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Singapore’s digital assets race – when the Lion roars 

As the race to attract the digital assets industry gathers momentum, Singapore has emerged as one of the global leaders and a key hub in the wider Asia-Pacific region.  According to Statista data, revenue in the Singapore digital assets market is projected to reach €501.6m in 2024, while Fintech Global reports that Singaporean blockchain and digital asset companies raised almost half of FinTech seed deals in 2023. 

Known for expertise in both finance and technology and with a high-value pool of talent to draw upon, digital assets have found a genuine home in the Lion City. Indeed this is the case too for, Zodia Custody, a venture of Standard Chartered which has 165 years of history in Singapore, where its first branch was opened in 1859. The Group’s longstanding commitment to business in the country is another key factor in making Singapore a safe and secure home for digital assets. 

MAS – The Innovative Regulator 

Most regulators tend to keep a lower profile but, the Monetary Authority of Singapore (MAS) has become known as an innovator in its own right. It was early to recognise both the utility of stablecoins, as well as the transformative economic potential offered by tokenisation of assets.  

The list of projects spearheaded by MAS is mounting up and notably includes Project Guardian launched in May 2022 and Project Orchid launched in October the same year. Project Guardian is a collaboration between policymakers and industry to test the feasibility of applications in asset tokenisation and decentralised finance. Pilots under Project Guardian include tokenising money market funds through a variable capital company structure; institutional mechanisms on bilateral digital asset trades; and cross-border FX payment solutions. Project Orchid is testing the applicability of digital money in Singapore while this year MAS intends to begin developing wholesale Central Bank Digital Currency for interbank settlement. 

MAS is also working with international policymakers and financial institutions to explore the design of an open, digital infrastructure to host tokenised financial assets and applications. The wide variety of projects being worked on and the commitment to exploration is marking Singapore out as a thought leader in all areas of digital assets – be that cryptocurrency, tokenisation or digital fiat currency. 

Clarity, Consistency and Connectivity 
Singapore is gaining competitive advantages from this regulatory approach. Digital assets firms based in the region – or wanting to locate there – have a clearer policy framework and can feel comfortable approaching the regulator to explore new business models and innovative approaches. MAS has become well-known for its progressive approach, not just on policy. It is working to create connectivity across the ecosystem in Singapore and APAC more broadly and has actively collaborated with others including Hong Kong and Japan to share knowledge and best practices. 

This connectivity is much needed to remain competitive on the global stage. With the Markets in Crypto Assets (MiCA) framework now being implemented across the EU, European countries will begin to benefit from a more cohesive policy regime. Other regions now need to keep pace with that change and MAS is working hard to raise the watermark of the APAC region. 

Just as London is a gateway to other financial markets, Singapore’s innovative ethos, as well as its timezone, make it a valuable hub for Zodia Custody’s activities in Asia-Pacific. Singapore is now providing greater regulatory clarity around digital assets. In April, it expanded the scope of regulated cryptocurrency-related activities to include custodial services covering both cross-border money transfers and the transmission of crypto between accounts and exchanges. This clarity is vital for a future in which tokenisation of real-world assets is set to grow.  

In 2023’s Global Crypto Adoption Index published by Chainalysis, Singapore ranks 77th in the index ranking and is ranked 57th for DeFi value received. Regionally, Central & Southern Asia and Oceania (CSAO) is the third-largest crypto market in transaction volume, accounting for just under 20% of global activity. However, when purchasing power and population are accounted for to measure grassroots adoption, CSAO dominates.  

The future certainly looks bright for Singapore’s economic potential when it comes to digital assets. It’s time to hear the Lion City roar. 

Disclaimer: This article is provided to you for your information and discussion only. It should not be regarded as a solicitation or an offer to buy or sell any products or services in any country to any person to whom it is unlawful to make such an offer or solicitation. View full disclaimer here: zodia.io/marketing-disclaimer.

21Shares and Zodia Custody partner on digital asset ETP custody services

Zodia Custody becomes a main custodian for 21Shares, bringing greater risk controls and regulatory compliance for institutional investors

London, UK — 25 June 2024 — Zodia Custody, a leading institution-first digital asset custodian whose shareholders include Standard Chartered, SBI Holdings, Northern Trust and National Australia Bank, has partnered with 21Shares, one of the largest ETP issuers, to provide custody services for physically backed ETP products in Switzerland and the wider European market. 

Digital asset exchange-traded products (ETPs) — which include exchange traded funds (ETFs) such as the Bitcoin Spot ETF — have become big business for institutional investors in the short time they have been approved for investors. Data from 21Shares shows that by the end of Q1 2024, 937 professional investors owned $11B in US Bitcoin Spot ETFs — around 20% of the ETFs’ total assets. By contrast, Gold ETFs had only 95 professional investors in their first quarter post-launch, representing less than 10% of Bitcoin ETFs’ reach.

Against the backdrop of a continuing sharp increase in ETP demand, institutions require greater security and expert custody services throughout the issuance to redemption lifecycle — which is where the partnership between 21Shares and Zodia Custody comes into play. 

Through this partnership, 21Shares will bring to its investors an additional layer of security, protection, regulatory compliance and transparency to its physically-backed ETPs . Additionally, Institutions using 21Shares for ETP investments will also benefit from cold-storage wallets,  coupled with 24/7 instant access to allow investors to move at the speed of the market. 

For institutional investors, the crucial end result is greater risk management controls, stemming from the custodian’s bank-grade and compliant approach to custody.

“ETPs promise a lot of potential, and institutional demand is loud and clear.” says Julian Sawyer, CEO of Zodia Custody. “We’ve listened. That’s why we have partnered with true market leaders in the ETP digital asset space, 21Shares, to deliver a partnership that will have a real impact on the whole ecosystem – without any compromise on security, risk management, or compliance.”

The partnership highlights both firms’ commitment to security and transparency, representing a means for institutions to get exposure to digital assets, including ETPs, with the same standards and guardrails as seen in traditional finance. 

“21Shares is thrilled to partner with Zodia Custody, leveraging their unparalleled expertise in secure digital asset storage and management,” said Mandy Chiu, Head of Financial Product Development at 21 Shares. “This collaboration marks a significant milestone in our commitment to providing top-tier investment opportunities for our clients. Zodia Custody’s industry-leading cold storage infrastructure and streamlined compliance solutions have enhanced our offerings, ensuring our investors benefit from the most advanced and diversified custodial services available. Together, we are setting new standards in the digital asset market, driving growth, and fostering trust among institutional investors.”

NAB Ventures takes a stake in bank-backed global digital asset custodian Zodia Custody

Investment from NAB Ventures sees Zodia Custody secure a fourth major financial institution to back the digital asset custodian globally

Sydney, Australia — 19 June 2024 — Zodia Custody, the leading, global institution-first digital asset custodian, has announced an investment from NAB Ventures, the venture arm of National Australia Bank (NAB). The investment now means that Zodia Custody is backed by four major financial institutions around the world, building on previous investments from Standard Chartered, Northern Trust and SBI Holdings.

“As a trusted financial institution, NAB is focused on ensuring the finance sector continues to provide simple, safe and secure services for Australians. This is particularly important in newer fields where technology continues to evolve quickly,” said Amanda Angelini, Managing Director, NAB Ventures. “NAB Venture’s investment in Zodia was based on a range of factors including their innovative approach, institution-grade safety and strong work with regulators. We look forward to seeing Zodia Custody drive further innovation in the digital assets space.”

The investment from NAB Ventures is a vote of confidence in the potential Zodia Custody offers in providing a safe and secure foundation for the digital asset ecosystem both locally in Australia and on a global scale. The investment follows Zodia Custody establishing its Australian operations in late 2023, as part of the custodian’s plan to further extend its geographical reach and investment into the APAC region.

“Zodia Custody is the next level up — for me, for institutions, and for the Australian digital asset ecosystem,” said Kate Cooper, CEO, Zodia Custody Australia. “The investment from NAB is another great endorsement of our mission and vision. But more than that, it signifies a turning point, with institutions and infrastructure providers jointly building the mainstream future of digital assets, without compromise.”

Following the investment, key immediate priorities include onboarding Australia’s unique ecosystem of home-grown digital asset exchanges, many of whom are moving assets onto the Zodia Custody platform in preparation for stricter regulatory requirements expected to come into effect in 2025. Zodia Custody is also priming itself as the custodian of choice for applicants of anticipated digital asset ETFs awaiting approval from the ASX.

“We are extremely grateful to NAB Ventures for their support in our vision to build a better institutional digital asset infrastructure. It’s a true vote of confidence,” said Julian Sawyer, CEO, Zodia Custody. “Incoming regulations will significantly change the landscape, similar to what we have seen in Hong Kong and Japan. This likely includes the segregation of assets, and requirements to hold them in cold storage — areas we are already way ahead of the curve on, having built our custody model on these principles while ensuring real-time access to move at the speed of the market and the highest levels of security.” 

Sawyer adds: “Combined with the prospect of digital asset ETFs, Australia is set to enter an unprecedented period of innovation and adoption. We are here and ready to support institutions on that journey.”

Welcoming the Digital Economy Council of Australia at Blockchain Week

#BW2024

Australia’s Blockchain Week 2024 opened last week with two important announcements from event organiser Blockchain Australia, the peak industry body representing Australian businesses and business professionals participating in the digital economy through blockchain technology. Firstly, the appointment of Amy-Rose Goodey as the new CEO, succeeding Simon Callaghan who stepped down after serving the past year advocating for the responsible adoption of blockchain technology by industry and governments across Australia. We look forward to supporting a new era of blockchain advancement under Amy-Rose’s formidable leadership.

The second announcement heralds a new chapter for Blockchain Australia, as the industry body rebrands to the Digital Economy Council of Australia (DECA). Under Amy-Rose’s leadership, DECA aims to redefine its focus, catering to a diverse membership that spans crypto and Web3 companies, governmental bodies, charities, and sectors involved in tokenisation, payments, and banking.

To mark Blockchain Australia’s rebrand to DECA, here’s my acrostic-style takeaways from Blockchain Week 2024 (because who doesn’t love an acronym in this industry?).

D is for diversity

Not just a nod to the complete (and much appreciated) absence of any manels at Blockchain Week, but an acknowledgement of the breadth of innovation showcased across a diverse range of the digital economy spanning sectors from fishing to trade finance. With such a broad range of passionate innovators focused on driving consumer outcomes through point solutions within their niches, and a focus on responsible innovation, we’re poised to capture the opportunity to add $60 billion per year to Australia’s GDP by 2030.  

It was also encouraging to see the diversity of guests joining the Aussie conversation from countries all around the world including the UK, Japan, USA, Vietnam, Hong Kong, Singapore and the UAE.

E is for elevate

One thing that struck me this week was the increased sense of positivity, which I’m sure was partly driven by upward market momentum, was but elevated by the conversational focus on building and innovation. 

Whilst many in the industry have been frustrated about slow steps towards regulatory clarity for digital assets in Australia, conversations this week didn’t get bogged down by that and felt much more like we were collectively moving forwards towards a target.

We look forward to establishing guardrails that will support safe and secure innovation, to elevate consumer protection and build trust, which will be crucial for mass adoption. Download our free Digital Asset Policy Playbook to see how standards are shaping up for a secure digital asset future in Australia.

C is for connectivity

Our CEO Julian Sawyer spoke on Day 2 about the importance of developing stronger interconnectivity between digital asset service providers, to create trusted networks that unlock increased functionality for digital assets stored in safe custody.

Zodia Custody services like Interchange and Gateway provide a pathway to achieve this vision, but we can only get there with solid collaboration with ecosystem players like trading venues, liquidity providers, market makers and staking services.

But connectivity will only be embraced if it can be trusted. 

Connectivity standards will be key to establishing trust between partners, as will much clearer definitions and an industry-recognised designation, akin to the USA’s ‘Qualified Custodian’ label.

A is for adoption

It was inspiring to hear the community so optimistic about future mass adoption of blockchain technology. Many discussions focused on specific indicators that would signal when we’ve reached mass adoption, and the drivers needed to get there.

I was personally encouraged to hear so many speakers recognising the need to improve the UX of blockchain-based applications and take the time to design experiences that help users outside of the industry get on the journey, building their knowledge along the way. 

Some other important drivers of adoption to help us get out of the “proof of concept death spiral” included a focus on customer outcomes and commercial impact, increasing access, making the language of blockchain much more accessible to those outside the industry, providing safer ways to connect identity with services, and improving the bridge between tradfi and digital assets.

How will we know when we get there? My favourite indicator of mass adoption is a future where the conversation shifts away from the architecture and implications of the underlying blockchain technology, to the experiences and outcomes it drives. Most people stopped debating TCP/IP a long time ago; it’s an established protocol that drives most online experiences today. We will know we’ve hit blockchain adoption when we stop talking about the technology itself, into a future where blockchain almost disappears from the experience.

Zodia Custody partners with Forteus Investment Management to diversify custody and deliver institutional staking

Forteus has partnered with Standard Chartered-backed custodian to provide secure custody, as well as the potential to earn income on their digital asset holdings through staking

London, UK — 30 May 2024 — Zodia Custody, a leading institution-first digital asset custodian whose shareholders include Standard Chartered, SBI Holdings, and Northern Trust, has partnered with Forteus Investment Management, the investment advisory business of the Numeus Group, and backed by Schroders, to provide secure custody and staking solutions. 

Forteus’ Digital Asset Select investment strategy provides long exposure to a diversified set of themes in the digital asset ecosystem. Tokens are carefully selected based on rigorous bottom-up fundamental research and on-chain data analytics; the portfolio is actively managed within a top-down risk management framework. By leveraging the market-leading staking infrastructure via vetted and approved third-party staking providers accessed through Zodia Custody Gateway, the partnership directly answers the rapidly growing institutional demand to earn potential rewards and additional income from digital asset holdings.

According to findings by data aggregator DefiLlama, $86 billion worth of funds are currently staked via various protocols, showing a dramatic increase compared to the $37 billion seen in the last quarter of 2023. Zodia Custody’s Staking enablement Service has been designed to be as frictionless as possible. At the same time, it also provides greater assurances to institutions through robust security measures, such as cold storage and counterparty risk protection, built into the custodian’s infrastructure. The partnership provides Forteus with an opportunity to connect with staking providers and institutional-grade security for its clients’ assets with Zodia Custody.  

Both firms are backed by global institutions, providing them with a unique depth of expertise in bridging gaps between digital assets and traditional finance. This partnership is built on shared values committed to regulatory compliance and governance, as well as established experience in supporting the specific needs of institutions.

“By working with Forteus, we are enabling wider access to digital asset staking solutions specifically for institutions with an innovative, like-minded partner,” says Julian Sawyer, CEO, Zodia Custody. “In leveraging Forteus’ deep investment expertise, we are not just meeting the needs of an institutional investor, but expanding the opportunities for investors in the digital asset space to yield better results.”

“Close collaboration with industry leaders like the team at Zodia Custody is critical in providing the robust custody and staking solutions that clients need, at pace and at scale,” says Nicolas Vanhoutteghem, President of Forteus. “Our collaboration is a testament to our pursuit of excellence in both investment outcomes, as well as custody, security and risk management.”

The move follows a string of recent Zodia partnerships with industry leaders such as ETC Group, DWS Group, and Tokenet that strengthen the digital asset ecosystem through the delivery of compliant products, secure custody, and robust risk management solutions.

The critical role of security in digital asset custody

The institutional future of digital assets depends on three elements: an infrastructure providing comprehensive market access, opportunities for yield and bank-grade security.  

Custodians play a significant role across all three of these elements. Drawing from a deep understanding of delivering digital asset security, this blog dives into the current digital asset security landscape, the threats lurking for institutions, and how Zodia Custody utilises industry-leading security practices to safeguard your assets.

Evolving security challenges in digital assets

The early days of the digital asset landscape were littered with examples of breaches, theft and cybercrime. Fortunately, the threat landscape of today is much improved, primarily due to the maturing ecosystem with players building rigorous and secure environments. 

The 2024 Crypto Crime Report produced by Chainalysis notes that funds stolen from crypto platforms fell by more than 50% in 2023 – driven perhaps in part by a cooler market, but also by a maturing ecosystem.

But the job isn’t done — yet. The Chainalysis report notes that individual incidents are still on the rise, and finds a total of $1.7 billion worth of digital assets were stolen in the past year alone. The current cybersecurity threats impact both individual retail and global institutional investors alike, though of course institutions may face a greater concentration of risk through exposure to larger value of assets. 

These risks entail anything from simple human error to cybercrimes committed by sophisticated adversaries such as private key theft, account takeover, and application hacking. External threats can be bigger, and potentially more insidious — such as “bad actors” or states actively trying to hack and disrupt businesses in the digital asset ecosystem using various hacking techniques and vulnerabilities, to negligence and fraud from within the ecosystem itself. 

We see this in the same Chainalysis report. It notes how compromised private keys were driving the largest share of hacks in the second half of 2023, followed closely by smart contract-related abuses. Likewise, hacking groups affiliated with certain states were also more active last year, but, again the good news is they were able to steal less compared to 2022 – partially due to the overall muted market conditions.

Falling prey to any of these issues presents a dual risk of loss impacting the bottom line, alongside long-term reputational damage. 

So, with a mindset of prevention being better than cure, it is imperative that we are open and transparent when discussing security measures. Below, we’ll do exactly that — diving into how a custodian can safeguard against these vulnerabilities, but also put protections in place for other eventualities.

Staying ahead of the risks

If security is a major element of the pathway to greater institutional adoption, then it is crucial that our ecosystem is able to apply the rigour and robustness learnt through decades of providing financial services into digital assets. It has to be more than a first line of defence — security has to be weaved into everything we do. 

Much like in traditional finance, custodians have a leading and vital role to play here. Be it risk management, counterparty insolvency protection, or regulatory compliance – a similar framework of safety can be applied to digital assets as evolved from a solid foundation of traditional finance. And that’s exactly what we’ve done. We work the full threat spectrum; protecting against various potential vulnerabilities and mitigating evolving threats. 

Third-party cold storage infrastructure is a powerful and proven defence against a variety of threats. By adhering to the principle of isolation and storing client assets offline in specialised hardware wallets, we can provide an added layer of protection against unauthorised access and cyberattacks.

While isolation as a whole boosts security, it can create fresh operational hurdles and delays, particularly during transactions if they are reliant on manual processes which are also vulnerable to human error. 

To mitigate this, we use a combination of the security of cold storage infrastructure with a measure of automation for transactions. This involves mirroring the data import pattern as per best practice outlined by the UK’s NCSC for moving data in and out of our disconnected environments, and rigorously verifying information integrity before any transfer occurs. This means institutions benefit from both security and instant access to holdings.

We also actively and routinely test our defences. We undertake regular security audits, penetration testing, and private bug bounties. Taking this proactive approach and enlisting the help of third-party experts to meticulously assess the resilience of our systems, processes and protocols, ensures any potential weaknesses and vulnerabilities are found and addressed. We have also done extensive scenario analysis to ensure there is no single point of failure – as a result, our defences do not hinge on one person or control. Should the worst happen, institutions will always be able to regain their holdings.

Through these measures and active testing of defences, we are strengthening our infrastructure continuously as demand for digital assets grows, meaning investor assets always remain safe. We’re also keeping an eye on the wider industry, and learning from the latest threats and breaches to improve our own controls as the landscape evolves. Security is not a stagnant, single activity, but a constant process of vigilance and enhancement — this is core to our DNA.

Zodia Custody – a partner for institutions 

Security is an industry-wide challenge. By prioritising it, we pave the way for greater institutional adoption. As an institution-first custodian, we provide robust security measures and foster open dialogue in the industry.

Security is a crucial conversation, and we’re committed to leading it. Let’s build a future where digital assets are a secure and trusted asset class for institutions. Partner with Zodia Custody, and unlock the full potential of crypto with complete peace of mind.

Get in touch with us here.

Disclaimer

This article is provided to you for your information and discussion only. It should not be regarded as an offer or solicitation to buy or sell any products or services in any country to any person to whom it is unlawful to make such an offer or solicitation. View full disclaimer at: http://zodia.io/marketing-disclaimer

Should you custody digital assets?

This blog series on regulating digital asset platforms in Australia is produced in collaboration with Hamilton Locke, an award-winning team of lawyers advising forward-thinking businesses and innovators on their most pressing challenges. Special thanks to Michele Levine and Jaime Lumsden.

As discussed in the first two blogs in this series examining Australian digital asset regulation, anyone who has factual control of digital assets will, under changes proposed by Treasury in the Regulating Digital Asset Platforms Consultation Paper, be providing a financial service and will be subject to requirements for a digital asset facility (DAF), including financial requirements such as a net tangible assets requirement.

Do you need to provide the custody yourself?

A DAF can either provide the asset holding function itself or can appoint one or more sub custodians to hold some or all of its digital assets. This is often referred to as outsourcing custody. 

In deciding whether you should outsource custody, it can help to consider:

  • what your capital requirements will be
  • your organisational capability
  • available custodial solutions and transactional functionality
  • risk appetite and issues

Does outsourcing custody change your NTA requirement?

Yes, it is proposed that DAF providers will get a discount on their NTA requirement when using an external custodian, but only if the custodian is itself a licensed DAF itself that meets the $5 million NTA requirement. This means DAFs can’t access the NTA discount if they use a global custody provider that is not licensed as a DAF locally. This can raise issues for businesses seeking to access global custody solutions that don’t have a presence in Australia.

If a DAF outsources custody to another DAF-licensed custodian, the DAF must hold 0.5% of the value of the assets held. This means that, from an NTA perspective, there is real value in outsourcing custody where digital asset holdings are less than $1 billion. When DAFs hold more than $1 billion of digital assets there is no NTA discount.

Since nothing is yet set in stone, it is quite possible that the NTA requirements will change as part of the legislative drafting process. 

Do you have the right organisational competence?

There are very few businesses in the Australian market that have digital asset custody experience.  This is because very few traditional custodians have forayed into digital asset custody and existing crypto businesses are experts in crypto solutions but don’t necessarily have traditional custody expertise. 

Once the reform becomes law, DAFs will need to demonstrate that they have the right organisational competence to provide asset holding services. It is unclear what education and experience requirements will apply or the extent to which ASIC will recognise or grandfather current experience in running a crypto business. Ideally, unregulated crypto experience will be sufficient to support an application for an Australian Financial Services licence for a DAF that will hold assets, but this remains to be seen and may affect who is able to obtain such a licence. 

What are the current digital custodial solutions in Australia? 

Digital asset custody today is broadly split into two categories: custodial software providers and true custodians. Custodial software providers generally provide software for clients to manage keys, whereas true custodians hold those keys themselves, in the same sense that custodians of fiat assets hold those assets directly.

For those DAFs who are able and willing to custody assets themselves, and intend to hold the appropriate licenses and applicable NTA, custodial software providers are an attractive option. However for those DAFs who are not able or willing to custody themselves and see value in outsourcing their custody to a specialist provider, true custodians like Zodia Custody provide comprehensive solutions.

What should you consider / do before outsourcing custody?

Appointing a custodian is no small task, especially for APRA regulated businesses that need to comply with the requirements in CPS 231 Outsourcing, CPS 234 Information Security and CPS 235 Managing Data Risk. Often custody appointments for traditional financial products are managed via a tender process with an RFP, which includes detailed due diligence and contract negotiations. It sometimes can take up to 6 to12 months to run a custody outsourcing project.  

These are the key things you should think about before appointing a custodian:

  1. What is the custodian’s experience?
  2. Where is the custodian based?
  3. Does the custodian have a local presence? Are they committed to the local market with provable local investment?
  4. Can you access a global network of trading venues and service providers from the custodian?
  5. What security controls are in place?
  6. How are the assets held and are there any co-mingling risks? If so, how are these risks mitigated or managed?
  7. How does the custodian manage concentration risk and counterparty risk?
  8. What transactional functionality is available? Can you access real-time trading and, if so, how?
  9. What fees are charged?
  10. What ancillary services and benefits can you access via the custodian?

What are the different custody solutions and transactional functionality?

Today, in Australia, the primary true custodians operating in the market include:

  • BitGo – privately owned, US based custodian, with hot and cold wallet functionality and 24 hour withdrawal SLAs
  • Gemini – privately owned, US based custodian, with hot and cold wallet functionality and 24 hour withdrawal SLAs
  • Coinbase – publicly-listed, US based exchange with hot and cold wallet functionality and 24 hour withdrawal SLAs
  • Zodia Custody Australia – bank-owned, locally operated custodian with real-time transactional capability from the security of cold wallets

As mentioned, it is yet to be seen which global custodians will invest in acquiring the necessary licenses and significant NTA holdings required to operate as a DAF once licensing is in place.

Risk appetite

In working out whether you want to hold digital assets yourself or outsource to a professional custody provider, it is important that you understand the risks with both approaches and choose the options that best aligns with your risk appetite and operating or regulatory requirements. Self custody may be feasible for smaller firms, but it is unlikely to be sufficient for firms requiring specialised services including audits and reporting.

Some of the key risks you need to consider are:

Self custodyOutsource custody
* Regulatory risk* Regulatory risk
* Financial risk* Financial risk
* Concentration risk* Concentration risk
* Operational risk* Operational risk
* Market risk* Market risk
* Asset risk* Asset risk
* Security risk* Security risk

How can Zodia Custody Australia help you?

Zodia Custody offers a proprietary custody platform that combines air-gapped, cold wallet storage built to government standards with real-time asset access for unparalleled security and operational efficiency. Our platform supports secure exchange connections, minimising counterparty risks with robust post-trade settlement processes. Enhanced by stringent monitoring, including tailored transaction approvals and fraud detection checks, our platform ensures full regulatory compliance. 

Zodia Custody Australia, in collaboration with NAB, launched in Australia in February 2024, following its affiliates being registered with regulatory bodies globally including the Financial Conduct Authority (FCA), Central Bank of Ireland (CBI) and Commission de Surveillance du Secteur Financier (CSSF) across the UK, Ireland & Luxembourg. Zodia Custody Australia has five local FTEs and intends to be licensed fully as an operating DAF with necessary NTA in time for legislation changes to come into effect.

If you’re considering delegating or outsourcing custody as a value-add to keep your clients’ assets safe, please get in touch with our friendly Zodia Custody team in Australia.

This blog series on regulating digital asset platforms in Australia is produced in collaboration with Hamilton Locke, an award-winning team of lawyers advising forward-thinking businesses and innovators on their most pressing challenges. Special thanks to Michele Levine and Jaime Lumsden.

 

What are Australia’s digital asset custody requirements?

What are Australia’s digital asset custody requirements?

This blog series on regulating digital asset platforms in Australia is produced in collaboration with Hamilton Locke, an award-winning team of lawyers advising forward-thinking businesses and innovators on their most pressing challenges. Special thanks to Michele Levine and Jaime Lumsden.

As discussed in the first blog in this series, “Will you be custodying digital assets?“, anyone who has factual control of digital assets will, under changes proposed by the Australian Treasury in the Regulating Digital Asset Platforms Consultation Paper, be providing a financial service and will be subject to requirements for a digital asset facility (DAF).

The current proposal is that DAFs will need to meet the minimum standards for asset holding.  There’s not much detail about the minimum standards but it appears they will include:

  • A requirement to hold digital assets on trust
  • A net tangible assets (NTA) requirement
  • Other financial requirements including a solvency and positive net assets requirement and cash needs requirement
  • Requirements relating to adequate organisation structure, staffing capabilities, and capacity and resources to perform core administrative activities.

What does it mean to hold digital assets on trust?

In a digital asset context, holding assets on trust essentially means that the DAF provider will hold the private key for the digital assets. By holding the private key, the DAF provider essentially holds legal title to the digital assets on behalf of its customers. Customers are beneficially entitled to those digital assets and this entitlement is reflected in the DAF provider’s records. These records are normally kept in ledgers which identify what digital assets are credited to a customer’s account. 

What is the NTA requirement?

Treasury’s Consultation Paper proposes that DAF providers will be required to hold NTA of at least:

  • 0.5% of the value of the DAF (if using a sub custodian digital asset facility that has $5 million NTA); or
  • $5 million (if performing the custody function itself). 

This requirement is broadly based on the NTA requirements for margin lending facilities. It is unclear why this approach was adopted, especially given that DAFs are more akin to platforms and schemes given the trust requirements that will apply.  

Net tangible assets is not defined in the Consultation Paper, but it is likely to have the same meaning as in ASIC RG 166, which sets out the financial requirements for AFS licensees. Net tangible assets are essentially all your unencumbered assets, less your liabilities, and there is a formula for determining this in ASIC RG 166.

We expect that at least some of the NTA must be held in cash or cash equivalents, with the remainder to be liquid assets. There isn’t much detail on this in the Consultation Paper, and presently RG c166 prescribes no cash equivalents or liquid assets rules for NTA for margin lending facilities, so we’ve had reference to these requirements in ASIC RG 166 for funds, IDPS operators, and custodians, who all have a cash equivalents and liquid assets rule. This means it is likely that the DAF NTA must be:

  • held as:
    • at least 50% as cash or cash equivalents, such as:
      • cash on hand, demand deposits and money deposited with an Australian ADI that is available for immediate withdrawal; 
      •  short-term, highly liquid investments that are readily convertible to known amounts of cash that are subject to an insignificant risk of changes in value;
      • certain specific financial undertakings or commitments made by third parties and which are permitted by ASIC; and 
    • the balance of the NTA in assets where the market value can reasonably be expected to be realised within 6 months.

However, as no detail has been provided in the Consultation Paper, it is possible that Treasury or ASIC could propose different cash equivalent and liquid asset rules for DAFs. It will be interesting to see if stablecoins will be permitted and, if so, what requirements will apply.

The rationale for the NTA obligation is to:

  • address the costs of an orderly wind-up in the event the DAF provider fails (i.e. to provide a financial buffer to decrease the risk of a disorderly or non-compliant wind-up); 
  • balance the need to avoid concentration of digital assets among a small number of custodians with the need to ensure robust NTA; and
  • ensure that as a facility expands, and the operational risk exposure of the platform provider grows, the provider will maintain a corresponding level of financial resources.  

 

Look out for part 3 in this series “Should you custody digital assets?”.

This blog series on regulating digital asset platforms in Australia is produced in collaboration with Hamilton Locke, an award-winning team of lawyers advising forward-thinking businesses and innovators on their most pressing challenges. Special thanks to Michele Levine and Jaime Lumsden.

US Bitcoin Miner Marathon Digital Holdings Selects Zodia Custody As International Digital Asset Custodian

One of the world’s largest Bitcoin mining companies selects the bank-backed digital asset infrastructure provider for global custody services

Zodia Custody, a leading institution-first digital asset custodian, whose shareholders include Standard Chartered, SBI Holdings and Northern Trust, has been selected by Marathon Digital Holdings (“Marathon”), one of the world’s largest publicly traded Bitcoin miners and a leader in supporting and securing the Bitcoin ecosystem, to provide international digital asset custody services. 

As Marathon continues to grow globally in existing and new markets, Zodia Custody will provide secure, bank-grade custody services for the firm’s Bitcoin holdings outside of the United States. Through this partnership, Zodia Custody brings a valuable layer of diversification in Marathon’s custody solutions. 

Built on mutual commitments to regulatory compliance and the strengthening of the digital asset ecosystem, the partnership will also deliver additional risk management assurances such as insolvency-remoteness and secure cold-wallet storage with 24/7 availability to move at the speed of the market.  

“A key element to Marathon’s success lies in its mature approach and mindset. As such, Marathon is a great example of how the entire ecosystem should move forward,” says Julian Sawyer, CEO of Zodia Custody. “We share many of the same values and ambitions for the future of the ecosystem, making us an excellent fit. As Marathon’s fourth custodian, we bring in greater diversification, and risk management – exactly what the ecosystem needs.” 

“The addition of Zodia Custody demonstrates our continued commitment to the secure management and diversification of our Bitcoin holdings – especially as we continue to grow internationally and expand into new territories,” said Salman Khan, Marathon’s Chief Financial Officer. “Zodia Custody’s compliance and reputation in the market as a leading institutional digital asset custody provider make valuable addition to our list of diversified custodians. We look forward to working together.”

Zodia Custody services institutional clients across multiple industries including digital asset mining, and the latest partnership with a leading, publicly traded Bitcoin miner is a step toward supporting the growth of this particular ecosystem. 

Australia, will you be custodying digital assets?

This blog series on regulating digital asset platforms in Australia is produced in collaboration with Hamilton Locke, an award-winning team of lawyers advising forward-thinking businesses and innovators on their most pressing challenges. Special thanks to Michele Levine and Jaime Lumsden. 

Australia’s national Treasury’s recently released Regulating Digital Asset Platforms Consultation Paper proposes a framework for regulating digital assets that leverages the existing Australian financial services (AFS) licensing regime and introduces a new financial product called a digital asset facility (DAF). 

While it is possible the proposal may still change, at present, and importantly, a facility will be a DAF if it is an asset holding arrangement or if it performs any one or more “financialised functions”, being token trading, token staking, asset tokenisation and crowdfunding. It is likely that asset holding will remain the central theme and anchor point for regulation, notwithstanding any tweaks Treasury may make. This is because asset holders are the primary gateway to crypto products and services, as well as the function of asset holding presenting one of the largest risks a person trading digital assets can face i.e. loss of those assets. 

What is asset holding? 

The Consultation Paper recognises two types of asset holding arrangements: 

  • DAFs that hold tokens; and 
  • DAFs that hold real world assets that back tokens. 

DAFs that will hold tokens are part of Australia’s $21.6bn of Australia’s crypto industry and it is presently unknown the scale of asset holding that may be required in relation to real world assets. 

When it comes to tokens, it is proposed that a person will hold assets in custody where they have ‘factual control’. Factual control as a concept is broad and seeks to capture all cases where digital assets are at risk with providers. It is unclear whether factual control will require both positive control (can transact with the token e.g. use, disport or transfer) and negative control (excluding others from using the token). This is likely to be further considered and clarified as part of the legislative drafting process as there may be instances where a DAF has positive control but not negative control. 

Either way, it is safe to assume that you will be a DAF if you store customer tokens in a hot, warm or cold wallet owned and operated by you. If your wallet solution is provided by, or utilises, third party technology, this will not change the outcome. It also doesn’t matter if you hold the tokens in an omnibus wallet or segregated wallets. 

What digital assets are caught? 

When it comes to the custody rules for digitals assets, not all digital assets are equal. Currently we expect digital assets custody rules to apply as follows:

Checkmark with solid fillAll digital assets that are not financial products, including where held through a financial product structure e.g. BTC held by ETF
Close with solid fillAny digital assets that are financial products of themselves (e.g. a token that is a derivative) 

It is possible this may change as part of the legislative drafting process. This is because it may make more sense for all digital assets to be subject to the same custody requirements given: 

  • traditional custodians are not currently set up to provide custody solutions for digital assets and it is unclear whether or how quickly this will change; 
  • any differential treatment may engender opportunities for regulatory arbitrage as businesses may decide to artificially design a product to fall inside or outside of traditional financial services; and 
  • digital assets have a different risk profile to other traditional financial products. 

If you currently custody digital assets (that are not financial products) in Australia, we recommend you familiarise yourselves with the upcoming changes, as they may have significant impacts on your business and you may need to make decisions to prepare. Get in touch with our friendly Zodia Custody team in Australia if you’re considering delegating or outsourcing custody as a value-add to your clients, and we can have a chat about how we can help you keep their assets safe with a true, qualified custodian. 

Watch out for the second blog in this series “What are the digital asset custody requirements?” to further inform your decision-making. 

This blog series on regulating digital asset platforms in Australia is produced in collaboration with Hamilton Locke, an award-winning team of lawyers advising forward-thinking businesses and innovators on their most pressing challenges. Special thanks to Michele Levine and Jaime Lumsden.

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