What Is A Qualified Crypto Custodian?

what is a qualified crypto custodian?

Security risks, hacking and cyber attacks, market volatility and regulatory risk make buying and selling cryptocurrencies stressful to say the least.

Perhaps more stressful is the challenge of securely storing crypto assets for safe-keeping… A process known as “crypto custody”.

However, online crypto financial services providers, such as Coinbase, Circle and BitGo are starting to offer secure crypto custodian solutions. These cryptocurrency platforms want to be the default partner banking for storing digital assets, such as Bitcoins and new asset backed tokens.

The collective aim is to convince institutional “hodlers” to hand over billions in crypto assets to a trusted crypto custodian.

They also want to move beyond risk management with crypto custody insurance to transfer risk to insurance companies, such as Lloyds.

What is a Qualified Crypto Custodian?

The nascent cryptocurrency industry is following custodianship laws and regulations put in place by the Securities and Exchange Commission (SEC).

Like a qualified financial advisor, a qualified crypto custodian must implement a set of controls designed to protect client assets. This includes protection from loss, misuse, misappropriation or exposure an advisor’s “reversal of fortune”.

The SEC also defines a “Qualified Custodian” as follows:

(3) “Qualified custodian” means —

(i) A bank as defined in Section 202(a)(2) of the Advisers Act [15 U.S.C. 80b-2(a)(2)] or a savings association as defined in Section 3(b)(1) of the Federal Deposit Insurance Act [12 U.S.C. 1813(b)(1)] that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act [12 U.S.C. 1811];

(ii) A broker-dealer registered under Section 15(b)(1) of the Securities Exchange Act of 1934 [15 U.S.C. 78o(b)(1)], holding the client assets in customer accounts;

(iii) A futures commission merchant registered under Section 4f(a) of the Commodity Exchange Act [7 U.S.C. 6f(a)], holding the client assets in customer accounts, but only with respect to clients’ funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and

(iv) A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients’ assets in customer accounts segregated from its proprietary assets.

A qualified crypto custodian is any organization that has custody of digital assets. Again, the SEC offers a definition below for the term “custody”:

(1) “Custody” means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. Custody includes —

(i) Possession of client funds or securities, (but not of checks drawn by clients and made payable to third parties,) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them;

(ii) Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and

(iii) Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.

The final SEC rules on custody and qualified custodian obligations can be viewed here.

Which Companies Are Crypto Custodians?

Companies offering crypto custody services include Coinbase and BitGo.

Other players include Komainu1, Circle, and ETC.

A smattering of traditional banks including Goldman Sachs, JPMorgan Chase, Bank of New York Mellon and the InterContinental Exchange have also announced they intend to enter the crypto custodian space.

What Does Coinbase Custody Cost?

Coinbase acts like an online securities brokerage, but for cryptocurrencies. Coinbase Custody is the institutional storage service for crypto assets offered by Coinbase.

The company offers trading for institutional and individual cryptocurrency investors on a limited number of crypto assets, coins and tokens.

As of this writing, Coinbase offers custody for a limited number of assets including Bitcoin, Bitcoin Cash, Ethereum, Litecoin and, in the future, ERC20 tokens.

Crypto custody is agnostic about where the assets are acquired. For instance, a cryptocurrency purchased on Coinbase, Circle or another exchange, could be stored securely by a 3rd party custody service.

For example, Coinbase Custody is only available as a service to accounts with greater than $10,000,000 in crypto assets.

According to Bloomberg, Coinbase Custody costs $100,000 as a setup fee for each account. The service also costs 10 basis points2 per month and requires a minimum balance of $10 million in digital assets.

Footnotes

  1. A collaboration between Japanese bank Nomura, Global Advisors (parent company of Coinshares), and hardware developer Ledger.
  2. A 100th of a percentage point