From tokenized real-world assets (RWAs) like real estate and mutual funds to native digital assets like stablecoins and cryptocurrencies, institutions and retailers are rapidly embracing the advantages of storing and transacting value on a blockchain.
As part of this shift, bank-grade digital asset custody solutions have become paramount. This primer will deep dive into the value of these solutions, the role of financial institutions and crypto businesses, and how digital assets and custody are shaping modern day finance.
What Is Digital Asset Custody?
The types of digital assets and their use cases have quickly multiplied with the advent of tokenization—the practice of representing tokenized real-world assets (RWAs) as tokens on a blockchain.
Beyond crypto, stablecoins, and Central Bank Digital Currencies (CBDCs), both retail and institutional investors can now hold a broad portfolio of tokenized assets that might include financial instruments (e.g., stocks, bonds), carbon credits or real estate. And with 10% of the world’s assets expected to be tokenized by 2030, these portfolios will only continue to grow and diversify.
As these digital asset holdings expand, investors are adjusting their asset management strategies accordingly. They are increasingly searching for sophisticated custody solutions that can not only give them exposure to digital assets and the broader crypto ecosystem, but also enable a robust range of use cases. According to our own research, most global finance leaders plan to utilize digital asset custody solutions within the next three years.
Benefits of Digital Asset Custody
As the financial mainstream leans further into crypto, custody is foundational to any business that wants to offer digital asset services. Many institutions already offer traditional custody to their customers, but expanding this to digital asset custody is an effective way to create new revenue streams and remain ahead of fast-moving competitors.
Simplicity, seamlessness and security are non-negotiables for these end users. But many are seeking solutions that go beyond core custody services to provide new investment opportunities and ways to further monetize their holdings, including issuance and trading of tokenized financial assets.
In response, institutions are integrating digital asset custody with existing services to offer a comprehensive experience across a variety of use cases and asset classes. Providers can even leverage customizable custody infrastructure to bring innovative new possibilities to market such as access to a tokenized securities registry platform, sub-custody networks for global service coverage, or the elimination of manual reconciliation.
Traditional vs Digital Asset Custody
Traditional custody is responsible for the storage and management of traditional assets like cash, real estate, precious metals or physical commodities. This is normally handled by large financial institutions like J.P. Morgan, Citigroup, State Street and others. These providers may also offer support for tax services and regulatory compliance.
This can involve a network of secure storage facilities, multiple parties and complex processes to protect against theft, damage or loss. While these are longstanding, proven services that add value to asset holders, they are also slow and cumbersome when it comes to transacting or moving assets; it involves many layers of people and paperwork—a system that is limited to traditional banking hours and competing time zones.
In contrast, digital asset custody can entail secure servers, hardware, multi-signature wallets and private keys to safeguard and manage digital assets. Layers of protection involve cybersecurity protocols, encryption, multi-factor authentication and more to enhance security against hacking and fraud. These custodians can offer around-the-clock instant, direct transactions and management services with always-on blockchain technology.
The contrast in asset type and solution means investors must evaluate different criteria when choosing traditional or digital asset custody solutions that meet their risk tolerance and investment goals. Investors in traditional assets tend to prioritize custodial factors like location or proximity, physical integrity and ease of accessibility. In contrast, digital asset custodians are often selected for their technology, security infrastructure and reputation.
For digital asset holders, a critical consideration is how custodians secure the cryptographic private keys that enable the transfer or control of an asset on a blockchain. Within the wallets—hot wallets, cold wallets, or air-gapped—that institutions use to hold their assets, there are two basic options for managing these private keys: Hardware Security Modules (HSMs) or Multiparty Computation (MPC).
HSMs are physical hardware devices or cloud-based storage options that rely on physical security, cryptographic isolation, secure communications and detailed audits and logs to protect keys. They are best used for wallets that are disconnected from the internet or for assets in long-term storage because, while effective, losing the device or having it stolen renders an asset inaccessible.
In contrast, MPC is a cryptographic technique that “shards” private keys into multiple distinct pieces that can be distributed across storage options. This makes it more difficult for bad actors to gain control over an investor’s keys because they need every shard to unlock access. However, MPC requires heavy computational resources that limit the number of shards that can be created, making it ideal for use cases that demand fast, automated access to keys or where HSMs are unrealistic options.
What Is a Digital Asset Custodian?
Most traditional custodians are large banks and financial institutions that serve asset managers or institutional investors. Institutional digital asset custodians are made up of a more diverse set of companies, including banks and financial institutions, crypto exchanges and fintechs.
These custodians are charged with the security, storage and administration of digital assets on behalf of clients. Importantly, and unlike traditional custody which involves holding the actual asset, crypto asset custody for institutions involves safeguarding access to an asset.
With a wide range of sometimes bespoke solutions that cater to a variety of client needs, providers like SG Forge, Zodia Custody and DZ Bank offer peace of mind through robust security measures and protocols that mitigate the risk associated with handling digital assets.
What to Look for in a Crypto Custodian
For holders seeking a digital asset custody solution, there are five key points of comparison.
1. Regulatory compliance:
Digital asset regulation is complex and varies by jurisdiction, but adherence to all industry regulations and legal requirements—including necessary licenses and certifications—is table stakes. In a world of still-evolving regulatory requirements, it’s important that custody partners also maintain the resources and teams to stay current on new frameworks to ensure seamless legal operation.
2. Security infrastructure:
The $1.46B Bybit exchange hack—the largest theft in history (crypto or otherwise)—underscores the importance of comprehensive security in custody of digital assets. Holders should seek out providers that rely on best practices in cybersecurity protocols and that offer advanced security measures such as multi-signature wallets, cryptographically-protected governance, cold storage options, and built-in compliance integrations, among others.
3. Reputation and track record:
Because digital assets and the custody solutions supporting them are still relatively new, a custodian’s reputation is critical. Take the time to assess their experience or historical performance in the digital asset industry. It’s also important to ensure they are transparent around fee structures and that those structures align with your target use case—some custody providers may charge more as transaction volumes increase, while others offer fixed pricing models.
4. Range of services offered:
The types of digital assets available and their use cases are rapidly expanding. Investors should choose a provider that is adaptable, can support a diverse range of needs and is well-positioned to scale alongside new market demands or asset classes. Look for a suite of flexible and customizable services that can execute management, trading and reporting functions for large volumes of high-value assets.
5. Partnership and integration capabilities:
The best providers offer flexible cloud or on-prem deployment as well as seamless integration with third-party platforms and financial institutions. Top custodians will also hold strategic partnerships with other technology providers to enhance their own service offerings.
Challenges with Digital Asset Custody
For institutions aiming to meet this growing need for bank-grade digital asset custody solutions, they must focus their offerings in two key arenas—technology infrastructure and compliance.
Ensuring that infrastructure and services remain up-to-date and competitive is an intense and ongoing effort that often boils down to one critical decision: whether to build or buy. While building a custody solution in-house may allow for a high degree of customization and provide greater control over the process, it also comes with heavy resource burdens. The technical and regulatory knowledge required to build a custody solution from the ground up is onerous and can significantly slow an institution’s time to market.
Tapping a custody infrastructure partner can alleviate these concerns, speeding time to market, removing in-house technical requirements for intensive security, and providing a built-in resource for ongoing technology and process improvements over time. When choosing a third-party provider, institutions should consider compatibility with their existing systems and how much of a lift will be needed for the integration.
Similarly, providers must be ready to comply with always-changing or emerging regulatory requirements—as well as variances between countries and jurisdictions. For example, MiCA in Europe; new regulatory frameworks in APAC; shifts in US regulation that enables banks to offer digital asset custody services—each of these is helping to define the role of digital assets and digital asset custody, allowing providers to follow guidelines while maintaining core services. Institutions opting to buy their custody solution should look to partners that possess a compliance-first mindset.
The Future of Digital Asset Custody
There is no question that digital assets and blockchain are moving into the financial mainstream. Nearly all institutional stakeholders (96%) see digital assets as an important diversification opportunity; more than 90% of respondents in the Ripple New Value Report say digital assets will have a significant impact on finance in the next three years; and tokenization is projected to become a $16 trillion industry by 2030.
This increased adoption and positive sentiment will only accelerate as technical advances pave the way for new use cases like the integration of smart contracts to automate and improve operations, fractional ownership through RWA tokenization, AI for threat monitoring, and enhanced security to reduce points of failure. Growing regulatory clarity around the world will further speed this embrace and widen this reach.
Critical to this growth will be the expansion of ever more sophisticated and seamless custody offerings to hold, manage and move these assets. We can expect new partnerships and more consolidation between custody providers and institutions in the coming months as the market matures.
Institutional Crypto Custody with Ripple
Ripple Custody enables institutions to leverage the bank-grade infrastructure needed to grow their digital asset services and meet rising demand. A single, fully integrated platform, it supports the 24/7/365 secure transfer and settlement of digital assets, tokenization and management of RWAs, private key management with MPC and HSM options, connections with DeFi and Web3 partners and applications, and more.
Ripple has always taken a compliance-first approach when developing digital asset solutions for customers; Ripple Custody is FIPS 140-2 Level 4 certified and SOC 2 Type II and ISO 27001 compliant. With expertise in digital asset regulation, Ripple provides customers with peace of mind knowing the solutions they’re leveraging are designed to be fully compliant with international Know Your Customer (KYC), Counter-Financing of Terrorism (CFT) and Anti-Money Laundering (AML) regulations.
And, in combination with Ripple Payments, institutions can extend new use cases for their clients, including the use of the Ripple USD (RLUSD) stablecoin to on-ramp into the broader crypto ecosystem, as well as streamlined off-ramps with global payouts in the customer’s preferred local currency.
Ripple Custody offers secure, scalable and highly customizable implementations that enable multiple use cases and ensure future-proof deployment—all without having to assume the risk and expense of building an in-house custody solution.
Learn more about why Ripple Custody is trusted by leading banks, crypto businesses and fintechs across more than 15 countries worldwide.
