January 2024 marks a significant milestone in the ETF space with the approval of digital asset ETFs in one of the largest markets, the US. While we’ve already witnessed similar activity on this side of the pond, these updates in the US should be considered more than just a market update; this could signify a pivotal shift, opening doors to fresh opportunities for institutional investors and paving the way for a more mature digital asset market. In the focus now: robust custodial services. 

What’s the buzz about and what’s in it for digital assets? 

The digital asset ETF space is witnessing significant momentum, with established players like BlackRock, Grayscale, Bitwise, and more gearing up to launch their ETF products. Let’s delve deeper into BlackRock — a global financial giant boasting an impressive $9.42 trillion in assets under management. The company is making a strategic move into the digital asset ecosystem by launching the iShares Blockchain and Tech ETF (IBLC). It’s designed to provide investors with exposure to companies that are involved in the development, innovation, and utilisation of blockchain and digital assets technologies. A testament to the rising importance of digital assets-focused investment products, sending ripples throughout the industry. 

The launch of IBLC is a nod from one of the world’s largest asset managers, signalling a significant shift. As the industry watches, the launch has the potential to boost confidence, spur innovation, and diversify the offerings. An institutional backing which has the potential to pave the way for a more mature and stable digital asset market – validating the conviction that digital assets is an integral part of financial services. 

A market update already yielding positive consequences with Standard Chartered Bank foreseeing USD 50-100 billion inflows to Bitcoin ETFs in 2024, potentially propelling BTC to reach the USD 200,000 level by end-2025. 

A new era of custodianship? 

In this transformative period, the importance of robust custodial services comes to the forefront. With the digital assets market maturing, the need for secure, innovative custodians becomes paramount. They play a crucial role in ensuring the safety and regulatory compliance of digital assets, within the digital asset market. 

Custodians are poised to lead the charge in this new era of ETFs by offering secure storage, streamlining processes, reducing costs, and furnishing a comprehensive suite of services essential for digital asset management. A pivotal moment turning custodians into architects of opportunity in this new era. 

Three reasons why digital custodianship is vital in the new digital asset ETF era 

There are a variety of reasons why custodianship emerges as pivotal for institutional investors. Let’s dive deeper into the ways they are taking centre stage: 

1. Highest level of security & insurance 

It all comes down to security. Custodians protect client’s assets by adhering to the highest security standards, implement robust digital and physical protocols, utilise advanced encryption techniques, multi-factor authentication, and continually monitor the network to protect against digital threats like hacking, phishing, and unauthorised access. Additionally, employment of cold storage solutions and the use of physically secured, air-gapped hardware devices, safeguards assets from both online and offline vulnerabilities. 

2. Advanced technology 

Tech is key. Key technological benefits from custodianship lie in the advanced solutions integrated into custodial platforms. From cutting-edge staking mechanisms to ecosystem connectivity through Interchange Connect, liquidity pool access, and yield generation functionality, custodians ensure access to the latest and most effective tools when it comes to digital asset management. 

Another benefit: the ability to process efficient, compliant withdrawals in real-time from cold storage. This eliminates the need for batching redemptions – ensuring efficiency and responsiveness. One example of our commitment to technological excellence is the approval we’ve secured from the FCA to offer staking services, including staked ETFs. These technological differentiators underline the significance of custodians in providing institutional investors with access to the latest and most effective tools for digital asset management, reinforcing their central role in the evolving landscape. 

3. Ecosystem expansion 

Be at the forefront: Clients not only benefit from the security of their assets but also gain access to a suite of additional options within our ecosystem. One example: staked ETH as collateral. The feature allows clients to stake assets while concurrently processing redemptions. It’s a game-changer, especially for those clients exploring the option of borrowing ETH to expedite redemptions, particularly when facing extended lock-up periods.  

Beyond custody, Zodia Custody’s ecosystem extends to include Interchange Connect for seamless connectivity, staking facilitation offering potential yield generation rewards on locked assets, and Zodia Protect ensuring hyper-secure storage of assets. This strategic approach not only safeguards assets but also opens doors to a diverse range of possibilities for clients. 

The beginning of a new phase 

The launch of BlackRock’s Bitcoin ETF signals a turning point in the financial services landscape, validating the conviction that digital assets are an integral part of the industry. It’s not just about embracing digital assets; it’s about simplifying the path for institutional investors to access this transformative asset class without the complexities of direct bitcoin ownership. 

As the industry embarks on this exciting new phase, custodians like Zodia Custody are not just protectors of assets, they are architects of opportunity. The future belongs to those who can seamlessly navigate the evolving landscape. 

Ready to explore the secure, innovative, and prosperous of digital assets? Contact us at [email protected] 

Gateway offers a curated, marketplace-like experience to help institutions discover select, vetted partners and services. As the most connected custodian, Zodia Custody is able to connect institutional clients to the most diverse ecosystem of products and services all with the benefit of seamless integration.

The marketplace will help reduce the time and effort it takes for clients to select trusted providers and functionality. In this vein, onboarding is simplified with clients being able to access the additional services from their existing Zodia Custody wallets. 

Zodia Custody Gateway is built to be an evolving marketplace of products and services, providing financial institutions a growing array of partners to increase connectivity to the digital asset space from a single source. Through Gateway, the digital asset custodian aims to bring an “app store” style experience to selecting products and services. From its launch, clients will be able to access Yield, Staking, and Prime services, with more to be announced in due course.

Twinstake, the institutional-grade and non-custodial staking provider, will be one of the partners providing services through Gateway from its launch. Andrew Gibb, COO and CFO at Twinstake said: “As a launch partner of Gateway, Twinstake is excited to bring staking services to Zodia Custody’s new and existing institutional clients, setting a benchmark for excellence and forward-thinking in the digital asset sector.”

Other partners providing services on Gateway at launch will include Blockdaemon, Hidden Road and OpenEden, with more in the pipeline. 

“No one can do it alone in digital assets. To get the most out of the opportunities in the market, financial institutions need the whole ecosystem at their disposal. And that’s what Zodia Custody Gateway is built for – to deliver the very best our industry has to offer from a single, seamless source.” said Julian Sawyer, CEO of Zodia Custody. “Through curated platforms like Gateway and our recently launched Interchange Connect network, we are connecting the digital asset industry piece by piece, and making it more accessible than ever for financial institutions.”

Choosing between a custodial technology provider and a digital asset custodian depends on an investor’s specific preferences and needs. With self-custody via technology providers, investors take on some of the duty of storing and safeguarding their assets, while digital asset custodians provide this expertise on behalf of their clients. It’s the decision between taking on self-custody vs. delegating for enhanced security and peace of mind. It is crucial for investors to thoroughly assess their requirements and make a well-informed choice regarding the storage and protection of their digital assets. 

  

In this article, you will learn: 

• What are custodial technology providers? 
• What are digital asset custodians? 
• Four key differences between technology providers and digital asset custodians 

  

What are custodial technology providers? 

Custody technology providers are companies that provide infrastructure services and software solutions for the secure storage of digital assets. They provide an agile environment for institutions to satisfy their business demands by offering software and/or hardware infrastructure. These providers enable their clients to independently organise the storage of their digital assets without requiring the providers to store the clients’ private keys. Fireblocks, Metaco, Ledger, and Blockdaemon are examples of leading technology providers. 

Technology providers offer a distinct approach to self-custody that differentiates them from basic self-custody. Unlike basic self-custody, which lacks advanced features, technology providers supply the essential infrastructure for securing and enhancing the capabilities of digital assets. 

Institutional investors considering self-custody should recognise that the loss or compromise of their private keys can result in permanent asset loss. According to research from Chainalysis, 20 percent of the existing bitcoin that has not moved from its respective wallet addresses in five years or more is considered lost.    

  

What are digital asset custodians? 

Digital asset custodians are third-party companies that safekeep digital assets on behalf of their clients in a safe, secure, and auditable way. Depending on the jurisdiction they are based in, digital asset custodians are also required to be compliant with regulatory requirements and registered with regulatory bodies.  

Operating with regulatory oversight, registered digital asset custodians have a proven track record in safeguarding digital assets on behalf of their clients. The core custodial offering is invariably supplemented by value-add services such as off-exchange settlement to reduce counterparty risk, access to yield generating protocols, and a chance to participate in governance and security of blockchains via staking. 

Hedge funds, large corporations, and asset managers are examples of such client types. 

  

Four key differences between custodial technology providers and digital asset custodians 

1. Access and control: – Technology providers and custodians serve distinct roles in the world of digital asset custody. Unlike custodians, technology providers do not possess the authority or capability to freely move their clients’ assets. This places the responsibility solely on clients to assume full responsibility for sending and transferring assets to custody wallets. When you take on the duty of self-custody, the safety of your assets is entirely in your hands. This means that if the recovery phrase is not carefully secured, you run the risk of indefinitely losing access to your funds. To mitigate any potential loss, it is important to recognise the critical role of securely storing your recovery phrase. 

2. Backup and recovery possibility – Clients share the burden of securing their assets, including in backup and recovery scenarios, when working with a technology provider. By contrast, custodians bear full responsibility of assets both in business as usual and disaster recovery scenarios. Consequently, recovery possibilities may be more limited when relying on tech providers compared to the comprehensive options offered by digital asset custodians. 

3. Lack of regulatory protection - Technology providers and digital asset custodians have distinct differences in terms of asset storage and regulatory obligations. Technology providers, unlike custodians, are not tasked with storing their clients’ digital assets and, as a result, are exempt from holding regulatory licences and are not subject to the same regulatory requirements as custodians for the safeguarding of digital assets.  

4. Insurance coverage – There is often a wide variation across the industry in the type and scope of insurance cover offered to protect digital assets under custody.  Due to the difference in burden of responsibilities, it is best to check the scope of insurance cover carefully when going down a tech provider route to ensure that your assets will be protected in all reasonable scenarios. Custodians typically provide a more comprehensive and higher grade insurance cover that can be reassuring for clients. 

For institutions aiming to navigate the world of digital assets, Zodia Custody stands as a trusted custodian, assuring the safety and security of your assets. This peace of mind empowers you to explore the untapped potential of the digital asset market. Stay ahead of the curve, get in touch with us here. 

November 11th marked the first-year anniversary of the collapse of FTX, serving as a crucial source of lessons and warnings for all players in the digital asset ecosystem. Acting as a catalyst, the collapse has sparked necessary dialogues geared towards providing clarity to all industry participants, ranging from regulators to institutions. 

In this article, we explore three lessons learned from the fall of what was once the world’s second-largest cryptocurrency exchange. 

Lesson one:  prioritise robust risk management 

The mismanagement of critical risk factors, including counterparty risk, inadequate liquidity, and operational oversights, played a pivotal role in the downfall of FTX. This collapse serves as a stark reminder for crypto asset service providers (CASPs) to bolster their risk management practices and implement robust internal controls when navigating the intricate landscape of digital assets. 

In the aftermath of the collapse, a notable shift occurred—institutional firms and CASPs themselves began taking a more proactive stance to identify and assess the risks that CASPs they deal with, either as counterparties or clients, may pose, and evaluate the adequacy of controls that are in place. This has enabled better-informed decisions to be made with respect to risk management and has, over the past year, resulted in standards across the industry increasing. Additionally, CASPs and institutional firms need to ensure that training and risk awareness throughout their organisations are significantly improved and that a culture of risk awareness and compliance is embedded. 

Embedding these cultures extends beyond merely implementing risk and compliance measures. As an industry, cultivating a mindset that truly values and proactively manages risks at every level is essential for attaining lasting success. 

This increased scrutiny reflects a growing awareness within the institutional landscape regarding the importance of comprehensive risk management strategies, which remain a challenge in the lack of clear consensus and crypto specific regulation. 

Lesson two:  embrace transparency and reporting  

Transparency and accountability form the bedrock of a thriving digital asset ecosystem. The FTX collapse reinforces the indispensable roles played by both internal and external audit functions. 

 For CASPs, transparency is not just an organisational value but a necessity for building trust with clients. The situation with FTX, where audited financial statements remained undisclosed until after the collapse, is an obstacle for clients seeking to comprehensively assess the financial health and operational integrity of a service provider. 

In response, institutions are increasingly choosing to collaborate with service providers that can provide evidence of reporting through SOC 1 and SOC 2 reports. The former focuses on internal controls over financial reporting, while the latter examines organisational controls pertinent to both operations and compliance. This transformative shift highlights an increasing emphasis on accountability and transparency within the digital asset space, marking a game-changing moment for those seeking to establish credibility and build trust. 

 However, the mantle of responsibility for transparency extends beyond service providers alone. Institutions, as architects of their partnerships, bear the responsibility to conduct thorough due diligence when selecting a partner. Asking rigorous questions and carefully researching a service provider’s history, shareholders, and risk management practices are non-negotiable prerequisites before making any commitments. 

The responsibility for transparency and accountability within the industry also extends beyond service providers and institutions; regulators play a crucial role. They bear the responsibility of proactively formulating clear and comprehensive regulations, enforcing them diligently, and taking decisive action against any misconduct. Well-defined regulations in the digital asset space act as necessary regulatory guardrails, contributing to clarity within the industry and fostering a conducive environment for the growth and maturation of the digital asset sector. 

Lesson three:  asset segregation is paramount   

In the aftermath of FTX’s collapse, a crucial lesson emerges — the importance of asset segregation and the protection of clients’ funds. The fallout, marked by the disappearance of significant client assets, serves as a stark reminder to the industry about the importance of maintaining a clear distinction in clients’ holdings. 

Asset segregation involves a clear separation of clients’ assets, preventing any co-mingling, whether among institutional clients or between an institution and the service provider. Let’s explore two scenarios of asset co-mingling and their potential outcomes. In the case of an omni-bus wallet where clients’ assets are mixed and the crypto service provider goes under, determining ownership becomes challenging. Despite the potential for retrieval, the looming risk of prolonged asset entanglement within a complex administrative process is evident. 

In another scenario, if there’s a failure to maintain clear segregation between clients’ assets and those of the provider, there’s a potential for these assets to come under the administration of the service provider should they go bankrupt. This outcome is contingent upon the legal structure in place and without the safeguard of insolvency protection. 

The collapse not only highlights the importance of a clear legal framework but also underscores the critical role of the implementation of a well-defined recovery and resolution strategy. Such a strategy is essential for ensuring that clients maintain both legal and operational control over their private keys and underlying assets. These measures serve as integral components in fortifying the resilience of market infrastructure and fostering confidence in the ongoing development of the digital asset ecosystem. 

Conclusion 

These lessons highlight the foundational principles that shape a resilient and trustworthy digital asset ecosystem. By implementing robust risk management practices, industry participants can navigate the complexities of the ever-evolving landscape with greater confidence and stability. Embracing transparency and reporting not only fosters trust but also cultivates an informed and collaborative industry. 

These fundamentals collectively set the stage for the sustained growth and maturation of the sector. Prioritising risk management, transparency, and asset segregation establishes a strong foundation capable of overcoming challenges and instilling confidence within the sector.