The failures of crypto firms like FTX and Celsius, as well recent bank collapses have eroded the belief in the financial system. Investors of all sizes are seeking reliable and secure storage for crypto. Investors are concerned about the safety and accessibility of their funds when they approach custodians.

Regulated custodians are vital in protecting assets. They provide services like segregated accounts and protection against financial instability. They also offer cold storage for keys, advanced security technologies, and insurance coverage in case of theft, loss, or misuse.

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Recently, several institutions revealed their plans for crypto. This brought new interest, capital, and participants. BlackRock filed for permission to create an ETF that tracks bitcoin, sending a strong signal to the rest the financial industry. It is not a small thing for BlackRock, one of the largest financial institutions in the world, to dip their toes into the bitcoin waters. This is a symbolic act that signals to the market “Bitcoin will be here to stay.” Institutions like this one will eventually need regulated custody in order to protect the assets of these new market instruments. It is difficult to ignore what has occurred in the last 18 months.

What can we learn from crypto failures?

  • All custody is not the same. Simply because someone holds your assets does not mean that they are a regulated Custodian. Custodians in traditional finance must adhere to specific regulatory standards for the protection of client assets. In the crypto-space, custodial solutions range from simple software solutions to fully licensed cold storage solutions. Cryptocurrency does not yet have the same global standards as other financial institutions.
  • To protect assets against misuse, theft, or fraud, investors need to have the systems that underlie them working together. Trading should be handled by separate entities. The traditional finance market infrastructure is a network of exchanges and broker-dealers. It also includes clearinghouses, transfer agencies, banks, and custodians. Each entity has its own role and set of rules.
  • Are you sure who your custodian really is? Has your custodian had a history of caring for assets? What is the security model of your custodian? Many people tried to withdraw their assets by 2022, but were disappointed.

You may want to find someone else if your custodian cannot reconcile these points and your personal risk analysis. Over time, I think that custodial practice will get stronger as a result of necessity. No custodian would like to be the next story in the news about losing client assets. Over the past 18 months, we have learned that strong safeguards are needed to protect investors’ assets. We all need to rise up and meet the challenges. Digital assets are the most innovative asset class on earth and a reliable infrastructure is essential for the industry to thrive.

Nick Baker is the editor.