You can watch the full interview with Henrik Gebbing on YouTube here.
Finoa was born in Madrid in 2018 when crypto enthusiasts Chris and Henrik realized there was a lack of custodied service providers which institutional investors needed in order to invest in crypto with other people’s money. Without custody providers, institutions cannot prevent a rogue employee from transferring unlimited amounts of their investors’ money out of the organization’s control. Finoa was built to provide institutions with a trusted partner that can respond to their complex regulatory and security needs.
Custody is a necessary step to bring more institutional players into the space, it gives institutions peace of mind and confidence to invest billions of dollars into Web3. The crypto ethos amongst individuals is to self-custody your assets, this works well for ordinary people who are familiar with wallets and managing private keys. However, institutions do not want to self-custody their assets as this presents unnecessary risks to the assets they are managing. Institutional grade custody is a net positive for the growth of Web3 and has some important benefits:
- Custodians need to be regulated (Regulation will bring more money into Web3)
- Protects investors
A fund that has raised money from investors is focused on performance and producing alpha – not on the safekeeping of assets. The fund managers do not want to worry about the security risks of their employees stealing, or otherwise misusing, investors’ funds. Because of this, most (tradfi) institutions’ compliance processes also require a custodian to be involved in every transaction. When investors in these funds ask how assets are stored, and the answer is to keep it in a MetaMask wallet or on a Ledger stick, that’s not good enough.
Historically, custody was a necessary prerequisite for the institutionalization of portfolios. In addition, people with very large portfolios may not feel comfortable storing their assets themselves and they would rather go to someone who specializes in custody to safe keep their assets. Custodians thus act as a critical on-ramp to grant institutional capital access to the cryptocurrency world.
How is regulation affecting custodians?
Regulation places a fiduciary duty on custodians, which means that they are required by law to behave in the beneficiaries’ best interest. This once again benefits and protects investors and promotes good practices in Web3. Progressive and appropriate regulation benefits custodians as many institutions have been waiting for regulators to take a stance before they start investing capital.
Finoa is regulated in Germany and the European Union (EU) and has been monitoring other jurisdictions to see where they can add a license to their business. US regulation has been somewhat of a leading indicator of how other regulators will act. Consequently, Finoa closely follows what happens in the US to keep up to date with the latest regulatory developments. In terms of plans to enter the US custody market, Finoa is not planning anything yet as they are focusing on scaling their business operations in Europe. The core business model is custody services, they are currently building value-added services to this such as staking, trading, and lending to differentiate us from the competition.
Recent regulatory proposals
A proposal to ban Proof-of-Work (POW) in the EU was put forward proposed in the Crypto Assets (MiCA) framework, the EU’s comprehensive regulatory package for governing digital assets. This was an ignorant proposal that would have had major ramifications for the industry in Europe. The crypto ecosystem has been flourishing in Europe and it’s important that regulators don’t make any reckless decisions that could jeopardize the growth and development of crypto in the region.
Travel Rule Proposal
A “travel rule” currently exists in tradfi and obliges banks and payment companies to store information that “travels” between payers and recipients. The rule requires these parties to store this sensitive information and make it available to authorities for several years. The policy only triggers when a transaction exceeds the threshold of 1,000 euros.
This was proposed to try and address AML in crypto. The proposal would require entities to KYC any wallet they are transacting with. This means that every wallet would have to go through a KYC process. There are a few problems with this:
- This causes huge data breach risks as sensitive information needs to be securely stored.
- If there is a data breach, the entire transaction history related to that account gets exposed. This puts individuals/entities at risk of becoming targets if their wealth is known.
- The proposal doesn’t take into account the massive overhead costs and risks involved with storing such sensitive information.
How Germany’s regulation helped Finoa
Germany declared crypto assets as financial instruments in 2020, this was a very progressive step at the time as other regulators were still scrambling to classify the asset class. They issued crypto custody licenses which helped Finoa gain credibility and trust from institutions that were entering the market. It is a good example of how regulation can actually benefit players in the Web3 space and reinforces the importance of regulatory bodies liaising with leaders in the crypto space. There needs to be clear communication between regulators and the industry to ensure that the EU does not fall behind the US and Asia as Web3 grows.
How can we mitigate data breaches while still promoting KYC?
The current KYC process forces users to submit their personal information to every platform that they sign up on. This means that each platform needs to store its client’s data securely (hopefully). But can this problem be solved or is it a lost cause? There is a case to use zero-knowledge proofs (ZKPs) to solve this problem. Users can have decentralized identities (DIDs) using ZKPs to overcome this KYC issue, this would be more secure and convenient for users. This benefits users as they would have one identity which would give them access to multiple apps. From a service provider perspective, it is also great because then businesses do not need to handle private data – they can eliminate the risk of data breaches.
Finoa is competing with a number of other custodians in the crypto space but has differentiated itself in a few ways. Finoa is quick to integrate and work with world-class projects and offer in-custody staking by partnering with large-scale staking companies like BlockDaemon, Figment, and Chorus-One. Finoa was the first custodian for Flow, NEAR, Mina, and many others which gives them an advantage by being early in the market. They have built in value-added services on top of their custody to provide a comprehensive solution to institutions.