Coinbase has just announced that they have officially begun their cryptocurrency custody service. While the program is still in its early phase, they already have their first client and have accepted their first deposit. Custody services are a way for large financial organizations to securely deposit their assets in a way that is insured. This service, the first of its kind, could lead to larger institutional adoption of cryptocurrencies at large.
Featured Image: The Coinbase Blog
What is custody?
Coinbase Custody is officially open for business, providing secure storage of crypto assets for institutions in both the US and Europe. Before the end of the year, we hope to bring this offering to Asia as well. https://t.co/KDtMQ5TT3B
— Coinbase ????️???? (@coinbase) July 2, 2018
Custody isn’t something that we usually think about every day, but it is something that affects nearly all of our lives. Basically speaking, custody is where you deposit your assets or valuables (such as dollars or gold) so that they cannot be easily stolen from you. For instance, keeping money in the bank protects you from physical theft, fire, flood, and other forms of loss. As well, deposits made in a bank or with a custodian are typically insured.
When it comes to cryptocurrency, however, a number of different considerations need to be made. While individuals can hold cryptocurrency in a very secure way that is resistant to the previously mentioned vulnerabilities such as physical theft, cryptocurrencies can still be lost or stolen. This is especially true if one is not an expert in cryptocurrency security.
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What’s also important is to consider the unique challenges faced by institutional investors that could have tens or hundreds of millions of dollars worth of cryptocurrencies that they need to securely store for long periods of time. For an individual, something like a hardware wallet or other form of cold storage could be sufficient. But if hundreds of millions of dollars worth of bitcoin were to disappear due to a successful hack, serious problems could arise.
The Benefits of Custody
The advantage of using a custody service is threefold.
First, a custody service should have significant infrastructure and the technological experience needed to know how to protect assets. For instance, if you store money in the vault at a bank, it is much more secure than simply putting it in your pocket, or underneath your mattress. That’s because as individuals, we are not security experts and cannot afford to invest in a high-grade vault or fleet of armored cars. When it comes to custody, they can afford to implement these kinds of infrastructure investments. In the case of Coinbase, they have so far never lost assets due to a hack.
The second major benefit is that a custodian, upon accepting deposits, becomes liable for their care. This means that in the event of a hack or theft, the institution who made the deposit is not personally liable for this loss.
Think of it this way. If you keep your bitcoin on an exchange – which is not a custodial service, and that exchange is hacked, generally speaking your bitcoin is gone forever. If you have a custodial arrangement, on the other hand, then the custodian would be liable for and required to replace any assets that they were responsible for losing.
The final and perhaps most significant advantage of using a custodian is that custodians are insured. In the event that a loss occurs, the custodian can fall back on their own insurance that will then be responsible for making certain that all depositors will be credited.
Paving the Way for Institutional Investors
Many cryptocurrency commentators like John McAfee have stated on multiple occasions that once institutional investors like banks and hedge funds become invested in cryptocurrency, then the valuation and stability of crypto assets will both improve.
Institutional investors are preparing to enter the cryptocurrency market with a vengeance. They are generally long term investors and will be pumping billions into the market. Expect the top ten coins to go through the roof fairly quickly. The bulk of alt coins will soon follow.
— John McAfee (@officialmcafee) May 21, 2018
Today, the global cryptocurrency markets combined are only equal to less than half of one trillion dollars. While this may seem like a lot of money, in terms of global finance it is actually quite small.
Now that institutional money has a way to safely and securely enter the cryptocurrency market, we may see a general upward trend over time.
Coinbase Takes a Cut
Coinbase will not be providing these services for free of course. According to their announcement that was linked to on Twitter, the fees for using this service are considerable.
In order to use the service, there is a $100,000 setup fee for each account, and each account must maintain a minimum balance of $10 million.
On top of that, Coinbase is levying a monthly fee of 10 basis points per month. This is equivalent to 0.001% per month. This would be mean a fee of $100 per month on a $10 million deposit. The announcement did not specify if this fee would be charged based on the valuation of the assets, or would be charged as a percentage of the cryptocurrency itself. The company does note as well that these rates could change as adoption rates change over time.
