Exploring the evolution of digital asset ETFs and the necessity of custodians

January 2024 marks a significant milestone in the ETF space with the approval of digital asset ETFs in one of the largest markets, the US. While we’ve already witnessed similar activity on this side of the pond, these updates in the US should be considered more than just a market update; this could signify a pivotal shift, opening doors to fresh opportunities for institutional investors and paving the way for a more mature digital asset market. In the focus now: robust custodial services.

What’s the buzz about and what’s in it for digital assets?

The digital asset ETF space is witnessing significant momentum, with established players like BlackRock, Grayscale, Bitwise, and more gearing up to launch their ETF products. Let’s delve deeper into BlackRock — a global financial giant boasting an impressive $9.42 trillion in assets under management. The company is making a strategic move into the digital asset ecosystem by launching the iShares Blockchain and Tech ETF (IBLC). It’s designed to provide investors with exposure to companies that are involved in the development, innovation, and utilisation of blockchain and digital assets technologies. A testament to the rising importance of digital assets-focused investment products, sending ripples throughout the industry.

The launch of IBLC is a nod from one of the world’s largest asset managers, signalling a significant shift. As the industry watches, the launch has the potential to boost confidence, spur innovation, and diversify the offerings. An institutional backing which has the potential to pave the way for a more mature and stable digital asset market – validating the conviction that digital assets is an integral part of financial services.

A market update already yielding positive consequences with Standard Chartered Bank foreseeing USD 50-100 billion inflows to Bitcoin ETFs in 2024, potentially propelling BTC to reach the USD 200,000 level by end-2025.

A new era of custodianship?

In this transformative period, the importance of robust custodial services comes to the forefront. With the digital assets market maturing, the need for secure, innovative custodians becomes paramount. They play a crucial role in ensuring the safety and regulatory compliance of digital assets, within the digital asset market.

Custodians are poised to lead the charge in this new era of ETFs by offering secure storage, streamlining processes, reducing costs, and furnishing a comprehensive suite of services essential for digital asset management. A pivotal moment turning custodians into architects of opportunity in this new era.

Three reasons why digital custodianship is vital in the new digital asset ETF era

There are a variety of reasons why custodianship emerges as pivotal for institutional investors. Let’s dive deeper into the ways they are taking centre stage:

Highest level of security & insurance
It all comes down to security. Custodians protect client’s assets by adhering to the highest security standards, implement robust digital and physical protocols, utilise advanced encryption techniques, multi-factor authentication, and continually monitor the network to protect against digital threats like hacking, phishing, and unauthorised access. Additionally, employment of cold storage solutions and the use of physically secured, air-gapped hardware devices, safeguards assets from both online and offline vulnerabilities.

Advanced technology
Tech is key. Key technological benefits from custodianship lie in the advanced solutions integrated into custodial platforms. From cutting-edge staking mechanisms to ecosystem connectivity through Interchange Connect, liquidity pool access, and yield generation functionality, custodians ensure access to the latest and most effective tools when it comes to digital asset management.

Another benefit: the ability to process efficient, compliant withdrawals in real-time from cold storage. This eliminates the need for batching redemptions – ensuring efficiency and responsiveness. One example of our commitment to technological excellence is the approval we’ve secured from the FCA to offer staking services, including staked ETFs. These technological differentiators underline the significance of custodians in providing institutional investors with access to the latest and most effective tools for digital asset management, reinforcing their central role in the evolving landscape.

Ecosystem expansion
Be at the forefront: Clients not only benefit from the security of their assets but also gain access to a suite of additional options within our ecosystem. One example: staked ETH as collateral. The feature allows clients to stake assets while concurrently processing redemptions. It’s a game-changer, especially for those clients exploring the option of borrowing ETH to expedite redemptions, particularly when facing extended lock-up periods.

Beyond custody, Zodia Custody’s ecosystem extends to include Interchange Connect for seamless connectivity, staking facilitation offering potential yield generation rewards on locked assets, and Zodia Protect ensuring hyper-secure storage of assets. This strategic approach not only safeguards assets but also opens doors to a diverse range of possibilities for clients.

The beginning of a new phase

The launch of BlackRock’s Bitcoin ETF signals a turning point in the financial services landscape, validating the conviction that digital assets are an integral part of the industry. It’s not just about embracing digital assets; it’s about simplifying the path for institutional investors to access this transformative asset class without the complexities of direct bitcoin ownership.

As the industry embarks on this exciting new phase, custodians like Zodia Custody are not just protectors of assets, they are architects of opportunity. The future belongs to those who can seamlessly navigate the evolving landscape.

Ready to explore the secure, innovative, and prosperous of digital assets? Contact us at [email protected]