Matthew Fetta, Chief Operating Officer, CoinFund.

New crypto market

The ways that custody operations is changing is a major challenge in liquid strategies, says Matthew Fetta, Chief Operating Officer at CoinFund, a Brooklyn-based crypto asset-focused investment firm that was founded in 2015.

“For us, custody is mainly a challenge in our liquid strategies. The custody solutions that exist are becoming much more robust."

In Clear Path Analysis’s recent report, Fund Technology, Data & Operations, North America 2022, industry leaders from companies including Capco, Lamar Associates, and Pzena Investment Management look at the best ways fund operators can overcome their fears and misunderstanding in the crypto-world and learn more about emerging digital investment opportunities.

Fetta said that changing industry norms were proving a challenge for custody but that the opportunities were still profitable and plentiful. “For us, custody is mainly a challenge in our liquid strategies,” Fetta said. “The custody solutions that exist are becoming much more robust. You have a few firms who are offering qualified custodial solutions similar to what you would find in traditional finance. There are other firms which are Office of the Comptroller of the Currency (OCC) chartered banks. You can argue that this is a robust enough custody solution to support certain requirements. Maybe not an R A requirement, but close.”

“You have to have capabilities internally to analyse the technology on either the blockchain or the secured solution provider that you are working with. This could be a firm like Firebox or Copper. There are many other firms out there who provide these non-custodial secured solutions.”

He explained that going out of the risk curve, which is where you can generate a significant amount of alpha beyond the marketplace, the question becomes, what is the best secured solution for the token that we are holding? “Here, you have to have capabilities internally to analyse the technology on either the blockchain or the secured solution provider that you are working with. This could be a firm like Firebox or Copper,” says Fetta. “There are many other firms out there who provide these non-custodial secured solutions.”

Looking at decentralised finance (DeFi), he adds, CoinFund has a robust process for automating smart contracts. “This expertise is both internal and external. The market in custody has evolved and will continue to do so.” As you get into more complex strategies and tokens, he says, you have to be more sophisticated in how you analyse your custody solution, from a regulatory and cyber perspective.

“One of the challenges with custody solutions is that the most secure way you can house digital assets is in a protocol called cold storage."

Custody practices

But this also comes into the question of how market players expect custody to evolve and the eternal question of what a perfect custody solution would look like to them.

“One of the challenges with custody solutions is that the most secure way you can house digital assets is in a protocol called cold storage,” says Fetta. “This effectively means you have a wallet on a blockchain. You have taken the passcodes or keys to access that wallet offline and put them in a drawer, so to speak.”

The problem with this type of protocol, he says, is that in order to get those assets out of that wallet to be able to transact with them, it can take two to three days. “Our portfolio is fairly large and very well hedged. We can move 20 to 25% in a day, which is expensive.”

He says that one of the trends that he would love to see, and which providers are starting to consider, is a solution as secure as cold storage with the ability to move assets very quickly.

To read the interview in full, and see more from the report, please click here.

 

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