The US's State Street, an institutional investor with $42.6 trillion in assets under custody, plans to launch an "institutional grade digital custody offering" through which its clients can store and settle their digital assets within a secure environment -- and it's turned to UK startup Copper for the infrastructure.
(Custodians, as the name suggests, hold customers' securities for them. Custody services can include settlement, safekeeping, and reporting of customers' marketable securities and cash. Secure custodianship of digital assets is a growing focus for many amid what is an immature market still rife with theft and fraud.)
The two have signed a licensing agreement ahead of State Street's planned launch of the new digital asset service, which is subject to regulatory approvals, they said this week. (The agreement comes days after London Stock Exchange (LSE) agreed to buy cloud-based trading technology platform Tora, in part to add digital asset trading to the exchange’s capabilities, and as the Swiss Stock Exchange launched a new digital exchange.)
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Founded in 2018 by CEO Dmitry Tokarev and with an advisory board that includes former Chancellor Philip Hammond, Copper provides a gateway into the crypto asset space for institutional investors by offering custody trading, and settlement solutions across 450 crypto-assets and more than 40 exchanges. It recently appointed former Citi MD and global co-head of futures, OTC clearing and FX prime brokerage Sabrina Wilson as its COO.
Its made a name for itself with through its "ClearLoop" product -- which supports near real-time settlement of crypto-assets and which one early investor in the company, VC fund Target Global described in early 2021 as "enterprise-grade backbone for cryptoassets that doesn’t really exist anywhere else".
As that blog notes, "If I’m a hedge fund I really don’t want to have to explain to my clients that I lost their capital trading on what I thought was a secure exchange; only to have it splashed across headlines that — like Coincheck — they stored my funds in a single hot wallet and did not even use multisig contract security..."
"ClearLoop", explained Target Global's COO/Founder Mike Lobanov in what appears to be one of the few moderately detailed explanations in public of how Copper works "bypasses intense credit risk exposure by allowing clients to hold their trading capital not on cryptoexchanges, but in a closed system, usually in their optical air-gapped crypto custody that involves multi-party computation, zero knowledge proofs and key sharding, while they find an interested party to take the other side of a trade..."
(Copper has some more detail on how it securs assets here.)
Copper raised $50 million in a Series B round in May 2021.
State Street's Digital Custody come amid transformation industry change
As Swen Werner, State Street's Head of Digital Custody and Payments noted in a recent blog: "As digital finance is becoming too big to ignore, it is forcing upon the industry a redefinition of what it might mean to be a digital custodian.
"But what shape will digital custody take?
"If custody services no longer concern the simple safekeeping of traditional assets but will come to include the storage of cryptographic keys that control those assets, will digital custody equate to simply storing private keys? Or, does digital custody require a more holistic view; a bridging of the old and the new, and a wholesale reimagining of the space?", he mused, adding: "The impact of this sea change to the global custody industry requires a reimagining of what custody means.
"There are several core aspects to this. First is segregation of assets from proprietary assets and how this could be achieved by the use of private keys. Asset owners will have to ensure that the custodian can maintain effective control over these assets through ensuring that nobody has access to those private cryptographic keys that control the digital assets. A second question is, with the use of distributed ledger technology (DLT) environments that utilize so-called wallets, what will replace the use of securities accounts in jurisdictions that require the booking of transactions into such accounts in order to transfer ownership?" said State Street's Werner.
"Legacy, at-scale custodians — trust banks that have the highest levels of regulation applied to them by default — have a distinct competitive advantage in the space as clients look to participate in the new digital economy."
“That State Street, one of the world’s largest custodians, is creating a new digital asset service is a hugely important development for institutional engagement in this new asset class,” said Sabrina Wilson. “We are proud to be part of State Street’s goal to lead the way in the transformation of financial infrastructure.”