Crypto custody varies in quality: Crypto Long & Short

Crypto custody varies in quality: Crypto Long & Short

The Importance of Regulated Custodians in the Blockchain Industry

The failures of crypto companies like FTX, Celsius, and BlockFi, as well as recent bank collapses, have eroded belief in traditional financial systems. In the face of these uncertainties, investors worldwide are seeking reliable and secure crypto storage. When investors approach custodians, their primary concerns are the safety of their funds and the ability to access them. Regulated custodians play a vital role in ensuring the security of assets by offering services such as segregated accounts, protection from financial instability, cold storage of keys, advanced security technology, and insurance against theft, loss, or misuse.

The Flight to Safety and the Role of Regulated Custodians

In the last year, we have witnessed a flight to safety as investors seek reliable alternatives to traditional financial systems. This flight to safety has brought increased interest, capital, and participants to the crypto industry. Institutions such as BlackRock filing for permission to create a bitcoin ETF signal a growing acceptance of cryptocurrencies in the financial world. However, the need for regulated custody becomes apparent as these institutions enter the market.

Not All Custody is the Same

One of the lessons learned from the failures in the crypto space is that not all custody is the same. In traditional finance, custodians must meet specific regulatory standards to protect client assets. However, in the crypto space, custodial services range from software solutions to fully licensed and regulated cold-storage solutions. The controls and standards that exist in other financial institutions are not yet global standards in the crypto world. This discrepancy highlights the need for stronger regulations and standards in the crypto custodial space.

The Importance of Separating Trading and Custody

Investors need the underlying systems to work together to protect their assets from misuse, theft, or fraud. In traditional finance, market infrastructure involves a carefully organized network of exchanges, broker-dealers, clearinghouses, transfer agents, banks, and custodians. Each entity has a specific, well-defined role and rules they must abide by. However, in the crypto industry, the separation between trading and custody is not always clear. This lack of separation can leave investors vulnerable to potential risks.

The Need for Transparency and Due Diligence

Another important consideration when choosing a custodian is knowing who they are and understanding their security model. It is crucial to conduct due diligence and assess the custodian’s track record and security practices. Many investors were disappointed when they sought to withdraw their assets in 2022, highlighting the importance of conducting thorough research and understanding the risks associated with a custodian.

The Future of Custodial Practices in the Blockchain Industry

The failures and challenges faced by the crypto industry over the past 18 months have underscored the need for strong safeguards to protect investor assets. As the industry matures, custodial practices will become much stronger out of necessity. No custodian wants to become the next news story about losing customer assets. The future of the custodial space in the blockchain industry is promising, but it requires all stakeholders to rise to meet the challenges.

Digital assets continue to be the most novel asset class on the planet, and reliable infrastructure is crucial for the industry to grow. The entry of institutions like BlackRock into the crypto market serves as a signal that cryptocurrencies are here to stay. As these institutions bring new interest, capital, and participants, regulated custody will play an essential role in securing the assets for these new market instruments. The need for regulated custodians that meet global standards in the crypto industry is becoming increasingly apparent.

In conclusion, the failures in the crypto industry and the flight to safety have highlighted the importance of regulated custodians in ensuring the security of assets. Not all custody is the same, and investors need the underlying systems to work together to protect their assets. Conducting due diligence and understanding the security practices of custodians is crucial. As the industry evolves, custodial practices will become stronger, ensuring the growth and reliability of the blockchain industry.

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