Asia-Pacific region.
Cobo is a digital asset management and storage platform founded by Shenyu. Its CoboCustody business was launched in December 2018. It currently supports the custody of more than 30 public chains and more than 700 tokens. Its offices span China and the United States. cities in the country.
JadePool, also known as Yaochi, was also launched in 2018. Its featured service is a financial cipher machine, which can be used to generate and store seeds, derive keys, and store keys. At present, it has completed an angel round of financing of more than 20 million yuan from Fenbushi Capital, Jianyuan Fund, and Prince Gong.
There are also Keystore, Wetez and other institutions in China, but according to public information and inquiries from PANews, these institutions have not yet obtained licenses. Some institutions confessed to PANews that in the field of digital asset custody, there is currently no domestic license to obtain. Applications can only be made overseas.
It is also worth mentioning that due to the current domestic regulatory situation on cryptocurrencies, the above institutions often choose to set up companies in Hong Kong to support themselves as a "protective umbrella".
Three "postures" for admission
At present, whether it is the giants in traditional institutions or the original companies and organizations in the encrypted world, they have already or are trying to cut into the track of encrypted asset custody, and an ecology has initially formed as a whole.
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Self-built hosting channel
Typical representatives of this category include exchanges such as Binance and Coinbase, as well as service providers in the custody vertical field such as BitGo, Bakkt, Xapo, Cobo custody, and Invalut, as well as traditional giants such as Fidelity. Among them, Coinbase has both exchange-level custody and vertical custody business.
In addition, according to a Bloomberg report in August last year, Goldman Sachs may also provide custody services for institutional clients.
Become an "Enabler"
A typical representative of this type of organization is IBM. It does not provide hosting services, but provides technical support for those who need hosting services. It uses FIPS140-2 Level 4 technology to develop a hardware security module (HSM: hardware security module), which supports customers to hold their own keys in the cloud ( keep your own key).
The advantage of IBM's solution is that it uses a purely electronic process to manage assets. Compared with cold wallets (hardware storage), which may take 1-48 hours, this solution is faster and can reduce the loss of arbitrage opportunities for institutional investors.
cooperative development
cooperative development
Typical representatives of this category include the cooperation between hardware wallet service provider Ledger and Nomura Securities and Global Advisors, and the cooperation between Bakkt and Bank of New York Mellon (BNY Mellon).
The former announced in May 2018 to jointly develop a project called Komainu to provide a safe and compliant path for institutional investors to enter encrypted assets. It is reported that they also use IBM's HSM program.
However, in April this year, Pascal Gauthier, the chairman of the project, told CoinDesk that although the project is still in full swing, due to its high difficulty, the release of related products may be delayed until 2020.
The latter are working together to develop a "geographically-distributed" key storage product, but as of now, no specific product has been disclosed.
Among Wall Street giants, in addition to Bank of New York Mellon, according to Bloomberg, JP Morgan Chase and Northern Trust Group (Northen Trust Corp) have entered the field of encrypted asset custody.
It is worth noting that many institutions enter this field with several postures.
As mentioned at the beginning of the article, in addition to self-built encrypted asset custody channels, Coinbase may also acquire Xapo, a heavyweight player in encrypted asset custody;
Bakkt is also similar. In addition to providing customers with its own hot and cold custody storage services, it also acquired Digital Asset Custody Company (Digital Asset Custody Company) in April this year, which is also in the field of encrypted asset custody. important players.
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Competitive differentiation
In the current encrypted asset custody market, everyone's core selling point is still around security, which is the initial stage of the development of the encrypted market and the only way to go. But in the long run, encrypted asset custody service providers must transform and upgrade.
Proofof Capital believes that, based on the current exploration direction of the industry, future custody service providers may also need to have functions such as mortgage dividends, proxy voting (that is, governance), forks, and tax declarations in order to better meet the needs of the market.
For customers, the core appeal of the function of staking dividends (that is, one of the PoS methods that have received a lot of attention in the industry) is value-added—institutional investors not only need the security of storage, but also the value-added of assets. By mortgaging encrypted assets into the network, it is a relatively compromised way to obtain relevant dividends.
Coinbase has made frequent efforts in the direction of staking this year, announcing its investment in staked.us in early February, and announcing on March 29 that its custody system supports customers to store Tezos in cold wallets for staking.
Wetez, HashQuark, JadePool, etc. provide similar mortgage services in China, and their annualized return rate is about 5%-25%.
In addition, there are some service providers with unique services. For example, Xu Bin told PANews that because InVault has obtained the relevant Hong Kong license, its company can provide dual custody of encrypted assets and legal currency.
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An increasingly clear road to compliance
The custody of large amounts of funds is not only a reflection of investors' demand for security and other value-added services, but also the only way for service providers such as exchanges to meet regulatory requirements.
For example, the Hong Kong Securities and Futures Commission (SFC) introduced a conceptual regulatory framework for virtual asset trading platforms on November 1, 2018.
The framework clearly states that as an intermediary, the operator of the exchange must comply with the regulations of the Hong Kong Securities and Futures Commission (Client Money Rules Cap.571). For the client's funds, the platform must establish one or more accounts and manage them separately. And to be clear whether they are securities.
The framework also indicates that the platform operator is expected to keep a certain amount of virtual assets entrusted by it and which are not frequently traded by customers (for example, 98%) in the form of cold storage to minimize risks.
Although there is currently no law that clearly and substantively stipulates that the custody of encrypted assets needs to comply with the trust law, but in the actual operation process, some trustees often apply to get Trust license in the region where it belongs.
For example, when PANews recently interviewed Paxos co-founder Rich Teo at the Consensus conference, the latter said that the founding team of his company had been in contact with financial institutions and the government in New York as early as 2011 to apply for supervision.
"About the end of 2013 or early 2014, Paxos began to communicate with NYDFS (New York Department of Financial Services), went through a long process, and finally got the trust license in 2015."
Xu Bin told PANews that it took seven months from the application to the acquisition of InVault's license, and the institution needs to pay a deposit to the Hong Kong regulatory authorities.
What is the impact of the guidance plan issued by FinCEN, which has recently caused heated discussions in the industry, on the custody of encrypted assets? Shalt, founder and CEO of BitMart, an exchange that has been approved by the U.S. Financial Services Bureau for MSB (Money Service Business) qualification, told PANews that since digital asset custody institutions in the U.S. market generally apply for state-level trust companies (Trust Company) ) to conduct digital asset custody business, such as the custody institutions of trading platforms such as Coinbase, ltbit, and Bakkt.
"According to the regulations of Fincen in the United States, banks (including Trust Company) defined by CFR § 1010.100 do not need to apply for a Money Service Business license under Fincen. Currently, states that are more friendly to digital asset custody policies include New York State, North Dakota, Wyoming, etc," he added.
