The wait for institutions has been something that has been a topic passed around in the bitcoin and broader cryptocurrency space for years now. Many people wonder how things like a bitcoin ETF or more options for crypto custody that many larger investment firms and businesses will prefer or perhaps even require access to invest in the blockchain space. With talk of banks now entering the crypto custody business, the question starts to shift to does crypto need more custody solutions? Will more options be good for the blockchain industry?
What is Cryptocurrency Custody?
While there are a lot of niche points to topics like this that are more standard to the traditional finance space, what it boils down to is that crypto custody providers are third-parties that provide storage and security for their clients' crypto. The idea is these custodians are there to help store digital assets and protect them against theft, fraud, and other potential forms of loss that may be incurred. These providers typically charge a fee in return for this service which is the primary business model for crypto custodial services. Institutional investors are often the target audience for these products; however, moderate to larger private investors may also opt to use them.
How Does Crypto Custody Benefit Investors?
While smaller crypto investors tend to manage their own funds using a range of means, everything from custodial wallets to hardware wallets, for some institutional investors, a regulated custodian is required to store their funds. Without access to a custody solution, many larger investors are unable to enter the space due to finance regulations or depending on region sometimes just rules at the companies they work. Many investors desire exposure to cryptocurrency but don't necessarily want to have to deal with learning how to store digital assets safely or worry about the security of their assets, in this way the service can also act as a form of convenience for certain private investors.
Adding bitcoin and other crypto exposure to investment portfolios is something that is growing, and crypto custody can be a benefit to the uptake and adoption of this practice benefiting both investors and those in the broader crypto space. From this perspective, it's hard to argue that institutional-grade digital asset custody is a bad thing. If you have significant crypto investments, you may even find these services suitable for your own needs. If you do opt to use one ensure you have thoroughly researched the financial institutions offering these services you are considering and ensure that they are not just compliant with your local regulations, but you trust them to keep your funds safe, you are after all essentially handing over your private keys.
How Do Cryptocurrency Custody Services Keep Funds Safe?
There is a range of measures that can be taken to help reduce the risks of storing funds. Often these service providers will use a combination of hot and cold storage depending on the needs of the investor, alongside other measures such as multi-signature wallets that limit the risks of a single person moving funds without multiple parties authorising and signing the transaction. Typically insurance is also provided for funds to further reduce risk to those that use custody providers. Generally, respectable third-party audits and reporting measures also work to ensure transparency and safety of funds held by the custodian services.
What the exact specifications required by law are will tend to vary a little depending on where you are located and slightly between services as you'd likely expect. You may even find financial services that provide custody solutions that take things to the extreme regarding the physical safety of their business including extreme measures to restrict access to not just the funds but the place they are stored.
Is Getting Traditional Finance Involved in Crypto a Bad Thing?
While this question doesn't have a solid answer and is something that will be dramatically affected by your perspective, there are some pros and cons to consider. The movement of traditional finance mingling with crypto does arguably have its merits, increased exposure to traditional investors means more funds entering the market and also more exposure through media and other venues that expose private investors and speculators to the market that otherwise wouldn't have much or any knowledge of it. It's thanks to this increase in adoption by traditional investment that you see far more talk of bitcoin and crypto in a positive light in various financial publications and mainstream news sources.
However, the other side of the coin is that with traditional finance comes increased regulatory scrutiny, and it's also arguable that perhaps that isn't the right thing for cryptocurrency either. Will this growing interest from regulators tame the wild west of crypto or will it stifle innovation? Only time will tell.
The Downsides of Crypto Custody
Custody solutions tend to come with a high degree of scrutiny and regulatory oversight, and this in-turn comes with significant requirements for KYC and other measures that can affect your financial privacy. Protecting your financial privacy is something we should all have the right to do, within reason. For many people around the world, even exposing your financial information to your government can put your funds at risk, something many of us that don't deal with these fears often forget. Giving up your private keys to a third party always has its risks, we've all seen the damage of bank runs, insolvency and other issues faced by financial institutions over the years and combining that with your cryptocurrency investments do come with a risk, no matter how excellent cryptocurrency the best cryptocurrency custody services may seem to be. To learn more about why it's crucial to protect your financial information, check out our article on why privacy matters.
Giving up more of our personal privacy tends to have a trickle-down effect and often results in those that really need this privacy starting to lose it. At the end of the day, do digital asset custody services help investors? Some, sure. Does it help Everyone? Probably not.
Banks are Starting to Join the Party
While banks have commonly been pretty negative about cryptocurrency in the media, that doesn't mean many don't expose themselves to these markets in one form or another. US regulators have recently clarified their stance on national banks being able to provide custody for digital assets, increasing the odds that even more custody solutions for those looking to enter the digital asset market will pop up.
Banks and traditional banking is something that many in the cryptocurrency and blockchain space have attempted to move away from. So while many long time crypto investors may be less than thrilled some from the forex, stock, and traditional finance arena will likely be excited to see more names they know when looking for custodian services. However, it's likely those that provide a better service than the national banks will prevail with time even if there is a temporary shift towards banks for cryptocurrency custody for a time. If banks do get their tentacles more into the blockchain industry, perhaps at least the exaggerations and fear that have been expressed by them to the media in the past will begin to melt away.
Custodial or Non-Custodial?
At LocalCoinSwap we think options have value, especially when it comes to cryptocurrency. We don't just offer a vast range of payment methods we also provide the ability to choose between custodial and non-custodial trading. This flexibility allows you to trade the way that suits you best, even if you don't want to give up access to your funds to do so. For those that are happy to use our custodial wallets, we help protect user funds by using a high percentage of cold storage to keep your funds safe when they are held with us awaiting a trade. Trade your way by trading with LocalCoinSwap.
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