What is Crypto Custody?
Crypto Custody refers to the solution of securely storing large quantities of one, or different, cryptocurrencies against any maliciousness or hacking activities. As we all know, digital assets like crypto are often stored online, and compared to traditional assets are more prone to risks such as Cyberattacks, Smart Contracts vulnerabilities, Liquidity Crises, and more. Considering all the risks associated with cryptocurrency holding, users prefer crypto custodians to help them protect their assets from any malicious activity.
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How Does Crypto Custody Work?
The working mechanism of Crypto Custody is a bit different than our traditional financial system. In traditional markets, custodians are often described as third-party entities, hired to safeguard assets from theft, by storing their clients’ funds on their own. Here in crypto, custodians don’t actually possess user funds because cryptocurrencies exist only on a public ledger, known as Blockchain, and can’t be altered. Hence, instead of assets, Crypto Custodians actually protect their users’ wallet’s private keys. For those who don’t know what private keys are, they are long alphanumeric codes that work similarly to passwords and grant crypto wallet owners, access to the funds stored in it.
The Importance of Crypto Custody
Security
Digital assets such as cryptocurrencies have decentralized nature, meaning that no central authority or government has any control nor is responsible for safeguarding digital assets. So, we believe Crypto Custody is an essential step to securely managing your holdings.
To maximize your security measures, don’t forget to choose your third-party custodian carefully.
Look for ones that store user’s funds in cold storage instead of hot wallets, and offer multi-signature wallets support.
Risk Mitigation
By improving the overall security of safeguarding assets, crypto custody works as a risk mitigation tool. Often trustworthy popular custodians utilize a wide range of mitigation strategies, including, but not limited to, regular audits (daily or weekly), insurance coverage, and cold storage systems, to protect their users and ensure that their funds are safe.
Compliance
Regulatory compliance with local governments is one of the key aspects of why you should go for the Custodian option. Governments and regulatory bodies of different countries are establishing strict rules when it comes to crypto holding, to ensure that it is not being used for illegal purposes, such as money laundering, drug dealing, and other like activities. Due to continuous regulatory changes, it is hard to always keep up with the latest regulatory changes and prepare documents on your own, for both retail investors on individual and organizational levels.
By collaborating with government-compliant crypto custodians, you can get rid of all these complex regulatory requirements as Custodians will be responsible for managing your legal status and keeping you updated with the latest changes.
Institutional Adoption
In my opinion, crypto custodians have opened the doors for institutional adoption to invest in cryptocurrencies. As you might be aware, institutions, especially hedge funds, pension funds, and asset managers, often have strict policies and require trusted custodian solutions that comply with local regulatory bodies, in order to jump into any financial market.
Currently, multiple specialized crypto custodians have emerged in the market to facilitate institutional investors offering them advanced security features, integration with trading platforms to swap cryptocurrencies at any time, and insurance coverage in case of any security breach.
Types of Crypto Custody Solutions
Hot Wallets
Hot wallets are one of the most popular private crypto wallets that let users store their funds in a completely decentralized way, with full control over their assets at little to no cost. There are three types of hot wallets: desktop, web-based and mobile wallets. These types of wallets store user funds directly on the internet and are more prone to attacks.
Multi-Signature Wallets
Multi-Signature Wallets refer to a type of crypto wallets that requires more than 1 signature to execute the transaction. They are often associated with different private keys, making them more secure than ordinary private wallets.
Cold Storage and Hardware Wallets
Cold Storage also known as Hardware Wallets are one of the safest ways to store cryptocurrencies, as they store private keys offline on a physical device, similar to a USB drive. Such types of wallets are not always connected to the internet, unlike hot wallets, and hence, are less vulnerable to attacks. Some of the popular Cold Storage (Hardware wallets) are Ledger Nano X, SafePal 1, Trezor Model T, and CoolWallet Pro.
Institutional Custody
If you are not aware of how to keep your hot, hardware, or multi-signature wallet secure, this is where Institutional Custody comes into play. Institutional Custody can be described as a third-party custodian that provides services to store crypto funds safely on behalf of institutional investors at a fixed or subscription cost.
Security Measures in Crypto Custody
Multi-Signature Authentication
Multi-Signature Authentication is one of the security measures often offered by Crypto Custodians to help you secure your funds. These authentications can vary. For example, a 3-3 multi-signature crypto wallet will require three signatures to authenticate any transaction. On the other hand, a 2-3 multi-signature wallet will require two signatures out of three to authenticate a transaction.
Cold Storage
Cold Storage or Hardware Wallets are considered one of the safest wallets, recommended for both individual and institutional investors, because of their enhanced security. As private keys are stored offline in a physical device, your wallet is less prone to attacks, compared to any other hot wallet.
Secure Key Management
Secure key management is one of the key points in ensuring your fund’s safety. Third-party crypto custodians manage private keys on your behalf, making the process not only easier but also safer.
Insurance Coverage
Well-reputable Crypto Custodians regulated by government bodies around the world often provide users with Insurance Coverage in case of any security breach or permanent loss of their digital assets.
Key Players in the Crypto Custody Industry
There are plenty of Crypto Custody service providers available out there in the market. Some of the popular ones include:
● Coinbase Custody
● Bitgeo
● Gemini Custody
● Anchorage
● Orbitos.io
● Fireblocks
Interested in learning more about some of the aforementioned exchanges? Use these links to learn more about Coinbase and Gemini
Factors to Consider When Choosing a Crypto Custodian
Reputation and Track Record
We believe reputation and track record play a vital role in deciding the right crypto custodian. Always go through the background history of the Crypto Custody Platform and check who it is owned and managed by, and what kind of track record it holds, based on previous users’ feedback. A well-reputed custodian with a long positive track record can be a signal that it is a trustworthy platform to conduct business on.
Compliance and Regulation
Compliance with local laws and regulations under government-established bodies is another factor worth considering when choosing a custodian. There is a possibility that even if the platform is well-reputed and has a good track record, it might not be regulated under your country’s law, making it inaccessible. Because of that reason, it is better to find a platform that complies with the local laws of your country and is licensed there.
User Experience and Accessibility
From a trader’s perspective, user experience, and accessibility to a variety of features and crypto services, matters a lot.
When choosing a crypto custodian, don’t forget to pay close attention to its UI and accessibility to different crypto services.
There is a possibility that a feature supported by one might not be accessible in another.
The Future of Crypto Custody
In my opinion, based on the facts discussed above, Crypto Custody holds an important role in ensuring the safety of funds and for that reason, it has a bright future ahead. A new innovation in Crypto Custody will emerge in the market, leading to a more secure experience for holding and trading cryptocurrencies.
FAQs
Are crypto custodians regulated?
The answer to this question is yes and no, at the same time. Not all, but most of the crypto custodians are regulated and comply with the centralized structure established by government institutions.
Is crypto custody necessary for individual crypto holders?
From a security point of view, yes, crypto custody is an essential factor for every individual digital asset holder to ensure the safety of their funds.
Are custodians liable for the loss of my crypto assets?
It’s hard to give a straightforward answer to this question. The insurance coverage actually depends on whether or not they do have such a policy. Often, Custodians held themselves accountable for any loss of assets due to a hacking attack, and compensate their users.
How do custodians ensure the security of private keys?
They ensure it by taking multiple security measures, such as implementing 2-FA Authentication, storing private keys physically instead of online, and creating a backup of private keys to tackle any malicious activity.
Can I access my crypto assets instantly with a custodian?
Yes, usually Custodians don’t restrict user access to crypto assets, but they do implement some security limitations to protect their client’s funds in the best way possible.
