Report reveals slow progress in the crypto custody sector

Hamburg based Digital Assets Custody (DAC) offers crypto custody consultancy services. The company published its first major report into custody solution providers and their offerings in 2019 – and has just released its 2nd edition.

In the 2020 Digital Assets Custody Survey, DAC once again looks to identify trends and challenges facing the custody sector. It finds nearly all providers have improved their core offerings since 2019, and the industry is growing overall. At the same time, DAC says the sector is still in its infancy and as in 2019 is characterized by a broad range of offerings with little or no agreed definitions & terminology and no standard strategies around pricing.

In terms of regulatory approaches, the uncertainty that has slowed progress in the wider blockchain and cryptocurrency sectors has impacted the custody space in a similar manner. Indeed, 43 percent of the report’s respondents stated they were not regulated by any financial authority. Of the 46 percent who said they were regulated by a financial authority, the dominant approach has been for custody providers to opt-in to be recognized as part of the existing financial services sector.

In this context, financial services overseers like the German Federal Financial Supervisory Authority, the Swiss Financial Market Supervisory Authority, and the UK’s Financial Conduct Authority are mentioned. Most participants identified regulatory harmonization issues related to licensing and compliance continuing to be a major pain point in 2020. The report notes this default reliance on existing financial authorities for guidance and oversight favors the entry of established entities into crypto custody market, as opposed to crypto-specific start-ups, as they have already established the required infrastructure and procedures.

More crypto deposit insurance available

While fiat bank deposits are government-guaranteed in most jurisdictions – by the FSCS in the UK, for example, and the FDIC in the US – no such government-backed insurance cover exists for crypto. On this front, the DAC reports there has been positive momentum in the crypto custody space, with 70 percent of providers confirming they have at least some form of insurance coverage in place (up from 57% in 2019). Despite this, the report notes that a majority of providers declined to disclose the cap of their insurance cover, so depositors should still conduct their own due diligence with regards to level of insurance cover when choosing a custody provider.

In terms of who is in the market for crypto custody solutions, the survey reveals providers are targeting services to the following groups; Asset managers 86%, Exchanges 81%, Traditional banks 81%, and Ultra-high net worth individuals 50%. In its conclusion, DAC says it expects significant change and some consolidation in the sector going forward, with increasing regulatory certainty being the major driver for adoption.