As demand grows for crypto access, brokerage platforms have been exploring ways to incorporate digital asset capabilities, from accepting crypto deposits, to offering crypto CFDs and spot-trading.
However, integrating cryptocurrencies and digital assets brings an array of challenges, especially for brokerage platforms built around traditional systems. Many brokers lack specialized blockchain expertise or infrastructure to confront core integration hurdles around security, compliance, and operations.
Here are 6 key challenges that brokerage platforms face when integrating crypto and why custody solutions providers are becoming essential partners for brokers to achieve speed-to-market and scalability:
- High Costs And Limits Of Crypto Payment Gateways
- Overcoming Technical Complexity In Crypto Integration
- Managing The Risks Of Crypto Custody And Key Security
- Burden Of Manual Crypto Deposit Reconciliation
- Complexity Of Crypto Withdrawal Processing
- Navigating Regulatory & Compliance Requirements
High Costs And Limits Of Crypto Payment Gateways
- Accepting customer crypto deposits via payment gateways like MoonPay, Bitpay, and Stripe generally have high costs (e.g. 1%-5%). Furthermore, payment gateways typically have limitations on the transfer amount (e.g. max USD 10k per transaction), creating inconveniences for users with larger deposits.
- Custody solution providers offer a compliant off-ramp channel for brokerages, empowering them to seamlessly accept large crypto deposits from end customers to fund their trading accounts, while minimizing associated fees. Leveraging the custody provider’s networks, such as Cobo’s Loop, brokers can also enjoy zero-fee, instant transfers with members. On top of that, custody providers can also support trading via Layer 2s to significantly reduce transactional fees while increasing the speed of transactions.
Overcoming Technical Complexity In Crypto Integration
- The technical and engineering work involved in supporting secure cryptocurrency trading and custody is highly complex. It requires expertise across blockchain protocols, wallet infrastructure, private key management, and more - which can all be fast-evolving in the dynamic world of crypto.
- Building these capabilities in-house would involve extensive resources in time and cost. However, licensed crypto custody solutions providers offer turnkey solutions that eliminate this complexity with plug-and-play solutions, such as Wallet-as-a-Service. By handling the heavy technology lifting and providing ready-to-use infrastructure, institutional crypto custody providers allow brokers fast time-to-market, scalability, and the flexibility to adhere to changing end user demands.
Mitigating Risks Of Crypto Custody And Key Security
- Brokers must decide whether to self-custody crypto assets or use a third party crypto custodian. Either option requires proper technological know-hows, key management procedures, and controls around storage and access. Breaches could lead to irrevocable loss of client assets.
- Custody solution providers are the experts who take away the risks associated with key management and safeguarding of assets, so operational overheads are lifted and brokers can focus on their core business. Based on their unique needs, brokers can choose from custodial wallets to non-custodial wallets including MPC (multi-party computation) custody and smart contract-based custody. Regardless of the preferred technology, these can be implemented with Wallet-as-a-Service to instantly allow brokerage platforms to securely and compliantly receive, store, and manage crypto and stablecoin deposits from their end clients. Powered by cutting-edge custody technologies, a battle-tested security architecture, and a proprietary risk policy engine, Cobo delivers the highest level of security for the brokers’ valuable crypto assets.
Burden Of Manual Crypto Deposit Reconciliation
- Brokers face the heavy burden of manual reconciliation when dealing with crypto deposits as (1) the inclusion of reference details when making transfers is generally not supported, and (2) blockchains do not have an alert / notification system for transactions. For brokers dealing with large volumes or a wide variety of tokens, this can become grossly intensive and impractical to manually monitor for incoming transfers and then reconcile them to the respective client accounts.
- Custody solution providers offer a wallet infrastructure to automate workflows and relieve that reconciliation burden. New unique addresses can be automatically generated for each customer (or payment) for easy reconciliation. In addition, the system also monitors incoming transfers and automatically credits the client accounts without any manual involvement. Brokers can then choose to automatically sweep all the customer deposits into an aggregated wallet for easy management. Also, screening / checks on transactions are automated to quarantine potentially risky deposits, reducing the burden of compliance.
Managing 24/7 Crypto Withdrawal Processing
- Processing crypto withdrawal requests manually can be troublesome and risky for brokers. They must verify account balances, prevent wrong or suspicious transfers, maintain a database for customer transactions and balances, and conduct AML checks for every transaction - all of which can be time-consuming and error-prone.
- Custody solution providers can help enable 24/7 withdrawals on broker portals through APIs. Depending on the brokers’ settings (e.g. by threshold value), withdrawals can be done via straight-through processing or go through multisig controls / role-based access controls. Additional protections can also be implemented such as whitelist / blacklist, auto-blocking high risk transactions, etc.
Navigating Regulatory And Compliance Requirements
- The regulatory landscape for crypto is still evolving and can vary across different jurisdictions. Navigating regulations like KYC, AML, KYT requirements adds complexity for brokers. Enhanced identity verification, transaction monitoring and reporting processes specifically equipped for crypto's borderless nature are important to prevent money laundering related risks.
- By leveraging custody solution providers, brokers avoid expending resources on adapting to shifting requirements themselves. Crypto custody service providers have frameworks put in place to enforce transaction monitoring, suspicious activity detection, sanctioned trading restrictions, investor identity verifications and auditable reporting that will help keep brokers compliant. This saves significant legal/regulatory costs.
While the promise of crypto integration is alluring, brokers still face substantial obstacles in incorporating crypto onto their platforms. Brokers who remain open to changes and proactively accept crypto stand to gain a significant competitive edge as crypto demand accelerates.
As a leader trusted by over 500 institutional clients to safeguard billions in digital assets, Cobo offers best-in-class technology and expertise to guide brokers on their crypto integration journey. Our custody solutions are specifically designed to solve the most pressing challenges outlined above - empowering brokers to meet crypto integration needs faster, better, and more cost-effectively.
In addition to crypto custodian services, Cobo offers users the advantage of direct over-the-counter (OTC) trading access within the platform, with exclusive rates for USDT-USD and other stablecoins. This service is specifically tailored to meet the needs of brokers, offering them a competitive edge to win in this market.
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