One of the main problems for institutional investors is how they can safely and legally store their tokens. This problem is creating a huge opportunity for small companies like Kingdom Trust. Earlier this year the 60-person firm agreed to an acquisition by BitGo, a San Francisco tech startup.
When banks and hedge funds start holding large amounts of cryptocurrencies, much of the money will go to Murray, Kentucky. Kentucky is home to Kingdom Trust, a small company that’s becoming the industry leader for storing cryptocurrencies.
Kingdom is one of a growing number of small firms taking risks to get in on early on the crypto revolution. Their willingness to experiment and their appetite for risk have been rewarded with expertise, reputations, and a head start on dominating a potentially huge new market.
Silvergate Bank, a community bank based in San Diego, works with more than a dozen cryptocurrency financial-services companies.
Cole-Frieman & Mallon, a San Francisco law firm that has gained a reputation for its work on cryptocurrency-fund formation, lists just five partners.
MG Stover, a Colorado-based boutique financial-services firm, has become known for offering fund administration and accounting services. Since taking an early crypto-focused hedge fund four years ago, the firm has amassed more than 50 funds as clients, according to CEO Matt Stover.
Arthur Bell, the Baltimore and New York City-based auditor of choice for many crypto funds, recently merged with Cohen & Company.
Greg Gilman, co-founder of incubator and investment firm Science Inc. said:
“People that were willing to take risks relatively early and stake out a little claim were able to grow significantly, while more established and larger, name-brand firms have been very quickly passed by in this area. You had to have guts and faith to do this 12 months ago. It didn’t require a lot of either to do this six months ago.”
Matt Jennings, a real estate investor, co-founded Kingdom in 2009 after he noticed that few traditional financial-services firms would allow him to hold real-estate investments in his retirement account. Jennings saw an opportunity to expand into offering custodian services to the funds after the Dodd Frank Act introduced a new rule requiring funds and advisory firms to use qualified third-party custodians to hold their assets. In 2011, the firm got its trust charter in South Dakota, because of the state’s “business friendly” policies.
As a directed custodian, Kingdom Trust doesn’t advise clients or recommend investment, it simply holds the assets. The firm holds alternative assets in individual retirement accounts and also acts as a qualified custodian for private-equity funds, venture funds, family offices, and hedge funds. Kingdom has amassed 100,000 clients and handles around $13 billion in assets, charging fees for its services that vary based on the complexity of the assets.
Things changed when Jennings met Mike Belshe in 2016. Belshe is a San Francisco tech entrepreneur with a cryptocurrency security startup called BitGo. In working together for that client, they considered partnering. BitGo had been offering security software for individual bitcoin investors, but had seen an increase in the number of institutions needing custodian services.
When they first met, Jennings didn’t initially understand digital currencies. However, he saw the potential.
“I understood that it was an alternative asset. We hold all kinds of alternative assets that I don’t understand,”
Belshe says that, compared with the banks he’s spoken to, Kingdom is “actually fairly innovative.”
“Because Kingdom started in the same way as a lot of tech startups—solving a personal pain point of its founder—the firm had more willingness to listen and try and see where it would go”
Through their conversations, Jennings learned about digital currencies, realizing his firm could be among the very few offering custodian services for cryptocurrencies to institutional investors. Further, he realized BitGo offered the only tech product with the level of security Kingdom required to make it work. The two companies first launched a product that allowed individuals to store digital currency in their IRAs.
“It became very obvious that his product was the perfect product to marry in with the custodianship of these assets,”
In 2017 the world turned crypto-crazy, and Kingdom and BitGo began to focus on offering custody for institutional investors. The timing was perfect: Crypto hedge funds had been proliferating (an estimated 100 new ones launched in 2017) and the skyrocketing price of bitcoin, ethereum and other “alt coins” meant small funds were suddenly sitting on tens of millions of dollars in crypto assets. That creates a compliance problem. Once a hedge fund goes over $150 million in assets, it is required to store its assets with a qualified custodian. Belshe estimates two dozen hedge funds crossed that threshold last year, but are not complying with the rule.
Indeed, an SEC letter in January stated that custody is a key issue facing “fund innovation” related to crypto holdings. Industry advocates including Union Square Ventures’ Fred Wilson have called for “institutional-grade custodians” to help firms comply with the law and offset security risks.
Belshe estimates there’s $10 billion worth of hedge funds holding crypto assets in the market, and another $10 billion of demand waiting to invest. He’s seen growing interest from typically conservative mutual funds and pension funds. The cryptocurrency custody is “by far” Kingdom’s fastest growing asset class.
That’s why Belshe decided a partnership with a qualified custodian like Kingdom was not enough. They could work better together as part of the same company, and so they merged. (Deal terms were not disclosed.) Belshe pointed to the SEC’s comments as justification for the deal.
“I wouldn’t write it better myself for why we bought Kingdom,”
Jennings calls the merger:
“a great marriage of technology and regulatory oversight.”
By merging BitGo’s technology and Kingdom’s compliance abilities, Belshe believes he can build the financial services firm of the future while locking down the market for institutional custodianship today, just as it’s beginning to explode. “People have looked at Kingdom and said, ‘Do these guys know the tech? They look like a bank, like a trust,’” he says. On the flip side, BitGo did not offer custodianship. Combining the two is step toward building trust with customers, Belshe says.
The Growing Crypto Custodian Market
Coinbase, the largest US bitcoin exchange and a Silicon Valley darling, announced in November it would begin offering institutional custodian services this year. The company reportedly held deal talks with Anchor Labs, a stealthy digital-custody startup, which fizzled. Anchor Labs then raised an undisclosed amount of funding from Andreessen Horowitz for its digital-custody product, according to Axios. Andreessen Horowitz is also an investor in Coinbase.
Gemini, a crypto exchange founded by the Winklevoss Twins, has held a trust charter from New York state since 2015 and offers institutional custodian options. The company charges a 1 percent fee, which sources say is steep compared to custodian services for non-digital assets but necessary to cover the enhanced security risks of crypto assets.
New York-based ItBit also obtained a trust charter in 2015. Ledger, a Paris-based company providing hardware wallets for cryptocurrencies, charges roughly half of Gemini’s rate for its custody option, currently in beta mode. Kingdom’s pricing is similar to Ledger’s, though the company declined to specify, noting its rates can vary.
Just today, cryptocurrency venture capital firm Digital Currency Group (DCG) confirmed an investment in Silvergate Capital Corporation, the holding company of the bitcoin startup-friendly Silvergate Bank. According to an announcement from Silvergate, the firm said Monday that it sold 9.5 million shares through a private placement generating $114 million in total – funds that will be used to further support the bank’s fintech deposit initiatives.
With over $10 billion of investment due to enter the crypto asset market this is an area of the newly emerging fintech space that is destined to grow at the same explosive rate as the crypto market itself.