This fact is often taken at its obvious face value, but the reality of cryptocurrency storage (aka cryptocurrency asset custody) is often a complex, convoluted and infinitely unique hurdle to solve.
That hasn’t stopped corporates from rushing to put bitcoin on their balance sheets, as evidenced by the Monday (June 23) news that a special purpose acquisition company (SPAC) merger between ProCap BTC, a “bitcoin-native” financial services firm, and Columbus Circle Capital Corp. was the largest-ever initial fundraise for a public bitcoin treasury company.
The new firm, ProCap Financial, will hold $1 billion in bitcoin on its balance sheet. But the report begs the question of where that bitcoin itself will be held.
Unlike traditional assets like cash or gold, bitcoin requires cryptographic keys for access and transfer. Lose the keys, and the bitcoin is gone forever. As bitcoin and other digital assets become mainstream, custody is likely to serve as one of the landscape’s key defining issues.
For businesses and treasury teams interested in crypto strategies, custody is no longer a purely technical concern. At the enterprise level, adding bitcoin to the corporate balance sheet sits at the nexus of accounting standards, insurance policies, regulatory compliance and board-level risk management.
While bitcoin treasury pioneer Strategy may be able to hold its multibillion-dollar bitcoin war chest in a certain way, that doesn’t mean the Main Street dental group’s $2 million crypto experiment is guaranteed the same degree of custody services.
Their local bank, for example, is unlikely to offer it.
Read also: GameStop Joins $50 Billion Institutional Surge Into Bitcoin as Treasury Asset
Navigating the Crypto Custody Conundrum
Still, for firms exploring the addition of crypto into their capital allocation strategies, Strategy’s filings with the Securities and Exchange Commission can provide insight into crypto custody where legacy financial institutions have traditionally tended not to play.
“We face risks relating to the custody of our bitcoin, including the loss or destruction of private keys required to access our bitcoin and cyberattacks or other data loss relating to our bitcoin,” the company noted in its most recent annual report.
Strategy also added that while most of its bitcoin is stored with U.S.-based, institutional-grade custodians under protective contractual terms, the legal framework for digital asset custody is still evolving. If a custodian were to go bankrupt, there’s a risk the company might be treated as an unsecured creditor, potentially delaying or preventing access to its bitcoin and resulting in financial losses.
The type of institutional custodians referenced typically offer a blend of cold storage (offline) and hot wallets (online), often backed by SOC certifications, bank-grade security, and insurance coverage.
Similarly, the accounting treatment of crypto is intricately tied to custody. The Financial Accounting Standards Board (FASB) has proposed new standards to more accurately reflect the fair value of digital assets, which could make corporate adoption more attractive.
Insurance for digital assets is still nascent, a reality that has led some corporates to explore creative solutions, such as distributed custody arrangements or programmable insurance smart contracts. Others are holding out for clearer regulatory guardrails that would give insurers more confidence to underwrite policies at scale.
As for on-premises solutions, holding bitcoin securely requires technical knowledge, robust infrastructure and detailed internal controls. The company, in essence, needs to become a bank itself. That is likely a radically different model than most finance departments are used to.
See also: Federal Agency Clarity Will Impact Policy for Crypto Custody and Banking
Is Crypto in the Corporate Treasury Risky or Revolutionary?
As the institutionalization of digital assets accelerates, custody itself may evolve, particularly if regulated financial institutions in major markets like the United States are able to compliantly enter the space. Spanish bank BBVA, for example, is reportedly advocating for bitcoin allocation among its individual high-net-worth (HNW) clients, many of whom are likely business owners or executives themselves.
“A bitcoin treasury is no longer a fringe expression of conviction, but rather it is becoming a defining strategic shift in response to a rapidly evolving financial landscape,” Swan Bitcoin Chief Investment Officer Ben Werkman told The Block Monday.
Meanwhile, J.P. Morgan Chase CEO Jamie Dimon said in May that the bank now offers its clients access to bitcoin, while reiterating his own skepticism about digital currency.
“We are going to allow you to buy it,” Dimon said at the bank’s annual investor day. “We’re not going to custody it. We’re going to put it in statements for clients.”
The surge in the price of bitcoin has left small banks facing urgent decisions around crypto, PYMNTS reported in May.
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