At the beginning of a person’s journey into the world of cryptocurrencies such as bitcoin, “wallet” often refers to what a traditional bank or brokerage account already does: hold a customer’s assets.It is a basic building block of crypto finance’s future.A wallet can be attached to an exchange for trading, used to make purchases with crypto, or to help access the world of nonfungible tokens and decentralized finance, or “ DeFi .”
Many Americans started investing in crypto through dedicated platforms such as Coinbase Global.Others might have taken advantage of crypto trading at online brokers such as Robinhood Markets or SoFi Technologies , or via payment companies such as Square or PayPal .This relatively small group of mainstream firms offering crypto access has seen revenue surge during the recent boom, propelling public stock offerings and share-price gains.
Now the range of investments might be growing, with old-school financial firms offering ways to hold or trade crypto.Interactive Brokers launched crypto trading in September.Visa and Mastercard , through individual partnerships with crypto firms, said they are working on bringing the ability to offer crypto services to banks and beyond.
Some established custodians that back online brokerages are also at some stage of supporting crypto.
A big question for investors is whether rising mainstream interest in crypto also will bring the mainstreaming of crypto wallets .If casual investors are soon able to cheaply hold crypto in the same place as their longtime checking, saving or brokerage account, could early dedicated wallet companies lose their edge?
But wallets come in many flavors.One distinction is whether a wallet is “custodial” or “noncustodial.” A custodial wallet is what most brokerage investors are used to, entrusting the accounting of your holdings to intermediaries that ultimately hold the assets.(Yes, you only indirectly “own” that Apple stock).
By contrast, a noncustodial wallet essentially lets individuals hold digital assets directly, with the ability to move them around on their own.
They are secured by codes known as “keys.” Noncustodial wallets also can be a way to branch out and hold nascent alternative coins or take advantage of “DeFi” applications.
Some would say that the latter type is fundamental to the whole decentralized promise of crypto, often with the saying: “Not your keys, not your crypto.” However, an individual then bears the risk of losing her or his keys or having them stolen.In an extra step, some owners prefer physical devices not connected to the web to keep keys safe.Square, for example, says it is going to build so-called hardware wallets.
Mainstream crypto brokers typically provide a form of custodial wallet.
Coinbase notably offers both types as part of its aim to stay on the cutting edge .
Wallets themselves are generally free to use.Brokers make their money from fees for trading, lending or other activities.Those fees are expected to come under pressure as more firms offer services and consumers become more sophisticated.
Even basic wallets might be vulnerable to the continuing evolution of cheap and familiar exchange-traded funds linked to crypto.An investor who just wants a bit of bitcoin exposure can now do so in an existing brokerage or retirement account.
Today’s basic wallets could get more sophisticated quickly, though.Robinhood is working on a new wallet with additional capabilities it expects to start rolling out soon.
Over one million people already are on a waiting list.
A more settled regulatory picture would likely accelerate things, too.A group of top U.S.financial regulators recently urged new standards for certain custodial wallets.Often a limit on what noncrypto-native firms offer is their comfort with the regulatory regime.
They frequently work with back-end crypto specialists that can support an array of activities for wallets.For example PayPal, Interactive Brokers and others work with Paxos, a regulated custodian that provides exchange services.
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Illustration: Tom Grillo/WSJ Some people may get introduced to crypto wallets without even realizing it.Mastercard, for example, joined with recently listed Bakkt to help banks, merchants and others offer services such as crypto rewards on card spending.
Those rewards might be viewed in a bank’s app, but could live in a custodial wallet with Bakkt.Offering wallets might also help future-proof banks and other traditional players in a world in which there are tokenized dollars or shares.
Wallets could play a role in spending, too, even if crypto itself isn’t widely accepted by stores .
Visa is working with digital-asset firm Anchorage to help banks offer crypto services, as well as to help Visa itself settle transactions with a digital token fixed to the U.S.dollar—a so-called stablecoin.This could make it easier to spend digital assets in a wallet via Visa’s networks without needing to change it to traditional fiat money to settle.
The big question may be whether holding customers’ crypto is key to getting their broader financial business.
At the end of the day, the most important wallet is the customer’s.
Write to Telis Demos at [email protected]
Appeared in the November 13, 2021, print edition as ‘Crypto Wallets Fit Investors’ Pockets.’.