Regulators May Be ‘Speeding Up Their Timeline’ on Cryptocurrencies

Increasingly sophisticated due diligence is en vogue when it comes to digital asset custody for institutional investors

article-image

iConnections Global Alts modified by Blockworks

share

Properly measuring counterparty risk in crypto has rarely been more crucial. 

This is the clear message emanating from a panel at the iConnections Global Alts conference in Miami on Tuesday featuring executives from Anchorage Digital, Bitgo, Coinbase and One River Digital.

Participants tapped the intended topic, the “evolution” of crypto custody, as a springboard to dive into all things due diligence in a post-FTX digital assets landscape.

Especially with heightened US regulatory scrutiny on the horizon.

Sarah Schroeder, a One River portfolio manager, said that “ultimately, this is a counterparties question.” She drew a parallel to Wall Street’s practices for safeguarding customer assets, including cash and derivatives. It’s “very easy” for institutional investors to “call upon Goldman Sachs” and its peers for that crucial function, she said.

But how cryptoassets are custodied is another question entirely for newcomer traders and allocators — with passive and active approaches alike — to wrap their heads around. How? By whom? And why?

There is no shortage of mechanisms these days, some more complex than others, for keeping digital assets under lock and key. There are more solutions being added by the day — especially after the historic implosion of Sam Bankman-Fried’s FTX, plus the subsequent shutdowns and deep rooted complications for a number of crypto’s erstwhile giants. 

Some of those custodial offerings, according to Adam Sporn, BitGo’s head of prime brokerage, have been around since crypto’s last major cycle. Some are still very much a moving target. 

Drawing particular institutional interest of late from the likes of venture capitalist and family offices, Sporn said, are cold storage solutions. Cold storage works by keeping the private keys that govern ownership of digital assets offline, as opposed to a “hot wallet” that is connected to the internet and may be hosted by an exchange.

READ MORE: Everything you need to know about hot vs. cold wallets

Rush for exchange exits

Both retail and institutional investors alike yanked their crypto assets off of exchanges in the wake of the wave of service provider bankruptcies and related freezes on customer withdrawals

It’s been a bit of a slog for outright custodians to regain trust in markets that were already deemed risky by much of the mainstream.

BitGo, according to Sporn, has picked up on a trend: Crypto-native funds “don’t care about the cold storage” and instead have been using hot wallets as much as ever. High-frequency digital asset hedge funds and proprietary trading entities typically have little use for storing their cryptocurrencies offline. 

But other portfolio managers with less time-sensitive trading styles have been carving out a middle ground, Sporn said, keeping something like 2% of their book in hot wallets for ‘liquidity needs” and locking up the remainder elsewhere. 

Neither trend is especially new when it comes to family offices and venture capitalists. But industry eyes and ears have been following the money — and, more precisely, how the money moves — since crypto markets collapsed in the fourth quarter of 2022. 

What to do about custody?

In that (brutal) context, industry participants are now looking for options when it comes to the digital asset products at their disposal, according to Yuriy Anosov, Anchorage’s head of trading. The longtime custodian is working on setting up a settlement and exchange layer similar to setups that have been commonplace on Wall Street for a while, Anosov said.

Anchorage is now supporting a couple of hundred cryptoassets, according to Anosov — adding that it’s now “really important to see what the inter-party agreements are like.” Anosov was referring to relationships between a protocol, or a DAO, and its own counterparties. 

The basic idea is that limited partners and general partners ought to do their homework on the service providers they choose to entrust with their capital. And, in turn, those service providers ought to carefully parse the internal governance of cryptocurrencies and Web3 initiatives they choose to bring onto their platforms.

Those dual layers of due diligence have become paramount, according to Lauren Abendschein, Coinbase’s head of institutional sales for the Americas.  

“We saw this with FTX, not having properly experienced individuals, particularly in control functions — and a well-documented history across those control functions,” Abendschein said. “It applies to crypto very much, as it does every other industry.” 

The SEC and the CFTC have taken note. Anosov said that he thinks “regulators are actually going to be speeding up their timeline in the case of actually [moving] regulations forward” in 2023.

There are a number of pending US legal and regulatory initiatives the panelists said they’re following. Among them: digital asset taxation and stablecoin oversight.

Jiri Krol, a top AIMA executive who moderated the iConnections conversation, said that “hopefully we get something done this year, but I’m not holding my breath.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Unlocked by Template.png

Research

RTK networks are critical to enabling a world of ubiquitous autonomous drones, vehicles, and industrial robots. We believe the GEOD token enables both a cost and product advantage for the GEODNET RTK network, which will allow it to out-compete multi-billion dollar incumbents Trimble and Hexagon.

article-image

Hunter Horsley says Solana is one of this cycle’s breakout successes that he thinks clients will want to access

article-image

SOL has climbed more than 2,000% in the past two years

article-image

MicroStrategy founder Michael Saylor alluded to Marathon’s CEO during a X Spaces on Tuesday

article-image

Crypto’s calls are equally as juiced as puts, creating a “smile” in the volatility surface

article-image

Turns out that owning the end-user via a crypto wallet is quite a prosperous business

article-image

The announcement followed growing speculation that Gensler would announce his exit before Trump takes office next year