Custodia Bank launches bitcoin custody platform

American Banker

Custodia Bank has unveiled its bitcoin custody service for institutional entities in select states, marking a long-awaited milestone for the crypto-focused financial institution amid its yearslong battle with federal regulators, the bank announced this week.

The Cheyenne, Wyoming-based company launched bitcoin custody last month, founder and CEO Caitlin Long said in an email to American Banker, after a multiyear marathon of building a bank in tandem with crypto regulation in her native state. She added that Custodia created its bitcoin custody platform in-house to prevent security problems that could arise from third-party integrations, which she said "have plagued some other regulated crypto custodians that pieced together third-party software."

Core to Custodia's custody platform is its segregated account structure, which means the bank stores customers' bitcoin on-chain and Custodia stores the private keys to it in segregated accounts. This is different from the omnibus custody model, which commingles customers' digital assets. Long wrote in a white paper published by Custodia that most of the bank's competitors use the omnibus structure.

"It feels great for this team to bring a genuinely new bitcoin custody service to the U.S. market, both in its technology architecture and its legal and regulatory benefits," Long said in the email. "Strict segregation is the most customer-friendly design for any bitcoin custody platform, and that's what [Custodia] is now offering."

Bitcoin custody hasn't made much headway in the traditional financial market, in part due to factors like regulator scrutiny, the notorious collapse of FTX, recent fraud convictions of Sam Bankman-Fried and the failure of several crypto-involved banks in the spring. Custodia has been warring with the Federal Reserve in court since last summer for access to the central bank's payments system, which was denied on the grounds of inexperienced management, a risky business model and an overreliance on crypto. 

Consultant Alex Jimenez said Custodia's institutional bitcoin custody platform launch was a long time coming, but added that he isn't sure if Custodia will be able to prove there's a need for the service.

"The interesting thing will be how successful they will be," Jimenez said. "Will businesses be investing in bitcoin? ... It all comes out to the appetite for risk that investors will have."

But Long has said that she imagined Custodia as a solution to the problems in the market, providing a secure bridge between traditional finance and digital assets. 

"The whole concept of online banking, much less digital assets that move at the speed of light, has massively changed risk management for the banking industry," Long said in a May interview. "This has to be bridged very carefully for that reason, so that digital assets don't trigger bank runs in the traditional banking system." 

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Caution and lack of clarity from regulators has also dissuaded most of the traditional financial institutions from offering bitcoin custody, Jimenez added. 

BNY Mellon announced last October that it planned to begin offering crypto custody to some clients, but most major banks, like Citi, JPMorgan Chase and Wells Fargo are touching digital assets in different ways, such as through tokenization. HSBC announced this week it plans to offer custody for tokenized securities through Metaco, a technology company owned by Ripple, starting next year. 

Jimenez said he thinks the industry will be watching Custodia to see if there's a demonstrated enthusiasm for institutional bitcoin custody, and with additional guidance from regulators, more participants may follow suit.

Long has been active in promoting further crypto regulation, especially in Wyoming. The Cowboy State created special-purpose depository institution charters, or SPDIs, in 2020 so banks like Custodia could provide services like custody for digital assets. 

Now that Custodia has launched the platform, Long said the team will continue building its banking APIs and services. She declined to give metrics for how many clients are using the custody services.

"Our goal is to meet the market need for a custody bank that can simplify operations and reduce risk for our customers by offering both U.S. dollar and bitcoin custody services," Long said.