The past 18 months have underscored an unarguable truth: that the seamless integration of digital assets into mainstream financial services can only happen with robust custody.
This in turn is accompanied by another truth: financial institutions must not be constrained with exclusive dependence on just one digital asset custodian, and instead should break free to adopt a multi-custody approach. This article explores why a strategic transition to multi-custody is integral in unlocking new possibilities and advantages across the digital asset landscape.
The advantages of going multi-custodial
The institutional digital asset industry is maturing. As part of that, the ecosystem is responding to create more intuitive products and services to better suit the complex needs of institutions.
But to truly become an ecosystem akin to what financial institutions are used to seeing, these solutions need to be able to work together. Custody is a prime example of this.
A multi-custodial approach is necessary for the development of that market through an institutional lens. As institutions increase their exposure in digital assets into the billions, it will be a requirement to not simply have all of your eggs in one basket. This is especially true when the assets in question are effectively bearer instruments. We’ve already seen how the risks of the old model play out: if a huge, integrated financial company is taken out of action, then the entire stack goes with it — everything could be lost.
A multi-custodial approach mitigates the risk of this happening, which is why it is so commonplace in traditional finance. It also greatly prevents operational redundancy, as the potential for downtime is reduced when you have a network of custodians.
But beyond risk, it also creates greater opportunities to harness different approaches and models to custody, so you can be sure that the right model is available for the specific requirements you need it for. Not to mention the myriad of other benefits, including various pricing models, a wide range of digital assets available, and even geographical reach.
While the need to go multi-custodial is not a necessary requirement for all players — smaller funds and startups might not have the resources to take this approach in the first instance, and it may be a problem for tomorrow. So, the option has to be there for the future. If we want digital assets to become truly a part of mainstream, institutional offerings, then the ecosystem is responsible for building that.
Preparing for a post-regulatory future
Talking about incoming regulations is perhaps the biggest pastime for everyone in the digital asset sector, and a significant point of interest for asset and fund managers around the world. We all know it is coming, even if we don’t know precisely what shape it will take.
If we go with the most prevailing sentiment, then we can expect a mirror of the regulations the financial services industry already has to accommodate. To that point, the more rigorous providers in the space — including ourselves — are already adhering to financial services best practice. This is a crucial point, especially when considering the sophisticated needs of larger institutions’ activity in digital assets.
This is where a multi-custodian approach will pay off. Adopting this system now means both sides of the trading equation, both institutions and exchanges, will be able to pre-empt a post-regulation environment from day one.
A multi-custodian approach should not just be viewed as a preventative regulatory measure. It can also be used as a selling point.
For institutional clients, a networked approach to custody can create greater cachet — you are not just working with one of the best providers in the market, but with multiple providers boasting both excellent reputations and diverse capabilities. This, in turn, makes investors more comfortable while also expediting the due diligence process.
But this will only work for early adopters of such a model. The future will see this as not just commonplace, but also a requirement for any large or sophisticated venture in digital assets. The time for adoption is now.
Building the ecosystem
It is an understatement to say that it’s not often you get to build an entire financial ecosystem from scratch. One of the most exciting things about the digital asset sector is that there are so many opportunities for innovation — to create something new in an area that is still relatively nascent.
But as the market matures, the innovators in this landscape will need to be able to integrate in order to meet the demands of institutions and investors. Our clients aren’t just used to working in a certain way out of mere preference — they have to work in that way because of regulatory requirements.
Thus, it is the responsibility of the digital asset ecosystem to create a truly networked approach. We must — together — build the future institutional infrastructure for digital assets.
As a bank-owned and bank-backed organisation, this is something we take to heart. We know, intimately, the pressures and requirements. This can be seen in our key services, such as Interchange Connect — our “network of networks” that connects custodial services. It is also something we kept at the forefront when developing Zodia Custody Gateway, our latest offering which provides a curated marketplace to quickly select and onboard services from Staking to Yield to Prime.
The future of digital assets is networked and integrated. Custodians such as ourselves must be at the forefront of this work. We must collaborate as one to create an infrastructure that allows institutions and investors to maximise the opportunities digital assets bring, without compromise.
Want to learn more about how we are building the future infrastructure for digital assets? Contact us here.