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June 13, 2018  

BitGo Still Aiming for Custodian Role

Details are emerging about a plan by BitGo to offer qualified-custodian services to cryptocurrency hedge funds.

The Palo Alto, Calif., firm had planned to enter the field by acquiring Kingdom Trust, but it abruptly canceled the deal late last month. Now comes word that BitGo has filed an application with banking regulators in South Dakota to become licensed as a trust — a move that would allow it to build a qualified-custodian business from scratch. BitGo expects the application to be approved as soon as the third quarter.

As for Kingdom, the developments call into question its ability to maintain its status as the broadest offering for crypto funds. It has largely relied on BitGo’s technology to safeguard 22 types of digital assets — more than any other institution meeting SEC requirements for qualified custodians. Kingdom handles not only highly liquid cryptocurrencies such as bitcoin, but also many tokens the SEC likely will treat as securities — thus requiring the services of a qualified custodian.

Under its technology contract with BitGo, Kingdom will be able to continue servicing existing clients for about another year. But it’s unclear whether the two companies will maintain a relationship going forward. BitGo and Kingdom already have stopped referring clients to each other. “We’re evaluating the best path forward,” BitGo marketing executive Clarissa Horowitz said of the company’s partnership with Kingdom.

Kingdom president Charles “Bo” Ives said the Murray, Ky., company can access other technology to maintain its business. “Our goal has been to expand the solution we have,” he said. “We are very excited about where we are headed.”

Kingdom was the first financial institution to offer qualified-custodian services to funds investing in a mix of digital assets. As of September 2017, it had about $100 million of digital assets under custody — a figure that has since grown substantially. Including traditional assets, Kingdom has about $12 billion under custody.

BitGo executives said the deal to acquire Kingdom didn’t face significant regulatory hurdles. But BitGo, a specialist in digital-asset security, decided it had no interest in Kingdom’s traditional custodian business and would be better off launching a qualified-custodian service on its own.

“BitGo hopes customers will choose BitGo Trust as their digital-only custodial offering,” said chief legal officer Shahla Ali, who joined the company in March after holding senior legal and compliance positions at Carlson Capital and Millennium Management. “We believe our solution will be attractive to many customers, including those currently with [Kingdom].”

The need for high-quality custody services for digital assets was highlighted this week when a small exchange in South Korea, Coinrail, revealed that 30% of the assets it held had been stolen by hackers.

“The fact is that these hacks are completely preventable and shouldn’t pose the level of risk that they presently do,” BitGo chief executive Mike Belshe said.

The SEC requires registered investment advisors to hold publicly traded securities with a qualified custodian — typically a licensed financial institution such as a bank or broker-dealer. Although only a few SEC-registered fund managers currently run crypto funds, demand for qualified-custodian services is expected to grow as institutional capital pours into the cryptocurrency market. Managers running gross assets of $150 million or more are required to register as investment advisors.

While Kingdom and BitGo currently enjoy a wide lead in the crypto-custody field, other players are developing competing offerings. They include startup Digital Asset Custody, which handles highly liquid cryptocurrencies but not securities-based tokens. Coinbase, one of the largest cryptocurrency exchanges, launched a custody business earlier this year — but appears to handle only a few of the most liquid cryptocurrencies, so far.

In addition to its planned qualified-custodian business, BitGo offers non-qualified custodian services for a range of financial players, including some of the largest crypto exchanges. Belshe formerly worked at Google as an engineer. BitGo’s chief technology officer, Benedict Chan, joined from Microsoft.