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A regulated custody solution has finally arrived.
BitGo, a blockchain security company, received a state trust company charter from the South Dakota Division of Banking late last week. This milestone cements BitGo as the only qualified custodian in the United States built exclusively for digital assets.
Many institutional investors have previously been wary of entering the crypto markets due to the lack of qualified custodians. This approval will help in a few ways:
Investment Criteria — Institutional investors have to check the boxes on their criteria list before making an investment. The qualified custodian requirement gives institutions peace of mind that their assets are (1) stored securely, (2) accurately reported, and (3) within their control when the investment team looks to buy or sell.
Higher Bar of Quality — Qualified custodians are required to meet certain security thresholds, file financial audits & monthly disclosures, and ensure full compliance with existing KYC & AML rules. This focus on process, compliance, and transparency creates higher levels of trust between investors, fund managers, custodians, and regulators.
Retail Products — A number of digital asset retail products (ex: ETFs) have been denied by regulators over the course of 2018. Numerous times the denials have been accompanied with language citing the lack of qualified custodians and/or the inability to ensure safe, unmanipulated markets. BitGo can now solve the qualified custodian issue which should bring the industry closer to retail product approvals.
BitGo CEO Mike Belshe highlighted the importance of his company’s accomplishment by saying, “Custody has been the missing piece of cryptocurrency market infrastructure and this gap has kept institutional investors out of the market. Traditional custodians don’t have experience handling cryptocurrency. Exchanges that double as custodians present a conflict of interest and raise regulatory concerns. BitGo Trust Company is a qualified custodian, and therefore the only custody offering that delivers the highest levels of both security and regulatory compliance.”
This is a big leap forward but I wouldn’t anticipate an immediate flood of institutional capital into the crypto markets. The recent 80%+ drawdown in prices has scared off a subset of institutional investors, while a different subset is still working to understand how best to deploy capital into the space. Do they buy Bitcoin? Invest in venture funds? Take beta exposure through an index?
Each institution will slowly work through their desired (1) investment strategy, (2) custody solution, and (3) risk management plan. Once they get comfortable, it wouldn’t surprise me to see initial investment sizes of 10 to 200 basis points. Every institution’s goals and portfolio is different so there is no one size fits all solution.
I’m confident that 0% exposure to digital assets is the wrong answer though. BitGo’s qualified custodian product should help more institutions #GetOffZero and put skin in the game.
We’re watching the creation of a new financial system. Institutions can’t afford to be left behind.
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Nothing in this email is intended to serve as financial advice. Do your own research.