The wider world of crypto tokens is becoming a bit more accessible to institutional investors.
The security startup BitGo exclusively told CoinDesk on Tuesday, July 10, it will expand its suite of custody products and services to support 57 new ethereum assets, a move driven by demand for services that safeguard private keys – the alphanumeric strings that act as passwords for crypto assets – and that, once lost, are gone forever.
As such, the move is a telling one for the blockchain security sector, one that showcases how it's in the midst of a changing competitive landscape.
Founded in 2013, BitGo has become an industry leader managing wallets at crypto exchanges, but to date, its service has been limited to larger protocols like bitcoin and ethereum. (Indeed, the overall lack of options has even led traditional custodians like BNY Mellon, JPMorgan and Northern Trust to consider the business, sources told Bloomberg in June.)
The startup is hardly the only industry upstart rushing to debut institutional custody services – U.S. exchange provider Coinbase, the Swiss startup Smart Valor and Japanese bank Nomura are just three of the companies rolling out licensed crypto storage solutions.
Yet the addition of ethereum tokens could be a key first-move advantage. According to BitGo CTO Benedict Chan, there has been a surge in demand for custody solutions for alternative crypto assets such as the kind it's now adding.
Benedict Chan, CTO of BitGo, told CoinDesk:
"These institutions, they generally don't want to self-manage their coins. They are looking for someone that can support multiple coins."
Timothy Furey, CFA and head of banking at Satis Group, a firm focused on advising institutions on ICO investments, described this blockchain industry trend as an "arms race" to offer institutional-grade custody solutions for a spectrum of assets.
That's why VP of product marketing, Robin Verderosa, said BitGo is now looking to obtain a BitLicense in New York and a qualified custodian license in South Dakota. BitGo aims to offer even more custodial services, adding more than 100 cryptocurrencies by the end of 2018.
Verderosa said courting institutional investors has become BitGo's priority, adding:
"What we've learned is that they're interested in investing in a basket of coins and tokens that kind of help hedge the market and give better returns."
Token rouletteEqually notable to the potential industry impact, though, is how BitGo is taking steps to ensure the quality of its service given the risks inherent in dealing with smaller cryptocurrencies.
When BitGo debuts support for dozens of cryptos today, it will include those offered by Kin by the chat messaging app Kik, several native tokens for decentralized crypto exchanges and the blockchain identity crypto Civic, a startup BitGo began experimenting with in 2017.
It's a reality that's had an impact operationally, as product manager Isaac Eleftheriadis now heads an 11-person BitGo team focused on rising cryptocurrencies and tokens.
According to Eleftheriadis, every token added in this first batch was explicitly requested by BitGo's institutional clients. Once there's an obvious demand for custody options, the team researches this token to make sure its issuers and founding team are reputable.
Long after adding basic storage features, support for crypto tokens requires ongoing vigilance.
"An added challenge for custodians who are coming to market is figuring out how they will handle issues like airdrops, hard forks, etc, and which ones they will support. This presents real technical challenges in addition to regulatory and tax-related ones," said Arianna Simpson, former BitGo employee and current founder of the crypto investment fund Autonomous Partners.
Speaking to this point, Eleftheriadis told CoinDesk his team actively monitors whether token issuers are planning code changes, in addition to quarterly security evaluations.
Some token issuers themselves have also become BitGo clients.
"There's been cases were customers asked us to support their ERC-20 token," Eleftheriadis said. "They don't want to do the ICO yet until all their tokens can be held by BitGo."
Other security effortsAside from BitGo, there are several startups in the race to serve institutional crypto investors.
Smart Valor CEO Olga Feldmeier spearheads one such provider, a licensed investment platform which also offers custody and management services. She agreed with Chan that many high net-worth individuals and institutions would prefer a licensed expert handle storage and security.
That's why Smart Valor is partnering with the hardware wallet maker Ledger to offer on-site storage of private keys and other services comparable with deposits at a bank. This Swiss platform for managing and trading tokenized assets is scheduled to launch in September, around the same time as Smart Valor's ICO.
"A lot of family offices are starting to think about investing directly in ICOs and protocol tokens," Feldmeier said. "The custody solution is extremely important because all the hacks so far, everything that happened until now, it was all hacks of exchanges."
Chan said ethereum tokens, in particular, are prone to issues caused by bugs in smart contracts. Regardless of Feldmeier's point that most breaches involve exchanges, hackers exploited such a smart contract bug in 2017 to steal $30 million worth of ethereum tokens from Parity wallet users.
A seasoned investor, Simpson referred to security practices for crypto tokens as "a moving target." Especially in this space, the devil hides in those details.
Luckily for institutional investors, startups like BitGo and Smart Valor are prioritizing secure custody for tokens, not just bitcoin.
Chan concluded:
"There's a lot of different events that have happened because of smart contract bugs. So, we try to be on the safer side there."
BitGo team image via BitGo
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