Crypto Custody: Adoption Shortcut or Blockchain Purists' Nightmare?

As crypto assets become a prominent part of the financial ecosystem, with institutional actors leveraging immense volumes of cryptocurrency, the question of how to go about storing and handling digital wealth at scale comes to the fore.

"Institutional investors require built-in support for automated compliance, as well as security, privacy and transparency. To succeed, the crypto finance ecosystem needs to listen to the needs of the market. Until more regulated, secure, reputable custodians enter the market, widespread institutional investment in digital assets will remain low."

Interestingly, while many commentators associate the emerging centralized crypto custody trend with the prospect of a more efficient and straightforward regulatory framework for the industry over time, some are worried about the current lack of oversight.

"Concentration of custody in and of itself is not necessarily disastrous, but concentration of assets increases the impact of black swan events. Given the lack of clear regulations in the crypto space, this risk is heightened even more than in traditional finance."

Diverging assessmentsAs there seems to be some degree of agreement among industry experts with regard to what is happening on the crypto custody front, opinions differ considerably about what the consolidation trend means for the industry.

"The big banks and brokerage firms want to introduce custodial relationships so they can produce more products to sell their existing customers. Their motivation is revenue based - pure and simple. Governments want to introduce custodial relationships so they can maintain their control over their citizens - pure and simple. Crypto purists should be very worried. Wall Street will most likely win this. Coinbase's recent acquisition shows the writing on the wall."

Lars Seier Christensen, chairman of the blockchain network Concordium, is skeptical about the very idea of outsourcing the custodial function to a third party in the domain of crypto finance.

Institutional investment vs. ideological purityParadoxically, in order to get anywhere close to making the dream of an open, decentralized financial system come true, the crypto industry has to cooperate with the old guard that it aspires to eventually take down.

Some experts who spoke to Cointelegraph on the matter saw the expansion of concentrated custody as a compromise between the crypto movement's foundational ideas and the need to funnel institutional money into the space for the sake of mainstream adoption.

"It is not an attempt to copy someone, it is an attempt to cope with the issues that concern the audience of new investors, which the market of crypto needs. Moreover, we should take into account the strict security requirements demanded by regulators. Application of custody makes sense to me: the end justifies the means."