Crypto Custody Services and Regulation – A Review | Barnea Jaffa Lande & Co.

Institutional investors, companies, exchanges, individuals and crypto miners all have strong demand for crypto custody services, provided by particular market participants. These services are intended to protect customers’ crypto assets and prevent them from loss or theft. Such services are subject to various local regulations. Different from traditional custody services, crypto custody takes place through secure key management.

US regulations

In the US, the regulatory environment for digital assets is evolving. Under the US Investment Advisor’s Act, investment advisors must register with the SEC and hold client funds or securities with a qualified custodian in segregated accounts. Eligible custodians include financial institutions or specialized custodian providers (subcustodians). In July 2020, the Office of the Comptroller of the Currency (OCC) issued a letter allowing national banks and federal savings associations to offer cryptocurrency custody services for their customers. In 2021, for example, a major US bank launched a cryptocurrency custody service for investment managers.

EU regulations

In 2020, the EU proposed a regulatory framework known as Markets in Crypto-Assets (MiCA). This landmark law will require cryptocurrencies to meet the same transparency, licensing, compliance and oversight as other financial products.

The bill is likely to enter into force in 2024, although there are concerns that the rapidly evolving nature of the crypto space will mean that the scope of the bill will not properly address new crypto services.

In addition, the UK regulates custody services in such a way that an entity holding private cryptographic keys on behalf of its customers may be subject to regulation by custody providers.

The Israeli market

In Israel, under the Financial Services Control Law, the administration or custody of virtual currency requires a “service provided in a financial asset” license. The Israel Capital Markets, Insurance and Savings Authority is responsible for issuing such licenses and supervising licensees. In addition, provisions of the Israeli trust law may apply to custody providers.

In case of insolvency

The question of whether a party is or is not a custodian can have far-reaching implications, especially in light of recent developments in the crypto space. Recently, some market participants who acted quite similar to “crypto banks” announced the cessation of withdrawals of all crypto funds that they hold due to market breakdown. For these actors, their terms and conditions included a warning that some of their services would include the transfer of title to the assets. This thus made these assets part of the assets available to creditors and the original owner of the assets just another unsecured creditor. This apparently should not affect digital assets held in pure custody accounts. However, it remains unclear whether these assets will be safe during ongoing insolvency proceedings.

We believe that reliable and regulated custody services are key to the continued development and growth of digital assets.