Questions and Considerations for Crypto Custodians

In the final blog of our three-part blog series on crypto custody, we focus on questions and considerations for customers when choosing a crypto custodian. (Missed part one or part two? Read about the three tiers of crypto custody here and dive deeper into institutional-grade crypto custody here.)_

Part Three: Questions and Considerations

Lawmakers and regulators may ultimately establish a broader set of legal and regulatory requirements to ensure safekeeping of cryptocurrency by custody providers. For the time being though, it’s largely cryptocurrency investors who must consider security, alongside other features and capabilities, when selecting one or more custody providers. Some of the chief considerations for customers today are summarized below:

• Liquidity: The speed at which customers want to access funds must be balanced with security concerns around transaction verification. If, for example, an asset movement request can be handled ultra fast, how “offline” or geographically distributed is the system, really? However, if the provider has instant trading capabilities from offline storage while maintaining the full operation process around transaction verification, you can have the benefits of getting into the market quickly, without compromising on security.
• Scalability: Institutional customers should consider how a custodian’s solutions can support their growing activity and need for additional services over time. For example, are there sub-accounting tools for multi-strategy accounts, how does whitelisting work, and how are new account holders verified, background-checked, and onboarded?
• Fees: Rather than seek out a solution based on initial sticker prices, customers can consider how well a given solution meets their needs and how its price model aligns with the security, features, and value delivered. Does the custodian require an initial set up fee, are there minimum holdings required to custody assets, or how might fees scale as assets increase?
• Leadership: A company’s senior leaders should not have the ability to access or move funds. Asking about leadership’s role in system governance can help customers understand how a custody provider ensures there is no single point of failure. Asking how governance process changes are made and who has access to those processes can confirm changes are not done in isolation, potentially eliminating risk associated with a single person gaining unauthorized control of your cryptocurrency.
• Monitoring and Change Management: A best in-class system should be continually assessed and enhanced in a methodological way. Knowing what mechanisms are in place for visiting sites and auditing equipment could be essential for understanding upgrades and staff rotations. Along those lines, customers should ask about controls applied for the testing and certification of site-by-site performance.
• Licensing and Audits: Many providers of crypto custody solutions operate without a license, which can leave customers open to many risks. Even among licensed providers, there are key differences in the type of license and that granting jurisdiction. In which state is the custody provider licensed? Does the license require capital reserve requirements, follow general banking standards, and fiduciary duties to customers? Customers should also ask who audits the company, what’s their general approach to compliance?
• Insurance: The insurance market for cryptocurrency is highly limited today, and even the most robust policies available are limited in terms of amount and incidents covered. Customers should understand how their funds are insured relative to the overall coverage carried by a provider, and make sure to not be oversold on the value of a providers coverage.
• Security: In part two of our blog series we examined institutional-grade custody solutions. Infrastructure and operational frameworks that help ensure the safety and security of where and how your cryptocurrency is being stored and moved are key.

Cryptocurrency is fast maturing as an asset class and customers choosing a custody provider should think long-term about what the provider brings to the table. Learn more about the state of crypto custody in our Guide to Crypto Custody or join our webinar today, October 7, 2019 at 12:00pm ET.

Onward and Upward,

Team Gemini