While cryptocurrency has been in the news for all the wrong reasons lately—from the Mt. Gox debacle to the collapse of the Japanese exchange Coincheck—digital currency is still a hot topic that has attracted the attention of big banks from around the world. The latest news in the cryptocurrency space is that JPMorgan Chase is launching custody services for cryptocurrencies, marking the first time a major bank has entered the crypto custody space. This is a big step forward for cryptocurrency, and it’s a development that could help bring peace of mind to crypto-investors.
Cryptocurrency custody gives commercial banks a foothold in the market, and they’re already moving quickly to fill the void. The newest way that banks are becoming involved in cryptocurrency is through custody services that allow them to protect their clients’ digital assets. The first commercial bank to offer a crypto custody service is Bank of New York Mellon, which announced in August that it will offer its clients the ability to store their cryptocurrencies with the bank.
Although the cryptocurrency market has seen a slight downturn today, last week saw the announcement of a new custodial service that is expected to legitimize the cryptocurrency market. This is because the service, which has been dubbed the “JP Morgan coin” by the media, has the potential to attract the big banks that have been wary of the market. (This is because the custody service, which would allow banks to hold and transfer cryptocurrency with the same level of security as fiat, would address the main barrier preventing banks from investing in cryptocurrency).Custody services are not the most attractive corner of the crypto-ecosystem, but 21st century solutions are. 21st-century approaches to digital asset storage and security are critical to the widespread adoption of cryptocurrencies. Therefore, the recent announcement by Cowen Inc. that the 103-year-old U.S. investment bank will hold cryptocurrencies on behalf of asset managers and hedge funds is noteworthy, especially given similar statements by traditional banking giants like Bank of New York Mellon and Deutsche Bank earlier this year. Is it too early to talk about a movement? It’s definitely a trend, Raphael Polanski, managing director of Boerse Stuttgart Digital Ventures GmbH, told Cointelegraph. Traditional banking giants like Wells Fargo – which has also announced plans to offer cryptocurrency services to its high-net-worth investors – are being pushed into this business by their customers who want to grow their cryptocurrency and token business. These customers are also not yet ready to entrust fintech pioneers with sums of hundreds of millions, Polanski says, adding: They want a reliable partner that they have known for decades, and that is still the traditional banks. Yes, more [traditional] banks will offer custody services, predicts Michael Hoffman, associate professor of finance at the University of Rochester. It’s like building a house with the guardian as the foundation, he told Cointelegraph. Most users are barely aware of the monitoring feature, but it is crucial to keeping the house afloat. Matthias von Hauff, CEO of fintech bank TEN31, told Cointelegraph: Jurisdictions with strong financial regulatory systems are generally beginning to see the importance of establishing a robust regulatory framework for crypto-currency storage. He also expects more traditional banks to become active in asset custody.
Door release ?
Old banks’ interest in storing cryptocurrencies may seem surprising at first glance. Finally, commissions are not profitable; Coinbase’s holding fee for securities, for example, is about 50 basis points per year. It won’t make them [i.e. the banks] much money, Hoffman said. But banks could see it as a loss leader that allows institutions to sell additional – and more lucrative – services, such as cryptocurrency trading, to new conservative customers. According to von Hauff, many providers offer their services almost for free, while the storage of cryptocurrencies logically opens the door to many opportunities for cross-selling: This amounts to offering free current accounts to bank customers. You lose money up front, but you have a customer to whom you can offer all kinds of financial products. Banks will also be sure to keep an eye on Fidelity Investments, the mutual fund behemoth that became the first institutional custodian of cryptocurrencies in 2019 and expanded its coverage of digital assets to Asia in October. Its Bitcoin (BTC) storage business has been incredibly successful, Fidelity CEO Abigail Johnson told Barron’s in December, adding: If you had asked me at the beginning if we or anyone else would prioritize bitcoin storage, I would have said: Not at all, I mean, that’s the opposite of what it’s all about, but the reality is you need it, because if you’re an individual who’s hiring an advisor and you’re drafting an estate plan, you really need someone to hold your Bitcoin.
Will banks displace fintechs?
With the exception of Fidelity, which is an outlier, the cryptocurrency custody industry really started to flourish in 2019, driven by fintech companies. But as stronger banks enter the arena, the focus may change. I wouldn’t say that the first fintech to enter this sector will inevitably be ousted by traditional financial institutions, but that as they enter this space, competition for customers will certainly increase, Sean Stein Smith, associate professor of economics and business administration at Lehman College, told Cointelegraph. Perhaps certain populations will prefer to do business with fintech companies rather than traditional commercial banks, he added. Polanski believes there should be room for partnerships between banks and fintech companies. We foresee many strategic moves in the market where traditional banks will invest in cryptocastodians instead of developing their own solutions. Banks are generally not pioneers when it comes to adopting new technologies, von Hauff said. Not surprisingly, most banks initially left this playing field to fintech companies. Now it looks like they are starting to catch up. The nature of cryptocurrency storage could also change soon, especially as the cryptocurrency industry moves from proof-of-work to proof-of-stake transaction confirmation protocols and stacking becomes more common, Hoffman told Cointelegraph. If a user bets on a cryptocurrency like Ether (ETH), which helps the network validate the blocks in its log, they can expect a return – about 6.7% over a 365-day period. But who will track, secure and document all these additional resources? In the future, everyone will have to offer stacking, Hoffman predicts, but not all holders will be able to do so. Perhaps it will become the domain of small businesses specializing in cryptocurrency storage. Meanwhile, things are moving fast, and Polanski expects crypto currency deposits to become widely commercialized within three to four years. The speed at which different companies are building a common infrastructure is amazing. As well as all the new entrants, regulation could also determine the future of childcare, he told Cointelegraph, adding: The combination of these effects leads to a network of large suppliers with similar prices, which partitions the market and makes it difficult for new competitors to enter. This should be a plus for cryptocurrency users who benefit from affordable and accessible services. In addition, Polanski envisions interoperability of custodians, making it easier for customers to move tokens and cryptocurrencies between ecosystems.
What about custody services for ordinary investors?
Recent announcements have focused on cryptocurrency storage solutions for institutions rather than individual investors, but that’s not so surprising because institutional players and private banking customers simply have more assets to deploy, Stein Smith said, adding: In terms of the business model, it makes sense to offer services to the most valuable customers first. Retailers don’t need that, Hoffman said. They can write their private key on a piece of paper and put it in the safe. You don’t even need it to file a tax return. But for institutional investors, it’s a different story. In the United States, accredited investors with assets of $150,000 or more must keep them under the supervision of a qualified custodian. In a way, it makes sense, Hoffman continued. They really don’t want the CEO of the company to hold the keys to the company’s billion dollar investment in BTC. While it is unlikely that the CEO would flee to the Cayman Islands with a locked key, it is best to place it in a secure financial safe. Retail deposit solutions lag behind in terms of usability and functionality, Polanski said, and he doesn’t expect that to change. They will continue to be a relevant option for those who want to use them, but they will not conquer the market.
Cryptocurrencies in pension funds?
All in all, the fact that financial heavyweights like Fidelity, BNY, Deutsche Bank, Northern Trust, DBS Bank and others want to offer storage of digital assets could be a revolutionary development for the world of cryptocurrencies, and we can expect that even pension funds will soon be able to store crypto assets. The inclusion of bitcoin and cryptocurrencies in retirement planning is actually already happening through self-directed IRAs, Stein Smith told Cointelegraph. With the growing interest in and integration of cryptocurrencies into traditional custody and other financial services, it makes sense for bitcoin and other cryptocurrencies to become an integral part of the retirement planning process. Related: Bitcoin on balance sheet draws negative attention from anti-cryptocurrency banks According to Hoffman, custody is big business, the foundation of the crypto-currency construct, and even if custody fees remain relatively low, 1% of $1 trillion is still a lot of money. At the same time, non-profits, pension funds and other institutional investors need secure and reliable custody services if they want to invest in cryptocurrencies. The main reason institutional investors have shunned cryptocurrencies so far is the storage problem, Duke University’s Campbell Harvey told Cointelegraph in April : They had no mechanism to store private keys. They didn’t want to take the risk of detention. But today some solutions seem to be within reach.Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks a foothold in the market. Cryptocurrency custody gives commercial banks. Read more about custody of cryptoassets and let us know what you think.
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