The digital asset industry experienced significant growth, reaching a peak of over $3 trillion in November 2021. However, the custodial sector of the market remained more modest, totaling $447.9 billion in 2022.
These figures are derived from a joint report on digital asset custody by consulting firm PricewaterhouseCoopers (PwC) and wealth tech platform Aspen Digital. The 39-page report was published on July 11.
The report identifies 120 custody service providers as of April 2023, categorized into two main groups: third-party service providers and self-custody solutions.
It highlights key institutional developments such as increased interest in crypto staking, driven by the Ethereum Merge, as well as the emergence of nonfungible tokens (NFTs) and the metaverse, attracting institutional investors.
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Security is cited as the primary challenge faced by the custody industry, as demonstrated by FTX’s failure in 2022, attributed to inadequate governance, risk management, and internal controls.
Consequently, institutions are increasingly seeking to safeguard their assets through reputable digital asset custodians or self-custody solutions rather than solely relying on exchange platforms for holding their assets.
Insurance policies present another challenge for custodians.
Self-custody solutions lack insurance coverage, leaving users uncompensated for any loss of digital assets resulting from negligence.
The report emphasizes that sound insurance policies are a critical factor when selecting digital asset custodians, as recognized by sources within family offices.
To assist investors, the report suggests a five-step approach to selecting a custody service provider.
These steps include mapping the market, creating a grading system, conducting performance reviews, and other necessary preliminary procedures.
In recent developments, Canada’s financial authority released guidance to aid fund managers in complying with legal requirements for investment funds holding crypto assets.
Additionally, it expressed confidence in the regulated futures market for cryptocurrencies, which it believes promotes greater price discovery.
The joint report by PwC and Aspen Digital sheds light on the state of digital asset custody, highlighting the challenges faced by the industry and offering recommendations for investors.
As the digital asset market continues to evolve, addressing security concerns and ensuring robust insurance policies will be crucial for the custodial sector to thrive.
