How To Choose a Qualified Crypto Custodian

Crypto custodians protect an investor’s digital assets, provide secure storage, and manage cryptocurrencies. Individuals can retain self-custody, which gives investors control but brings significant risks, such as losing private keys and passwords or managing security breaches.

Custodians can mitigate these risks by using sophisticated security protocols and policies. Robust custody products can be essential for individual and institutional investors.

What Is Crypto Custody?

A qualified crypto custodian is a financial institution expert who guards and manages digital assets like cryptocurrencies and non-fungible tokens (NFTs). Custodians securely store the assets and support digital transactions with advanced cryptography and hardware security measures.

By contrast, self-custody is when investors secure their private keys. This option gives an investor control but is susceptible to forgotten keys and passwords, hacked devices, or mistakes. Crypto custodians use robust protocols like multi-signature wallets and offline cold storage.

Regulatory Compliance and Security Standards

A qualified custodian not only guards assets but also complies with the relevant laws, regulations, and best practices. These standards may be set by the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC). To prevent unauthorized access and other cybersecurity threats, a custodian should meet the following conditions:

• Regulatory compliance: Custodians should follow the relevant laws and regulations, including Know Your Customer (KYC) and anti-money laundering (AML) rules. A custodian should meet reporting, auditing, and fraud detection standards.
• Security standards: A qualified custodian should have up-to-date cybersecurity measures such as cold (offline) storage, multi-signature wallets, multiparty computation, biometrics, and hardware security modules. Robust protocols like proof of reserves should be audited regularly. Insurance coverage would add another layer of protection. Advanced cybersecurity standards include penetration testing, data encryption, protection against distributed denial of service (DDoS), and 24/7 monitoring to prevent breaches and data loss.
• Asset segregation: Custodians should segregate an investor’s assets from their holdings. Proper protocols prevent the mingling of funds and help protect your assets in cases like bankruptcy.
• Transparency: Custodians should be fully transparent with frequent auditing and reporting. Account and transaction tracking should be available to investors so holdings are visible.

Services and Offerings

• Hot wallets: Investors use hot wallets, internet-connected wallets for active assets for frequent trading or transactions. Benefits include convenience and quick access, but come with a greater risk of hacking or loss.
• Cold storage: Cold wallets are offline, with private keys stored on hardware disconnected from the internet. This provides benefits against online threats. The drawback is that it’s offline for making trades or transfers.
• Multi-signature wallets: “Multisig” wallets require several keys to make transactions (e.g., three out of five authorized keys). Benefits include greater security, loss prevention, and oversight.
• Hybrid models: This is a combination of hot wallets and cold storage for both security and convenience. Hybrid models allow quick transfers from hot wallets with most assets offline.
• Institutional grade vaults: Physical high-security vaults and bunkers for storing crypto assets offline.
• Insurance coverage: A qualified custodian should have comprehensive insurance coverage, including internal and external policies.

Trading Capabilities and Integration

The ideal crypto custodian offers seamless integration with cryptocurrency exchanges and robust trading capabilities. Look for custodians with a comprehensive trading platform alongside asset storage, enabling easy access to liquidity across exchanges like Coinbase, Kraken, and Binance for rapid trading, lower slippage, and application programming interface capabilities.

Streamlined trading integration improves liquidity and lets investors capitalize on market opportunities faster while protecting assets. A custodian platform with trading functionality, research tools, and real-time market data enables savvy crypto investing.

Fees and Pricing

The costs for a crypto custodian depend on the platform and the type of services offered. Generally, there are three types of fees you’ll encounter:

• Custody fee: This is charged annually as a percentage of the value of the assets under custody. It’s usually less than 1%, but it can depend on the provider and the assets investors store with them. For example, Gemini Custody charges an annual fee of 0.40% (40bps) for storing cryptocurrency.
• Setup fee: A flat fee may be assessed when opening a custodial account with the provider. Some firms waive this fee and let investors open an account for free, while others charge a one-time fee.
• Withdrawal fee: This is charged every time individuals withdraw crypto from their custodial account. Some providers charge a flat fee such as Gemini at $125 per withdrawal.

Choosing a Qualified Crypto Custodian

Investors should research potential custodians who meet their security needs and risk tolerance. They can request documents like audit reports and insurance policy coverage. An investor should compile the following information before choosing a custodian:

• Regulatory licenses and compliance
• Independent third-party audits
• Multi-signature wallets
• Cold storage amount and procedures
• Insurance coverage and limits
• Security protocols and encryption
• Transparent proof-of-reserves reporting
• Experience and tenure in the industry
• Client asset segregation methods
• Reputation and client satisfaction
• Exchange trading integration

Examples of Crypto Custodians

• Anchorage Digital: Anchorage Digital is a regulated and compliant crypto management and custody platform. It offers staking, governance, trading, lending, and borrowing.
• Coinbase Custody: The exchange giant Coinbase offers institutional custody products as part of its Coinbase Prime platform. Clients can access other Coinbase products for trading, lending, and borrowing.
• Fireblocks: Fireblocks is a crypto custody provider that uses a secure transfer network to move funds among wallets, exchanges, and other platforms. It also offers multiparty computation technology, eliminating the need for private keys and reducing theft.
• Fidelity: Fidelity offers crypto custody services through its subsidiary, Fidelity Digital Assets. It provides secure storage, trade execution, and client support for institutional investors. It also offers research on the crypto market and industry trends. Fidelity Digital Assets also provides services for Fidelity Crypto, enabling individual investors to buy and sell digital assets in its Fidelity Investments app.
• BitGo: BitGo is a crypto custody provider that provides institutional-grade security, multi-signature authentication, and insurance coverage. It also offers compliance and reporting tools.
• Casa: Casa is a crypto custody company that offers a self-custody solution using multi-signature technology, hardware devices, and a recovery key to secure crypto. Casa also offers an inheritance product for designating a third-party executor who can access an investor’s assets in case of death or incapacitation.
• Gemini: Gemini is a regulated and compliant crypto exchange and custodian that offers trading, lending, borrowing, and staking. Gemini Custody uses multi-signature technology, role-based governance protocols, physical security, and biometric access controls to guard customer assets. Gemini also provides insurance coverage for digital assets in cold storage.
• Etana: Etana is a licensed and secure digital asset custody provider that operates globally. Etana’s custody platform uses hot, cold, or multiparty computation wallets for cryptocurrencies, stablecoins, NFTs, and other digital assets. Etana also provides fiat currency custody, trade support, and securitization services. Etana works with financial institutions and crypto exchanges to provide secure and scalable digital asset products.

The Bottom Line

Selecting a qualified crypto custodian is crucial for the security and protection of digital assets. It requires careful consideration of regulatory compliance, security standards, service offerings, reputation, insurance coverage, and fees. Making an informed decision in this selection process helps safeguard an investor’s digital assets.

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Correction—Dec. 4, 2023: This article has been corrected to remove incorrect information about Anchorage Digital.