With increasing institutional participation in the digital asset space, the role of custodians is evolving significantly to meet institutional requirements. It started off with the Custody 1.0 stage focused purely on the safekeeping of digital assets, then to Custody 2.0 where custodians like Hex Trust built institutional-grade infrastructure to meet regulatory, operational and compliance requirements.
Now we enter the Custody 3.0 era: offering monetization of custodied assets through universal connectivity to decentralized on-chain applications. Institutional custodians now provide access to a large number of on-chain services, enable operability across chains, and help organizations safely integrate digital assets into their business operations.
There’s an increasing number of real use cases around blockchain technology – new DeFi services, the metaverse, products around luxury and arts, the transfer of IPs and digital ownership. All of these use cases focus on and run on this new infrastructure which to a large degree rely on blockchain technology. Digital asset custodians essentially secure the foundation of this new digital asset infrastructure.
More institutions like banks, asset managers and insurance companies are starting to enter the digital asset space. But it’s not just about safekeeping anymore. New entrants demand access on a 24/7/365 basis, with high reliability, scalability and the highest level of security - all within a regulated and compliant environment. This calls for a greater need in service providers like custodians, to support institutions in safely integrating digital assets into their business operations.
Custody 1.0 was mainly about self custody starting with Bitcoin, and cold storage solutions which often require manual processes.
Custody 2.0 involved more complex technologies such as multi-party computation (where keys are sharded and distributed) as well as hardware security modules for tamper resistance and key management. Clients now demand flexibility, in terms of desired wallet types (hot/cold) and custody types (full/sole/shared). Multi-party computation is something that allows for this flexibility, by allowing interaction between wallet and custody types, to fit the needs of respective clients. Hardware solutions are equally important in this process, being the key entity that keeps and manages these shards of keys.
Another aspect which calls for flexibility is the need to meet the different regulatory requirements across jurisdictions. With different clients operating under different jurisdictions, custodians need to obtain respective licenses and meet compliance standards to deliver solutions to clients regardless of where they are.
The core aspect in the Custody 3.0 era is about universal connectivity, for the huge number of blockchain protocols, increasing token standards, security tokens, NFTs and DeFi services including staking, delegating, wrapping/unwrapping, lending or borrowing. It’s the custodian’s job to provide clients with access to these services, with higher demand for tight integration between asset holding wallets and blockchain smart contracts that interact with these wallets. On top of that, blockchain technology enables the representation of pretty much anything – art or real estate for example – which adds to the need for universal connectivity offered by the custodian in this era.
This race for universal connectivity also encompasses the integration of newly emerging technologies around NFTs, the metaverse and GameFi. Institutional investors are starting to dip their toes into this sector of the digital asset economy, looking towards interacting with it in a more dynamic and active way.
As a pioneer of NFT and metaverse custody solutions, Hex Trust has integrated support for Sandbox LAND as our first steps towards entering the metaverse. Aside from this, we support a range of NFTs, which all require the same type of activation as traditional digital assets like crypto – taking LAND as an example, developers or owners need to be able to lease or build on top of their digital real estate. Profile picture NFTs can also be staked or used as membership proof. This all ties back to the universal connectivity that custodians have to offer in the Custody 3.0 era – the flexibility to engage and activate all types of digital assets in this newly introduced economy.
So it’s not just about safekeeping anymore. It’s about being able to use custodied assets in a dynamic and active manner. Custodians are evolving to continue to provide such activities – whether it be trading, staking or delegating – and do so for a variety of technologies including NFTs.
So in this new Custody 3.0 era, institutions have custodians at hand and are usually prepared for regulatory and security concerns – but what about retail users like gamers? Hex Trust took a step towards targeting this alternative market of retail gamers by launching a joint venture with Animoca Brands. The JV will deliver an institutional-grade GameFi wallet for gamers to safekeep their in-game assets and utilize them in a highly secure, interoperable and scalable manner. It will be released in Q3 of 2022.