What is Coinbase Custody, and why does it matter?

Earlier today, on the 2nd July 2018, Coinbase announced the release of a new service called Coinbase Custody. This would potentially allow crypto hedge funds, exchanges & ICOs to store their crypto within Coinbase Custody very securely, potentially easing concerns around security in general in the crypto space.

Below we go through what Coinbase Custody is, and why it could have a big knock on effect for things like Bitcoin's price.

What is Coinbase Custody?

At the time of writing this, Coinbase claims to be storing over $20B in crypto assets. Given the current market cap of all crypto is around $270B on CoinMarketCap, this represents a significant portion of all crypto globally (~7.4%). So any kind of announcement by Coinbase, especially one around how they store funds, is significant.

Coinbase Custody is a new service launched by Coinbase related to storing crypto, where it allows 'Digital Asset Custody For Institutions'. e.g. it allows crypto hedge funds, exchanges and ICOs to store their crypto within Coinbase. Prior to the release of this, and similar products, storing very large amounts of crypto securely has been difficult, with many exchanges and ICOs being hacked and their funds stolen. This offers these exchanges/ICOs a place to store their crypto safely, and under the custody of Coinbase.

An important feature of Coinbase Custody is that it's regulated, more specifically it's partnered with ETC (Electronic Transaction Clearing), which is an "SEC-registered broker-dealer and FINRA member subject to regulated financial reporting and independent audits".

The amounts involved here are potentially very large, in the 7, 8 or even 9 figure range. Coinbase's CEO states that "Over 100 hedge funds have been created in the past year exclusively to trade digital currency. By some estimates there is $10B of institutional money waiting on the sidelines to invest in digital currency today...". If this is correct, just crypto hedge funds have this $10B waiting to deposit; this seems to exclude exchanges and ICOs which may have billions more.

Coinbase vs Coinbase Custody vs Pro vs Prime?

Just to clarify, Coinbase Custody is a different website to Coinbase. It's operated by the company 'Coinbase', but similar to Coinbase Pro (recently rebranded from GDAX), it serves a different purpose. A short summary of the various services Coinbase has:

  • Coinbase: A beginner-friendly website for your average person to buy/sell crypto.
  • Coinbase Pro: A more advanced website more oriented to actively trading crypto rather than just buying and holding.
  • Coinbase Prime: Similar to Coinbase Pro, this website allows institutions & corporations to invest in/trade crypto, making a bigger emphasis on security (as institutions/corporations may be trading with larger amounts of money than a Coinbase Pro user).
  • Coinbase Custody: A website also targeting institutions, intended as a way to store crypto in a very secure way. This is similar to the main Coinbase website, except for institutions (and we'd guess can be used alongside Coinbase Prime as a way to store the majority of an institution/corporation's funds).

Why is Coinbase Custody a big deal?

Above we mention how much Coinbase is already storing in their various websites, in the range of $20B. This means by offering services that make it more secure for institutions like crypto hedge funds to invest in crypto, they're allowing this institutional money to move into the crypto space more easily. News of exchanges & ICOs getting hacked is common, so it's very likely that regardless of the current crypto market, many institutions would likely be discouraged just by the fear of their funds being stolen.

So by Coinbase creating products like Coinbase Custody, they're removing barriers to entry for large amounts of money that may then move into the crypto space.

Some other important things to note around Coinbase Custody's launch:

  • Coinbase Custody seems to have already accepted its first deposit, so this service is production ready right now.
  • Coinbase Custody has a big emphasis on security, with features like "rigorous penetration testing", cold storage, on-chain segregation of crypto assets, and hardware based in different geographic locations required to sign transactions.
  • In the announcement Coinbase have a section for 'Support for more crypto assets', where they say they "plan to continue adding support for new assets". Back on June 12th 2018 they announced that they're adding ETC support for example.
  • With Coinbase developing new products in the institutional space, could this encourage the NYSE/NASDAQ to become more involved in crypto?
  • In the announcement, Coinbase suggests they'll allow clients to "participate in the crypto ecosystem through proof of stake and distributed governance".

Coinbase Custody announcement increasing Bitcoin's price?

We've seen a number of post around this Coinbase Custody announcement claiming that it caused Bitcoin's price to go up. Some thoughts on this topic:

  • News of BTCC relaunching a crypto exchange was around the same time, so this may be been related to Bitcoin's price increase.
  • July 2018 is the start of 'Q3', or the 3rd quarter of 2018. We've seen a lot of speculation that this may cause Bitcoin's price to temporarily increase, and that any recent news may have nothing to do with it.
  • If this Coinbase Custody announcement did cause Bitcoin's price to go up temporarily, it may just be short-term, where in a few days/weeks the price could continue decreasing (many people have been using the term 'bull trap', a word that describes a false signal indicating Bitcoin's price is going up, when it's actually going to continue going down).

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