The growth of the crypto industry has witnessed an interesting dynamic develop between crypto and Venture Capital (VC). Perhaps one of the most significant pieces of the puzzle has been the emergence of solutions for institutional-grade custody in crypto. Institutional investors now have a way into the market and can pick from a range of solutions that allow them to secure crypto assets in a trusted, safe and regulated way. This post will discuss where the VC industry has been and where it’s going with a focus on institutional-grade custody in crypto.
The growth of the ICO and Venture Capital
Before we discuss where the crypto industry is now, in relation to institutional capital, it’s important to understand where it’s been.
In 2017, the ICO craze exploded; yet, it stood somewhat independent of VC firms. Crypto assets were leveraged as token sales. Capital flowed into the ecosystem. A new financing paradigm was fostered and more traditional financing actors began to take notice.
VC firms reviewed the crypto space and looked for avenues to develop value for clients. It became apparent that the value did not lie in the applications that lay on top of blockchains, but in the blockchains themselves such Bitcoin and Ethereum. VC firms needed to figure out how to engage with crypto assets at their base level.
Consequently, one notable way that VCs engaged with to gain exposure to crypto assets is through Simple Agreement for Future Tokens (SAFTs). In a SAFT deal, the VC firm invests a financial capital in a start up in exchange for its agreement to, at a future date, give them a proportion of the tokens it sells in an ICO.
At this point, ‘future tokens’ will be distributed. Institutional VC firms are required to store these assets in a safe and secure way. This means how wallets and the like simply won’t do. VC funds need institutional-grade custody.
Custody remains a major challenge from the bottom to the top in crypto. This is warranting crypto service companies to enter the space to pave the way for efficient forms of VC participation.
Institutional-Grade Custody – What is it?
In traditional financial markets, a custodian is a financial institution that provides a secure storage service for financial securities to minimize the risk of theft or loss. In the blockchain industry, this is no different. Custodians provide the service to institutional crypto asset investors. Custodians store the assets for investors for increased safety or sometimes because it’s required by law.
Crypto custodians provide a range of services to blockchain companies. Such services include, but are not limited to, cold storage solutions, fork management, asset insurance, legal services and 24-7 customer service. Take for example Coinbase Custody which launched in 2018. It offers clients access to the secure institutional-grade offline storage solution that has been used Coinbase’s exchange business since 2012.
How does Cryptocurrency Custody work?
Institutions, or blockchain start-ups, who wish to buy and hold crypto assets, sometimes lack the expertise to do this in a secure way. Issues of the being able to accomplish buying and selling of crypto assets at scale and their ability to accept this level of risk are also raised. Enter the regulated, insured and trusted third party crypto custodian who relieves the institution or crypto company of these limitations .
Enter crypto consulting company Fundshing
There are a number of companies offering institutional-grade custody in crypto services such as Anchorage, Bank Frick, BitGo and Fundshing. Fundshing is a company we have consulted with in the past so will good place to unpack how blockchain service companies are approaching crypto custody.
What is fundshing?
Fundshing is a venture capital company for blockchain based projects. They provide services to launch and promote token offerings especially focusing on providing this service to blockchain start-ups.
Fundshing are provide a turnkey service solution that covers critical areas that blockchain start-ups most often require:
- Technical Solutions -integration of blockchain technology into existing system and issue ERC20 compliant tokens.
- Legal Solutions – provision of experienced industry lawyers and institutional grade custody available for token offerings.
- Community & Marketing Solutions– efficient marketing team and also a global community managers to manage and promote your token offering social media accounts.
- Seed funding – Fundshing provides seed funding to early start-up companies for both equity and tokens. Fundshing team will analyze the idea, business plan/whitepaper and execution team before making the final decision.
They intergrate all the companies, stake holders and business assets into a unified blockchain ecosystem, which makes the business efficient, transparent and reliable.
Fundshing and institutional-grade custody
One of the core offerings of Fundshing is institutional-grade custody in crypto. This opens doors for institutional capital no matter the geographical limitations of the client’s company.
Let’s see how this works in practice.
Fundshing supply the company seeking a token offering with a fiat Custody Account. This provides the token offering with an Operating Account with a major bank in a major financial centre, Hong Kong. Banking for MC membership revenues, expenses and international fiat transfers are therefore provided to the ICO company. This is backed up by their partners being regulated & licensed Trustee Custodians. They handle all required AML/KYC on members and contributed funds.
In fact, Fundshing have partnered up with two heavy hitters in the space: Hong Kong-licenced and public trust company Legacy Trust and Ledger, a global leader in security and infrastructure solutions for cryptocurrencies and blockchain applications. These strategic partners are introducing the world’s first institutional-grade custody solution, to help accelerate the flow of institutional money into digital assets. Fundshing are using these strategic partnerships to offer high level custody to crypto platforms.
The approach to safe custody is reinforced via a robust legal service which is part of their consulting package. Hong Kong has been known historically for its business-friendly laws and today it’s the 3rd largest financial centre in the world. Fundshing help token offerings make the most of this pro-business environment and its inherent advantages. Their law firm partner acts as a Hong Kong based Trustee for the ICO company and handles each token offering as a unique entity. This can provide the necessary corporate structure as required.
Interested in taking a closer look at Fundshing’s token offering services and custody solutions then follow the link.
Why will custody solution services win out in the future?
The core reason why the future will offer VC firms like Fundshing a strong platform for growth is due to increased regulatory scrutiny. Financial authorities like the U.S. Securities and Exchange Commission (SEC) have started to prosecute cases that could be considered as unauthorized sales of securities to the public. For example, in June 2019, The SEC sued Kik Interactive Inc. for conducting an illegal $100 million securities offering of digital tokens. The SEC charges that Kik sold the tokens to U.S. investors without registering their offer and sale as required by the U.S. securities laws.
Such experiences have made a placement with VCs (and other groups of ‘professional’ or ‘accredited’ investors) much more attractive. In addition to that, VCs also have an important signalling effect for an eventual public sale.
Post 2017, the market downturn in cryptocurrency assets contributed to less demand from retail investors. Conversely, institutional investors purposefully invest in an anti-cyclical manner.
Increased institutional participation is also visible in terms of the numbers of cryptocurrency funds launched. There are now over 900 crypto funds, up 10x from before 2014. Institutional-grade custody in crypto is here to stay
Institutional-Grade Custody in Crypto – wrapped up
VC funds have evolved over time as new opportunities and challenges emerge in the financial landscape. Blockchain provides interesting opportunities in the ecosystem such as democratizing VC firms and opening them up to greater range of investors. With crypto space set to mature and increase in financial clout over the longer term, VC service firms are in for an interesting run.