In order for institutions to be fully engaged with Digital Assets, they are going to need a third party to look after their assets - a role which has historically been provided by custodians.The regulators in most jurisdictions insist that the organisations that manage your funds have to be independent of the entity that physically looks after the assets.
The good news is that the options and choices for those looking for custody solutions for their Digital Assets continue to evolve. Metaco has announced that it is using Aon (the world’s second-largest insurance broker) and a group of Lloyds of London underwriters, as they are now able to offer “crime-protection” insurance for Digital Assets held in Metaco’s Crypto-wallet. This means that clients’ Digital Assets will be protected, both when their assets are stored “hot” - online, and “cold” – offline.
This is not the first time Aon has been involved in supplying insurance for Digital Asset custody providers, as it announced earlier this year it was working with Anchor labs in the USA. However, while AON claims to have 50% of the current insurance market for Digital Assets, other firms, as the chart above illustrates, are also active in offering insurance solutions for the custody of Digital Assets.
Another potential new custody provider for Digital Assets is 20/30. Robert Gaskill, from 20/30 (the first company to issue a Security Token, to be listed on the London Stock Exchange), recently told 20/30 is looking at an acquisition in the custody sector. 20/30 is considering buying a firm that integrates its current custody solution and so will offer full insurance for custody of Digital Assets provided by Lloyd’s of London.
Interestingly, we are seeing companies relocating from the Channel Islands (where being a trustee is a regulated function) to the UK, where currently trustee services are not regulated. The reason, no doubt, is that it will save these companies compliance costs. This means they ought to have lower professional indemnity insurance premiums and less capital tied up in the business, as not being regulated the capital adequacy rules are totally different. But why is this relevant?
Well, there are a number of people who believe there is no reason why a trustee could not, in effect, offer a very similar service as a custodian and, because the compliance cost-base is potentially less, trustees will be able to offer this service at a lower price. Assuming that the FCA does not insist that you need to be regulated to “look after” assets for regulated firms, could we see traditional custodians like BNY Mellon, State Street, Northern Trust, JP Morgan or Citigroup, to name a few, offering themselves as trustees as opposed to being custodians?
Given JP Morgan’s foray into the Digital Asset sector by launching the JP Coin, will this give it an advantage over its competitors, as it has potentially a deeper understanding of some of the challenges and opportunities being presented by Digital Assets?
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