An institutional approach to the custody of crypto assets: The decision making and trade-offs in crypto asset custody

Abstract

The rapid emergence of new asset classes causes many challenges that professional and institutional investors face while considering allocating funds to these assets. With the new asset class — in this case, crypto assets — challenges are often related to regulation and technological implementations. The custody of crypto assets fundamentally differs from how traditional assets — such as equities — are kept safe and sound. Because of this, it is crucial to understand the fundamental difference of crypto asset custody as institutional adoption arises and clarify different strategic, operational and regulative trade-offs between other solutions. This paper discusses different solutions for crypto asset custody and their perceived trade-offs. As the industry and the need for trust grow, it is crucial to have proper and clear regulation frameworks and operating environments for reliable custodians to thrive. To further clarify perceived trade-offs and requirements, one alternative investment fund from the Nordics was interviewed. From the interview, a few simplified assumptions were created related to the decision process of crypto asset custody solution, which institutional actors might need to consider. In addition to various strategic and operational requirements, one of the essential factors in choosing a custody solution for institutional actors (ie in the Nordics) may be the local laws and regulations related to the field of crypto assets. Local regulations may force institutional actors to rely on third-party solutions, which may have different trade-offs compared to other solutions.