The recent year 2020 gave time for many to look for alternative means to increase their financial inflows and revenues upon the strike of the pandemic. Every individual, institution, and economy hurriedly turned to the digital space to see what’s in store for them as lockdowns and quarantines and strict health protocols halted many physical interactions and face-to-face communications. What turned out was the acceleration of digital adoption being incorporated in many incumbent systems, processes, and mechanisms across government and industries.
For the major part, global exposure to virtual currencies and digital assets became phenomenal as is seen reflected on the all-time-highs of Bitcoin, Ethereum, Polkadot, and every other altcoin there is. What was once looked down to and termed as “valueless, computer-based assets created out of thin air” are now sought after as reliable hedges against the dwindling value of the fiat. Celebrated high net worth marchers on the digital aisle included Microstrategy, PayPal, Visa, Mastercard, and Tesla. With the sole purpose of helping their clients buy, sell, hold, and pay for products and services using cryptocurrencies, the demand for crypto custody and digital wealth management is expected to increase this 2021.
Funds and asset owners and managers are now faced with the daunting task of keeping up with the accelerated transformation of the financial industry. They are now seeking to outsource and partner with custodians to be able to cope up and adapt to the challenges ahead. Custodians have effective solutions to complex matters in place from security to settlement execution that makes them a vital cog in the financial services market.
Custodians are charged to take care of their client’s wealth and funds. They are regulated financial institutions that are paid fees for executing such services which are usually based on percentage from assets under custody (AUC). The boom waiting to explode in the field of custody services is when large funds from institutions like pension funds start flowing into digital currencies not worth in the billions but worth in the trillions.
The continuing progress and transformation in the industry call for custodians to facilitate such progress. The following are some areas of the growing demand for custody.
Technological advancement and innovation are sending pressure upon financial institutions to level up with customer expectations. Even with the in-house adoption of back-end office features, the cost of maintaining resources and personnel are beginning to take a toll on overall operations given that investment funds are increasing in size and complexity and must be managed with flexibility. For these reasons, asset managers outsource custodians to take over the reins where they are master facilitators in fund administration, post-trade, and multi-custodian investment operations.
Other areas that are beginning to be outsourced to trusted custodians include collateral management, passive currency overlays, loan administration, investment analytics, and private equity fund administration.
Many traditional financial institutions have systems that still run under outdated mechanisms. Taking cues from keeping up with customer experience in technology with many other different areas, they are pressured to keep operational efficiency up by outsourcing their technological requirements. This is to continue leveraging their investment platform functionalities while benefitting from outsourced operations.
The demand for data management is also on the rise to consolidate data from multiple internal and external sources, the purpose of which is to strongly support asset managers to make wise and informed investment decisions. Adopting AI solutions make data management sophisticated and fast, that outsourcing custody services, indeed, is an idea whose time has come.
Also, Superannuation fund consolidation, acquisitions, and mergers will continue through the years as smaller funds will likely be absorbed by larger funded counterparts. Asset managers will naturally be put under much pressure as these megafunds need more rigorous risk management and proper governance.
An impediment that needs attention is the lack of fully regulated crypto custodians, including trading exchanges, and other service providers. Very few mainstream banks offer custodian services. SEC regulation promulgates that customer assets worth more than $150,000 are required to store the holdings with a qualified custodian, such as banks, saving associations, registered broker-dealers, futures commission merchants, and foreign financial institutions.
The crypto space may be a decentralized lot, but it is becoming clear that regulation can be a good thing, such that it brings investor confidence, standards, clarity, and soon, mass adoption. In Europe, the so-called MiCA or Markets in Crypto Assets Proposal aims to create a pan-European regulatory regime for crypto-assets and related services, and a pilot regime for market infrastructures based on distributed ledger technologies, which creates a safe space for testing innovative DLT-based financial market infrastructures in the European Union.
Microstrategy, PayPal, Visa, MasterCard, and lately, Tesla, are only some of the big players who bought Bitcoin into their portfolios. Bitcoin’s scarcity of supply, having only 21 million bitcoins in its lifetime, is driving its price into all-time highs. With retail and institutional purchases of cryptocurrencies happening daily, substantial crypto holders may need to partner with custodians, as regulation requires. Not only that, their crypto funds and assets need to be fully protected and secured. Institutional needs, to be able to buy, sell, and hold digital assets, robust multi-authentication institutional crypto-asset custody solutions must secure the services of custodians.
We can surmise that the age of cryptocurrencies has finally arrived, even without mainstream adoption yet. Crypto conversations are beginning to dominate coffee shops and dinner tables, whereas before they are often dismissed as a passing fad. The coronavirus health protocols of staying home and working from home schemes significantly contributed to the growing public confidence cryptocurrencies, fintechs, and DeFis are enjoying now. The governments and authorities of the world, thus, are taking a long hard look into the new asset class basically to protect the consuming public from fraud, theft, scams, terrorism, and other cybercrimes, and some other complex matters that will somehow keep the centralized fiat in its lofty place while digital money does its thing.
Third-party service providers offer digital currency custody solutions to store and secure fiat and cryptocurrencies. Their specialty is to manage institutional investments and hedge funds that include megafunds consisting mainly of bitcoin and other cryptocurrencies. Custody services are relevant now more than ever to bridge the gap between institutional investment and the shifting cryptocurrency space. With obviously increasing crypto demand and regulation in the talks, it will only be a matter of time before custody services become a default service in all of the crypto market dimensions.
Wallex is a FinTech company that employs blockchain solutions to conform to your escrow, custody, exchange, transfer, and asset management needs. Our AML/KYC/CFT procedures enable us to operate internationally, conforming to each country’s policies in our area of operation. We operate under tough security conditions with round-the-clock measures to guarantee fund safety. We are at your service wherever you are, whenever you need us. Our advisory team is ever ready to assist you with a wiser way of investing. Call now.