Last year the digital asset market finally shook off its 2018/2019 slumber and delivered on the promise it showed to many early investors in 2017. As the world metaphorically burned, cryptocurrencies ballooned into a trillion-dollar industry, sparking a wave of global disruption amidst the fallout of a devastating pandemic, a viciously contested U.S. presidential election, political uncertainty and on the brightside, more regulatory certainty for the ownership and trading of cryptocurrencies.
At the heart of digital assets is a rich history of innovation that goes back to the 1980s cryptography field. A series of events, since then, has continued to shape the space; Bitcoin being the most imperative of all.
Nowadays, hundreds of thousands of digital assets are in circulation, and this number is expected to grow exponentially as the onset of the Covid-19 pandemic has pushed the payment systems towards faster digitalization, as people begin to shy away from using physical fiat currency and other 2020s trends start taking effect such as remote work and stablecoin payments. The question is: are crypto custody solutions ready to accommodate this huge shift?
Digital assets are stored on a distributed ledger known as the blockchain. Custodians of digital assets possess a private cryptographic key that can execute the transfer of ownership of a cryptocurrency from one party to another. Digital asset or crypto wallet custody services offer regulated safekeeping of cryptocurrencies. As the benefits of digital assets become harder to ignore, the requirements around custody services are also poised to evolve.
Through thorough research and some ongoing trends, we have compiled a list of the most notable digital asset custody trends we are most likely to see in 2021:
Will OCC Continue to Roll Out Crypto and Blockchain Red Carpet for Banks?
Last year, the United States banking regulator the Office of the Comptroller of the Currency (OCC) issued a letter clarifying federal savings association as well as national banks' authority to offer custody solutions for customers. On Jan 4, 2021, the OCC published another letter, in which they addressed the legal permissibility of several finance-related projects that include the use of technologies like blockchain networks, to engage in bank-permissible activities.
These letters bring new opportunities for national banks in the U.S. to expand their custody services of digital assets. In light of this clarification, the question should be asked if crypto wallet and digital asset custody service providers will satisfy the growing needs of these expanded services?
While pro-crypto Comptroller of the Currency Brian Brooks has now vacated his position after the Trump administration ended, his replacement Michael Barr is no crypto luddite either, having previously served as advisor to embattled Ripple. While it’s still too early to tell, expect the OCC to make big moves this year again as the U.S.’s crypto regulatory path becomes clearer under the Democrats and new president Joe Biden.
Central Bank Digital Currencies (CBDC) Will Break Out
A central bank digital currency (CBDC) is a digital form of money “used to refer to various proposals involving digital currency issued by a central bank”. The national bank of Bahamas was the first bank to develop a CBDC and launched its Sand Dollar in October 2020.
The latest to join the race to launch the CBDC is People’s Bank of China, which recently rolled out the Digital Yuan in two Chinese cities to test the waters. While it is still early days for central bank currencies, many countries are in different stages of developing their own CBDCs and it seems likely that several markets in 2021 will make aggressive moves towards creating their blockchain-based tokens for domestic retail and/or wholesale payments as well as cross-border settlements.
NFT Revolution will Demand High-Standard Custody Services
The Non-Fungible Token (NFT) sector is poised to build on their momentum and be one of the biggest stars of the year. In 2020, NFT sales soared to transform these non-transferable crypto assets (mostly ERC721 tokens)into a million-dollar industry, with vastly appreciating digital assets increasingly craved by investors for their rarity, creativity and zeitgeist appeal.
This year, the NFT market has already seen a growth of two-fold, as the concept is observing a lot of funds entering the industry. The growth is attributed to people realizing that NFTs can represent almost anything in the digital world, from art, collectibles, sports (e.g. NBA Tops) to gaming and more .
Like many scarce collectibles, NFTs can be worth a considerable sum, and need a crypto wallet of high-standard that can keep them safe. For example, a recent rare “alien” CryptoPunks NFT fetched a staggering $750,000 (605 ETH at the time) at an auction in January 2021. As the world of NFT continues to grow in 2021, the custody service provider must upgrade their solutions to keep the highly valuable and long-term asset NFTs safe in the most secure air-gapped (offline) hardware wallets.
Institutional Custody Will Challenge Existing Crypto Retail Solutions
Institutional participation in the cryptocurrency space is rapidly increasing as regulations become clearer. Certain big financial institutions around the globe are trying to tackle the need for better crypto custody solutions. Some are building internal teams within their company. For example, Fidelity in the US, DBS, Northern Trust, and Standard Chartered have already launched in-house custody solutions. Others are leveraging the expertise of startups, like Hype in Italy with Conio.
For the existing retail-oriented crypto solution providers, such as Coinbase, meeting institutions’ demands will require a considerable transformation in terms of development. Some of the organizations use hot wallets while others prefer cold wallets. For institutions to exchange, hold or trade digital assets, they need robust digital asset custody solutions. In the coming year, there will be a shift from crypto evangelism to capital market pragmatism, where crypto’s old guard will have to adopt some of traditional finance’s best practices to ensure their survival and retention of customer loyalty.
Increasing Digital Asset Wallet Users
In 2020, the worldwide market of hardware crypto wallets was valued at about $200 million. As per an unofficial report, the number is expected to grow three-fold in 2026, and will reach a value of $795 million. People using crypto wallets are roughly doubling each year, and if the trend continues at this rate, there could be a million crypto wallet users by 2030.
As user numbers continue to grow, user-friendly digital wallets will become very important in the evolution of value transfers and banking products, making exchanges seamless and easy.
For digital assets, keys are equal to assets. A single misuse can result in loss of assets, and due to the irreversible nature of blockchain, any transaction occurring on the network is definite. For too long, crypto custody solutions have been difficult to implement on scale, and are too clunky. The IT rules designed for Web 2.0 are certainly inefficient when it comes to storing blockchain-based tokens.
Wallet users will have to choose between whether they should manage their own access to their assets, and risk losing their funds if they lose their keys, or keep their funds with crypto custodians, which come with their own risks and fees. Ultimately, we may see a rise in exchanges offering both hardware and software wallets that take the guesswork out of asset management and allows users all the bells and whistles they’d find in a traditional bank.
Rising Crypto Frauds Demand A Robust Solution To Counter the Attacks
While the year 2020 was great for cryptocurrencies, with mass adoption and institutional entering the space, another couple of billion dollars worth of crypto scams and hacks have blighted crypto’s name yet again. Cases of data breaches, Ponzi schemes, theft, etc., are still very much happening. The great Twitter hack once again sullied Bitcoin’s name mainstream and new crypto darling DeFi had the proverbial rug pulled from under investors with several smart contract-based protocols suffering rather suspicious hacks or bugs costing millions.
During last year alone, about 30 scams were reported. Predictions are that this trend will continue during 2021, with new scams penetrating the crypto market. Regular hacks give a constant reminder not to store crypto assets online in hot wallets, which brings a much-needed custody solution to manage the risk.
Staking, Lending, and Other Crypto Services
Ethereum 2.0 and other blockchains have brought proof-of-stake consensus algorithms. These PoS networks rewards users who stake their assets to secure the network. The node with high stakes has more chances to be chosen for mining the block.
In 2020, yield farming (liquidity mining) protocols that offer users incentives to stake their crypto into their liquidity pools have risen dramatically in popularity, with assets like YFI (Yearn.Finance) increasing from $300 upon launch to over $40,000 at one stage.
In this arms race, Annual Percentage Yield (APY) is the great differentiator. Therefore, custodians and exchanges will increasingly offer customers interest in their cryptocurrencies in case they make them available for staking.
Offering these staking services for cryptocurrencies under custody is another area of interest for crypto wallet service providers, and they may develop and implement new requirements with implications for custody models. Getting fixed returns on investment that far outstrips that found in banks and traditional institutions may make more investors take the plunge and convert their money into crypto for hire.