The Importance of Custodians for Institutional DeFi Investors: Large VS Small Funds
Managers who run funds with $1–10M of family and friends’ money will have very different businesses to funds that have $150M+ AUM. We look at the role of custodian services for a range of institutional investors.
What is a custodian?
Custody in the institutional crypto world plays a fundamental role in accessing crypto and decentralized finance (DeFi). Custodians store private keys, approve, and sign transactions. They interact directly with broker/dealers and exchanges to facilitate transactions for fund managers. They are paramount to safely acquiring and holding crypto assets.
The best custodians aggregate all liquidity opportunities for fund managers so funds can choose from the best prices across all market sources.
Different Institutional Custody Requirements
Managers who run funds with $1–10M of family and friends’ money will have very different businesses to funds that have $150M+ assets under management (AUM). If a manager is primarily allocating assets on behalf of friends and family, their investors will likely be more lenient in terms of the safeguards required to ensure that manager is operating their business correctly. This leniency comes from a place of trust.
Small Funds and Family Offices
With this trust, many small funds choose to self-custody their assets—meaning they do not use a third-party custodian. This choice allows small funds to save on management fees and other costly third-party services. Foregoing third-party services, like custodians, also reduces some counterparty risk. For example, in the worst cases, rare technical failures by a custodian could lead to a loss of access to funds.
Not using third-party services may work absolutely fine for family offices, but there are of course associated risks: Without third parties, fund managers could withhold or distort information, or abscond with funds. Fund managers may also not be able to provide the same depth and transparency on trading operations that qualified fund administrators can—so trust is a big deal!
Large Funds and Financial Institutions
As a fund grows into taking capital from larger institutional allocators such as pension funds and endowments, they become subject to far more rigorous requirements in order to ensure fund managers are acting in compliance with regulations and are properly safeguarding their clients’ assets. Generally, as fund allocations get larger, more due diligence is required.
The US requires established funds to use qualified custodians which are SEC approved when AUM surpasses $150M. When a fund’s assets surpass $150M in outside capital, they have to both register with the SEC and are legally required to custody their assets with a qualified custodian. In addition, a fund manager must distribute thorough account statements and notify clients regarding how their assets are being held. They must also enter into a written agreement with an independent public accountant to examine those assets on a surprise basis every year.
Thus, while smaller funds and entities like family offices, who purely invest one family’s assets, might not require third-party service providers like custodians, larger funds will.
Custody Solutions with MetaMask Institutional
MetaMask is the world’s most used and trusted DeFi wallet. It serves over 10M monthly active users and is integrated with almost every DeFi dapp, offering direct access to tens of thousands of venues for trading, staking, lending, borrowing, derivatives, asset management and more.
MetaMask Institutional is an institution-compliant extension of MetaMask. Today, we are actively integrating with a wide range of third-party custodians. Our approach is to be custodian agnostic. We seek to provide access to a variety of custody technology as well as qualified custodians to ensure that we serve the needs of the entire institutional market.
As the ultimate DeFi bridge for both traditional finance and crypto enterprises, only MetaMask Institutional provides unrivaled access to DeFi without compromising on institution-required security, operational efficiency, or compliance requirements.
Our early-adopter program also welcomes smaller funds and family offices that are self-custodying their assets.
Next week we will dive deeper and cover different custody tech stacks for institutional DeFi investors.
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