As the market for crypto assets matures, custody services have emerged as a massive business. While it’s counter to the spirit of controlling your own assets without an intermediary, the reality is that many consumers and professional traders will prefer to have a third-party manage their assets. They don’t want to take on the risk of losing their private keys and thus irreversibly losing their assets. Further, for institutions entering the space, custody is a requirement.
This has resulted in a myriad of custodians for digital assets. There are companies like Coinbase, BitGo, and Crypto.com that have been focused on crypto from day one, but traditional financial institutions have also entered the space. BNY Mellon, Fidelity, and Northern Trust have all announced plans to provide custody for crypto assets.
The type of transactions, volume, specific assets, and exchanges used to trade, all play into what setup makes the most sense for your situation.
Whether you go with one of the crypto-focused custody providers or an established institution, there are few key issues to keep in mind:
Trust — Clearly the first and most important consideration when choosing a provider is trust. Crypto assets are a bit different than traditional financial assets, in that a breach is considerably less forgiving. A hack typically means that funds will be irreversibly lost. There are mechanisms built into the infrastructure used by traditional financial institutions and others involved in money transmission to retrieve funds misappropriated due to fraud or errors. These don’t currently exist in crypto.
Return — After ensuring the proper controls and security measures are in place to prevent hacks, you want to make sure you’re maximizing your return. In addition to the potentially appreciation of assets over time, certain assets are eligible for staking and/or can be used as collateral for lending. Getting that mix right and being able to rebalance as necessary should be top of mind.
Reporting — Once you ensure a custody provider can be trusted and that you’ll be able to maximize your return with them, tracking and reporting is the next most important consideration. Crypto assets have complex accounting requirements and there are significant tax implications for transacting in crypto. When making decisions about what to do next, you need to be able to clearly assess your financial position and the implication of any potential moves.
In any case, none of these considerations are “one size fits all.” The type of transactions, volume, specific assets, and exchanges used to trade, all play into what setup makes the most sense for your situation.
Take a look at what’s out there. If you’re unsure of what’s right for you, talk to others who have dealt with this before (even if if they seem potentially competitive, find out). While it’s a bit more effort up front, it’s worth putting in the time to carefully assess your custody options before choosing a provider. Ideally you’ll be working with them for years to come.