In Hong Kong, the digital asset sector continues to experience rapid development and innovation, driven by the government’s supportive stance in fostering the growth of the sector.
This has opened up new opportunities for institutional investors that extend beyond he holding and trading cryptocurrencies and fueled the need for institutional-grade custody solutions, a new report by consulting firm PwC Hong Kong and Hong Kong-based digital asset company Aspen Digital says.
The report looks at the crypto custodian landscape at large, shedding light on the role of custody in enabling Asian institutional investors to grow and capture new opportunities in the digital asset ecosystem.
According to the report, despite growing institutional interest in crypto and digital assets, traditional financial institutions and other investors are facing key challenges in the safeguarding and transacting of digital asset due to the operational complexity of most solutions available in the market, security and reputational risks, and the lack of availability of insurance policies, among other concerns.
Many market participants have indicated that Asian institutional investors are seeking reliable, institutional-grade digital asset custody options to safeguard their existing crypto holdings and new investment targets.
This comes as many investors realize that self-custodial solutions have limitations in supporting their ongoing trading and operational needs of their growing digital asset portfolios.
The limitations of self-custodial crypto solutions
Self-custodial solutions first emerged in the market after the 2014 Mt. Gox hack as an efficient method that removes the need for intermediaries and which reduces reliance on centralized exchanges or custodians. This ultimately improves security and privacy while providing end-users with full control over their cryptocurrencies.
Despite their many advantages, self-custody solutions also come with responsibilities and require users to properly secure their private keys, maintain backups and stay vigilant against potential thefts like phishing attacks or physical loss of keys.
These factors make self-custody solutions not user-friendly for institutions that are new to the digital asset industry, and have prompted service providers to enhance their technical capabilities and service offerings, the report says.
This includes implementing multi-party computation in transaction approvals and creating a custodial ecosystem that facilitates access to and the safeguarding of different types of digital assets such as non-fungible token (NFT) collectibles, digital asset staking and liquidity provision in decentralized finance (DeFi) protocols.
Demand for digital assets on the rise
Rising demand for institutional-grade digital asset custody options comes as major developments in the crypto space are fueling institutional interest in the emerging asset class.
The first development outlined in the paper is the recent Ethereum Shanghai upgrade which saw the network transition from a proof-of-word to a proof-of-stake consensus mechanism. The event saw institutional interest, as seen in total ether deposited in the Ethereum network, rose to 24.2 million since Ethereum’s merge in September 2022 (13.7 million ether), data from Nansen, a blockchain analytics platform, show.
This development has led to increased demand for digital asset staking opportunities and prompted institutional investors to turn to technology service providers for their digital asset staking needs. These companies have emerged as a popular alternative as they aim to provide an all-in-one service for crypto stacking that includes the integration of digital asset stacking providers, as well as other service providers in compliance, trading fiat on- and off-ramp and tokenization, the report says.
Finally, the last trend outlined in the report is the advent of NFTs and the metaverse. NFTs have a huge potential to provide real business utility for institutions owing to their ability to facilitate seamless value exchange and ensure digital asset ownership protection, the report says. In addition to that, NFTs are accelerating metaverse developments, a market which could potentially generate up to US$5 trillion in impact by 2030, McKinsey estimates.
Booming demand for NFTs is fueling the advent of new solutions targeting institutional investors, the report notes. As opposed to self-custody solutions, these products allow clients to hold NFTs without managing the private keys themselves. Apart from safekeeping NFTs for clients, service providers also allow institutions to access various decentralized marketplaces as well as buy and sell NFTs directly.
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