Julian Sawyer, the new chief executive of Zodia Custody, said the custodian is aiming to scale as institutions look to enter the digital asset market via regulated providers following the collapse of cryptocurrency exchange FTX.

Zodia Custody was formed by SC Ventures, the innovation and ventures unit of Standard Chartered, and Northern Trust in 2020 and Sawyer took over as chief executive in January this year. He was previously chief executive at cryptocurrency exchange, Bitstamp.

Super excited to have joined @ZodiaCustody https://t.co/jRaCkrr7Gt

— Julian Sawyer (@julian_sawyer) January 3, 2023

Sawyer told Markets Media that he was attracted to joining Zodia Custody due to the opportunity to contribute to market structure in a nascent asset class.

“Standard Chartered and Northern Trust play significant roles in traditional finance and have significant controls in place,” he added.

He expects that the controls in traditional and digital finance will converge, and this process has been accelerated by the bankruptcy of FTX. Sawyer said institutions have not lost interest in digital assets despite the cryptocurrency exchange’s collapse in November last year, as they view the sector over a three, five and ten-year timescale and Zodia Custody has had many inbound enquiries.

“The direction of travel is not in dispute and institutions want to store their digital assets in a safe, regulated entity,” he added.

Zodia Custody faces competition as other firms have also launched, or are planning to launch, digital asset custody including Nasdaq Digital Assets, State Street Digital, BNY Mellon and Archax, the first digital asset exchange and broker regulated by the UK Financial Conduct Authority.

Sawyer argues that Zodia Custody differentiates itself as it is owned by regulated banks with insight and capability in security, risk management and compliance. Zodia Custody is also registered with the FCA.

In addition, in December last year Zodia Custody launched Interchange, a service which protects clients’ digital assets from exchange insolvency. This has become increasingly critical since the FTX allegedly did not segregate client assets.

Introducing our new service: Zodia Interchange in collaboration with @zodiamarkets. You can now actively trade on multiple exchanges directly from your #custody wallet. Minimum risk & full asset #segregation guaranteed❗️#SecureTrading
Learn more: https://t.co/Y05hUeDVN2 pic.twitter.com/KlqAluR0LP

— Zodia (@ZodiaCustody) December 7, 2022

Traditionally clients have needed to hold assets at a crypto exchange in order to trade. In contrast , with Interchange they keep their assets with Zodia Custody, and mirror their holdings on exchanges. Interchange will also only connect with regulated, know-your-customer and anti-money laundering compliant venues.

Sawyer said: “Our technology provides instant access to exchange trading balances and Interchange offers capital efficiency, as clients do not have to pre-fund holdings on exchanges.”

Zodia Custody has its own sales capability but Sawyer added that another differentiator is that it’s bank owners can also offer other services to clients such as foreign exchange or prime brokerage.

Growth plans

Zodia Custody is looking to scale up in 2023. Sawyer said his experience at Starling Bank demonstrates his ability to scale a business in a fast-moving environment. He co-founded the digital start-up Starling Bank in 2015 and was chief operating officer for four years.

Sawyer added that during 2023 Zodia Custody will be developing Interchange, aiming to custody more tokens and to expand geographically. In February this year Zodia Custody announced it had entered into definitive agreements to launch a joint venture in Japan with SBI Digital Asset Holdings, a company that oversees and operates digital asset-related businesses.

Breaking News‼️ @ZodiaCustody & @SBI_DAH are launching a joint venture in #Japan, bringing tier 1 #cryptoasset #custody services to financial institutional clients. We're excited to establish SBI Zodia Custody as the go-to custodian.

Learn more ? https://t.co/XvGuliJ1YQ pic.twitter.com/LsjCqxpf6b

— Zodia (@ZodiaCustody) February 2, 2023

The joint venture will act as a Japan-based crypto assets custodian, targeting institutional clients, subject to regulatory approval. It will be the first tier 1 crypto asset custodian for institutions in Japan according to Sawyer.

Alex Manson, SC Ventures, said in a statement: “This marks our second joint initiative with SBI since signing our MOU to accelerate portfolio expansion efforts as well as ecosystem building in May last year.”

Sawyer described the SBI joint venture as validation of Zodia Custody’s model. He added: “It is a question of when, not if, we will expanding Asia and US .”

However, he said the US needs to provide regulatory certainty over the treatment of digital assets.

Regulation

On 15 February the Securities and Exchange Commission proposed rule changes to enhance protections of customer assets managed by registered investment advisers.

Gary Gensler, chair of the SEC, said in a statement that investors would benefit from the proposal’s changes to enhance the protections that qualified custodians provide. Gensler added: “Thus, through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.”

#ICYMI: Superintendent Adrienne A. Harris released Regulatory Guidance to better protect customers in the event of an insolvency or similar proceeding. Read more here: https://t.co/Nstz39M9Wo pic.twitter.com/FJ0fbrJBxH

— NYDFS (@NYDFS) January 23, 2023

In January this year the New York Department of Financial Services also released regulatory guidance on its expectations for sound custody and disclosure practices on safekeeping of customers’ virtual assets, especially in the event of an insolvency or similar proceeding.

Coalition Greenwich said in a report, Digital Asset Market Structure 2023: The Where and How of Trading after FTX, that digital asset market structure has improved. The asset class has become more institutionally friendly for those firms that remain vigilant, security-conscious and focused on the long term.

David Easthope, who advises on market structure and technology at Coalition Greenwich, said in the report that he expects the decoupling of liquidity from custody and settlement to continue, and for market structure to focus on greater capital efficiency and reduction of counterparty risk with end-of-day net settlement.

Report by @deasthope outlining recent changes to digital asset market structure, examining how traders are altering their trading practices in terms of trading methods & venues & looking at how market practices & regulation will alter the trading landscape https://t.co/NrncvOsht4

— Coalition Greenwich (a division of CRISIL) (@CoalitionGrnwch) February 7, 2023

“Settlement networks at Anchorage, Etana, Cboe Digital, Copper (ClearLoop), and others will offer greater liquidity provider coverage in 2023 and beyond,” added Easthope. “This will allow firms to seek more OTC liquidity/streaming liquidity (e.g., B2C2) without the need to physically move assets and pre-fund accounts for trading in exchanges.”

Some firms have publicly stated a willingness to execute at slightly worse prices if they do not have to pre-fund trades according to the study.

“Regulatory clarity around custody (including a better understanding of what qualified custody means in the U.S.), along with education by the custodians about different institutional-grade custody options, will also help firms better integrate digital assets into their investment frameworks, while reducing the technology and operational risk that we’ve now come to know is very real,” added Coalition Greenwich.

In 2023 Coalition Greenwich expects institutions involved with digital assets to focus on making sure their investment strategies are compatible with greater safety and security considerations.

“Custody has very much come into focus, with more emphasis on institutional-grade, third-party custody as opposed to exchange-based custody,” added Easthope.

Institutional-grade custody requires insurance, advanced security methods, bankruptcy remoteness, and settlement networks. However, the report added that the less popular digital assets are not always supported by custodians, so some self-custody may be required.

“Savvy firms will seek hybrid strategies as the market matures further,” said the report.

The FTX catastrophe is not the end of the market according to Coalition Greenwich. In contrast, the firm sees it as the beginning of the market’s migration to institutional-grade infrastructure, along with the guardrails and regulatory clarity investors need to more fully commit to long-term involvement.

The chief legal office of Coinbase, the listed crypto exchange, said:

Another busy morning. We’ve now dug through the @SECGov proposed rulemaking and I’m glad to see the SEC recognizes Coinbase Custody Trust Co. as a qualified custodian, and after today’s SEC proposed rulemaking, we are confident that it will remain a qualified custodian.

— paulgrewal.eth (@iampaulgrewal) February 15, 2023

As I said earlier, we appreciate that the SEC is following the standard course and undertaking a public rulemaking process to address this topic. Public engagement in the comment process will help the SEC to ensure that the rule meets the needs of investors and the market.

— paulgrewal.eth (@iampaulgrewal) February 15, 2023

Rulemaking on that topic, as well as the others listed in our rulemaking petition, could offer needed clarity to consumers, investors, and the industry. https://t.co/DjcdlAVPT5

— paulgrewal.eth (@iampaulgrewal) February 15, 2023