Q&A: How to Build Institutional Trust in Security Token Custody

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Posted by Polymath
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Custody is a key consideration for any institution entering the world of security token issuance or investing, but there are question marks over its myriad of regulatory and technical factors. As the security token market heats up, there’s a growing movement to bring the level of trust, scalability, security, and usability in traditional asset custody to the world of digital assets.

In this Q&A, Polymath sat down with Martin Kreitmair, Managing Director of Tangany, to get his views on the role of custodians in the security token market, the unique challenges of token custody, and what makes for a good digital asset custodian.

Tangany is a member of the Polymath Service Provider Ecosystem.

Polymath: What role does custody play in enabling institutional adoption of security tokens?

Martin Kreitmair (Martin): Custody is the key to satisfying the needs of institutional players. Professional investors are usually not interested in the blockchain itself, but the products based on blockchain. Self-custody is completely out-of-scope for those investors, so there are custodians that provide services for digital assets on chain. 

Digital assets on the blockchain have to fulfill the same regulatory requirements as assets stored in traditional ways. A licensed custodian can provide institutions with ready-made software solutions that allow them to offer compliant digital asset custody to their clients.

Security Token Custody: The Challenges and Opportunities CTAPolymath: What challenges do organizations face in custodying security tokens, compared to traditional assets or cryptocurrencies?

Martin: We’re still in the early days of tokenization; it’s about at the stage e-commerce was in 1994, when Amazon was founded. Custody of security tokens has to be as easy as it is for traditional assets, and we’re not yet there. The question about how assets can be securely stored shouldn't be the focus for token holders. Whoever wants to invest in security tokens (or crypto-assets in general) should be able to do so without any knowledge of blockchain and without the need to spend several weeks preparing everything. That is the usability and value we as digital asset custodians are adding to the market by providing simplification.

Unlike traditional assets, security tokens often come with in-built technical security functionalities, yet it is still up to the custodian to develop asset-specific security solutions for all kinds of crypto-assets. That is also something investors shouldn't have to worry about.

We’re still in the early days of tokenization. Custody of security tokens has to be as easy as it is for traditional assets, and we’re not yet there.

Polymath: What do issuers need to consider when looking for a custody solution?

Martin: Generally, the custodian should be regulated, which is a very high signal of trustworthiness. Furthermore, the custodian should have been active for several years, should have a broad range of existing clients, and has to provide a scalable product. The most important aspect is trust, followed by security, scalability, and experience. The technical solution is the final aspect to address. It needs to be able to support token management.

Polymath: How do you see the role security tokens play in capital markets changing over the next five years?

Martin: Digitization will change the world of securities dramatically over the next few years. Security Tokens are the first glimpse of that change. Regulatory and technical innovation are really boosting the topic in many regions around the globe. Why would someone prefer physical securities over digital ones? They are more expensive, less liquid and not smartphone-ready. The customer base for physical securities is decreasing as younger generations are used to everything being digitally available.

Martin Kreitmair

Managing Director of Tangany

Martin is one of the co-founders and managing directors at Tangany GmbH. It offers a regulated white-label solution for digital assets on the blockchain, which is used in the finance industry and for tokenization projects. They have more than 25 clients such as WEG Bank AG, CM-Equity AG, and many more. Furthermore, Martin is also a member of the board at Bundesblock e.V., the German blockchain association, to drive this new technology into politics and to spread knowledge in Germany. Besides blockchain, he loves music and live events in Munich where he is living.  

All views expressed or claims made above solely belong to Martin Kreitmair and do not reflect those of Polymath. Polymath does not endorse or recommend any product or service provided, or to be provided, by Martin Kreitmair or Tangany.

The information in this document does not purport to be complete and has not been independently verified. Polymath gives no undertaking, and is under no obligation, to update this document or provide any additional information or to correct any inaccuracies which may become apparent.

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Security tokens come with a unique set of requirements. While they’re intended to bring efficiency and automation to capital markets, digital asset custodians often face scalability and efficiency issues when handling them on public blockchains.

This guide dives deep into the challenges surrounding security token custody and how a purpose-built blockchain can overcome them.

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