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Cryptocurrencies and digital assets are causing a stir in the current financial market, among other areas. They provide a platform that opens up more business opportunities for investors globally. However, as more players enter the game, some worries accompany this asset. High risks come with trading in digital assets, with thefts through hacking on the rise. Furthermore, losing and forgetting private keys is also a significant issue when storing them.
It is common in traditional finance platforms to find currency and asset holders looking for ways to safe-keep them—the same works for people with digital assets. Investors buying, investing, and trading cryptos are spiking daily, leading to a pressing need for a secure and stable avenue to store their assets. Thus, there has been excitement around crypto in recent days. Let’s delve into the topic to understand what we are dealing with.
What is Crypto Custody?
Custody refers to the supervision and protection of something valuable by a trusted party on one’s behalf. Therefore, crypto custody involves handing over your digital assets’ rights to a trusted party for protection. The party handed the mandate to watch over the digital assets as a crypto custodian, which in most cases, is an institution. The institution will store them according to the specifications required by a particular asset to ensure security.
Unlike in traditional custody relationships, a custodian of digital assets has no right to give out the assets to anyone to gain interest. The custodian is liable for the loss of assets in their care. If anything happens to your assets in the custodian’s hands, they must restore them fully. Lastly, the institution does not earn interest while keeping your assets. As the depositor, you must pay a specific fee for the institution to be your legal custodian.
To recognize a custodian as a qualified party, they have to look at a few aspects of their storage system, including:
- Technology: A top-notch technology framework is necessary for a custodian to ensure the safety of assets. An upgrade is essential to handle decentralized assets without compromising confidentiality and security in storage and transactions. Thinking about customers’ involvement is also vital, ensuring they can participate in rights owed to owners.
- Operations: The institution must find a way to maximize the benefits of the assets they care for. One way to do this is by comparing how working alongside traditional assets will affect their undertakings. They also need to assess past, current, and future market trends for sustainability in trading.
- Compliance: Rules surrounding crypto assets are scanty. It would be best for the custodian to keep up with any new rules that may develop for the ultimate customer experience. Learning from crypto legislators would be of help for assured efficiency in running their systems. Creating a lasting trust relationship with clients is vital while listening to their demands in the partnership.
- Risks and Resilience: Eliminating fraudulent transactions and cyber-attacks should be to cyber-attacks in establishing an institution. Maintaining credibility as a custodian calls for updating the security system and heightening user experience. Custodians can achieve this by incorporating good cryptographic proficiency for the same. Another approach is investing largely in insurance of customers’ assets in case of a mishap.
These are a few factors to consider as a custodian as the process transcends with time. Institutions wish to gain the most from holding their clients’ assets. Thus, they aim to attract whales in crypto investments. However, it does not discredit small-scale investors all the same.
How Does Crypto Custody Work?
Before delving into how crypto custody works in a third-party situation, there are a few things to note. First, custody does not always entail a third party. Self-custody is when one chooses how to secure assets without institutions’ involvement. Partial custody also called the “wallet plus” solution, involves a self-managed wallet with little input from an institution.
Institutional custody involves two forms:
- Hot Wallet: Entails storage of private keys on an online network or online-enabled hardware. Hot wallets do not necessitate the presence of the holder physically to transact. As a result, they have fast transaction rates but are not secure since someone can launch an attack through them.
- Cold Wallet: Entails storage of private keys on external hardware offline. They are slower due to accessibility limitations than hot wallets but more secure.
Why All the Hype?
There is a lot of uncertainty and difficulty surrounding cryptos. Since investments in assets have significant risks in case of loss, investors choose to keep with custodians safely. It helps with securing assets while utilizing upgraded technology to help.
Here are a few advantages that come along with Crypto custody.
- Clients are comfortable knowing that custodians store their assets safely, reducing the risk of loss by theft or forgetting private keys.
- Custodians offer platforms of trade besides storage and insurance of assets.
- Crypto users are encouraged because they do not have to hold on to their assets all the time, luring more into business ventures employing cryptocurrencies, leading to an increased value of a coin.
- An asset owner can learn more about cryptos and their security from experts.
- Some institutions offer asset owners a chance to earn some stake for storing their assets with them.
Key Players in the Industry
- Coinbase: It has over 35 million users. Coinbase provides an exchange and wallet platform to enable users to trade and stake their stored coins.
- itBit: The network provides professional, personalized services for its qualified investors, including reports, protection, customer service, and online representation.
- BitGo: The custodian holds the storage of over 100 digital assets. The platform presents competition with cold storage solutions and a customizable user interface, among other exciting features, providing personalized services.
- Gemini: Upholding all regulatory requirements, Gemini offers customers a chance to exchange and store Bitcoin, Ethereum, and Litecoin, among others, at low costs. In partnership with Samsung, they have a mobile application to activate a mobile wallet.
We can expect the transcendence of crypto custody as the concept adapts to new technology and competition in the future. Furthermore, there is a high demand for crypto custody institutions owing to the masses embracing crypto trade.
The process will open more doors to advertise cryptocurrencies and digital assets. Safe to say, it has several benefits and endless potential.