If the crypto industry is going to grow, there needs to be more emphasis on security, according to a recent KPMG report shared with Bloomberg. The report claims that since 2017, hackers have stolen over $9.8 billion in crypto by capitalizing on weak security and problems with the code.
Some institutional investors are trying their luck with cryptocoins such as Ethereum and Bitcoin. As a result, this has led to the need to safeguard these digital assets if more investors are to come in. One of the authors of the report, Sal Ternullo, who is also co-head of KPMG’s crypto division, said the security was a major concern for large investors. As a result, most of them were opting not to own crypto. He said that no institutional investor would take a position in the crypto sector if there were no guarantee that their value could be safeguarded or held like traditional assets.
Crypto Custody Solutions
Institutions are beginning to realize that there exists a need for custody solutions. As a result, they have begun to create custody solutions. A good example is the custody solution created by Fidelity Investments. Besides that, various crypto exchanges such as Gemini and Coinbase now offer crypto custody solutions for their institutional investors. In addition, other large players reside in the space such as Bitgo provide cold storage and hot wallet solutions.
Crypto works much like other bearer investments. This means that just like cash or some types of bonds, whoever holds the crypto owns it. However, losing the private key, which is either written down on paper or stored in a digital wallet, sometimes gets lost.
If a user were to lose their private key, they have also lost access to the crypto forever. A good example is the drug dealer who lost over $58 million in crypto when he lost his private keys. This problem makes key custody a huge challenge for financial firms, which are used to working with non-digital assets. The KPMG solution emphasized that crypto custody was crucial for the continued growth of the sector.
Its report explains custody in detail. It states that custody is the process of managing the private keys of digital currencies used by the owners during transactions. Custody is an important step for the institutionalization of crypto. If the market is to scale, crypto custody is important since it helps to earn customer trust.
KPMG notes that there are numerous opportunities for crypto custodians to make a tidy sum of money. The money will come in the form of management fees form offering custodian services and by offering services that are only possible in the crypto industry.
Education Gap
Despite the issues explained above, the large players in the custody space are fixing these inefficiencies. For example, companies like Bitgo offer insurance and are building out the proper protocols for institutions to store assets in a compliant matter. The problem is large financial firms still have a hard time understanding the storage mechanisms. Large portfolio managers are simply used to storing their clients assets on some of the largest brokerage platforms around. Traditional assets are very easy to track and manage. On the flip side, institutions are still trying to learn crypto storage. Even though all these custodial solutions exist, money managers still have a difficult time wrapping their head around facets such as cold storage and hot wallets. Without these large brokerages being commingled with crypto storage solutions, it simply results in more risk and time needed to diversify in crypto assets. Not to mention, many of the largest traditional firms in the world still have strict guidelines in place that eliminate the movement into crypto assets. Movements in traditional markets such as being a “fiduciary” are roadblocks that will have to be maneuvered around to truly spark mass adoption in digital assets.
Summary
The KPMG report is quite straightforward. With the crypto sector being worth around $245 billion, a loss of $10 billion in three years is quite huge. Institutions will not willingly place their money in an industry that is fraught with so much insecurity. Only crypto custody solutions will convince them to risk their money in the emerging crypto sector. For providers of crypto custody solutions, tremendous opportunities are awaiting them.
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