Hackers and Fraudsters Targeting Crypto Custody Services
When it comes to safeguarding cryptocurrencies, hackers and fraudsters are always on the prowl, making crypto custody a high-stakes business. Unlike traditional assets like stocks and bonds, which are considered relatively straightforward to custody, the protection of crypto assets comes with significant risks and expenses. According to Hadley Stern, the chief commercial officer for Solana custody tool Marinade, the cost of safeguarding crypto assets can be up to 10 times higher compared to traditional assets, as reported by Bloomberg.
Stern, who previously led digital asset custody at Bank of New York Mellon Corp, noted that the high costs associated with crypto custody have made it a lucrative growth area for both traditional Wall Street banks and startups. The crypto custody business, currently valued at $300 million, is experiencing rapid growth at a rate of approximately 30% annually, according to estimates by Fireblocks.
Finance professor Campbell Harvey from Duke University mentioned to Bloomberg that new entrants in the industry are optimistic about the significant expansion of the market in the future.
Traditional Banks Making Moves into Crypto Custody
Currently, the crypto custody market is dominated by players like Coinbase and BitGo, as traditional financial institutions have been hesitant to enter the sector due to regulatory uncertainties. However, banks such as BNY Mellon, State Street Corp., and Citigroup have either ventured into crypto custody services or announced plans to do so, albeit cautiously.
For instance, BNY Mellon launched a digital assets custody platform in October 2022, initially supporting Bitcoin and Ethereum custody. Nasdaq had announced plans to enter the crypto custody space but later paused its initiative in July 2023 due to regulatory concerns.
Controversy Surrounding Crypto Custody
Despite the growth in the crypto custody sector, third-party custody services have faced criticism from the crypto community. The mantra “not your keys, not your coins” emphasizes the importance of holding one’s encryption keys to maintain control over assets, casting doubts on the necessity of external custody services. While custody firms strive to mitigate risks of hacks and thefts, incidents like the recent settlements with Robinhood and Galois Capital with the SEC have raised concerns about lapses in custody protocols.
Regulatory Hurdles and the Role of the U.S. SEC
One of the significant regulatory challenges in the crypto custody space is the SEC’s rule, SAB 121, which imposes restrictions on financial firms offering crypto custody services. Despite President Joe Biden vetoing a congressional attempt to overturn the rule, some banks have received exemptions. However, uncertainty persists, with the industry closely monitoring potential changes based on the outcome of the U.S. presidential election.
Many in the crypto community are eagerly anticipating the November elections, with former President Donald Trump pledging to replace SEC chair Gary Gensler with someone more supportive of the crypto industry. David Portilla from Davis Polk & Wardwell LLP highlighted the need for transparent regulatory policies to address the risks associated with crypto custody.
Future Outlook and Market Dynamics
With traditional Wall Street players and startups eyeing the growing crypto custody market, the industry is poised for significant evolution. Overseas players like London-based Copper are closely monitoring the U.S. market, with potential shifts depending on the election outcome. Bobby Zagotta, CEO of crypto exchange Bitstamp USA, emphasized the importance of seizing opportunities in the evolving services marketplace.
As the crypto custody sector continues to expand and evolve, the integration of traditional financial institutions and regulatory frameworks will play a crucial role in shaping the future landscape of asset safeguarding services.