SC Ventures, the innovation and ventures unit of Standard Chartered Bank, and Northern Trust, one of the world’s largest custodian banks, are teaming up to create Zodia Custody, a new service for institutional investors holding cryptocurrencies.
In a press release, the firms said that cryptocurrencies already represent 0.3 percent of the world’s currency and bank deposits and are forecast to continue growing at a compound annual growth rate of 32 percent between 2019 and 2024.
The two banks point out that while there is increasing interest from institutional investors in cryptocurrency, institutions only account for 9 percent of investments in this asset class at present.
Cryptocurrencies represent 0.3 percent of all currency and bank deposits
Last month Boston Consulting Group (BCG) and law firm White & Case published a report saying banks should get into the lucrative cryptocurrency custody business soon or risk failing to exploit a key competitive advantage.
Cryptocurrency custody is a service that has traditionally carried a significant fee premium over the custody of shares and bonds.
The records of share and bond ownership are kept by central securities depositaries (CSDs). However, cryptocurrency ownership is determined by control of a private key and in theory, anyone who sees the private key can steal the cryptocurrency by signing a transaction.
The risk of theft can be reduced by ensuring that cryptocurrency transfers are only possible using multiple signatures, rather than a single signature.
“Crypto custody fees are relatively high”
“You can’t physically prove cryptocurrency is safe: you have to do so mathematically and operationally,” Mike Belshe, CEO of specialist cryptoasset custodian BitGo, told New Money Review earlier this year.
“In crypto we have to worry not only about making a bad investment, but also about the asset disappearing from underneath us,” said Belshe.
“As a result, crypto custody fees are relatively high. In fact, custody requires these fees to help build out its research and development efforts,” he said.
Traditionally, custodians of financial assets might charge as little as 1 basis point (0.01 percent) per year for holding clients’ equities and bonds, but the annual cost of safekeeping bitcoin and other cryptocurrencies has historically been more than a hundred times higher.
Custody costs have now come down
In 2018 Coinbase, for example, charged a set-up fee of $100,000, plus 1.2 percent a year, for a minimum account size of $10m, to custody crypto assets.
These costs have now come down: Coinbase now charges a set-up fee of $0-10,000, with 0.5 percent annual custody fee and a $1m minimum balance.
Zodia, the new joint venture between Northern Trust and Standard Chartered, is expected to begin operations in London in 2021, subject to registration with the UK’s financial markets regulator, the Financial Conduct Authority (FCA).
At launch, Zodia will provide custody services for bitcoin and ethereum, followed by ripple, litecoin and bitcoin cash, the firm said.
“Interest continues to grow in these emerging and innovative financial instruments”
“We combine the risk management, compliance, governance and security approach of a regulated financial institution with the cutting-edge innovation of crypto asset and key management technologies,” said Maxime De Guillebon, Zodia’s CEO.
“By doing so, we enable operational efficiency and speed of transaction without compromising on security or reliability.”
“The introduction of digital custody backed by the know-how and experience of global banks is a breakthrough in the evolution and support of institutional cryptocurrency markets,” said Pete Cherecwich, president at Northern Trust.
“Zodia’s robust capabilities will make it possible for institutional asset owners, family offices and asset managers to invest in a range of cryptocurrencies as interest continues to grow in these emerging and innovative financial instruments.”
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