Blockchain and digital assets have spread across myriad industries as real-world use cases grow and progressive regulatory regimes take effect.
Across the finance sector, institutional adoption of digital assets is gaining momentum, largely driven by new use cases, subsequent revenue streams, and efficiency gains afforded through blockchain technology.
Institutional-grade digital asset infrastructure is a prerequisite for implementing and utilising blockchain’s capabilities. Digital asset custody is one component of this infrastructure, and it is integral to adoption growth, security, stability, and compliance with global industry standards and regulations.
The value of crypto assets held in custody solutions is expected to reach $10T by 2030, and 10% of all financial assets will be tokenised by 2030.
There are a few custody options on the market, each suitable for different purposes. Therefore, institutions must consider several factors before selecting the right provider for their business.
The tokenisation of real-world assets will transform finance, so institutions need to note progress in this space at every stage. Many already use blockchain technology to streamline familiar financial use cases like payments, treasury, staking, and trading.
With faster global transactions, real-time settlement, increased transparency, and 24/7/365 market access, the opportunities to improve financial services with blockchain are endless.
Outside of finance, tokenisation will support the growth of new business models and use cases, from stablecoins and real estate to tokenising carbon credits and electric vehicles to luxury physical assets like jewels and artwork. The many possibilities are already becoming reality.
However, the efficiency gains, innovative use cases, and new revenue streams promised through tokenisation may go unrealised if institutions fail to adopt highly secure digital asset infrastructure like custody.
In this early stage of institutional adoption, ensuring the right choice of custody solution can provide the highest level of security and ability to meet regulatory compliance requirements. This is fundamental to establishing credibility and trust across the crypto industry at large.
In traditional finance, custody refers to the safekeeping of conventional financial assets like cash and securities. A bank or a third-party financial institution, such as a trust company or a brokerage firm, can carry out this task.
While the provider’s main responsibility is to prevent loss or theft of the customer’s financial assets, they are also responsible for ensuring regulatory compliance and can provide related asset management services.
Digital asset custody providers play a similar role in the secure and compliant storage of financial assets. However, cryptographic keys (also known as “private keys” or “secret keys”) are required to access and move these assets.
At a basic level, there are two main types of digital asset custody:
Managed custody: Not unlike traditional custody solutions, institutions place management, storage, and movement responsibilities on a third party.
Self-custody: Institutions manage digital assets independently without relying on a third party for support.
Similar to the advent of the Internet, institutions may experience a significant learning curve regarding the different types of digital asset custody solutions, regulatory constraints, and the best approach depending on their business model.
There are a few trade-offs between managed and self-custody solutions that institutions need to consider.
First, managed custody may require less operational overhead, as the third-party provider is responsible for storing and safeguarding private keys. However, this can lead to greater risk, as you are entrusting the safekeeping of your private keys to someone else and, therefore, relinquishing control.
Managed custody solutions may work for some, but the standardised approach can impact an institution’s ability to operate at scale for others. In the short term — and perhaps without adequate knowledge of the different types of solutions — quickly onboarding a managed custody solution may seem appropriate, but it can hinder long-term growth.
With self-custody, institutions can retain ownership and control over their private keys while simultaneously leveraging a highly customisable and scalable solution that can be adapted for new business frameworks and use cases. However, not all self-custody solutions are created equal. While some can appear cost-effective, flexible, and out-of-the-box at initial deployment, the reality is that those solutions often become difficult and expensive to scale alongside your business and lack the necessary security and compliance requirements of institutional players such as global custodian banks.
When it comes to build vs. buy, financial institutions and businesses of all shapes and sizes need to understand their options and ultimately find a trusted, experienced partner to help build their digital assets business and future-proof their financial infrastructure.
The crypto industry is constantly evolving and at a rapid pace, and custody providers are not excluded from this evolution. They must adapt and grow alongside the market to best serve institutions and emerging use cases.
Equally, institutions must carefully consider which digital asset custody solution can help them meet their current and future goals. Choosing the right provider can empower institutions to confidently navigate the digital asset ecosystem and prepare them for the future of finance.
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