As cryptocurrency continues to reach individual investors, highlighted by the recent launch of nine spot Ethereum exchange-traded funds, custodian providers are becoming increasingly vital. Given the regulatory and security concerns surrounding digital assets, crypto custody differs fundamentally from the safekeeping of traditional assets. As more institutions adopt blockchain technology, the tools and technologies developed by custodians could potentially be applied to other areas as well.
Understanding Crypto Custodians: Proliferation Continues, a new from Javelin Strategy & Research, explores how the new wave of custodians has introduced a series of innovations to the industry. Joel Hugentobler, Cryptocurrency Analyst at Javelin and lead author of the study, lays out the considerations that financial institutions should consider when selecting a custodian, including storage methods, insurance coverage, and the full range of product offerings.
Branching Off
In the early days of crypto, a few exchanges employed executives with backgrounds in traditional finance who later branched off to specialize in custodial work for digital assets. Several of these executives went on to establish their own custodial companies, focusing specifically on the crypto space.
“There’s obviously a lot of overlap between traditional and crypto custodians in such aspects as managing the assets or verifying ownership,” said Hugentobler. “But what really separates them is the added layers of complexity that involves the blockchain. This adds focus toward needed security, risk, and compliance. In addition, there’s tracking wallets, tracking transactions, and verifying ownership.”
As more traditional financial institutions entered the digital asset industry, the technology and solutions offered by custody providers evolved, leading to the development of enterprise-grade solutions. Asset manager Fidelity joined the custody race, competing with other players to create robust solutions capable of supporting institutional clients. According to the report’s analysis, Fidelity Digital Assets is the only legacy finance name among the major players in the crypto custodian landscape.
The solutions offered by most of these custody providers include compliance with regulations and even insurance for their clients’ holdings, aimed at bolstering confidence and adoption. Custody-focused companies have also fixated on platform capabilities and user experience, offering solutions beyond storage, such as staking.
Even financial institutions with a history of asset management generally turn to crypto specialists for custodial services. For example, nine of the 11 bitcoin exchange-traded funds introduced earlier this year have employed Coinbase as a custodian, including those operated by organization like BlackRock, with its deep experience in handling assets.
For institutions new to the digital asset market, a custodian allows them to avoid the complexities of establishing and maintaining blockchain addresses and securely managing private keys—tasks that carry significant risk.
However, it’s not just about having the technology to store digital assets properly. Outsourcing these services also relieves financial institutions from the burdens of auditing, tax, compliance, and other related tasks.
Moving Toward Other Assets
Custodians also have an opportunity to develop risk management services within their platforms, helping both institutional and retail clients better assess the industry’s environment, portfolio positioning, and risk metrics. Focusing on dynamic tools within the overall user experience will also be an important factor as retail and institutional customers choose a custody provider.
Gaining this experience with assets held on the blockchain could also pave the way for traditional finance to blockchain rails. We’re already seeing automobile titles stored on the blockchain in California, and tokenized stocks and bonds being listed in the EU.
“There are plenty of live examples of custodial options that have proven to be faster, more efficient, and more transparent solutions than existing rails,” said Hugentobler. “Whether it’s assets or products, we think that it’s just a matter of time before they end up on the blockchain.”
Hugentobler sees several opportunities in the capital markets that could benefit from the efficiencies that a digital custodian can bring. The blockchain could bring liquidity and create a market for assets that are illiquid or opaque, like art or fine wine.
“Custodians in the space that are really focused on this technology are going to benefit from the experience,” Hugentobler said. “As the technology matures, they will be in the best position to handle a wide range of assets.”