The digital asset industry reached an impressive milestone in November 2021 when its market cap surpassed $3 trillion. However, when it comes to the custodial aspect of the market, the numbers remain more modest. In 2022, the custodial market was valued at $447.9 billion, according to a joint report by consulting firm PricewaterhouseCoopers (PwC) and wealth tech platform Aspen Digital. The report, published on July 11, provides insight into the state of digital asset custody and offers valuable information for investors and industry participants.
The report identifies 120 custody service providers as of April 2023, categorizing them into two main groups: third-party service providers and self-custody solutions. These providers play a crucial role in ensuring the security and safekeeping of digital assets for institutional investors and individual users alike. The increasing interest in crypto staking, driven by the Ethereum Merge, and the emergence of nonfungible tokens (NFTs) and the metaverse have captured the attention of institutional investors, enhancing the demand for custody solutions.
One of the significant challenges faced by the custodial industry, as highlighted in the report, is security. The lack of appropriate governance, risk management, and internal controls have raised concerns among institutional investors. The failure of FTX, a prominent exchange platform in 2022, exposed the vulnerabilities of certain custody solutions. As a result, institutions are becoming more inclined to safeguard their assets through self-custody solutions or reputable digital asset custodians rather than solely relying on exchange platforms for storage.
Insurance also poses a challenge for custodians. Self-custody solutions typically do not offer insurance policies, leaving users uncompensated in case of any loss of digital assets due to negligence. The report emphasizes the importance of sound insurance policies as a crucial criterion for investors when choosing a digital asset custodian. Family offices, in particular, place significant value on insurance coverage to protect their assets.
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To aid investors in selecting a custody service provider, the report suggests a five-step approach. These steps include mapping the market, creating a grading system to evaluate providers, conducting performance reviews, and conducting other necessary preliminary procedures. By following this methodology, investors can make informed decisions based on their specific needs and risk appetite.
The regulatory landscape surrounding digital asset custody is also evolving. Earlier this month, Canada’s financial authority issued guidance to assist fund managers in complying with legal requirements for investment funds that hold crypto assets. The guidance reflects the increasing recognition and acceptance of digital assets within the traditional financial system. Furthermore, the authority reaffirmed its trust in the regulated futures market for crypto, citing its role in promoting greater price discovery.
Overall, the report provides valuable insights into the current state of the digital asset custody industry. It sheds light on the challenges faced by custodians and offers suggestions for investors on how to approach the selection process. As the digital asset market continues to grow and evolve, safeguarding assets and ensuring their security will remain a top priority for market participants. The custodial industry plays a crucial role in meeting this demand and providing peace of mind to investors looking to enter the digital asset space.
In conclusion, while the digital asset industry has witnessed significant growth, the custodial market has yet to reach the same heights. However, with the increasing interest from institutional investors and the emergence of new asset classes like NFTs and the metaverse, the demand for reliable custody solutions is expected to rise. The PwC and Aspen Digital report provides valuable insights into the challenges and opportunities in the custodial industry. By addressing concerns regarding security and insurance and following a structured approach to selecting custody service providers, investors can navigate the digital asset landscape with confidence. With the continuous development of regulations and the increasing recognition of digital assets within the traditional financial system, the custodial industry is poised for further growth and innovation in the coming years.
