Why Custody Is a Bigger Decision Than You Think

The big decisions in life require strategic planning.

Consider homeownership: when you think about homeownership, you don’t start with deciding on parameters like location and number of bedrooms. Instead, you think about *whether* you should buy a house, how it would affect you personally and professionally, and what would happen in case of big-picture scenarios like an economic downturn, starting a family, etc.

As Head of Business Development at Anchorage, I’ve had many conversations with crypto investors seeking a custody solution. Across these conversations, I’ve found that some investors aren’t aware of the full impact a custodian can have on their operations, and therefore skip over some important considerations in their custody decision-making process.Crypto custody is much more than just safekeeping, and below I lay out a framework for thinking about custody.

Your custodian sets the pace for your activity

Many investors I talk to don’t want to think about custody. They want to set it and forget it: make the decision once, feel confident that their assets are safe, and return their focus to generating returns.

But in reality, if chosen poorly, your custodian never fades into the background; instead, custody becomes a (painfully) ever-present part of your workflow.

Speed matters. While cumbersome and delay-prone transaction flows are frustrating on their own terms, the speed at which you take action can have a dramatic impact on fund performance.

Your custodian’s responsiveness affects everything from your ability to execute a time-sensitive trade, to moving assets to safety in the event of a blockchain vulnerability like the one that recently affected MakerDAO.

Your custodian can boost both alpha and marketing

The two main functions of a fund are (a) generating returns, and (b) fundraising. Operations underlies both functions, and custody is a critical part of operations. If chosen well, it can help with both functions; if chosen poorly, it can instead hinder.

Your custodian can help generate alpha by facilitating asset productivity. Asset productivity comes in many forms: not only yield-generating mechanisms staking and inflation, but also on-chain governance on issues that may affect the value of your assets, and enabling you to claim forked assets.

Custody is also increasingly important to LPs: using a third party custodian is fast becoming an entry criterion. It can also provide extra credit if the custodian provides detailed reporting and supports on-demand proofs of existence and exclusive control.

Your custodian can constrain your operations

Custody shouldn’t be a chore. Self-custody protocols are notoriously stressful to operate: they require a high degree of coordination, often including physical presence at a specified time for each and every transaction.

When people leave your organization or when new people join, you’ll need to perform complicated key ceremonies each time. Business continuity planning is also a must-have: organizations need to have a plan in place for scenarios like accidental death (known as the “bus factor” in security) or even plain old forgetfulness.

Most organizations outgrow their self-custody solutions over time, as third party custodians solve many of the problems of self custody. However, cold storage custodians require keys to be physically retrieved by humans for each signing operation, and human processes take time (and expose keys to risk). Furthermore, cold storage custodians typically require synchronous confirmations (for example, by video conference) to authenticate users’ identity and intent.

You shouldn’t have to jump through hoops just to execute your investment decisions. Your asset withdrawal process shouldn’t create dread or cause heart palpitations.Some good questions to ask are:

• Will you be able to transact remotely? If not, this may restrict your ability to travel for work or personal reasons.
• Will you be able to approve transactions asynchronously from your coworkers? If not, this will add coordination burden.
• How many pieces of information do you need to keep safe? The more information, the more operational overhead and fear of loss.

Ideally, your custodian should adapt to you, not the other way around.

Conclusion

When choosing your custodian, consider all the ways custody might affect your fund beyond keeping your assets safe.

Choosing your crypto custodian is more than just choosing a back-end service provider: your custodian may have far-reaching impact throughout your organization. The right custodian can be a valuable partner to your fund’s performance.

For help thinking through your custody decision, and to learn more about Anchorage, please get in touch.