With institutional interest in crypto assets growing, crypto-specific projects and traditional finance companies alike have been ramping up their institutional offerings to cater to the needs of this specific client base.
Though a lot of effort has been put into building secure infrastructure and solutions for financial institutions to enter the cryptocurrency field, unclear regulations remain a significant barrier to institutional adoption.
Rising Interest in Institutional Cryptocurrency Investment
The past year has been undeniably marked by the entrance of professional traders and institutions into cryptocurrency, driven by the potential for value appreciation and portfolio diversification. There’s NASDAQ’s interest in the space, for instance. And numerous attempts at bitcoin-based exchange-traded funds.
When asked whether or not he sees institutional investors entering the cryptocurrency space, Boris Bohrer-Bilowitzki, the head of sales at digital assets custody and portfolio management firm Copper Technologies, affirmed the trend.
“Yes, without a doubt,” he told Bitcoin Magazine, “from very public entrances like U.S. pensions and university endowments, to European pension funds, family offices from all over the world, and sophisticated fund structures and strategies. There is also an increasing number of U.S. high frequency trading getting into this space.”
Based in the U.K., Copper Technologies claims to hold anywhere between $100 million and $500 million worth of cryptocurrencies on behalf of clients like Nickel Asset Management, a U.K.-licensed institutional digital assets arbitrage fund.
“If you’re technologically minded, there has never been a better time to be in finance,” Bohrer-Bilowitzki said. “All the rules are being re-written as people begin to understand the potential of distributed ledger technology (DLT) for any asset class, traditional or digital.”
For Scott Freeman, co-founder and partner of JST Capital, a digital assets financial services firm serving institutional investors, demand has accelerated over the past few months. He said the trend correlates with the effective entrance of pioneers into cryptocurrency, paving the way for followers to follow suit.
“Whereas in the past many investors did not want to be the first to enter this space, we’ve now seen first movers enter the space, and now others are willing to invest in crypto as a diversified, uncorrelated investment,” Freeman told Bitcoin Magazine. “The market continues to evolve quickly. Clients are more comfortable than they were three months ago and will be more comfortable with investing in digital assets three months from now.”
JST Capital was founded in January 2018 to bring traditional and sophisticated financial tools and solutions to banks, brokers and institutional investors dealing with this rapidly growing asset class. In June 2019, led by a team of former fund managers, investment bankers and traders from the likes of UBS, the Royal Bank of Scotland (RBS) and Bank of America, JST Capital launched a suite of cryptocurrency offerings that includes over-the-counter (OTC) trading, risk management modelling, optimization strategies and consulting services.
Asian Markets: An Increase in Institutional Cryptocurrency Interest
According to Freeman, JST Capital has seen traction in both the U.S. and Asia, two markets the company has operations in. He said the trend has been driven by these markets’ respective dynamic blockchain startup ecosystems and overall higher awareness of the technology.
“The Asian market tends to be more driven by retail investors, though we have seen an increase in institutional interest from Hong Kong in particular,” Freeman said. “We see a lot of blockchain innovation still coming out of Silicon Valley but more recently we’ve seen a lot of projects out of Asia gaining traction.”
Alongside JST Capital, Switzerland’s fintech startup Crypto Finance has also been looking to serve Asian institutional investors wanting to gain exposure to cryptocurrency.
On September 10, 2019, the company announced the expansion of its professional digital assets services offering to the Asia-Pacific region “a dynamic, vital region that plays a big role in both the traditional financial sector and the emerging digital assets markets.”
Crypto Finance provides regulated asset management, brokerage and storage solutions in digital assets for top Swiss and European banks and financial institutions, the company claims. Its subsidiary, Crypto Fund, is reportedly the first and only asset manager for crypto assets that’s regulated by the Swiss Financial Market Supervisory Authority (FINMA).
Need for Institutional Cryptocurrency Custodial and Trading Services
Until recently, one of the main barriers to institutional adoption of cryptocurrency has been custody, or the ability of financial institutions to hold and secure cryptocurrencies on behalf of trading clients.
And no doubt, there are good reasons to be concerned, given the heightened cyber risk associated with crypto assets and their extensive history of hacks and fraud. In fact, blockchain security company CipherTrace estimates that a total of $227 million worth of cryptocurrencies was stolen from cryptocurrency exchanges and infrastructure in the first half of 2019 alone.
Copper Technologies was founded in January 2018 to address just that, Bohrer-Bilowitzki said. At the time, services available simply did not meet clients’ security standards.
Copper’s standalone cryptocurrency custody application, Copper Unlimited, has several built-in safeguards and uses techniques such as key sharding to ensure maximum security. Key sharding is a process by which a private key is split into separate pieces, or shards, and then distributed between trusted third parties.
Copper also uses an Optical Air-Gap for its cold storage, which provides an added layer of protection that prevents offline machines from being infected with malware.
Although security is paramount for crypto assets, there’s also a need for fast access, Bohrer-Bilowitzki said. To this end, Copper Platform, a trade and settlement infrastructure company, was launched in June 2019. It links custody with multiple exchanges like Bitfinex, BitMEX and Binance, as well as OTC desks.
“Having your private key locked in a mountain vault is all well and good, but it doesn’t help you execute a variety of trading strategies,” Bohrer-Bilowitzki said. “The safeguarding and trading infrastructure was developed specifically to marry the worlds of ‘hodlers’ and those that need constant, quick and secure access for trading purposes.”
For JST Capital’s Freeman, it’s clear that a lot of progress has been made to develop and deliver secure and sophisticated tools for institutional investors. As the industry matures, even better solutions will emerge.
“The market is more advanced than it was six months ago and we expect to see better and more robust solutions to solve this issue over the next three to six months,” Freeman said. “There is a tremendous amount of energy going into improving custody solutions to match the needs of institutional investors, as well as the accountants and auditors who need to make sure the solutions are compliant with current standards of financial reporting.”
A Booming Institutional Cryptocurrency Industry
JST Capital, Copper and Crypto Finance are part of the growing list of companies targeting institutional players.
In fact, since 2018, the institutional-grade trading of cryptocurrencies and tailored custody services have multiplied in number, with established crypto startups like the exchanges Coinbase, Gemini and itBit, as well as blockchain security company BitGo, all launching services.
Coinbase unveiled its suite of institutional products in May 2018, which it has since expanded through strategic moves like acquiring Xapo’s institutional businesses in August 2019. According to Coinbase, the acquisition allowed it to become the world’s largest crypto custodian, with over $7 billion in assets under custody. It claims to serve more than 120 clients in 14 different countries.
BitGo received the green light from South Dakota regulators in September 2018 to create and operate a cryptocurrency custody service. In May 2019, the company expanded its institutional offering with the launch of a new clearing and settlement system operating off-chain.
But this booming industry is about to get even more crowded, as traditional players have begun entering the space.
In October 2018, American multinational financial services corporation Fidelity Investments launched a digital asset arm to handle crypto custody services in-house and execute trades for investors such as hedge funds and family offices.
Bakkt, a bitcoin futures exchange and digital asset platform founded in 2018 by the Intercontinental Exchange (ICE), acquired Digital Asset Custody Company (DACC) and partnered with Bank of New York Mellon (BNY Mellon) in April 2019 to develop a secure crypto asset custody and storage service.
And on September 11, 2019, Hong Kong-based Legacy Trust announced the launch of its digital asset custody arm, First Digital Trust, a move it says will help it “stay at the forefront of this burgeoning industry.”
Legacy Trust, a traditional pension and family trustee founded in 1992, recently pivoted to serve the cryptocurrency community, launching what it claims is the world’s first voluntary pension plan supporting digital assets on September 4, 2019.
Regulatory Landscape Needs Improvement
Institutionalization is a necessary next step for cryptocurrency to reach mainstream global acceptance, and while startups and traditional financial institutions alike are building out the infrastructure and tools needed for professional traders and institutional clients to participate, a key challenge hampering institutional adoption remains: regulation.
“Institutional Investors are eager for more regulatory clarity, particularly in the U.S.,” JST Capital’s Freeman said. “Crypto has not been around for very long and there are also some investors who simply want to see crypto assets continue to be adopted and traded.”
Copper’s Bohrer-Bilowitzki noted that progress has been made regarding cryptocurrency regulation over the past year. Undeniably, Facebook’s controversial Libra stablecoin project has added a sense of urgency to the task, but there’s still a long way to go.
“I think the technology is there, but what is still lacking is an understanding at a regulatory/industry level about what custody means for digital assets,” Bohrer-Bilowitzki said. “The regulatory landscape still needs to improve. The lack of agreement among national/regional bodies is still discouraging to some. But this too is changing rapidly for the better.”