Unlocking Crypto Custody: A Guide for Advisors

• Understanding the Complexities and Solutions of Crypto Custody
• Expert Perspectives on Crypto Custody
• Unpacking Crypto Custody
• The Evolution of Custodial Solutions
• Emergence of Separately Managed Account (SMA) Solutions
• The Dawn of Spot Bitcoin ETFs
• Advisors' Choice of Crypto Custody Solutions
• Understanding Access and Control in the Crypto Custody Landscape
• Implications of Custody and Discretion
• Considerations for Custody Selection

Understanding the Complexities and Solutions of Crypto Custody

Navigating the realm of digital asset investing can be challenging, particularly in the aspect of asset custody. The introduction of the spot bitcoin ETF approvals has made it easier for investors to gain access to bitcoin, with custody aspects neatly packed into the deal. Nevertheless, the question of where and how to store and secure these assets remains a hurdle for many investors who desire direct ownership of these assets.

Expert Perspectives on Crypto Custody

Miguel Kudry of L1 Advisors provides insights into crypto custody solutions for advisors while Todd Bendell from Amphibian Capital discusses the most common questions on custody in the realm of digital assets.

Unpacking Crypto Custody

Investor control and access to digital assets are largely determined by the chosen custody method. It is crucial for financial advisors to comprehend that no one-size-fits-all approach exists when dealing with crypto custody. Instead, the best solution depends on the unique needs, objectives, and risk tolerance of each client.

In the crypto world, control of a digital asset goes to whoever holds its private keys. This control may either be maintained by the investor themselves through self-custody or non-custodial solutions or by a third party through custodial solutions on behalf of the investor. The method of custody also determines the level of discretion advisors have over these assets.

The Evolution of Custodial Solutions

Custodial solutions have evolved significantly over time. Advisors and clients now have more compliant options to gain exposure to these digital assets. Some of the first solutions included public trading vehicles with less efficient pricing mechanisms, private funds, and hedge funds, some of which stored their assets on unregulated exchanges and custodians. Over time, qualified custodians have become the standard for these vehicles.

Emergence of Separately Managed Account (SMA) Solutions

In 2020, we witnessed the emergence of Separately Managed Account (SMA) solutions. These provide a compliant avenue for advisors to gain direct exposure and discretion over their digital asset portfolios. Cryptocurrencies managed on SMA platforms are held in custody by qualified custodians, often acting as liquidity providers for trades and other transactions on these platforms.

The Dawn of Spot Bitcoin ETFs

Fast forward to 2024, on January 10, 11 spot bitcoin ETF applications were approved by the SEC, paving the way for a new and efficient indirect ownership option. Although ETFs do not represent the purest form of holding digital assets, they have met a significant market demand, as evidenced by the average $300 million in daily new inflows for the first five trading days and over $1 billion in net new inflows. These figures place the spot bitcoin ETFs amongst the most popular ETF launches in history.

Advisors' Choice of Crypto Custody Solutions

Boomer Saraga, founder and CEO of Khelp Financial, implements a diversified strategy in managing crypto custody, integrating ETFs into various investment vehicles such as 401Ks, brokerage accounts, and holdings for large corporations and institutions. Saraga emphasizes that Separately Managed Accounts (SMAs) are an ideal solution for high net worth individuals seeking differentiated exposure but struggling with the technicalities of crypto and digital solutions. On the other hand, "digital natives", seasoned in blockchain and DApps, find self-custody solutions more suited to their investment style.

Understanding Access and Control in the Crypto Custody Landscape

The level of access refers to how closely an investor can interact with a digital asset in its purest form (on-chain). The more off-chain layers or wrappers around an asset, the lesser the level of access. Conversely, the level of control is a measure of how much power an investor has to make decisions about their assets without external limitations or the need for permissions from third parties.

Implications of Custody and Discretion

The wealth and asset management industries have largely been built around asset discretion. This is why digital asset advisory solutions have focused on developing custodial, discretionary products that mirror the traditional advisory and investment management landscape. However, this has led to a growing segment of self-custodied, self-directed clients who have ventured into digital assets on their own, thereby growing a portfolio outside of the advisory relationship.

Considerations for Custody Selection

Tax implications play a significant role in the selection of a custody solution. For instance, the cash-redemption nature of the spot bitcoin ETF triggers a taxable event with every sale of shares. Conversely, an investor who owns the underlying

Edited by Jonathan Stoker