By Pete Settles
How could the crypto economy fall flat?
The lack of a way to safely secure, store and exchange cryptoassets. That’s how.
“Institutional investors especially, will not take positions in cryptoassets if their value cannot be custodied and safeguarded in the same way traditional assets are,” says Sal Ternullo, co-leader of KPMG’s Cryptoasset Services and co-author of its new report: Cracking Crypto Custody.
Custody is one of the essential elements in building the successful tokenization of traditional assets, and for the institutionalization of cryptoassets to become reality, according to the new report.
Since 2017, hacks and compromises of cryptoassets native to public blockchains have resulted in at least $9.8 billion in losses at current valuations
But improving performance, scalability, privacy and interoperability of the blockchain infrastructure is driving increased tokenization of traditional assets and enticing institutional investors and large pension funds to grow their allocations and positions in crypto assets.
“Cryptoassets are no longer an exotic instrument, bit player or side show,” says report co-author Mike Krajecki, managing director for KPMG’s Emerging Technologies practice. “There is broad market acceptance that permissionless blockchains, native tokens and cryptoassets will enable robust new ecosystems of commerce and trade.”
KPMG has identified four critical building blocks necessary for a successful custody model. Whether institutions build custody solutions from scratch, transform existing custody solutions for non-digital assets, or contract with a third party custody service provider, these are the building blocks business and technology leaders should be focused on, according to the report.
Next-gen security and resilience –Transactions executed on public blockchains are final. Without trusted intermediaries to capture, confirm, clear, settle and account for the transaction, there is no recourse for owners to recover an underlying asset once it has changed hands. As such, the importance of building highly secure and resilient custody and wallet infrastructure is more important than ever before. Advances in cryptographic techniques including multi-party computation (MPC) based solutions are transforming the landscape of possibility for crypto custody.
Comprehensive compliance – Financial services is one of the most heavily regulated industries. Organizations delivering custody products and services for digital assets must comply with many different regulatory requirements that are required in jurisdictions across the globe. These challenges continue to evolve with the introduction of new regulatory structures at both the state and federal level.
Third party trust -- The wave of institutions entering the market need a trusted partner to have custody and hold cryptoassets for safekeeping, while ensuring they are available and accessible for speedy transactions over a blockchain network. Many financial institutions have been cautious to transform their business models to serve the growing number of crypto users. Developing trust in custodial solutions, by deploying third-parties to perform formal Service Organization Control (SOC) reporting is a key element in hastening the transformation and the success of the crypto economy.
Value-added custody – Crypto custody models present exciting new opportunities for financial services companies to connect custody with adjacent front, middle and back office services that have traditionally operated in silos. Furthermore, crypto custodians will unlock new revenue verticals by developing innovative and unique crypto asset services, including staking-as-a-service and governance decision making similar to traditional corporate actions. KPMG’s Cryptoasset Services practice is working with startups, fintechs, large financial services organizations, and central banks to help develop the key capabilities of institutional grade custody solutions –built with security, resilience and compliance.
The report notes that crypto custody is presenting opportunities for custodians of traditional assets.
“The technical and operational requirements of cryptoasset custody, security and exchange create unique challenges for enterprises looking to transform their businesses from custodians of traditional assets to engaging with cryptoasset owners,” says Tegan Keele, blockchain program leader – KPMG US.
If you would like to set up an interview with Sal Ternullo, Mike Krajecki or Tegan Keele to discuss the crypto report in more detail, please contact Pete Settles @pgsettles or firstname.lastname@example.org.