On March 9, Komainu, a digital assets custody services provider created in 2018 by global investment bank Nomura together with digital asset security firm Ledger and digital asset investment house CoinShares, closed a $25 million series-A funding round.
Alan Howard, co-founder of Brevan Howard and Elwood Asset Management, led the fund raise. Galaxy Digital, the crypto investment firm headed by Michael Novogratz, a former Goldman Sachs partner and principal at Fortress Investment, also participated.
So too did NOIA Capital and Nomura Research Institute. These investors will act as strategic partners to the business. The founding joint venture partners also participated.
Komainu already provides custody to CoinShares for its exchange-traded products tracking Bitcoin, Ether, Litecoin and XRP.
It launched in June 2020 with a target to achieve funds under custody of $2 billion by the end of last year.
Investing in crypto has been profoundly accelerated
Henson Orser, Komainu
It had already exceeded $3 billion under custody by the time of the latest funding round. This comes after Komainu gained eye-catching endorsement in January from UK law enforcement.
It won a contract from the National Police Chiefs’ Council cybercrime programme to provide storage for any crypto assets seized from suspected criminals by all police forces in England and Wales.
The commitment of funds from Howard as well as from Novogratz highlights the growing interest of prominent managers of large macro funds in taking exposure to crypto.
“Institutional investors’ thinking about investing in crypto has been profoundly accelerated by the global stimulus that came in response to the pandemic,” Henson Orser, president of Komainu, tells Euromoney. “And having the foresight to establish an institutional-grade custodian in preparation for this has put Nomura, Ledger and CoinShares ahead of the curve.”
He says: “Komainu initially had to be fit for purpose to help the family offices, whales [large bitcoin holders] and specialist investors store their bitcoin securely. Now, as portfolio managers of the big macro funds or of sleeves for traditional asset managers look to add some bitcoin to their portfolios, they require an additional software layer on top of that secure custody. They have to ensure their reporting systems capture those digital asset allocations and their order management and execution systems.”
Komainu will put part of the $25 million towards building out this new layer to help sophisticated fund managers move more easily between crypto and conventional securities that are increasingly being traded and settled on both traditional and distributed ledger rails.
Orser says: “Right now, an institutional investor looking to take exposure to crypto has to move fiat currency from a traditional custodian to a crypto exchange where it might acquire stablecoins that it then holds in a hot wallet to exchange for crypto, which it finally transfers to a cold wallet for custody.”
He says: “That is a lot of steps and a lot of operational risk, and there’s demand now to make that all more seamless and to provide more of a crypto prime-brokerage service for institutions to borrow and lend against crypto collateral.”
Growth
CoinShares reports that $4 billion has flowed into crypto assets in the year 2021 up to March 8, already matching flows in the last three months of 2020. Bitcoin daily trading volume is $11.8 billion in 2021, up from $2.2 billion for 2020, with investment products now representing 7% of that volume, up from 4% in 2020.
The Securities and Exchange Commission (SEC) shows no sign yet of permitting bitcoin or other crypto exchange-traded funds (ETFs), on the basis that the underlyings trade mainly on unregulated markets.
Exchanges and fund managers remain hopeful, continuing to file for ETFs that would require an SEC rule change to be approved.
If that day ever comes, it will be interesting to see how popular bitcoin ETFs might be with different classes of investors, compared with, say, S&P500 and Nasdaq ETFs.
“Wall Street and the institutional asset management industry will likely soon be pressing their regulators that this business is passing them by,” says Orser. “Having a regulated institutional-grade custody provider will help them participate.”
Komainu has gone from strength to strength over the past year
Steve Ashley, Nomura
Komainu was initially leanly staffed, drawing on its founding partners, with Orser arriving there after a stint co-heading global markets Americas at Nomura.
He says: “There are some very forward-thinking people at Nomura who believe that it’s a question of when, not if, mainstream financial firms and asset managers embrace digital assets. And when the external and internal approvals fall into place, they want already to have built the necessary infrastructure.”
On announcing the new funding round, Steve Ashley, head of wholesale at Nomura, said: “Komainu has gone from strength to strength over the past year, capturing growing institutional interest in the digital asset space. These new partners and investors come as Komainu embarks on the next stage of its plan to build a best-in-class digital asset custody platform.”
It is a competitive business. Coinbase revealed in the S-1 filed at the end of February for its direct listing that by the end of 2020 it already had $90 billion of crypto assets on its custody platform, boosted by the acquisition of the institutional custody business of crypto wallet provider Xapo in August 2019.
Anchorage is another big provider and is now a federally chartered digital asset bank.
On March 4, the New York State Department of Financial Services licensed BitGo to operate as an independent, regulated qualified custodian under New York State Banking Law.
Komainu is regulated by the Jersey Financial Services Commission. It will be using part of the funds it has just raised to expand geographically in Europe, Asia Pacific and the US, and will need to acquire charters from more regulators.
As it seeks to sign more partnerships with asset managers, it now has more endorsements to add to those from the UK police.
Howard says: “With over $3 billion in assets under custody, Komainu has become one of the leading digital assets custodians globally. I am pleased to support Komainu in its mission to bridge the gap between legacy finance and the digital assets class.”
