Interest in digital assets is continuing to surge at financial institutions across the globe. As they develop new products and services in this space, these organizations have singled out offerings like digital asset custody and crypto trading as strong areas of interest.
In order to build out crypto products and services such as these, institutions must either work with a digital asset sub-custodian or build a direct custody solution in-house.
In traditional financial markets, banks utilize sub-custodians to hold their assets. In the digital asset space, some FIs may assume that they aren’t equipped to custody their own assets in terms of technology, operations, and risk; given these factors and the popularity of sub-custody within traditional finance, electing to work with a sub-custodian may appear to be an obvious solution.
However, there’s currently a strong trend of institutions electing to move away from sub-custody as they uncover certain limitations that come along with it. In this blog post, we’ll walk you through 3 notable companies who have moved away from sub-custody or are currently doing so.
PayPal: Moving to direct custody to launch crypto deposits and withdrawals
Towards the beginning of 2020’s crypto bullrun, PayPal’s announcement that they would be launching digital asset services helped push BTC prices.
But soon after the launch, some users reported frustration with the fact that PayPal wasn’t allowing users to actually deposit or withdraw their digital assets from their accounts. The platform enabled users to buy assets and move them around PayPal, but it wasn’t possible to move them anywhere else.
This is a prominent limitation of sub-custody. Working with a digital asset sub-custodian means entering into a “closed-loop” system. In a closed-loop system, the sub-custodian holds assets in cold storage and doesn’t actually move funds in or out of custody. If you want to buy, you buy through the sub-custodian venue, and if you want to sell, you sell through the sub-custodian venue.
In March 2021, PayPal acquired the Israel-based MPC provider Curv. In doing so, they signaled a movement away from the sub-custody model and towards building a direct custody solution.
As of late May, PayPal has officially announced that they will soon enable users to exchange Bitcoin across third-party apps, which wouldn’t be possible in a sub-custody model.
Robinhood: Encountering issues with closed-loop custody
Much like PayPal, Robinhood offers crypto custody and trading service to users that exist within the “closed-loop” sub-custodial system.
As of today, users are unable to deposit or withdraw crypto on Robinhood. You can buy and sell digital assets on the platform, but all within a closed loop.
However, in February 2021, Robinhood announced that they’re planning to enable cryptocurrency deposits and withdrawals on their platform. This signals that they’re moving away from sub-custody and towards a direct custody model, though it’s currently unknown how exactly the company plans to build direct custody.
Revolut: Utilizing MPC to build custody within the organization
Like many institutions, when Revolut initially launched digital asset services, they worked with a sub-custodian. But eventually, they realized that the custody model they initially opted for was limiting their ability to grow the business and roll out products that would allow them to differentiate at a rapid pace.
For example, launching a customer withdrawal feature was a critical goal for Revolut, and the sub-custody model was getting in the way of doing so. To get closer to their goal of becoming the “go-to super app,” Revolut needed to bring digital custody in-house and they needed to do it quickly.
That’s why Revolut chose to utilize MPC (multi-party computation) to build a direct custody solution within their organization. This allowed them to maintain full control of private keys, ensure assets were protected from cyber and internal fraud, and deliver a protocol-agnostic wallet infrastructure.
Interested in getting the full story on how Revolut moved from sub-custody to direct custody? Check out our newest case study, How Revolut eliminated closed-loop custody and manual treasury operations to scale their finance platform with Fireblocks, to learn more.