Written by: Richard Parker
According to a report by Bloomberg, Goldman Sachs (GS[NYE] – $225.33) may be making plans to enter the cryptocurrency industry as a custodial service provider. These custodial services would involve the secure storage of customers’ digital assets and will lead to decreased risk for cryptocurrency investors.
The steady rise in the number of investors entering the space, including large corporations like IBM (IBM[NYE] – $153.00), has prompted an equal increase in the number of new projects and service provision opportunities. The finance sector has found new and creative ways to satisfy investors despite most banks being hesitant to deal with cryptocurrency.
From Bitcoin futures to custodian vaults, the virtual currency landscape is slowly becoming more similar to that of its fiat counterparts. Although adoption within the industry is gradually increasing, there are still several issues plaguing investors. One of those issues is security.
Holding cryptocurrency assets on exchanges has led to theft and other adverse outcomes in the past. This discourages adoption and even further investment by investors who already hold digital assets. As a result, the presence of reliable storage infrastructure for these virtual assets has become a pressing need. At this early stage of development, a unique opportunity for crypto asset custody has presented itself.
Goldman Sachs is one of the most prominent banks in the US, and if it opens its doors to cryptocurrency, the move will go a long way in influencing mass adoption. Although the mere prospect of the banking giant’s entrance into the virtual currency market is exciting, it is still only a rumor, as reported by Bloomberg.
However, after it leaked, the markets saw a positive shift, performing better than they had been doing. According to the anonymous Bloomberg source, Goldman Sachs is working to find ways to serve their crypto-holding clients but have not reached any conclusion yet.
This is not the first rumor alluding to the Wall Street giant’s adoption of cryptocurrency. In May 2018, The New York Times reported that the bank was on its way to becoming the first Wall Street firm to set up a trading desk. Unfortunately, that plan has not come to fruition till date.
What is a Custodian Bank?
A custodian bank is a specialized financial institution that safeguards customers’ securities to reduce the risk of theft or loss. Congress established these institutions with the Investment Company Act of 1940 as a way to ensure that the interests of investors are protected.
Usually, institutions that offer custodial services do not offer commercial or consumer banking services like mortgage, lending and so on. They also tend to be large and prominent firms since they are often responsible for keeping high-value assets worth millions and even billions of dollars.
Apart from securely keeping clients’ assets, these institutions also carry out other services like transaction settlements, tax support, account administration, dividend collection, foreign exchange, and interest payments. The roles of a typical custodian bank include:
- Safekeeping and holding assets and securities like bonds and stocks as well as high-value commodities like precious gems and cash.
- Arranging settlement for customers concerning any sales, purchases, and deliveries in and out of the held assets, including securities and money.
- Gathering analytics data and income from the assets in custody, including dividends, where stocks, equities, and interest payments are concerned.
- Administering tax withholding and foreign tax reclamation documents where income has been collected on an asset.
- Administering various corporate actions (both voluntary and involuntary) on assets like stock splits, mergers, tender offers, stock dividends, and bond calls.
- Providing information about things like annual general meetings and related delegations, on the various held securities as well as their issuers.
- Carrying out foreign exchange transactions for domestic and international assets.
Today, Goldman Sachs is one of the largest investment banking institutions in the world. It is also a major dealer in the United States Treasury securities service market. Apart from investment banking services, the bank offers custodial services like securities and asset management, prime brokerage, investment management, and securities underwriting. Since its founding in 1869, the institution has stayed at the forefront of the US investment banking system and recorded several milestones.
In 2015, 21% of Goldman Sachs’ total company revenue came from investment banking alone. This consisted of two parts:
- A financial advisory including investitures, mergers and acquisitions, spin-offs, restructuring, and corporate defense activities.
- Underwriting which includes public offerings, capital raises and private placements of equity and debt instruments.
The bank’s reputation, size and past experience with investment and custodian services, shows its competence as a potential cryptocurrency custodian. Apart from the fact that such a big name backing crypto will ease investors’ fears, the firm can play another vital role: The introduction of virtual assets to its existing customer base.
The Issues Faced by Cryptocurrency Custodians
The fear and lack of confidence in the market shown by investors is a major discouraging factor for firms that plan to offer cryptocurrency custodial services. Unfortunately, this fear is caused by factors like exchange hacks, ICO scams and the speculation regarding regulation. Until these issues are fixed, banks, especially large banks like Goldman Sachs may remain hesitant to enter the space.
There is without a doubt, a lot of profit to be made from keeping digital assets for investors, but ultimately, at what cost? This is what custodian firms must consider before taking the risk involved with diving into a market as new and volatile as cryptocurrency.
While other industries are taking huge leaps of faith, the banking industry has more to lose from a crypto market collapse and cannot afford to adopt the trial and error approach. To launch full cryptocurrency services, banks must be able to find creative ways to mitigate risk and protect their customers.
Other Cryptocurrency Custodian Projects
The rapidly evolving climate of the cryptocurrency industry means that several firms compete with each other on projects in the same domain. The idea of cryptocurrency custodial services is no different.
Apart from Goldman Sachs, several other companies have either launched or are working on providing these services in the near future. One example is Nomura Holdings Inc. which partnered with JPMorgan Chase & Co., Bank of New York and Northern Trust Corp– three major Wall Street custodians– to create the first digital asset custodial service in May 2018.
Another prominent example is the Fusang Investment Office, a Hong Kong-based investment firm, which recently revealed its plans to launch the Fusang Vault, a cryptocurrency holding service, in Q4 2018.
Decentralised Capital, an Australian firm also launched the first cryptovault in Australia recently. So far, the project has been met with interest from potential investors searching for the best solutions to storage issues within the space.
Depending on whether the rumors about Goldman Sachs entering the cryptocurrency custodial services market are true, the move has the potential to have positive and even explosive effects for the industry.
Apart from being a confidence and credibility builder for potential investors, it takes a lot of the pressure off smaller startups that lack the necessary experience to successfully safeguard investors’ assets.
Investors what would rather keep their assets with an experienced Wall Street bank, which will lead to the smaller firms imitating the bigger bank’s processes. Ultimately, this will lessen the potential for error that would ordinarily be present within the custodial domain.
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