“Digital assets are effectively cybersecurity problems”: Anchorage Digital on the institutional adoption of crypto assets

The financial services industry is marching towards the mainstream adoption of digital assets, fueled by an increasing number of companies and investors who want to own cryptocurrencies and other crypto assets.  

As the institutional adoption of digital assets continues to grow, so does the opportunity for companies to offer safe storage and transactions with these assets. 

Custodial services, in particular, are an essential part of the ecosystem as it combines security with flexibility and are critical for the expansion of digital asset investments. 

But custody services are no longer just about the safekeeping of assets in the traditional sense – in the crypto world, there’s a whole other layer to consider like the issue of storing cryptographic keys that control those assets. 

“These assets are not like traditional assets, they are effectively cybersecurity problems,” said Diogo Monica, co-founder and president of Anchorage Digital, a digital asset platform for institutions valued at over $3 billion. 

Speaking at Tearsheet’s inaugural Bankchain conference, Monica explained how the storage and safekeeping of crypto assets has evolved over the past few years to more complex solutions from simply using cold storage devices (physical devices that are not connected to the internet, like a USB stick) to keep their crypto assets offline. 

“Physical security solutions were what I lovingly call 'pirate custody', which is the same technology that the pirates used in the 1700s to protect their gold coins – put in a safety deposit box somewhere with a treasure map,” he said.

But you can't store a very sophisticated digital asset with the same types of armed guards that you can store bars of gold. There was a rising demand for a solution with the same safety, if not better, than the traditional model of cold storage, in a way that would allow institutions to use the keys and participate in the ecosystem.

Unlike a fraudulent credit card transaction, a blockchain transaction cannot be reversed with a phone call – such a reversal would require restructuring the entire blockchain. Trusting a custodian means trusting their security and reliability above all else, because if a breach ever happens, stolen assets are nearly impossible to recover, according to research.

With crypto adoption constantly evolving, institutions are looking for partners that can support the custody of hundreds of assets and offer API’s that allows them to move assets in a safe manner. Large players that require third party qualified custodians “very clearly want a partner that is unambiguously qualified custodian”, according to Monica, and regulation plays a large role here. 

This was one of the reasons why Anchorage sought to obtain a national trust charter, as the Office of the Comptroller of the Currency (OCC) indicated that this was a path forward for crypto banks. The OCC approved the application, making Anchorage Digital Bank the first national bank for digital assets.

This move marked a step forward towards more institutional clarity about digital assets, and a path for financial institutions to participate in digital asset services. While it’s the first bank to get a charter, Anchorage doesn’t want to be the last. 

“If you're planning on offering crypto services and platforms, you should think about the OCC charter as the right path forward, because it provides the industry the clarity that they have when dealing with traditional securities, products and financial products,” Monica told the audience at the conference. 

Crypto needs the same regulatory clarity of auditing that you have with traditional banks, which have created a robust system over time, having gone through many economic cycles. Institutions want to come into the crypto space in a way that’s easy, safe and regulated.

This makes sense given the rising demand for digital asset services coming from a wide range of companies. At Anchorage, clients used to be primarily risk-seeking entities like crypto funds, hedge funds, VC firms, Monica said. 

But now it’s every single type of company under the sun – there’s crypto miners, exchanges, consumer banks, institutional banks, endowments, large foundations, and nonprofits.

And all of them bring different types of issues. Large integrators and fintechs care about product completeness –  they ask if all of the services are accessible via API, as well as reporting standards and scalability. For some of the larger players, such as traditional banks, questions are more around the regulatory clarity.

This is why it’s important to have a platform that is well integrated, with all of its products falling under the same umbrella. 

“Clients really liked the fact that they can trade from the same safety of the custody, they can stake from the safety of their Anchorage Digital Bank, and they can just do all of the services under one trusted partner,” Monica said.

Companies looking to enter the digital asset custody sector need to think about their asset support capabilities and have a strategic vision of which blockchains they want to support in the future.

“If you're a large institution coming into this space, then you should look at the technical capabilities – at the end of the day, the safety of the platform is the only thing that guarantees that the assets will stay on the platform,” he said. 

And staying on top of regulatory developments is also a must. Great relationships with regulators will be a distinguishing factor between crypto winners and losers over the long term. 

Some large financial services companies also made moves into the space. Just last year, BNY Mellon formed a new digital asset unit to serve this rapidly growing demand. 

"Growing client demand for digital assets, maturity of advanced solutions, and improving regulatory clarity present a tremendous opportunity for us to extend our current service offerings to this emerging field,” said Roman Regelman, CEO of asset servicing and head of digital at BNY Mellon.

Mastercard is also eyeing the sector, investing in digital assets startups. 

“The past year has seen incredible momentum in the world of crypto assets, from the explosion of NFTs to the piloting of central bank digital currencies in countries across the world. As we look to what’s next, it’s all about finding new use cases and problems blockchain technology can solve for now and in the future,” said Jess Turner, executive vice president of New Digital Infrastructure and Fintech at Mastercard.