Digital Asset Custodian Service: Coinbase vs Banks

We are at a point now where banks are offering their clients asset custodian services for cryptocurrencies. But what does this mean exactly? And what can we expect from it?

Generally speaking, the relationship between banks and cryptocurrency in the US has been convoluted. Almost as much as the very concept of money itself, in fact. However, a letter from the Office of the Comptroller of the Currency (OCC) might be on the path to changing that. 

OCC letter

The purpose of the OCC is to charter, regulate, and ultimately supervise national banks. The interpretive letter elaborates on the fact that national banks can provide fiat bank accounts and act as cryptocurrency asset custodians on behalf of crypto businesses. This clarification coming from the OCC has the potential to open the doors for larger financial institutions. In doing so, they could be more comfortable in providing traditional bank accounts to cryptocurrency companies. Moreover, they could actually offer custodial services for the private keys of their customers.

There are some who believe that this is the beginning of a new era for the industry. A time where banks will have the ability to offer complimentary digital asset services that could attract sophisticated investors. Alternatively, and on a more optimistic level, that a Bitcoin ETF is more likely to gain approval. Others, however, lament that banks will eventually go on to audit and tax every single penny. Even worse, in the future, they will immediately agree to assist the federal government in seizing coins.

Custodial services

In its letter, the OCC makes an acknowledgment about the key difference between cryptocurrency and custodial services for fiat money. They point out the fact that digital currencies solely exist on the blockchain or distributed ledger. Because of this, there is no such thing as physical ownership of the instrument. Thus, a bank that “holds” digital currencies on behalf of a customer is not possessing them in the traditional sense. Instead, they take possession of the cryptographic access keys to that unit of cryptocurrency.

Brian P. Brooks, the acting Comptroller of the Currency, says:

From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today. This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”

True, there are an array of differences between fiat and cryptocurrency. With that being said, the desire for protecting one’s financial wealth is exactly the same. Those who are holding cryptocurrency are able to keep their cryptocurrency within a digital wallet. They can do so with either an exchange or – in the case of higher net worth individuals – a Trust Company.

The OCC’s statements are valuable when it comes to providing certain assurances to banks. Specifically, that they are able to go after this particular line of cryptocurrency custodial service.

What is ‘Coinbase Custody’?

2018 would see the launch of Coinbase Custody, an independent company with NYDFS regulations. Its purpose is to address the challenges of the security, regulatory, and operational variety. These challenges are ones that the crypto market typically pose. Coinbase Custody offers institutions with proper access to the custody solution that underpins Coinbase. The duration of this underpinning has lasted over six years.

Coinbase Custody’s overall design provides the best financial controls for institutions and companies. Particularly, for those who are looking to trade digital currencies, including the lilies of Bitcoin and Ethereum. The arrival of this company was following the emergence of numerous hedge funds targeting the digital currency space. Moreover, the design of the offering provides institutions with tailor-made custodial offerings.

According to the introduction document:

In the face of this uncertainty, crypto-first institutions may feel they have no choice but to self-custody their crypto assets. Institutions that are new to crypto, on the other hand, might have custodial services already but aren’t sure how to approach a net-new asset class with entirely new security risks.”

For the most part, the intent of Coinbase Custody is to give institutions safe and secure means for digital asset storage. These assets, of course, include cryptocurrencies. They will have access to audit trails, withdrawal limits, and support for an array of signers.

The platform has phone support readily available for institutions who need confirmation of fund transfers. The same applies to other account changes. It also gears primarily towards the support of all major digital assets. As is, the definition of this pertains to the same assets Coinbase lists on its consumer-facing custodial service. These include Bitcoin, Ethereum, and Litecoin, as well as other ERC20 tokens.

Why is it so important?

Up until recently, the targets of Coinbase’s most notable forays have predominantly been traditional consumers. Not only that, but it aims its sights towards early-stage venture capital. With the use of Coinbase Custody, the platform aims at financial institutions and hedge funds.

Just how institutional are we talking here? Well, Coinbase Custody has a minimum balance requirement of $10 million in USD. Furthermore, it charges a setup fee of up to $100,000 USD. On top of that, there is a charge of a 10 basis points fee on a monthly basis.

The bottom line is that this is a very significant offering. If for no other reason than it effectively opens a door to the crypto space for institutional investors and hedge funds. With it, they are able to enter and operate in the space, which will ultimately lead to thriving.

Multi-signature wallets and hardware wallets will often appeal to stringent investors. However, this new platform will provide a secure and stable service for corporates, large-scale businesses, and other financial players. Now they will be able to carve out cryptocurrency offerings of their very own and properly store their portfolio.

Put simply, it functions as a gateway for large-scale businesses to enter into cryptocurrency markets. In doing so, they can also start to compete in them. As for solo investors and small firms, the time may come when they won’t hog the stage as much.

Gemini & Anchorage

The players in the industry include such names as Gemini and Anchorage. The former is a regulated cryptocurrency exchange. The latter is a digital asset custodian. These two agree that this type of custody has the potential to be beneficial for the industry. 

Noah Perlman, Gemini’s Chief Compliance Officer, makes the following statement:

Today’s forward thinking announcement by the OCC validates Gemini’s long standing approach to custody. Gemini has built an institutional-grade custody solution to address the unique challenges of storing digital assets, that’s regulated by the NYDFS, and serves many institutional partners. A regulated solution provides the best option for the safety and security of clients’ crypto assets.”

Nathan McCauley, the CEO of Anchorage, provides digital asset custodian services for various institutions. In his own words, he says:

The OCC letter is a positive development for the entire crypto industry. A lack of regulatory clarity has been a big roadblock to more institutional activity in crypto, and major pronouncements like this help move the needle.” 

Be that as it may, McCauley does have some cautious words to say about the matter. He explains that becoming a digital asset custodian presents challenges beyond those that are strictly regulatory. “It is highly technical,” he adds, “often bespoke work with no easy corollary in traditional finance.” 

Furthermore, it is true that the OCC will give national banks the ability to custody cryptocurrency. However, for the time being, the letter fails to expand FDIC insurance coverage to digital currency.


IOHK, a Blockchain engineering company, recently signed a custody agreement with Coinbase. In doing so, it ensures custody for the cryptocurrency connecting to its Cardano blockchain, ADA. As of this year’s Q4, ADA holders can put their assets into storage in Coinbase Custody. Specifically, in the company’s institutional-grade storage that has since been battle-tested. At the same time, they can also retain the ability to delegate their stake.

Agreements of this kind are vital for getting closer towards widespread adoption of cryptocurrencies. They effectively allow institutional and large investors to manage their funds in a safe and secure manner. Moreover, they can do this while also abiding by regulatory requirements. With luck, this will mitigate any and all concerns from regulators regarding the security of cryptocurrency. This is something that has been notorious for hampering efforts to make crypto acceptable in mainstream finance.

Another interesting fact about Cardano is that it is the world’s first blockchain-based entirely on peer-reviewed science. Its construction is specifically to scale so that it can fully replace the global financial system. What’s more, its design allows it to be compatible with current – as well as future – transaction systems and currencies. Not only that but it guarantees sturdy governance that could last decades into the future.

Not too long ago, IOHK made an announcement concerning the date of unveiling the product’s ‘Shelley-era’ functionality. This will introduce the full decentralization of the blockchain, indicating that the system is being run by its users. This announcement upholds Cardano’s enduring position as a leading cryptocurrency.

Money laundering and illicit activities

There is a popular belief that cryptocurrency is primarily useful for money laundering and illicit crimes. Even more so than fiat currency. However, contrary to this assumption, there is substantial evidence proving otherwise. As a matter of fact, banks are already establishing the compliance and legal guardrails necessary to bank cryptocurrency companies safely.

Take Silvergate Bank for example. At one point, this was among the first banks to provide major cryptocurrency companies and exchanges with fiat bank accounts. Cryptocurrency companies consistently make attempts to retain an array of banking relationships. They do this in order to diversify the general risk of potentially losing an account.  

When you think about it, cryptocurrency actually fares comparatively better in regards to fighting money laundering and illegal activity alike.

Jonathan Levin is the co-founder and Chief Strategy Officer of Chainalysis. This company is a leading cryptocurrency tracing firm. Levin provides further explanation as to why this benefit. He states the following:

Every cryptocurrency transaction is recorded on a public ledger, making it inherently transparent. This enables us to quantify how much of all cryptocurrency activity is associated with crime …That just isn’t possible with cash and other traditional forms of value transfer.”

An interesting fact about the letter is that it notes “Fiat money refers to instruments that do not have intrinsic value.” Moreover, currencies that are government-issued – including USD after abandoning the gold standard – “are traditional fiat money.”

What the future may hold

Many are starting to see the value and practicality that comes from using Bitcoin, as well as other crypto assets. So, what does this mean for the future?

Well, more than anything, this will likely serve as a revolutionary catalyst. In particular, for an acceleration of clarity from the state of Washington. It will pave the way for a much more solid regulatory framework for our industry. This, of course, is a good thing.

Keep in mind that more often than not, the clarity of what we are able and unable to do tends to fluctuate. A lot of people hope that this signifies the commencement of a trickle-down effect. Perhaps this announcement can function as a stabilizer of some sort.

But a question still remains. What will happen when we reach a point where all the headlines surrounding this announcement fade away? What will be left when the dust settles? Realistically speaking, in the short term, not a lot of new asset custodian entrants from this regulatory support. However, there is a bright spot to be found here. There is a chance that onlookers will see the government’s acknowledgement that crypto is real. Or, at the very least, crypto is real enough to do business with.