Crypto custodians have ‘tremendous’ growth potential, says KPMG

“Big Four” consultancy giant KPMG has said that cryptocurrency custodians have “tremendous” growth potential as more institutional investors join the space.

“Cryptoassets are no longer an exotic instrument, bit player or side show. There is broad market acceptance that permissionless blockchains, native tokens and cryptoassets will enable robust new ecosystems of commerce and trade,” said Mike Krajecki, managing director for KPMG’s Emerging Technologies practice, in a report shared with The Block on Monday.

The crypto ecosystem is evolving at an “incredible” rate, according to KPMG, and custodians will have to ready their security solutions for the future, it said. 

“Secure storage architectures can deliver speed and resiliency at scale to support requirements for high throughput in payments, high-frequency trading, and other retail applications,” said the firm. 

Rising crypto hacks are another reason that will propel the demand for custody solutions, according to KPMG. At least $9.8 billion in crypto assets have been stolen by hackers since 2017, said the firm, adding that institutional investors will not risk owning crypto if their value cannot be safeguarded in the same way their cash, stocks and bonds are. 

“Institutional investors especially will not take positions in cryptoassets if their value cannot be custodied and safeguarded in the same way traditional assets are,” said Sal Ternullo, co-leader of KPMG’s Cryptoasset Services.

The consultancy giant has identified four "critical" building blocks for a "successful" crypto custody model: Next-gen security and resilience, Comprehensive compliance, Third-party trust, and Value-added custody.

“As cryptoassets proliferate, custodians have a tremendous opportunity to profit—both by earning management fees for delivering straightforward custodian services, and also by offering adjacent services only possible in the emerging crypto ecosystem,” KPMG concluded.

There are currently 42 crypto custody service providers, including Bakkt and Fidelity Digital Assets, according to The Block research.  Over the years, these providers have received $1.3 billion in investment. The focus of custodial services has also indeed shifted from consumer to institutional as shown by the percent of custody companies founded with a focus on the latter, per The Block research.