deen

07 Oktober 2021

Custody Solutions: Custodial Relationships vs. Infrastructure Providers

Alessandro Fuser

Alessandro Fuser

Junior Product Manager bei Crypto Finance (Infrastructure Services) AG

Über den Autor

Owning cryptocurrency requires storing private keys securely. Losing a private key can prevent a user from accessing and transacting funds, effectively making them unrecoverable. Secure storage is therefore a key component of digital asset management, especially for corporations, as they need to mitigate operational risks (e.g. transaction errors, key loss, counterparty risks, attacks, and fraud).

Consequently, as financial institutions increase their participation in the cryptocurrency space, the need for providing high-grade custody solutions also increases. This is in part attributed to the efforts to reduce risks, but also driven by the recent regulatory developments across countries worldwide. For example, in October 2020, the Swiss Financial Market Supervisory Authority FINMA imposed Anti-Money Laundering (AML) regulations to crypto custody providers, while in January 2020 BaFin, the Federal Financial Supervisory Authority of Germany, began requiring authorisations from firms offering custody solutions of cryptocurrencies. Similarly, in the first half of 2020, Singapore imposed the compliance of AML/CFT regulations and the obtainment of a license from the Monetary Authority of Singapore for all cryptocurrency businesses.

With this in mind, two main types of firms have begun offering private key storage solutions for institutions. The first are custodians, which are market intermediaries responsible for safekeeping client assets, while the second are technology vendors that provide storage infrastructure without directly managing clients’ assets.

The distinction between the two plays an important role depending on the relevant jurisdiction, but the selection of a partner is generally based on a company’s specific requirements.

Below is an overview of the major differences between custodians, which store and manage assets for clients, and infrastructure providers, which enable clients to perform safekeeping and management of digital assets themselves by providing the technology and architecture.

 

As evident from the comparison chart above, the conceptual differences between the two are significant, especially in the long term.

Confronted with alternative solutions that fulfil applicable legal and regulatory requirements, companies, whether banks or professional institutions, often gravitate towards a fully outsourced custody solution. Steering away from a fully integrated system allows companies to focus on their core competencies. However, this requires handing over control of digital assets, making the choice of a fully regulated, trusted partner crucial. On the flipside, working with a specialised infrastructure provider leaves the control of assets with the financial institution itself. A tailored infrastructure solution can be integrated with institutions’ existing systems, allowing the financial institution to apply its existing governance frameworks to transacting digital assets. Crypto Finance offers both custody (in conjunction with our FINMA-regulated digital asset brokerage offering) and storage infrastructure solutions for digital assets. Our infrastructure is flexible, and our uncomplicated set-up presents opportunities to achieve cost savings and reduce operational inefficiencies.

As the cryptocurrency ecosystem matures, and financial institutions increase their exposure to digital assets, partnering with infrastructure solution providers (such as Crypto Finance) facilitates growth by providing an accessible entry point into the management of digital assets. We provide tailored development and expert guidance allowing our clients to seamlessly add new business lines.

Crypto Finance increasingly sees demand from financial institutions looking to gain experience with managing digital assets within existing frameworks. We partner with them throughout the process, providing digital asset brokerage and custody services, and also support them in operating our secure infrastructure, which retains the required speed and flexibility to support transacting in digital assets while prioritising security.

About Crypto Finance: The Crypto Finance Group offers both custodial and non-custodial storage solutions in addition to prime brokerage, asset management, consulting, and asset tokenisation services. Its infrastructure division provides what is often referred to as warm storage, combining the security of deep cold storage with the immediate access to liquidity of hot wallet-like processes. By empowering clients to manage their assets directly, Crypto Finance is able to deliver ad hoc solutions that are tailored to and evolve with the client’s most demanding requirements.

Learn more about Crypto Finance’s Storage Infrastructure here, and reach out with any questions here.

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