‘Big 4’ accounting firm KPMG says the lack of robust crypto custody is constituting a significant roadblock to more broad-based institutional adoption of cryptocurrencies.
As such, KPMG reports that custodial services may profit greatly if they provide adequate tools to safeguard the virtual currency holdings of market investors.
In recent times, the crypto custody scene has seen the emergence of new entrants like Coinbase Custody. Mainstream establishments like Fidelity have also debuted custody tools for virtual currencies.
Crypto Industry Needs Better Safeguards Against Cyber Theft
In a report shared with Bloomberg, KPMG argued that the inability to protect crypto funds from malicious cyber intrusions is hindering the growth of the industry. According to the firm’s report, hackers have stolen about $9.8 billion in cryptocurrencies since 2017.
The spate of these hacking incidents is also reportedly dampening the enthusiasm of institutional investors with KPMG crypto-asset chief Sal Ternullo remarking:
“Institutional investors especially will not risk owning crypto assets if their value cannot be safeguarded in the same way their cash, stocks and bonds are.”
According to the KPMG report, the gap in the current state of the crypto custody scene presents an opportunity for asset custodians to profit from providing robust security for cryptocurrencies.
As previously reported by Blockonomi, firms like Fidelity Investments, Coinbase, BitGo, and Gemini are populating the crypto custody scene. Major banks like Dutch giant ING are also building cryptocurrency custody tools with reports recently emerging that about 40 banks in Germany have applied to become licensed virtual currency custodians in the country.
KYC and AML Compliance on top of Proper Crypto Custody
Apart from proper crypto custody, the KPMG reports also identified know your customer (KYC) and anti-money laundering (AML) compliance as requirements for greater institutional involvement in cryptocurrencies. According to KPMG, established firms need to revamp their KYC and AML protocols for cryptos as the asset class offers challenges different from those found in other investment instruments.
Intergovernmental bodies like the Financial Action Task Force (FATF) have been calling on member nations to ensure that crypto exchanges comply with best standard KYC and AML practices. EU member nations are also adopting the fifth anti-money laundering directive (AMLD5) which echoes many of the regulations found in the FATF guidelines.
Balancing Cold Storage and Trading Flexibility
As pointed out by the KPMG report, hackers have stolen billions of dollars in cryptos from businesses like exchanges and wallets. In response, these platforms have moved away from hot wallet storage to cold wallet cryptocurrency storage.
Many of the high-profile crypto hacks have occurred because cybercriminals were able to access cryptocurrency funds stored in unsecured hot wallets. Regulators in countries like Japan have even passed laws limiting the percentage of cryptocurrency exchange reserves that can be kept on online hot wallets.
While cold wallet storage offers greater security being “air-gapped” — isolated from the internet, this increase in safety often comes at the cost of trading flexibility. The time taken to process transfers from cold wallets could mean that institutional investors like crypto hedge funds could miss out on arbitrage opportunities which tend to last for only a few moments.
To this end, some pundits are clamoring for a more robust crypto insurance market for hot wallets that will incentivize institutional investors to keep some of their holdings in readily accessible online storage platforms. Major British insurer, Lloyds recently revealed plans to provide cryptocurrency insurance services to big-money players with virtual currency funds in hot wallet storage.