Crypto custodial solution is a new innovation in the crypto space and it is gearing to usher in a new phase that will institutionalize the ecosystem. Of all the triumphs that were recorded in 2018, the explosion of this services stands as the most impressive. In this article, we will take a closer look at the concept of a crypto custodial service and how important it is to the establishment of crypto as a household name.
Why Is Crypto Custodial Solution Important?
Crypto custodial solutions main functionality involves the securing of crypto assets from unauthorized access and theft. To achieve this, a custodial service provider must look for ways to safeguard private keys, which are complex alphanumeric combinations used in completing crypto-enabled transactions. The complex nature of private keys makes it difficult for owners to easily remember and when they are hacked or stolen, the asset that these keys access are lost forever.
For years now, individuals have relied on online or hardware wallets and crypto exchanges as solutions for the safekeeping of their private keys. However, the susceptibility of crypto exchanges and online wallets to hacks has constantly served as this solution’s flaw. Also, storing private keys in hardware wallets or on paper has its limitation as it possible to lose the device or the paper. Apparently, the risks of losing private keys are even more pronounced when it comes to institutional investors. As such, these investors are yet to fully explore the potentials of the crypto market as it would take ingenious strategies to safeguard their assets.
In addition, an institutional investor in the United States is mandated by SEC under the Dodd-Frank Act to store their customers’ assets with a qualified custodian once the worth of the assets they control exceed $150,000. Therefore, this restricts their involvement with crypto, regardless of the fact that they are willing to introduce their clients’ to crypto investments.
This is where crypto custodial solutions come in and they currently have two basic methods of resolving this issue.
What Are Crypto Custodial Solutions?
Crypto custodial solutions are platforms that offer storage solutions for institutional investors like hedge funds, and other entities that control a huge amount of cryptocurrencies. These solutions currently deploy two ways of safeguarding the assets of their customers.
Hot Storage System
In this approach, the custodial solution connects the storage to the internet. As expected, this strategy gives customers quick access to their funds which means more liquidity. However, the downside of this approach is that the storage is also open to online attacks.
Cold Storage System
This solution completely disconnects the storage from the internet, therefore, shielding it from the risks that come from online exposure. On the downside, the solution does not offer as much liquidity as the hot storage does since the storage is offline and accessing the funds in real time would come with some difficulties.
The combination of the above-listed forms of custodial storage is known as vault storage which involves the storage of a large percentage of the funds in cold storage that can only be accessed with a private key.
The Future Of Crypto Custodial Solutions
Although the crypto space has witnessed innovative developments in crypto custodial solutions, the expectations are getting higher. In 2019, the following are the expected outlook of crypto custodial solutions.
Traditional Custodial Giants Will Shake Up The Ecosystem
We already have names like Coinbase, BitGo and Fidelity Investments pioneering the drive for the explosion of regulated custodial services. Nonetheless, the introduction of established names in this industry like Goldman Sachs will create an even more formidable lineup that will further establish the institutionalization of crypto. Although many of these big players have indicated their interest in this nascent market, they are yet to fully commit their resources to achieve their plans.
In 2019, the popularity of crypto custodial services and regulations will spur the emergence of established names in this market.
The Introduction Of Crypto Custodial Regulations
In the closing stages of 2018, notable developments were made with regards to crypto custodial regulations in some regions which include Malta, Switzerland, Bermuda, and Mauritius. These developments showed that governments have started noticing the growth of the crypto custodial market and they are willing to set up the right frameworks that will nurture this growth.
However, the situation in regions like the US where a considerable number of crypto custodial solutions are situated is still very confusing. The unavailability of clearly stated guidelines for the approval of a crypto custodial service is stalling the operations of firms like Coinbase and BitGo.
Nonetheless, there are indications that regulators in these regions will take the bold step of deploying frameworks that will govern this market in the near future.
Crypto custodial solution is the latest innovation in the crypto space and the progress made so far shows that it will usher in a new phase in the realization of the emergence of crypto as an institutional investment vehicle. Regulatory indecision which is currently a limiting factor will eventually give way as established names endorse and join the market.