First Stage Investor

New Coinbase Custody Solution Targets Institutional Investors

New Coinbase Custody Solution Targets Institutional Investors

At some point, every “disruptive” technology or business becomes the “establishment.” That’s the way of the world.

Southwest Airlines used to be a plucky upstart budget airline. Now it’s a major airline in the same league as Delta, United and American. Amazon changed the face of retail with e-commerce. Now it’s the new Sears. Facebook used to be for college kids. Now it’s for grown-ups. Cryptocurrencies used to be for outsiders. Now they’re for Wall Street.

Two major announcements this month have moved bitcoin and other cryptocurrencies to the “right” side of the tracks. Last week, the parent company of the New York Stock Exchange, Intercontinental Exchange (ICE), announced it was creating a bitcoin trading platform for big investors. And this week, in even bigger news, Coinbase announced it is creating a secure custody solution for institutional investors who want to invest in cryptocurrencies.

The pair of announcements addresses the key problems facing institutional investors interested in investing in cryptocurrencies: custody and regulatory hurdles.

In order for institutional investors to enter the crypto markets, they needed a third party to store their holdings. There were way too many security risks involved in storing it themselves. Could you imagine the repercussions if hackers exploited a poor security setup and walked away with millions (or billions)?

Coinbase’s offering, called Coinbase Custody, is designed to be that third party. It gives pension plans, asset managers and sovereign wealth funds a secure place to store their crypto investments. This is actually how it works in other markets as well, so it brings cryptocurrencies in line with the norm.

ICE’s proposed trading platform addresses the regulatory side of the issue. The idea is to use swap contracts to trade bitcoin. The swap contract is more complicated than exchanging dollars for bitcoin. But it allows bitcoin to be traded as a commodity, which gives it regulatory cover. Swap contracts are regulated by the Commodity Futures Trading Commission, which views bitcoin as a commodity.

These two announcements are absolute game changers for cryptocurrencies. Goldman Sachs and venture capital firms Andreessen Horowitz and the Founders Fund are lined up and ready to go. The institutional money is coming. It’s only a matter of time.

Good investing,

Vin Narayanan
Senior Managing Editor, First Stage Investor

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