Asian Institutional Investors Focus on Third-Party Crypto Custody Services – PwC Report

Growing demand for custody solutions

Price Waterhouse Coopers (PwC), one of the world’s four largest accounting and consulting firms, and Aspen Digital, a digital asset management company, today released a joint report on digital asset custody. Demand for institutional-grade digital asset custody solutions in Asia has shown to be growing among family offices, high net worth individuals and wealth management firms.

Bitcoin and other crypto-assets (virtual currencies) and digital assets face a number of challenges as they continue to be adopted by institutional investors as an alternative asset class, the report notes. There are many issues to be resolved in terms of trading and protecting digital assets, such as operational complexity, security and reputational risks, and insurance availability.

As a result, more and more institutional investors are realizing the limitations of self-custody solutions for their ongoing portfolio trading and management needs. Asian institutional investors are looking for reliable institutional-grade custody services to protect their current digital assets and new investments, many market players said. .

connection:Financial giant CACEIS to offer cryptocurrency custody services in France

Current state of the custody market

After peaking at ¥418 trillion ($3 trillion) in November 2021, the cryptocurrency market is still worth ¥167 trillion ($1.2 trillion). Along with the expansion of the virtual currency market, the need for custody has also increased.

Custody solutions began with self-custody solutions such as hardware wallets, followed by third-party providers of cold storage for institutional investors. It has evolved into a provider of solutions that include the Web3 ecosystem.

The report states that there are 120 custody providers as of April 2023. Among them are traditional financial institutions such as Citigroup and Deutsche Bank. The market capitalization of the custody market in 2022 is valued at approximately 62.5 trillion yen ($447.9 billion).

The report broadly divides the custody market into two categories: self-custody solutions and third-party service providers. Third parties include cryptocurrency exchange wallets and custody companies, both of which manage users’ private keys. There are risks such as

Custody companies also vary in form, from regulated and licensed companies to companies that only offer bespoke technology development services.

Examples of self-custody include hardware wallets and software wallets, but all private key management is entrusted to the user.

Diversifying custody needs

The report reports that as the cryptocurrency industry develops, custody needs are diversifying.

For one thing, it was pointed out that institutional investors are interested in staking Ethereum. Ethereum moved to a PoS (Proof of Stake) consensus algorithm last September with the implementation of a major upgrade, “The Merge.” The total amount of ETH deposited in the network has grown significantly from 13.7 million ETH back then to 23.9 million ETH today.

Institutional investors are also at the stage of considering entering into investments in NFTs (Non-Fungible Tokens) and Metaverses.

Therefore, digital asset custody companies will not only manage cryptocurrencies, but also provide services that help customers understand and participate in new business opportunities and asset classes such as decentralized finance (DeFi), NFTs, and the Metaverse. to expand and evolve its role, the report explained.

For institutional investors in Asia, the ability to securely hold and access all types of digital assets is a core component of their digital asset strategy.

Custody challenges

The report identifies three challenges in managing digital assets:

• Security: Choose self-custody or a highly reliable custody company instead of a cryptocurrency exchange. He also pointed out the limitations of self-custody.
• Regulatory environment: Lack of harmonization of regulations at global level makes it difficult to choose a compliant custody firm
• Insurance contracts: contract content is a key factor in choosing a service provider

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