Custodians: Safeguarding Your Crypto • Letter 101

Hedgehog Admin -

Howdy! This is Colton Dillion, cofounder of Hedgehog, the crypto robo-adviser that makes it easy to keep your portfolio diversified while managing it all in one place.

If you haven’t already, make sure to check out our new mobile application located in both Google Play and the App Store under the name Hedgehog Crypto. If you would like to see a preview of its features you can see a short demo at this link.

Welcome to newsletter #101. Last week, we spoke about Emerging Markets. This week, we delve into a vital aspect of investment management: the role of a custodian.

What is a Custodian?

Whether you're a retail investor or represent an institutional investment firm, understanding the significance of a custodian is essential to protect your assets and ensure compliance with regulatory requirements. Join me, come along, as we unravel the responsibilities and benefits of a custodian in safeguarding your investments.

A custodian, in the context of investment management, is a financial institution or entity entrusted with the safekeeping, administration, and management of assets on behalf of clients. Sometimes you may see the term “qualified” in front, as in a qualified custodian, which has certain additional requirements of keeping these assets separate for each depositor and trustee at the custodian. They act as a trusted intermediary, holding and protecting various types of assets, such as securities, cash, and other financial instruments. Custodians play a crucial role in maintaining the integrity and security of investors' assets, ensuring transparency and accountability throughout the investment lifecycle.

One of the primary responsibilities of a custodian is to provide secure storage and safekeeping of clients' assets. They employ robust physical and digital security measures, including state-of-the-art vaults, encryption technologies, and comprehensive risk management protocols. By safeguarding assets from theft, loss, or unauthorized access, custodians instill confidence in investors and minimize the risk of asset misappropriation.

In the case of cryptocurrencies and digital assets, this is obviously incredibly important, but there haven’t been many clear federal rules and regulations established for US crypto custodians. As a result, the states have largely had to step in and offer guidance, such as the New York Department of Financial Services’ BitLicense framework, and trust companies have had to assemble a hodgepodge of money transmitter licenses in the 38 states and territories that require them. However, there is the rare bank that has received an OCC charter in spite of their cryptocurrency activities, but even they haven’t cracked the nut on FDIC insurance for digital assets.

Custodians facilitate the seamless settlement of investment transactions. They ensure timely and accurate processing of trades, coordinating with various parties involved, such as brokers, exchanges, and clearinghouses. Custodians also maintain comprehensive records of investment holdings, transactions, and corporate actions, providing clients with transparent and auditable account statements.

In the intricate world of investment management, custodians play an indispensable role in safeguarding your assets and ensuring regulatory compliance. Their responsibilities encompass secure asset storage, seamless transaction settlement, meticulous record-keeping, regulatory compliance, and risk management. At Hedgehog, we use a custodian to comply with these standards and ensure we don’t run afoul of the SEC’s custody rule. When it comes to customer funds, it’s always better to be safe than sorry!

Quick Hits

  • FTX is seeking to sell their share of AI firm Anthropic while the demand is high. Anthropic is developing a rival to ChatGPT by the name of Claude that aims to process a higher volume of input and recently came off a $450 Series funding round.
  • What is Tron all about? We’re not talking about the hit movie, but rather the chain developed in 2017 by crypto main character, Justin Sun, Tron remains as the 11th largest crypto project by market cap.
  • Cathie Wood unbothered by SEC suit against Coinbase. ARK investment management increases their position of COIN following the recent news of a SEC lawsuit against Coinbase.

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What are you most excited for this summer? Me personally? I’m getting married to my beautiful and talented fiance. Reply to this email with your story and you'll be entered in the giveaway.

Keep hedging,
Colton