June 30th, 2018
Custody Issues Will Soon Disappear, Allowing Big Money to Flood the Crypto Market
The Three Crypto Evils: Custody, Regulations, and Trading
Big financial institutions’ interest in participating in the cryptocurrency market continues to grow. They are investing heavily and recruiting talent to set up Bitcoin trading capabilities. For example, Goldman Sachs has already begun offering its clients the ability to trade Bitcoin futures via one of its New York desks.
Bitcoin is already overcoming technical issues such as scalability. Nevertheless, several obstacles remain, impeding big investment institutions from pouring big money into the crypto market. In this regard, Robert Dykes writes in the International Business Times:
Global institutional investors have $130 trillion of assets under management. A tiny slice of that moving into crypto will have a huge positive impact on an industry whose market cap remains under $300 billion.
But to see this kind of money flood the market, “the crypto industry needs to provide the facilities and tools these big-money players are used to,” Dykes stresses.
Correctly, he identifies three main challenges: custody, regulations, and trading.
Custody is the biggest obstacle delaying the entry of financial institutions, Dykes writes:
There are jurisdictions where it is illegal for an investment fund with more than $150 million under management to custody their own assets. Institutions have to work with trusted third-parties — banks and financial companies — that hold their assets in legal safekeeping.
Moreover, unclear regulations also deter big investors. Dykes blames global regulators because “they have shown little consistency on how to allow innovation in blockchain technology while minimizing risks for investors and the financial system.”
Regarding trading, Dykes argues that the crypto trading space is fragmented, has poor liquidity, and lacks much of the infrastructure that big investors require for high-volume and high-frequency trading.
Custody Services Will Open Crypto Markets to Big Investors
The good news is that there are positive developments towards eliminating or minimizing one of the main obstacles to the opening of the crypto market to big investors: custody.
Specifically, the custody Consortium Komainu is one of the instruments aiming to help solve issues related to custody.
Nomura, Ledger, and Global Advisors have joined efforts to create the Consortium Komainu. According to Bloomberg, Bank of New York Mellon Corporation, JPMorgan Chase, and Northern Trust Corporation are already working on or exploring these custody services.