Digital asset custody solution providers are fast emerging as the key to the next bull run in the cryptocurrency market as the recent spike in the entry of family offices, high net worth individuals (HNWIs) and enterprise asset management firms (EAMs) in the sector has led to a surge in demand for institutional-grade custody solutions, new research revealed.
The growing trend of family offices and investment funds eyeing investment opportunities in well-known NFT collections and virtual land in the metaverse is also adding to the surging demand for reliable custody providers, the report by PwC said.
The demand spike is projected to help the digital asset custody market grow several-fold in the next few years from the current estimated market size of $448 billion.
The recent collapses of some of the high profile crypto exchanges and a series of market shocks have triggered the flight of institutional investors in the sector to reliable asset custody solution providers, the PwC report on the state of digital asset custody said.
“With their growing interest in the market, private wealth sector participants are in search of reliable digital asset custody solutions,” the report by the global consultancy major said.
“There is also an increased understanding and strong demand for institutional-grade custody solutions that will enable investors to pursue a wide spectrum of opportunities in a safe and controlled manner,” it added.
The report showed that institutions face key challenges in the safeguarding and transacting of digital assets – whether it be from operational complexity, security and reputational risks, or availability of insurance policies, among others.
Technology service providers offer multiple services to family offices, institutional investors
The PwC report said technology service providers have emerged as a popular alternative, as they aim to provide an all-in-one service for digital asset staking.
“This not only includes the integration of digital asset staking providers, but other service providers in compliance, trading, fiat on-and-off ramp and tokenisation,” it said.
For family offices and investment funds, technology service providers allow them flexibility in staking participation, while offering security with built-in compliance infrastructure, PwC said.
Custody plays major role in digital asset transactions
For starters, one key difference between trading most financial instruments and digital assets lies in the process of custody.
In digital assets, custody refers to the process of safekeeping cryptographic private keys which enables the owner of the wallet to control and access cryptocurrencies within the wallet and are used to execute transactions on a blockchain network.
“As the industry grows at an unprecedented rate, the demand for safe and secure custody of digital assets continues to grow even faster, indicating the importance of custody in driving institutional adoption of digital assets,” Manhar Garegrat, Country Head for India and Global Partnerships at Liminal, a leading provider of wallet infrastructure and custody solutions, told Arabian Business.
“With regulatory frameworks developing across the globe, investment funds, treasuries, lenders and staking service providers are increasingly looking to digital assets as their next growth opportunity,” added the senior executive of Liminal, which also has operations in the UAE.
Garegrat said the flurry of attractive tokenisation-based use cases like NFTs, DeFi, metaverses, and the ability to unlock illiquid real-world assets have further captured the attention of institutions and investors to the sector.
“At Liminal, we have already witnessed an exponential growth in the number of institutions opting for regulated and compliant custody solutions,” he said.
Big time thefts trigger shift towards safe custody solutions
Industry experts said while most retail users and institutions were comfortable storing their digital assets on exchanges, failures of some of the big exchanges – as also the growing incidents of token thefts – have shifted the focus towards the importance of either building self-custody capabilities or depending on regulated custody service providers.
A recent report by Slowmist revealed that hackers have stolen a whopping $30 billion in digital assets since 2012.
“It is high time that the industry and regulators brought about some sort of linearity into how institutions handle their custody and build impregnable wallets backed by insurance, build trust, protection and transparency for users,” a Mumbai-based industry executive said.
The PwC report also showed that in view of the fast-evolving digital asset ecosystem, custodians worldwide are also striving to enhance their technical capabilities and service offerings.
“This includes multi-party computation in transaction approvals and creating a custodial ecosystem that facilitates access to and the safeguarding of different types of digital assets – from NFT collectibles to staking and liquidity provision in DeFi protocols,” the report said.
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