The crypto custody market experienced significant growth in 2022, reaching a total value of $448 billion, according to a joint report by PricewaterhouseCoopers (PwC) and Aspen Digital. While the overall digital asset industry peaked at over $3 trillion in November 2021, the custodial segment remained relatively modest.
The report identifies two main categories of custody service providers: third-party service providers and self-custody solutions. As of April 2023, there were approximately 120 custody service providers operating in the market. Key institutional developments contributing to the growth of the custody market include the rise of interest in crypto staking, made possible by the Ethereum Merge, as well as the emergence of non-fungible tokens (NFTs) and the Metaverse.
Security is identified as a major challenge for the custody industry. Due to inadequate governance, risk management, and internal controls, institutions are increasingly seeking self-custody solutions or reputable digital asset custodians to safeguard their assets rather than relying solely on exchange platforms.
Another challenge faced by custodians is the lack of insurance coverage provided by self-custody solutions. Users are not compensated for any loss of digital assets resulting from negligence. The report highlights that sound insurance policies are crucial criteria for family offices when selecting digital asset custodians.
To assist investors in selecting custody service providers, the report suggests a five-step approach, which includes mapping the market, creating a grading system, conducting performance reviews, and performing other preliminary procedures.
In related news, Canada’s financial authority recently issued guidance to help fund managers comply with legal requirements for investment funds holding crypto assets. Furthermore, the authority expressed confidence in the regulated futures market for cryptocurrencies, emphasizing its role in promoting greater price discovery.
Overall, the growth of the crypto custody market in 2022 was driven by increased interest in crypto staking, enabled by the Ethereum Merge, and the prominence of NFTs. The challenge of security highlights the need for robust governance and risk management practices, while the issue of insurance coverage calls for improved policies to protect users’ digital assets.