Blog Invest Custody of assets: what does it mean and why does it matter?

Custody of assets: what does it mean and why does it matter?

date June 15, 2021 time 5 min read 136 views

If you’re going to store your money somewhere — or invest it — then security should be at the top of your priorities list. To achieve this, few things are more integral than custody of assets. For anyone still in the dark about exactly what this concept means and how it works in practice, we have all the answers.

Ah, custody of assets — it’s a concept that’s deceptively simple yet endlessly complex at the same time. In its purest form, custody means that an entity holds assets for safekeeping, thereby protecting them from theft or loss. But it’s not always so straightforward. 

Companies use different policies and methods to secure their clients’ assets, all with varying levels of complexity. The chosen processes will partly depend on the types of assets and institutions in question (traditional bank vs online lender, for example, and crypto vs fiat currency).

Confused already? Keep reading and we’ll try to shine some light on what custody of assets is and why ignoring it could put your assets at risk.

Custody of assets is not as scary as it sounds
Wondering what custody of assets is? It’s not as scary as it sounds. (Source: Pixabay)

Wondering what custody of assets is? It’s not as scary as it sounds. [source: pixabay] https://pixabay.com/photos/portugal-lisbon-money-museum-safe-4715104/ 

Defining custody of assets

Before we go into the finer details, let’s start with a simple definition: custody of assets means a third-party looks after assets on behalf of another. Although you might think your assets belong to you, once you deposit them with an institution, you’ve effectively transferred ownership to someone else (either the institution itself or a third party).

But what does this look like in practice?

In the context of peer-to-peer lending, for example, a custodial entity can help collect interest from borrowers, re-invest that interest into other loans, and protect collateral. This helps protect customers from potential problems (more on this later). 

Before we go any further, it’s useful to clarify a few key terms in the world of custody: escrow payments and non-custody assets.

Escrow payments

Escrow payments involve a third-party holding money for two other parties while they complete a transaction. 

This is a more limited function — it’s only performed temporarily for a single purpose, whereas custody of assets is a continuous process involving a wider range of functions (not just holding money).

Non-custody assets

Now that’s cleared up, let’s delve into a related definition: non-custody assets. This should be easy enough to grasp if you’ve understood everything so far! Basically, non-custody assets are anything that isn’t held by a custodian of some kind.

Cash falls into this category since it’s stored in the pockets of individuals and not held by a financial institution like a bank — and so do cryptocurrencies when we store them in our own private crypto wallets.

Hold on, we’re not quite done yet — there’s one final term to discuss, and that’s legal custodians. In this context, we can define a legal custodian as the entity that holds custody of an asset.

But here’s where things get interesting — just because you deposited your assets with one institution, it doesn’t necessarily mean that institution is the custodian. 

For instance, at MyConstant, we use our partner Prime Trust (an accredited custodian) as an intermediary to look after certain deposits. Thanks to their insurance policies and compliance with regulations, funds entrusted to them receive an extra level of protection.

A legal custodian is a third-party that protects your assets.
A legal custodian is a third-party that protects your assets. (Source: Pixabay)

Advantages and issues with custody of assets

Let’s start with the positives. Custody of assets isn’t just some fancy feature that sounds good but offers minimal practical benefits — it’s something that protects your assets from risks of theft and loss. In other words, pretty important stuff!

Without a third-party custodian handling assets, the “custody” belongs to the company you are dealing with directly. Namely, if you lend money using a peer-to-peer platform and there’s no custodian, there would be no mitigating party involved in the transaction and the platform carries all the risks

A third-party custodian would help to spread the risk and be a neutral holder of your assets.

In our case, we go a step further. Prime Trust is a trust that acts on the behalf of customers, meaning its loyalty lies with investors and borrowers — not MyConstant.

Which option sounds the most secure to you? 

Another significant benefit is that many custodians guarantee the safety of your assets. In our case, Prime Trust is regulated by the Nevada Financial Institutions Division and chartered, ensuring that it complies with all the necessary requirements to keep assets secure. 

Assets held in Prime Trust’s custody are protected by a $130 million insurance policy.

This is a huge perk in the loosely regulated cryptocurrency world, where regulations aren’t yet fully refined and assets aren’t yet protected by the same deposit guarantees as “standard” checking or high-yield accounts with banks.

The biggest advantage of custody of assets is the security offered.
The biggest advantage of custody of assets is the security offered. (Source: Pixabay)

Potential problems

But we want to be impartial here — there are a few potential issues with giving custody of your assets to a third party.

Because custodians like Prime Trust are regulated and bound to follow certain rules, they may have to carry out processes that can result in delays in payments or the release of assets.

While we understand these delays can be annoying for you, the benefits of added security do outweigh the inconvenience.

How it works with MyConstant

At MyConstant, we pride ourselves on taking the safety of your assets seriously. We’re not a custodian — our partner Prime Trust, a company specializing in custodial services, carries out the custodian role and handles the bulk of our fiat cash and collateral. 

This will work slightly differently depending on what you use us for — we employ different methods to secure your assets depending on how you use our platform and products.

When Instant Access (which gives you unlimited free withdrawals) is disabled, Prime Trust escrows funds and returns your fiat (USD) currency.

When you borrow through us, using crypto as collateral, it works a little differently.  We store 30% of your crypto collateral in a third-party wallet — where it’s ready to be liquidated if necessary — and the remaining 70% in our password protected hot wallets, of which only our senior team has access to.

In both cases, only a handful of our senior team will have access.

But this isn’t the only benefit. Prime Trust can provide “double-lock” protection for your investment in the event of a hacking. The first “lock”, for example, in an unlikely event of MyConstant’s platform being hacked, your assets will already be outside of the platform – in the custody of Prime Trust.

The second “lock” is the insurance policies at Prime Trust. Anything held in escrow by Prime Trust is collectively insured for up to $130 million.

Whatever you’re after, we’ve got your back.

Ready to take advantage of the benefits of custodians while still earning great investment returns

Sign up for our platform today and give it a go.

Written by Sarah Bromley

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