Which Crypto Custodians Can Meet the High Demands of Funds?
In this week’s research piece, we present the top five crypto custodians for professional crypto investors. All data comes from the 21e6 Crypto Fund Database.
Authors: Jan Spörer, Jona Hauch, Maximilian Bruckner
Introduction
This week’s list could not be more different and diverse as it is: We have an exchange-turned-full-service offer in there (Coinbase), a multi-exchange facilitator (Copper with ClearLoop), a zero-trust custody provider (Fireblocks), a traditional Liechtenstein private bank (Bank Frick), and another exchange-custody provider (Gemini).
Mt. Gox, Bitfinex, and all-too-recently FTX: Investors have learned over and over again that hot wallets and crypto exchanges are no safe places to keep cryptocurrency at. History has shown that these providers sometimes misappropriate funds or get hacked.
Private and professional investors alike are looking for secure yet fast, flexible, and cost-effective alternatives. And professional investors are often not allowed to self-custody their clients’ assets. From this complex set of requirements emerged a number of crypto custodians that fill this gap.
We ran the numbers for you to find out who the most used custodians are for one of the most demanding classes of professional investors: crypto hedge funds.
#1: Coinbase
The U.S.-listed digital asset exchange Coinbase utilizes the Coinbase Custody Trust Company for the Coinbase Vault custody service. As a US-regulated exchange, Coinbase is in a prime position to offer auxiliary services to existing exchange clients.
As with other exchange-provided solutions, funds get a convenient all-in service package from Coinbase.
Coinbase claims that all assets held under the Custody service are segregated into Coinbase Custody Trust Company in New York. [1] Furthermore, Coinbase undergoes organizational (note: not technical) SOC 1+2 Type II audits, which are used in the United States. Unlike Gemini, Coinbase is not a U.S. Qualified Custodian but claims to fulfill the necessary criteria. [2]
Coinbase was the first custody provider to receive the German regulator-issued (BaFin) crypto custody license.
#2: Copper
Many funds cite Copper as their much-preferred custody provider. Copper offers the “ClearLoop” Solution, an off-exchange collateral management system that allows users to mitigate counterparty risks when working with crypto exchanges that are integrated with the system
Copper has prominent backing from Tiger Global, Dawn Capital, Alan Howard (from Brevan Howard), and Elwood Technologies. State Street was one of Copper’s partners.
Copper once operated under Copper Technologies (UK) but is now under the Swiss entity Copper Technologies (Switzerland) while maintaining offices mainly in London.
On the downside, U.S. funds remarked that they are concerned by Copper’s lack of support in time zones outside of the UK. To the best of our knowledge, Copper has no digital asset custody licenses anywhere in the world at the moment. Furthermore, the cooperation between the renowned bank State Street and Copper ended earlier this year. [2.2] [2.3]
#3: Fireblocks
Like Copper, the U.S.-based custodian Fireblocks has a range of renowned investors, with Sequoia, BNY Mellon, and others. Fireblocks came out of “stealth mode” in 2019, already then backed by about $16m in venture financing.
Fireblocks claim that they cannot trigger any transactions without client approval and cannot even lock users out of their funds. They thus advertise to keep as much control as possible in clients’ hands.
One of Fireblocks’ differentiating features is the compliant access to DeFi for institutions. It is not usually trivial for corporations to manage access of their employees to DeFi protocols while maintaining control, security, and compliance.
Before the Terra-Luna-UST crash in 2022, Fireblocks was valued at a $8bn valuation. [3.1]
#4: Bank Frick
Among Swiss and Liechtenstein-based funds, the family-run Bank Frick is a popular option. Founded in 1998, making it the oldest institution in the top 5 list, they added DLT-related services to their banking portfolio already in 2018.
Bank Frick offers full banking services while also providing digital asset storage solutions. Corporations that open a bank account with Bank Frick can get fiat currency accounts, cryptocurrencies, and crypto funds through this bank without any further touchpoints with digital asset service providers.
The bank offers trading of 14 of the leading cryptocurrencies, and staking services for Polkadot (DOT) and for Tezos (XTZ). [4.1]
#5: Gemini
Gemini was founded in 2014 and is one of the older crypto-native organizations that still operate.
Unlike the others on the list, Gemini Trust Company, LLC is a U.S. Qualified Custodian. As a U.S. player, Gemini maintains the SOC 1+2 Type II audits and is also a crypto exchange (both are characteristics shared with Coinbase).
In 2021, when markets were still much higher than they are today, Gemini announced that it had more than $30bn assets under custody. [5.1]
Conclusion
It is worth noting that Binance CEFFU (formerly Binance Custody) did not make the list. We know first-hand from conversations with digital asset funds that recent uncertainties around Binance have impacted investors’ confidence in Binance’s credibility and stability. Binance is still among the largest remaining players in the “Others” bucket.
Anchorage’s custody service has also not made the cut for this list. Metaco is another notable (yet too small to be listed) player.
Must-have and therefore “commodity” features among the top players include customizable transfer approval processes, whitelisting of crypto addresses that can receive outgoing transfers, and cold storage custody.
We are especially curious to see who will be awarded what licenses over the coming years. So far, only a few institutions have received the German BaFin crypto custody license, for example. We think that exchanges with a credible custody offering will continue to have an edge in the market.
About 21e6
21e6 Capital is a Swiss investment advisor, connecting professional investors with optimal crypto investment products.
Please find more information about our authors on our homepage: 21e6.io
Authors
Jan Spörer is Due Diligence Manager at 21e6 and responsible for overseeing the content quality management of the 21e6 Crypto Fund Database.
Jona Hauch is a Business Development Advisor at 21e6 Capital AG.
Maximilian Bruckner is Head of Marketing & Sales at 21e6 Capital AG.
References:
21e6 Crypto Fund Database, cryptofunds.21e6.io
[1.1] coinbase.com/prime/custody
[2.1] ledgerinsights.com/copper-digital-asset-custody-no-fca-authorization
[2.2] bloomberg.com/news/articles/2023–02–15/coinbase-says-it-already-complies-with-sec-crypto-qualfied-custodian-plan
[2.3] coindesk.com/business/2023/03/16/banking-giant-state-street-cuts-ties-with-crypto-custody-firm-copper/
[3.1] coindesk.com/business/2022/01/27/crypto-custody-firm-fireblocks-raises-550m-at-8b-valuation/
[4.1] bankfrick.li/en/services/blockchain-banking
[5.1] gemini.com/blog/gemini-crypto-under-custody
Originally published at https://assets.21e6.io.
