Despite the growing crypto custody market, the industry reportedly faces challenges with security and insurance.
The market for cryptocurrency custody showcased a substantial worth of $447.9 billion last year, even though the peak value for the entire digital asset industry exceeded $3 trillion in November 2021.
The numbers were unveiled in July 11th report shared by consulting giant PricewaterhouseCoopers (PwC) and Aspen Digital, a wealth tech platform.
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According to the 39-page study, as of April 2023, the marketplace was home to 120 custody service providers, which were categorized into two types, each catering to specific user needs: companies providing third-party services and those offering self-custody solutions.
The report mentions key industry developments, such as the surge in cryptocurrency staking interests triggered by the Ethereum Merge, the rise of non-fungible tokens (NFTs), and the Metaverse, as the key developments igniting the curiosity of institutional investors.
However, the industry isn't without its challenges, and the report points out that security remains the primary concern. As the FTX collapse demonstrated, lapses in governance, risk management, and internal controls can result in significant security vulnerabilities. The report notes:
Institutions are increasingly looking to safeguard their assets through self-custody solutions or reputable digital asset custodians, rather than simply holding them with exchange platforms.
Moreover, issues surrounding insurance policies also present a hurdle for custodians. Self-custody services typically lack insurance coverage, meaning that losses arising from negligence aren't compensated.
For investors navigating the custody service provider landscape, the report provides a systematic selection method comprised of five steps. It includes market mapping, a grading system, performance reviews, and additional preparatory steps.
It is worth noting that, recently, the US Securities and Exchange Commission (SEC) has started considering tightening rules on cryptocurrency custody. However, many crypto industry players, including the Blockchain Association and Andreessen Horowitz (a16z), opposed the proposed rule changes.
