Despite the collapse of a number of crypto platforms in the past year, institutional interest in digital assets remain high. The challenge now is to create a workable custody proposition for a blockchain-based trading environment, writes Swen Werner, head of custody at State Street Digital, in a recently published insight. Jointly authored with Dayle Scher, research principal at fintech advisory firm Celent, the piece references a study that was published in an issue of State Street’s Digital Digest this year.
Swen Werner and Dayle Scher cite the establishment of property rights as a particular challenge in digital asset custody, using the bankruptcy of crypto platform Celsius last year as an example. Because most of the cryptocurrency that Celsius’ clients held was in the firm’s interest-bearing accounts as opposed to its custody accounts, it was deemed that Celsius owned most of the digital assets. As a result, Celsius’ customers will be last in line for repayment. Approximately 600,000 accounts were affected, with assets valued at US$4.2 billion.
The incident has prompted the Securities and Exchange Commission (SEC) to look into the importance of segregation in safeguarding investors’ access to their digital assets. A proposal has been made to bring cryptocurrencies under the scope of SEC’s custody rule to ensure that client assets will remain available to the client, despite custodian default, insolvency, or the like.
Oldie, but goodie
According to the study, traditional custodians remain the trusted choice for institutional investors, with almost 75 percent of respondents saying that they prefer to use an integrated provider for digital asset servicing. In conclusion, “custodial services must develop new methods and controls to ensure that customer protections are in place, and the residual risk is understood when dealing with digital assets”.