If banks and hedge funds start holding large amounts of cryptocurrencies, much of the money will flow—virtually, of course—through Murray, Kentucky. That’s home to Kingdom Trust, a small company that’s quickly become the crypto industry’s go-to option for holding its digital coins.
The crypto revolution has a few kinks to work out before it can revolutionize anything. One of the simplest problems—how institutional investors can safely and legally store their tokens—is creating opportunities for unexpected players like Kingdom. In January, the 60-person firm agreed to sell itself to BitGo, a San Francisco tech startup, making for strange bedfellows, even in an industry full of unexpected players.
Kingdom is among the boutique, seemingly out-of-nowhere firms taking risks to get in on early on a potential revolution. As is common in crypto-land, many of these service providers stumbled into the category almost by accident, then saw an opportunity. Their willingness to experiment and their appetite for risk have been rewarded with expertise, reputations, and a head start on dominating a potentially huge new market.
Silvergate Bank, a community bank based in San Diego, works with more than a dozen cryptocurrency financial-services companies. Its CEO, Anthony Lane, has said he’s not a coder type but a "Joe-six-pack kind of guy" who became personally interested in bitcoin in 2013.
Cole-Frieman & Mallon, a San Francisco law firm that has gained a reputation for its work on cryptocurrency-fund formation, lists just five partners. MG Stover, a Colorado-based boutique financial-services firm, has become known for offering fund administration and accounting services. Since taking an early crypto-focused hedge fund four years ago, the firm has amassed more than 50 funds as clients, according to CEO Matt Stover.
Arthur Bell, the Baltimore and New York City-based auditor of choice for many crypto funds, recently merged with Cohen & Company. Managing member Corey McLaughlin told an industry publication the volume of firm launches in crypto is unlike anything he’s seen in two decades.
“People that were willing to take risks relatively early and stake out a little claim were able to grow significantly, while more established and larger, name-brand firms have been very quickly passed by in this area,” says Greg Gilman, co-founder of incubator and investment firm Science Inc. “You had to have guts and faith to do this 12 months ago. It didn’t require a lot of either to do this six months ago.”
Real estate investor Matt Jennings co-founded Kingdom in 2009 after he noticed that few traditional financial-services firms would allow him to hold real-estate investments in his retirement account. After the Dodd Frank Act introduced a new rule requiring funds and advisory firms to use qualified third-party custodians to hold their assets, Jennings saw an opportunity to expand into offering custodian services to the funds. In 2011, the firm got its trust charter in South Dakota, because of the state’s “business friendly” policies, according to Jennings.
Over time, the firm grew into a solid, if boring, little business. As a directed custodian, Kingdom Trust doesn’t advise clients or recommend investments—it simply holds the assets. The firm holds alternative assets in individual retirement accounts and also acts as a qualified custodian for private-equity funds, venture funds, family offices, and hedge funds. Kingdom has amassed 100,000 clients and handles around $13 billion in assets, charging fees for its services that vary based on the complexity of the assets.
Around two years ago, Jennings met Mike Belshe, a San Francisco tech entrepreneur with a cryptocurrency security startup called BitGo, through a mutual client. In working together for that client, they considered partnering. BitGo had been offering security software for individual bitcoin investors, but had seen an increase in the number of institutions needing custodian services.
Belshe and Jennings make an odd couple. Jennings, a lifelong Kentuckian, is an avid freshwater fisherman. His 19-year-old son, Coleton, was a high school fishing champion and together they co-founded a line of fishing products that includes several types of baits and lures, and a signature hair jig.
Belshe is a Silicon Valley insider, having started as a software engineer at HP and Netscape in the 1990s and later co-founding a search company that sold to Microsoft. As an early member of the team working on Google’s Chrome, he helped develop two well-known networking protocols. He avidly blogs and tweets the gospel of cryptocurrency and mentors high-school students on coding.
When they met, Jennings didn’t initially understand digital currencies. But he saw the potential. “I understood that it was an alternative asset. We hold all kinds of alternative assets that I don’t understand,” he says. All that mattered was that Kingdom could meet regulatory requirements.
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Belshe says that, compared with the banks he’s spoken to, Kingdom is “actually fairly innovative.” “Existing banks wouldn’t go there” he says. “Even if they are intrigued, they usually say no.” Because Kingdom started in the same way as a lot of tech startups—solving a personal pain point of its founder—the firm had “more willingness to listen and try and see where it would go” in its DNA, Belshe says.
Through their conversations, Jennings learned about digital currencies, realizing his firm could be among the very few offering custodian services for cryptocurrencies to institutional investors. Further, he realized BitGo offered the only tech product with the level of security Kingdom required to make it work. “It became very obvious that his product was the perfect product to marry in with the custodianship of these assets,” Jennings says. The two companies first launched a product that allowed individuals to store digital currency in their IRAs.
Late last year, as the world turned crypto-crazy, Kingdom and BitGo began to focus on offering custody for institutional investors. The timing was perfect: Crypto hedge funds had been proliferating (an estimated 100 new ones launched in 2017) and the skyrocketing price of bitcoin, ethereum and other “alt coins” meant small funds were suddenly sitting on tens of millions of dollars in crypto assets. That creates a compliance problem. Once a hedge fund crosses $150 million in assets, it is required to store its assets with a qualified custodian. Belshe estimates two dozen hedge funds crossed that threshold last year, but are not complying with the rule.
Indeed, an SEC letter in January stated that custody is a key issue facing “fund innovation” related to crypto holdings. Industry advocates including Union Square Ventures’ Fred Wilson have called for “institutional-grade custodians” to help firms comply with the law and offset security risks.
Since launching, cryptocurrency custody is “by far” Kingdom’s fastest growing asset class. Belshe estimates there’s $10 billion worth of hedge funds holding crypto assets in the market, and another $10 billion of demand waiting to invest. He’s seen growing interest from typically conservative mutual funds and pension funds.
That’s why Belshe decided a partnership with a qualified custodian like Kingdom was not enough. They could work better together as part of the same company, and so they merged. (Deal terms were not disclosed.) Belshe pointed to the SEC’s comments as justification for the deal. “I wouldn’t write it better myself for why we bought Kingdom,” he says. Jennings calls the merger “a great marriage of technology and regulatory oversight.”
There will be cultural challenges to combining Kingdom, a staid financial trust, with BitGo, a fast-moving, venture-backed Silicon Valley startup. But Belshe says he and Jennings share an innovative spirit. “Even though we come from pretty much opposite worlds, in terms of how he sees a good business and how I see a good business, it’s very similar.”
By merging BitGo’s technology and Kingdom’s compliance abilities, Belshe believes he can build the financial services firm of the future while locking down the market for institutional custodianship today, just as it’s beginning to explode. “People have looked at Kingdom and said, ‘Do these guys know the tech? They look like a bank, like a trust,’” he says. On the flip side, BitGo did not offer custodianship. Combining the two is step toward building trust with customers, Belshe says.
Others are eyeing the same opportunity, though firms that have already obtained a trust charter—a time-consuming regulatory process—have an advantage. Coinbase, the largest US bitcoin exchange and a Silicon Valley darling, announced in November it would begin offering institutional custodian services this year. The company reportedly held deal talks with Anchor Labs, a stealthy digital-custody startup, which fizzled. Anchor Labs then raised an undisclosed amount of funding from Andreessen Horowitz for its digital-custody product, according to Axios. Andreessen Horowitz is also an investor in Coinbase. Both declined to comment.
Gemini, a crypto exchange founded by the Winklevoss Twins, has held a trust charter from New York state since 2015 and offers institutional custodian options. The company charges a 1 percent fee, which sources say is steep compared to custodian services for non-digital assets but necessary to cover the enhanced security risks of crypto assets. (The Winklevoss’ bitcoin fortune alone likely boosts the assets Gemini is managing; they’re estimated to own around $1 billion in bitcoin, depending on price fluctuations.) New York-based ItBit also obtained a trust charter in 2015. Ledger, a Paris-based company providing hardware wallets for cryptocurrencies, charges roughly half of Gemini’s rate for its custody option, currently in beta mode. Kingdom’s pricing is similar to Ledger’s, though the company declined to specify, noting its rates can vary. Gemini and Ledger cryptocurrency speculators are banking on the theory that someone dumber than them will buy their tokens for more than they paid. That’s a pretty good bet … until it isn’t.
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