The changeable burden that regulation is about to lay on digital asset custodians

Safe custody is the service that will unlock corporate issuance and institutional investing in the securities, asset-backed, non-fungible and fund token markets. While there is widespread recognition that regulation of digital asset custodians would accelerate progress, regulators around the world have so far reached consensus on combating financial crime only. Even that is proceeding slowly and patchily, but regulation of digital asset custodians and digital asset custody risks is proceeding more raggedly still as different jurisdictions jostle for advantage.

Secure custody emerged early in the history of cryptocurrency markets as the main barrier to the entry of institutional investors. It remains the major obstacle to the engagement of traditional, long-only institutional investors in tokenised assets such as Non-Fungible Tokens (NFTs) and security tokens.

Even the more adventurous institutions pioneering trading and investment of tokenised assets – namely, hedge funds, wealth managers, exchanges, corporate treasuries, sovereign wealth funds and family offices – are now demanding custody services that are not only high-quality but regulated.

It is not hard to see why. The task of safekeeping the cryptographic public/private key pairs associated with a digital wallet that confer ownership and control of a tokenised asset requires the mitigation and management of risks that are different from those of traditional cash and securities custody.

Because they are used to store, manage and transfer tokenised assets, private keys also represent a single point of failure. In a traditional custody chain, by contrast, various intermediaries (brokers, depositories, clearing houses, custodians) reconcile holdings and transactions repeatedly.

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