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Why a Tiny Kentucky Firm Rules a Corner of the Crypto Market

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 ... either to do this six months ago.” Real estate investor Matt Jennings co-founded ...

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If banks and hedge funds start holding large amounts of cryptocurrencies, much of the money will flow—virtually, of course—through Murray, KentuckyThat’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 anythingOne of the simplest problems—how institutional investors can safely and legally store their tokens—is creating opportunities for unexpected players like KingdomIn 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 revolutionAs is common in crypto-land, many of these service providers stumbled into the category almost by accident, then saw an opportunityTheir 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 companiesIts 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 partnersMG Stover, a Colorado-based boutique financial-services firm, has become known for offering fund administration and accounting servicesSince 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 & CompanyManaging 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 agoIt didn’t require a lot of either to do this six months ago.”Alternative AssetsReal 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 accountAfter 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 fundsIn 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 businessAs a directed custodian, Kingdom Trust doesn’t advise clients or recommend investments—it simply holds the assetsThe 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 fundsKingdom 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 clientIn working together for that client, they considered partneringBitGo 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 coupleJennings, a lifelong Kentuckian, is an avid freshwater fishermanHis 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 MicrosoftAs an early member of the team working on Google’s Chrome, he helped develop two well-known networking protocolsHe avidly blogs and tweets the gospel of cryptocurrency and mentors high-school students on coding.When they met, Jennings didn’t initially understand digital currenciesBut he saw the potential“I understood that it was an alternative assetWe hold all kinds of alternative assets that I don’t understand,” he saysAll that mattered was that Kingdom could meet regulatory requirements.LEARN MOREThe WIRED Guide to BitcoinBelshe 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 investorsFurther, 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 saysThe two companies first launched a product that allowed individuals to store digital currency in their IRAs.Surging DemandLate last year, as the world turned crypto-crazy, Kingdom and BitGo began to focus on offering custody for institutional investorsThe 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 assetsThat creates a compliance problemOnce a hedge fund crosses $150 million in assets, it is required to store its assets with a qualified custodianBelshe 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 holdingsIndustry 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 classBelshe estimates there’s $10 billion worth of hedge funds holding crypto assets in the market, and another $10 billion of demand waiting to investHe’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 enoughThey 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 saysJennings 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 startupBut 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 saysOn the flip side, BitGo did not offer custodianshipCombining the two is step toward building trust with customers, Belshe says.Competition LoomsOthers are eyeing the same opportunity, though firms that have already obtained a trust charter—a time-consuming regulatory process—have an advantageCoinbase, the largest US bitcoin exchange and a Silicon Valley darling, announced in November it would begin offering institutional custodian services this yearThe company reportedly held deal talks with Anchor Labs, a stealthy digital-custody startup, which fizzledAnchor Labs then raised an undisclosed amount of funding from Andreessen Horowitz for its digital-custody product, according to AxiosAndreessen Horowitz is also an investor in CoinbaseBoth 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 optionsThe 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 2015Ledger, a Paris-based company providing hardware wallets for cryptocurrencies, charges roughly half of Gemini’s rate for its custody option, currently in beta modeKingdom’s pricing is similar to Ledger’s, though the company declined to specify, noting its rates can varyGemini and Ledger cryptocurrency speculators are banking on the theory that someone dumber than them will buy their tokens for more than they paidThat’s a pretty good bet … until it isn’t.Trust but VerifyCryptocurrency speculators seem to bank on the theory that someone dumber will buy their tokens for more than they paidThat works, until it doesn't.As interest in cryptocurrencies soars, scams are multiplying.The company behind cryptocurrency tether claims to have $1 behind each unit of its currencySome observers are doubtfulRelated VideoSecurityHacking the Trezor Bitcoin VaultMark Frauenfelder saved 7.4 bitcoins on a Trezor electronic vault then he lost the passcodeHere he hacks the device to unlocks his funds.#cryptocurrencyMost PopularscienceIf There's Life on Saturn's Moon Enceladus, It Might Look Like ThisAuthor: Emma Grey EllisEmma Grey EllisscienceAmerica’s Secret Ice Base Won’t Stay Frozen ForeverAuthor: Sarah LaskowSarah LaskowbusinessBrad Parscale Will Be Donald Trump's 2020 Campaign ManagerAuthor: Issie LapowskyIssie LapowskyMore StoriesView CommentsSponsored StoriesPowered By OutbrainIssie LapowskyParkland Conspiracies Overwhelm the Internet's Broken Trending ToolsErin GriffithThis Startup’s Test Shows How Harassment Targets Women OnlineGigi SohnAjit Pai’s Plan Will Take Broadband Away From Poor PeopleTom SimoniteThe Pentagon Wants Your Help Analyzing Satellite ImagesTom SimoniteWhy Artificial Intelligence Researchers Should Be More ParanoidMore businesssocial mediaWhat Facebook Isn't Saying About Trump and Clinton's AdsAuthor: Issie LapowskyIssie Lapowskynational affairsTrump Names Brad Parscale 2020 Campaign ManagerAuthor: Issie LapowskyIssie LapowskyWIRED OpinionSenate Democrats Have a Plan to Save Net NeutralityAuthor: Charles ESchumerCharles ESchumerFighting WordsAmazon's Battle to Bring Conversational AI Into Your HomeAuthor: James VlahosJames Vlahosnational affairsA New Bill Aims To Prove the Value of Broadband AccessAuthor: Issie LapowskyIssie LapowskyClarion CallPeter Thiel Is a Flawed Messenger With a Crucial MessageAuthor: Zachary KarabellZachary KarabellWe RecommendPowered By OutbrainDavid PierceHow BitTorrent Spurred the Streaming RevolutionIssie LapowskyGothamist Lives, Thanks to a Boost From Public RadioMiranda KatzThis Startup Is Challenging Mechanical Turk—on the BlockchainKlint FinleyAs Protection Ends, Here’s One Way to Test for Net NeutralityNitasha TikuEx-Google Employee Claims Wrongful Firing For Criticizing James Damore’s MemoGet Our NewsletterWIRED’s biggest stories delivered to your inbox.submitSubscribeAdvertiseSite MapPress CenterFAQAccessibility HelpCustomer CareContact UsSecuredropT-Shirt CollectionNewsletterWired StaffJobsRSSCNMN CollectionUse of this site constitutes acceptance of our user agreement (effective 3/21/12) and privacy policy (effective 3/21/12)Affiliate link policyYour California privacy rightsThe material on this site may not be reproduced, distributed, transmitted, cached or otherwise used, except with the prior written permission of Condé Nast. window.__INITIAL_STATE__ = JSON.parse(decodeURIComponent("

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