Coinbase opened up its digital currency custody service last week, and 10 hedge funds and family offices have signed up, in order to protect their cryptocurrency. One of the company’s first clients for this service was Polychain Capital. According to Olaf Carlson Wee, CEO of the $1 billion crypto hedge fund, “Coinbase is incredibly well positioned to store the next $100 billion of crypto assets.”
The custody service is designed to protect digital assets in a way that is similar to how traditional securities are safeguarded. With this initial set of investors, the service may be tested to develop trust among new investors. Coinbase is targeting a goal of 100 large institutional clients and $5 billion in assets under management by 2019, as reported by Bloomberg.
The custodial service is part of a Coinbase effort to diversify its revenue streams. Sam McIngvale, heading the customer acquisition effort for the Coinbase custody project said in an interview with Bloomberg that Coinbase currently stores over $20 billion in digital assets for mostly retail investors. This project will increase the firm’s holdings by 25% if successful.
There are many other companies that either plan to, or already offer custodial services for institutional investors, in reaction to the ongoing hacking and cybertheft attempts over the years. With more money being invested in crypto, the demand for custodial services has grown, as institutional investors wish to protect their digital assets and those of their clients, particularly in the cases of hedge funds and pensions where a single theft of assets may affect numerous clients of each firm. With this added layer of security, these companies may become more likely to invest in this space, contributing to the total volume of digital assets in circulation. Custodial services not only give fund managers a sense of relief, but they may satisfy the requirements of US officials that require asset funds to use regulated custody services.
Though an SEC spokesperson declined to comment, McIngvale stated that Coinbase has been in contact with the agency as well as the Financial Industry Regulatory Authority to ensure compliance. He stated, “We sort of have an understanding with the SEC and Finra, and it allows us to execute contracts with clients and take the first deposits.” That said, Coinbase may not need an official SEC approval, since it is partnered with Electronic Transaction Clearing Inc., a broker-dealer that is already SEC-regulated.
Currently, Coinbase offers its custodial services to investors in Bitcoin, Bitcoin Cash, Ether and Litecoin in the US and Europe. As the service matures, it is expected that Coinbase will add more types of digital assets to its offerings, including digital tokens issued by the investors themselves. The service may also be offered in Asia by 2019.
Investors must have a minimum of $10 million in digital assets to invest. Coinbase charges a $100,000 setup fee, plus 10 basis points in monthly fees. In exchange, Coinbase will provide cold storage, which is more secure than accessing the coins using a hot wallet that allows for active trading.