1. When institution ready?

The crypto industry has expected institutions to enter for quite a long time. When institution comes in we will see mass adoption, they say. To achieve that, we have to be institutional ready. Following the regulatory requirement, one major infrastructure is crypto custodial service. Today we will look at what I believe are the top custodian providers for institutional clients.

2. How institutional clients evaluate a custodian provider?

To have a better understanding of what players are leading in this field, we need to take one step back and see how institutional clients evaluate a custodian service provider. According to a keynote given by Mike Belshe, co-founder and CEO of BıtGo, at the 2019 Pantera Annual Summit, typically his clients ask him about his team, its financial standing, its insurance policies, whether completed the SOC1 type audit [1], regulatory compliance, and the tech. Borrowing this logic, in this article, I will use client size and asset under custody as the two major criteria.

With that in mind, we will take a look at Coinbase Trust, Fidelity, Bakkt, Paxos, Bitgo, Gemini Trust, Prime Trust, Kingdom Trust and other emerging custodian providers which have been covered by major crypto related media.

3. Who need crypto custodian services?

In the US, under the Investment Advisers Act if 1940, “for any investment adviser with asset under management over $150,000,000 … shall take such steps to safeguard client assets over which such adviser has custody, including, without limitation, verification of such assets by an independent public accountant, as the Commission may, by rule, prescribe.”

This means any hedge funds, OTC desks, broker dealer with an asset over 150 million USD needs a licensed custodian. As Coinbase Custody mentions in its introduction video, such clients include asset allocators, endowment, pension funds, family offices, and managers who manage those funds such as hedge funds, crypto funds, and index funds.

4. What is the compliance requirement for crypto custodian providers in the US?

In New York state where most of the US financial institutions reside, the regulatory body is New York Department of Financial Services (NYDFS), which is also the regulatory body for other virtual currency related business. Under New York’s banking law, NYDFS has granted charters to limited custodian providers such as Paxos Trust, Gemini and Coinbase Custody. The trust charter is to be differentiated to the BitLicense for Virtual Currency Business Activity.

According to NYDFS, “An entity chartered under the New York Banking Law must receive the prior approval of the Department to engage in virtual currency business activity. However, such a chartered entity is not required to apply for a BitLicense”. And, out-of-state entities can perform trust activities in New York, but “out-of-state business required to obtain a BitLicense to engage in virtual currency business activity in New York State or with New York State residents”. Therefore, the trust charter granted by NYDFS to crypto custodian services is obviously of more value than the charter issued by other states.

In other states, such as South Dakota, the regulation body is the Division of Banking.

5. Who are the leading crypto custodians in the US?

Coinbase Trust, as a NYDFS certified crypto custodian company started in 2018 and acquired Xapo’s institutional business in August 2019, Coinbase Trust claims to be the world’s largest crypto custodian. It offers custodian of 33 cryptos, with over “$7 billion in Assets Under Custody (AUC) for more than 120 clients”. With no public disclosure of its clients, we can only find from news coverage that its clients include Grayscale, the world’s largest digital asset manager, and the suite products of Coinbase itself such as Coinbase exchange, Coinbase Pro for liquidity and Coinbase agency only OTC. Fidelity Digital Assets (FDAS), a new subsidiary company of Fidelity founded in 2018, has recently acquired the non depository trust license from NYDFS. As explained in an article by Blockonomi, “this new license will give Fidelity’s cryptocurrency branch the permission to launch a cryptocurrency custody and trade execution platform for institutions and individual investors for New York residents — which is notable as this is where much of American wealth is managed, traded, and such”. Although there is limited information about its supported cryptos or AUC, FDAS leverages over $ 7 trillion asset under management of its parent company Fidelity. And according to a recent Coindesk report, “FDAS has a diverse client base, including hedge funds, family offices, an investment advisor and a small, U.S.-based pension fund.” Bakkt Warehouse: Bakkt has acquired the Digital Asset Custody Company (DACC) in April 2019 and announced institutional custody Bakkt Warehouse in November. In August, NYDFS has authorized Bakkt to provide custody services for bitcoin in conjunction with the launch of physically delivered bitcoin futures contracts. And its initial clients include Pantera Capital, Galaxy Digital, and Tagomi. The Bakkt custodian services is fully insured, SOC 2 Type II audit compliant. Kingdom Trust is an independent qualified custodian regulated by the South Dakota Division of Banking. It offers custody of digital assets. Kingdom Trust provides Bitcoin, Ethereum, Ripple and Litecoin custody service designed for financial institutions, hedge funds, investment sponsors, RIAs and family offices. Kingdom Trust currently serve over 100,000 clients and have over $12 billion in assets under custody. But the amount of its digital asset under custody is currently undisclosed. BitGo is a long player in the institutional business and has acquired license from South Dakota Division of Banking in 2019 as a public South Dakota Trust Company. It supports 200+ tokens and cryptos. And according to a report by The Block in May 2019, “BitGo has traditionally focused on its flagship custody business, reportedly storing $2 billion in clients’ assets across 100 different coins and tokens.” Based on its client chart as follows, BitGo’s clients are mostly exchanges, wallets, crypto payment companies or token funds.

BitGo Clients (part)

6. Paxos is rebranded from itBit in 2016. Paxos is more known for its stablecoin issued in 2018. But itBit has started to offer institution custodian services in 2017 and has received trust charter from NYDFS. It is focused on meeting the sophisticated needs of institutions, active traders and other trading professionals. It offers custody for 8 tokens and Paxos is qualified to custody cash, securities, and physical assets like gold. But I did not find any information about Paxos’ AUC or clients.

7. Gemini Custody™: launched in September 2019, Gemini Custody is a fiduciary and qualified custodian under New York Banking Law and is licensed by NYDFS to custody digital assets. It now supports 18 cryptos for custody. It is SOC 2 Type 1 compliant. The custody is insured. Its clientele includes the suite of products in Gemini’s ecosystem such as BlockFi, SPEDN Flexa and other wallets such as BRD wallet. There is little information found about it AUC.

8. Prime Trust is a qualified custodian provides FIAT and token custody, funds processing, AML and KYC compliance, and transaction technology for the new digital economy. It first started crypto custodian in 2018. It is SOC 2 Type 1 compliant. It provides custody for Bitcoin, Ethereum, ERC20, and Stellar. Its main crypto custodian are crypto exchanges and wallets. PrimeTrust also provides fiat custody and is Binance US’s fiat partner.

9. Anchorage is a a South Dakota-chartered trust company founded in 2017. Services are not yet offered to residents of New York. Anchorage services are offered to institutional investors only, and are not marketed to residents of the EU. As a state-chartered trust company with fiduciary[2] powers, Anchroage’s disclosed clients are mostly crypto funds and most of which are its investors. It is also worth mentioning that Anchorage is also a founding member of the Libra Foundation.

Part of Anchorage’s Clients

10. Ledger Vault

Ledger Vault is not a qualified custodian, but rather provides self-custodial tech for institutional clients. It provides both hardware and APIs for clients as such small wallet providers, or token foundations.

11. Vo1t is established in 2015 in London UK. According to its website, its clients include Zedra, Securitize, BCB Group, Equity Trust Company, etc. In addition to custody, Vo1t also provides lending, staking and validating services. It is not positioned as a qualified custodian services provider but rather a cold storage solution. It supports 19 coins and counting.

6. What’s new with the institutional custodian providers?

As Tim Ogilvie, CEO of staked.us mentioned in a recent podcast, more institutional crypto holders view staking reward as stationary yield, so more custodian providers are keeping up with clients’ demand of staking and on-chain governance participation. A second trend is multiple custodian providers are getting into the broker dealer. As stipulated by SEC, a broker is “any person engaged in the business of effecting transactions in securities for the account of others” and a dealer is “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise”. A recent report by the Block says that BitGo, Abra, Gemini and MakerDao are all exploring or seeking a broker dealer license. Coinbase and Circle have both been granted a broker dealer license in 2018, now able to operate as a broker dealer, offering digital tokens considered to be securities.

That’s all about the leading custodian service providers for institutional clients in the US. Coming up, let’s take a closer look at crypto enabled payment.