C U S T OD Y
WH Y CO U N T E R PA RTY R I S K I S T H E K EY TO CRYPTO MARKET INSTITUTIONALISATION
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s hedge funds and other asset managers continue to seize on the assortment of investment opportunities in cryptocurrencies and blockchain technology, many big-ticket long-term allocators pension funds, insurance companies, foundations and endowments – may be sitting on the sidelines thanks to continued concerns surrounding asset security. A recent investor survey by decentralised infrastructure technology provider VALK found that more than half – 54 per cent – of respondents are ‘very concerned’ about custodial services in DeFi. At the same time, some 52 per cent of the those polled (100 institutional investors holding USD1 trillion in assets) are ‘very concerned’ about security issues in crypto. The core issue stems from the way crypto assets are traded on exchanges - a central component to the market architecture – and how the security of hot wallets, which are used in order to trade, is managed. In recent years, a slew of digital assets custody platforms including
Copper, Fireblocks, Gemini, and Komainu have developed advanced services for trading and exchange, while Fidelity, Anchorage and BitGo are among those platforms offering buy-and-hold services.
Seeking comfort
“There are now very powerful solutions in place, but the knowledge is yet to be disseminated so that institutional investors can take comfort,” says Anatoly Crachilov, founding partner and CEO at London-based Nickel Digital Asset Management. “The reputational angle of crypto is improving, and that will help open the gate for institutional arrivals.” While the digital assets hedge fund space initially blossomed around crypto-native managers willing to accept greater risk and more operational leg-work in return for attractive investment opportunities and sizable alpha generation potential, the market will not fully develop unless larger traditional asset managers and investors come onboard, suggests Asen Kostadinov, head of strategy at London-based crypto
custody service provider Copper. “But for them, a lot of the key details - like counterparty risk, and how settlement is done - are going to be non-negotiable,” Kostadinov tells Hedgeweek. “At the beginning of any market, people actually can compromise – they want to be there and they will make do with whatever they have. However, as this market develops, the details start to matter a lot. “Fortunately we have, to some extent, a blueprint of what the infrastructure should look like, because we’ve know how traditional markets operate.” For Copper, an understanding of the traditional finance space and creating products that can provide the same safeguards traditional asset classes enjoy is vital for fostering investor confidence, and that stance forms the basis of its Walled Garden and ClearLoop products. “Ultimately, you are trying to create a market structure resembling the market structure that you see in traditional finance,” he observes. “In crypto, one of the first things
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Key details such as counterparty risk and how settlement risk is done are going to be non-negotiable for larger players
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Major advances in the way trading and custody infrastructure tackles counterparty and exchange risk in digital assets are helping to assuage investor fears and will help further drive institutionalisation of this market further down the line, industry participants say
H E D G E W E E K IN S IG H T R E P ORT
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