The Four Building Blocks of Crypto-Asset Success

Companies seeking to enter crypto-assets face “unique challenges” due to the nature of the technical and operational requirements of the sector, according to KPMG.

The consultancy and audit giant has published a 24-page report setting out what it sees as four “critical building blocks” for companies that want to provide custody services for cryptocurrencies and other digital assets.

“This expanding crypto ecosystem is poised to alter the financial services landscape as we know it,” KPMG stated in the report. “But it’s also complex and in a continued state of disruption.”

Servicing digital assets was “fundamentally different” to traditional asset classes, the report said, as it involved a significantly different ownership and control model, and thus required a different approach from companies entering the space.

Those wishing to succeed in the crypto-asset space needed to invest to ensure “next-gen security and resilience”, KPMG said. Since 2017 hacks and “compromises” of crypto-assets had caused losses of almost $10 billion – and this only included publicly reported cases. As there is no central authority responsible for the asset, “the risk of loss to participants is enormous”, the report stated.

In addition, insurance companies were still working out how to provide adequate insurance against hacks and security failures for crypto-assets.

“Successful crypto-custody businesses will embrace the leading cryptographic techniques to enhance the security and resiliency of custodied crypto-assets, and focus on building customer trust through efficient and timely transaction processing,” KPMG said.

Extensive regulation of traditional assets and activities poses problems to those in the digital assets sectors, particularly when trying to comply with requirements around anti-money laundering and Know Your Customer.

Companies exploring crypto-assets should therefore ensure they have “comprehensive compliance”, KPMG said. Some firms have been denied regulatory approval due to a failure to meet compliance requirements, so an “informed and detailed view of the changing regulatory landscape is paramount”, the report stated.

Linked to this, new market entrants needed to pay particular attention to gaining and maintaining trust, the consultancy said in its report. “For service providers, this may require investments in new risk and governance talent who possess the expertise to design and implement comprehensive control environments for crypto-asset custody platforms,” it said.

Finally, KPMG highlighted the importance of taking a longer-term view of the development of crypto-assets and related services. Developing crypto models could present “exciting opportunities” to connect front, middle and back office operations, the report said.

“Winning crypto-custodians will focus on two fronts,” KPMG concluded. “Building out core capabilities, and keeping pace with rapid technical changes that may drive new revenue opportunities and future competitive advantages.”

The full report, ‘Cracking Crypto Custody’, can be downloaded here.