Anchorage Digital played an unusual role in the 2021 crypto boom: it helped Visa buy an NFT. Now, following the industry's January launch of spot bitcoin ETFs, the San Francisco startup is gearing up for a bigger opportunity by helping institutions buy and manage crypto assets.
CEO and co-founder Nathan McCauley called the Securities and Exchange Commission's Jan. 10 approval of bitcoin ETFs "a big unlock for the institutional ecosystem" for crypto custodial companies like Anchorage.
"The ease by which traditional investors are going to be able to get access to bitcoin through the ETF is a big game-changer," he told Investor's Business Daily. "We're excited to see that progress."
The Promise Of Bitcoin ETFs
The Securities and Exchange Commission's decision to approve 11 spot bitcoin ETFs loosed a new tier of institutional investor to begin buying digital assets. That immediately increased the demand for companies able to safeguard those institutional digital portfolios.
Crypto custody is a critical and complex concern. Crypto assets are essentially lines of code stored on blockchains, online distributed ledgers purportedly with no centralized authority. That makes these assets vulnerable to serious security breaches and fraud, which led to major scandals like the FTX meltdown in 2022.
In fact, the SEC sent a strong message that, despite the approval of the bitcoin ETFs, custody arrangements will be heavily scrutinized.
SEC Chair Gary Gensler underscored this point in a blog post, saying bitcoin ETF issuers "will be required to provide full, fair, and truthful disclosure about the products." The approval of the bitcoin ETFs, he stressed, "does not endorse" the "arrangements" presented to would-be investors, "such as custody arrangements."
Custody Is A Critical Concern
Anchorage uses "hardware security modules" for generating and managing keys, random characters created by encryption protocols to verify transactions and owners of a blockchain asset, co-founder Diogo Monica explained in a 2021 interview. "These are the types of systems that are used to store nuclear launch codes," he said.
In February, Anchorage introduced Porto, its first self-custody service for institutions. The offering enables institutions to directly buy, sell and manage their blockchain assets.
Anchorage said it has $45 billion in assets under custody on its platform. The company's customers now include private equity firm Apollo Global Management, as well as institutional crypto exchange EDX Markets and Eaglebrook Advisors, a crypto platform for financial advisors.
Anchorage competes with bigger players like Coinbase, as well as major financial institutions like Bank of New York Mellon, State Street and JPMorgan Chase.
Institutional Interest In Bitcoin
Despite its size, Anchorage stands out for a key reason. McCauley and Monica, who have extensive backgrounds in network security and cryptography and worked together at Square and Docker, launched Anchorage in 2017 to focus squarely on custody.
The concept sprang from their dealings with investors, including institutions, who reached out to them for help with their crypto assets, Monica recalled in a 2021 interview. One institutional investor who had lost the key phrase to a $1.5 million bitcoin account offered Monica 20% of the amount if he could help recover the assets.
McCauley said they quickly saw the business opportunity: "We were like, 'Hey, this is actually a scalable problem.' If these guys have this problem where they're having trouble keeping their crypto then dozens if not hundreds of other firms will have the same problem."
'What The Hell Is An NFT?'
By 2021, as the crypto market soared to new highs, Anchorage was on a roll.
The company became the first crypto asset bank approved by the U.S. Office of the Comptroller of the Currency. Anchorage drew the attention of the U.S. Marshals Service which picked the company to help the agency store and manage crypto assets seized from criminals.
In August 2021, Anchorage unveiled a major high-profile client. The company announced that it helped Visa buy a non-fungible token, CryptoPunk #7610, for $150,000. It was the payments giant's first foray into the world of NFTs.
The crypto industry also saw Visa's move as a big win. The market was then surging on the way to a peak value of $3 trillion. But crypto still confounded many in the business world.
Monica recalled some of the questions the Visa team asked about buying CryptoPunk #7610: "How do we do it? How do we safely keep it? The legal team (asked): 'What the hell is an NFT? Why do we want it? Why am I buying it with crypto?' "
Visa's NFT purchase helped crypto go mainstream.
Crypto Crash And Regulatory Heat
But then the crypto market collapsed.
The industry shed roughly $2 trillion in value in the 12 months to November 2022, as it reeled from the FTX scandal and growing regulatory concerns. Even Anchorage took some heat from regulators.
In April 2022, the Office of the Comptroller of the Currency reprimanded the company for violating rules for monitoring money laundering. However, the agency also said Anchorage had taken "corrective action" to address those concerns. Anchorage said in a statement that it was "working to strengthen the areas identified" by the OCC.
For Anchorage, dealing with regulators and navigating their concerns are an inevitable element of the company's evolution. Some crypto proponents reject such influence. Decentralized finance, or DeFI, they argue, must be free from government control and any form of centralized authority.
Bitcoin ETFs: Regulation Is Inevitable
"Many DeFi fundamentalists believe that everything in DeFi should be unregulated. I don't agree," Monica said in a 2023 interview. "We can't just ostracize traditional financial institutions."
McCauley echoed this point: "The fundamental belief in crypto is that centralized intermediaries tend to not be trustworthy. Our view is that the path forward is the transparency that's built on top of blockchain combined with the best of regulatory approval."
Like most in the industry, Anchorage sees the approval of spot bitcoin ETFs as a huge step forward for digital currency. McCauley said the company is "in position over the next year and honestly next several years to be a custodian for the bitcoin ETFs." Anchorage has raised $487 million in venture funding and is currently valued at over $3 billion, the company said.
Cathy Yoon, general counsel of the Wormhole Foundation, a crypto-focused research and development organization, says the need for more options for crypto custody will create opportunities for Anchorage. "There is already too much concentration risk with the current custodians for BTC ETFs," she told IBD.
Competing With Wall Street Giants
However, investor Logan Allin, managing partner of Fin Capital, said he was "not bullish" on "any of the new wave of digital asset custodians." Companies like Anchorage, he said, are "likely transient players" compared to established players like BNY, Fidelity and State Street. Bigger "global custodians" have the "long-term credibility, existing teams/infrastructure, and trusted relationships with regulators to support the next wave of digital asset adoption," he said.
"If you are a global asset manager and have the choice of BNY or Anchorage, who are you going to choose and trust — the bank that Alexander Hamilton used and has been around for 240 years or one that has been in business for less than a decade?" he added.
Bitcoin And Crypto Skepticism
Anchorage faces another challenge: the lingering skepticism about crypto.
Bitcoin ETFs underline growing interest in crypto as an investment asset. But critics still dismiss crypto as a get-rich-quick industry infamous for taunting skeptics with the slogan: "Have fun staying poor."
Even McCauley says that, for crypto to achieve greater success, the industry must offer more than just a speculative asset.
"I don't consider speculation to be a utility," McCauley said. "It's wonderful to give people a noninflationary asset that will increase in value. But that's not the promise of crypto. The promise of crypto is something much more than that."
Meanwhile, despite the SEC's decision on bitcoin ETFs, overregulation is still a concern.
"We're still in that infrastructure-building phase, in the incubation phase with crypto," McCauley said. "It's easier to start to say, 'Hey, we should regulate this.' Or 'We should shut this thing down' before you've got those really tangible use cases where you see mass global benefit. That's the worry — that while crypto is in its incubation phase, will it be overregulated?"
You can follow Benjamin Pimentel on LinkedIn and Twitter/X @benpimentel
