Crypto asset custody is an important and often required component of crypto investment management. However, due to technological and regulatory challenges, advisors must conduct greater due diligence when assessing custodial solutions. Jason Hall and John McNiff from Methodic Capital Management introduce crypto custody solutions from self-storage to “custody as a service” and discuss how the transparency of the blockchain can help support custody considerations.
Regulatory considerations are a key factor when choosing a custodian. In the U.S., registered investment advisors must use qualified custodians, though the specific parameters of this designation are not yet clearly defined for digital assets. Globally, licensing and regulatory mandates can vary widely, with some countries not requiring licensing at all. Working with custodians that have clear regulatory requirements and robust internal frameworks helps protect against fraud and ensures business integrity.
Transparency measures are also important. Custodians should offer a certain level of transparency, conducting comprehensive audits on their financials, IT, risk management, and infosecurity procedures. Blockchain-based custody can offer high transparency through technologies like proof of reserves, with the potential to reduce fraud and irresponsible financial behavior.
Compatibility with investment strategy is also a factor. Depending on technological limitations and regulatory restraints, custodians often support different asset mixes. Getting specific assurances of all relevant assets will prevent the need for multiple custodians.
Choosing the right custodian requires careful analysis of regulatory rules, security measures, and transparency. With the appropriate diligence and resources, digital asset custody can offer more safety, transparency, and cost efficiency than traditional models of custody.
Given the pending status of digital-asset legislation in the U.S. and throughout the world, working with custodians that have clear regulatory requirements and robust internal frameworks helps protect against fraud and ensures business integrity, said Henrik Gebbing, COO of Finoa.