Custody and modernization of banks
From early 2017 and before, many of us knew how important custody would become. I have been thinking a lot about the direction of custody, not only for institutions, but for individuals as well.
Stepping back a bit. Custody, in its simplest form, refers to the responsibility of a third party to keep the customer(s)’ funds secured. That party, the “custodian”, therefore owns the private keys, technically. They typically provide insurance for whatever happens to the funds (although that part is still in progress in the crypto landscape, which is why none of the custody solutions so far obtained the official status of being a “qualified custodian” company).
The advantage for the customers is to get away with the heavy and complex responsibility of managing the crypto wallets, whatever it may be (hardware wallets, cold storage, private keys, paper wallets, encrypted notes, splitted keys, multisig wallets, … you name it).
There is also the question of being safe, “being your own bank” can be tricky especially when the amounts are significant. I will note though, that for most individuals looking to replace a simple checking account in a future where everything could be paid in crypto, there are already many friendly wallets that would do. I am not going to list them, simply because I would probably miss a few that are equally great.
The only one that aims to divert though, in this period of time, is MCO or crypto.com, via other functionalities such as Crypto invest, debit cards, staking and cashback on wallet holdings, and the sharing of commissions on transactions. In fact, I would say that this might be the first step into a new type of bank we are witnessing, in a baby form right now.
Now that we set the stage on custody. The most important developments started with the early popular names of the space, Xapo et Ledger. Then recently, Nomura announced the formation of a dedicated suite of custody solutions, Komainu, which sound promising. Yet this all remains targeted for institutional accounts, with typically a minimum of $10M or more. To the credit of Kingdom Trust, with whom I had several good contacts, they are contributing to the custody evolution via the addition of ERC20 tokens and more, and lower minimum. As I am writing this post, in fact, Bitgo just announced an apparent regulatory approval in the US as custodian. I expect we will see much more similar news in the next 6 months, for those solutions/applications that have been in the works for the past 18 months.
Still, this is not yet for individuals. Last but not least, I have had great interactions with Copper, an emerging custody company with innovating procedures to keep the funds safe, without ever owning the keys entirely (namely via a robust platform and tools enabling an automated process of keys distribution). I am a beta tester of the platform so stay tuned for better outcomes and updates there. But still, how would the individuals cope with the eventual new world of digital payments, collectibles, securities, and store of value?
This is where I’d like to see more innovations on the banking front. If I’m not doing it myself as part of a new venture, I lay down here a few elements of my vision:
- Banks, as in the role of a physically secured location, will always be needed.
- Banking, as in the role of providing banking services, is going to reshape swiftly in the next decade. Banking needs a complete revamping to par with the ongoing FinTech developments. Some companies are already taking the first step, via custody solutions, or via crypto friendly services (e.g Silvergate bank). Crypto.com (MCO), for example, started as a debit card provider, but will most likely become a new type of bank of such, as they aim to provide a full set of financial services: education, convenience, safekeeping, and investment vehicles — while embracing some of the decentralization aspects being brought by the new tech. They still have a long way to go, flaws, and many things to clarify. But the direction is good. I expect even better products will come out in the next 12 months, heading right there, in a new banking era.
- Modernisation all around: the next generations will need a way to secure their crypto funds, without any special expertise. We can expect everyone to know the basics of crypto, but we can not expect anyone to know about splitted/distributed private keys and multisig wallets. That is where ‘banks’ will be required. Autonomous building. It should be buildings that are safeguarded 24/7, watched from all angles via quality cameras accessible to customers, and with automated points of access. Audio will probably be the default mean of communication by then. No need of physical persons, other than the guards. The building should be bulletproof, looking like a tank or bunker possibly. If anyone is interested in this topic, I have many more details that are part of a business or operational plan. This text is a brief introduction of what could be the future of banks as we know it.
The only reason why we still need a physical storage/location, you might ask, is because you need to have at least part of the keys that secure your funds (the big funds or savings), in a place that can be restricted to physical attackers or threats.
There are, however, a few possible and innovative ideas to prevent such threat without the need for physical protection. This could be another topic in itself, but probably coming up in the next few years anyway. Meanwhile, a clever way to individually secure funds today would be to use a Trezor in conjunction with a 25th keyword that is a password to input in real time, when connecting the Trezor. One could then have a few dedicated wallets for threatening situations.
Current custodians include the following actors, although just Bitgo was officially approved as a qualified custodian so far:
Bitgo, Komainu (Nomura / Ledger), Ledger Vault (Multi-User Approval), Xapo Vault (Btc Only), Kingdom Trust (Support of ERC20 tokens in progress), Gemini Custody (96% Min $100k), itBit, Coinbase Custody, Seed Cx, Altairna (Btc & Etc), Madison Trust, Ledger X, KNØX (apparently fully insured, in discussion with them), and Copper (beta stage now, will be flexible when it comes to adding new tokens). All for institutional investors only, except Ledger Vault and Copper.
Many more will come. At first, we will see those custody companies inventing and building new banking services as well. Later, specialization will take shape. The distinction between specialized secured custodians and specialized banking services as a second layer (the former being physical military grade infrastructure) will become clear. And there meet the new era of banking, years from now. Economic power redistributed, refined to a deeper level of control, a mix of secured storage and individual ownership. Exciting time.