The importance of crypto asset custody remains underappreciated within the industry. Beyond safeguarding digital assets for holders, custody services act as a critical bridge connecting the cryptocurrency ecosystem with traditional finance. Recent regulatory advancements have further solidified its compliance framework, marking a significant milestone.
The Booming Crypto Custody Market
In late July, the U.S. Office of the Comptroller of the Currency (OCC) issued a public letter clarifying that nationally chartered banks are permitted to provide crypto asset custody services. This move not only creates a more favorable regulatory environment for traditional financial institutions to enter the crypto custody space but also encourages increased investment in digital assets by conventional investment firms.
As an integral part of the crypto ecosystem, custody solutions allow third parties to focus on their core functions without diverting excessive time and resources to understanding how to securely hold assets or manage accounts.
Despite its critical role, crypto asset custody has historically received less attention than trading, asset management, or brokerage services. This is largely due to its early-stage development and distance from retail consumers. However, its significance cannot be understated.
"In traditional capital markets, custodians play a vital role in the 'asset management—brokerage—custody—trading—clearing and settlement' chain. Similarly, in the crypto ecosystem, the separation of exchange functions and custody services is becoming increasingly clear," explains Zhang Li (a pseudonym), a business lead at Huobi.
Li Yao, Senior Vice President at Cobo, echoes this sentiment, emphasizing that custody not only protects assets for industry participants but also serves as a conduit linking the crypto world with traditional finance.
"Globally, the origins of asset custody in traditional finance date back to the 1860s when the first mutual fund in the UK was established with custody provided by the Bank of England. This was aimed at curbing unregulated private investment projects that lacked legal protection, often resulting mismanagement or absconding with funds. The purpose of custody in crypto is similar—only with the emergence of正规托管机构 can traditional fund managers gain the confidence to enter this industry," Li Yao tells Chain Catcher.
According to Section 206(4)-2 of the U.S. Investment Advisers Act of 1940, registered investment advisers deemed to have custody of client assets must "place these assets with a qualified custodian" and "undergo an independent audit of the assets."
Over the past decade, most crypto asset custodians have emerged natively within the crypto ecosystem, with traditional asset custody providers largely staying on the sidelines. The OCC's recent stance may alleviate concerns among some traditional financial institutions.
"As financial markets become increasingly digital, banks and other service providers will need to leverage new technologies and innovative methods to meet customer demands while continuing their historical role as financial intermediaries in payments, lending, and deposit services," stated the OCC.
The Current Landscape of Custody Services
With growing interest from financial institutions, the crypto custody industry has developed a relatively clear structure and segmentation.
The crypto asset custody market first emerged around 2013–2014. Early entrants like Xapo, which raised $40 million in funding, leveraged their first-mover advantage to gain trust from institutional clients. By early 2018, Xapo was reported to store approximately 7% of all circulating Bitcoin, valued at around $10 billion at the time. Other players like Metaco and Kingdom Trust also began operations during this period.
The surge in crypto asset prices and Xapo's success prompted many cryptocurrency exchanges and wallet providers to launch institutional custody solutions. Prominent examples include Coinbase and BitGo, alongside domestic pioneers like Cobo, which entered the market in 2018. Gemini, Bakkt, and hardware wallet manufacturer Ledger followed suit in 2019.
Since 2019, traditional financial institutions have also started dipping their toes into crypto custody. Asset management giant Fidelity and trust company Prime Trust are among the few early entrants, though regulatory uncertainty and high barriers to entry have limited widespread adoption.
Simultaneously, the industry has seen accelerated consolidation through investments and acquisitions. Leading custodian BitGo has acquired several companies over the past three years, including Kingdom Trust, staking service provider Hedge, security token platform Harbor, and portfolio management tool Lumina. In August 2019, Coinbase acquired Xapo's institutional custody business for $55 million.
Post-acquisition, Coinbase reported serving over 150 major clients with more than $7 billion in crypto assets under custody, including over 225,000 BTC stored for renowned investment firms.
Client Segmentation: Retail vs. Institutional
From a client perspective, the crypto custody market can be divided into two segments: To C (consumer-grade) and To B (enterprise-grade).
"To C consumer-grade custody primarily involves hardware cold wallets and web/mobile hot wallets, emphasizing simplicity and flexibility. To B enterprise-grade services focus on cold storage and multi-signature platform solutions, often extending to clearing, settlement, and asset management—prioritizing security, trust, and comprehensive service," notes Zhang Li.
Solution-Based Segmentation: Storage vs. Technology
From a solutions standpoint, Li Yao categorizes the market into fund storage custody and technology service custody.
The former refers to custodians solely providing storage services for clients who do not frequently withdraw assets, catering to entities like family offices or investment funds. The latter involves custodians offering additional services such as address system development or public chain integration for exchanges or blockchain developers.
"About 40% of Cobo Custody's clients are exchanges. By integrating our public chain, exchanges can generate addresses for their users. Thus, many exchange addresses in the market are actually managed by Cobo Custody," reveals Li Yao.
Private Key Management Strategies
Different solutions often correspond to varying private key storage methods, including:
- HSM (Hardware Security Modules): Utilizing dedicated physical hardware for key security.
- MPC (Multi-Party Computation): Splitting private keys into shards for enhanced security.
- Multi-Signature: Requiring multiple approvals for transactions.
For clients like exchanges or hedge funds that execute numerous daily withdrawals, low-latency MPC solutions with online key storage may be preferred over offline multi-signature options, which can delay withdrawal times.
To bolster security for institutional clients, many custodians invest heavily in physical key storage. For instance, Coinbase Custody and Xapo maintain vaults across the U.S. and globally. Xapo even repurposed a former military bunker in Switzerland, restricting access to personnel with pre-registered biometric and DNA data.
"When we need to execute large transfers, they FaceTime us to ensure we aren't under duress. For exceptionally large transactions, they fly in personally to confirm," shared a Xapo client interviewed by Fortune magazine.
Future Challenges and Opportunities
Despite growing interest, the crypto custody industry faces a pressing question: how to achieve profitability?
Currently, most custodians rely on charging small fees (often basis points) for storage and transaction services. "This is still far from the diversified business models of traditional custody banks, which include custody, settlement, asset services, and proxy payments," admits Zhang Li. Chain Catcher reports that one prominent domestic project initially promoting custody has since pivoted to other ventures due to profitability challenges.
As competition intensifies, custody fees are declining, with many players operating at a loss to capture market share. They hope that increased participation from mainstream financial institutions will inject larger volumes of assets, eventually leading to profitability. Some custodians are exploring alternative revenue streams, such as lending, asset management, or trade execution services.
Recently, custodian Anchorage launched brokerage services for its clients. "Institutional investors want a single solution for all their crypto needs—custody, trading, staking, voting, etc. Our goal is to make Anchorage that solution," stated CEO Nathan McCauley.
"Similar to traditional finance, crypto custodians won't just be custodians in the future. They will evolve into comprehensive asset management platforms to better serve clients," predicts Li Yao.
Security and Insurance Considerations
Despite stringent security measures, custodians cannot entirely eliminate theft risks. Unlike major exchanges with robust profitability and compensatory capabilities, custodians may lack the resources to cover losses fully in the event of a breach, potentially causing irreparable harm to clients.
This has spurred the emergence of crypto-focused insurance products. Global insurance broker Aon has formed a consortium of insurers to offer crypto asset insurance for clients of Metaco, a digital asset custody technology firm.
However, based on Li Yao's market insights, such insurance comes at a high cost. "Typically charged monthly, annualized rates can range from a few percent to over ten percent. Insurers assess the platform's security capabilities to determine premiums, and their evaluations are quite stringent."
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Overall, the crypto asset custody ecosystem is maturing, laying a solid foundation for increased institutional investment in the digital asset space.
Frequently Asked Questions
What is crypto asset custody?
Crypto asset custody refers to the secure storage and management of digital assets on behalf of individuals or institutions. Custodians use advanced security measures, including cold storage, multi-signature wallets, and insurance, to protect assets from theft or loss.
Why is regulatory compliance important for custodians?
Regulatory compliance ensures that custodians adhere to established standards for security, transparency, and accountability. This builds trust among institutional investors who must meet legal requirements, such as those outlined in the U.S. Investment Advisers Act of 1940.
How do custodians generate revenue?
Most custodians charge fees based on assets under custody (AUC) and transaction volumes. Some are expanding into adjacent services like lending, brokerage, or asset management to diversify revenue streams and enhance profitability.
What security measures do custodians employ?
Common measures include hardware security modules (HSM), multi-party computation (MPC), multi-signature protocols, and geographically distributed vaults with biometric access controls. Regular audits and insurance coverage further mitigate risks.
Can custodians support active trading strategies?
Yes, many custodians offer integrated solutions with low-latency key management for clients requiring frequent transactions, such as exchanges or hedge funds. MPC solutions are often preferred for their balance of security and efficiency.
What trends are shaping the future of custody?
Key trends include regulatory clarity, traditional financial institution entry, service diversification beyond pure custody, and rising demand for insured solutions. The industry is evolving toward integrated platforms offering custody, trading, and asset management.