In 2019, the digital asset markets witnessed a boom in crypto custody solutions offerings. As a result, investors are now able to store their crypto holdings securely with regulated third parties in exchange for a small fee.
In this guide, you will learn what crypto custody is, how it works, and why it is such a big deal for the digital asset markets.
What is Crypto Custodian?
In the traditional financial industry, a custodian is a financial institution that stores securities and other assets on behalf of institutional investors to minimize the potential risk of loss or theft. Before the digitization of the financial markets, custodians held piles of physical stock and bond certificates. Today, most securities are kept in electronic form.
The largest custodian banks are State Street, Bank of New York Mellon, and JP Morgan Chase.
In the last 18 months, we witnessed the rise of several crypto custody providers.
A crypto custodian stores digital asset holdings on behalf of professional and institutional investors. They provide a secure storage facility in exchange for a small fee.
The raison d’être of crypto custodians is two-fold.
- Firstly, they enable investors who do not want to deal with the technical aspect of securely storing digital assets to still invest in this new asset class.
- Secondly, they enable institutional investors who are required to store their investment at a regulated custodian to enter the digital asset markets.
Crypto custodians, therefore, allow investors that previously were not able to enter the digital asset markets to invest in bitcoin and co.
How Does Crypto Custodian Work?
While the exact process differs from custodian to custodian, generally speaking, investors register at crypto custodians, undergo AML/KYC checks, and then send their digital asset holdings to wallets operated by the custodians service provider.
Crypto custodians hold their clients’ digital assets in multi-signature cold storage wallets to ensure the utmost fund security. These custodian service providers guide against hackers and thefts mostly seen in crypto assets stored in crypto exchanges platforms. They also adds extra security to the portfolio of crypto assets they hold in their cool storage wallet for its clients.
An example of a leading crypto custodian service would be Coinbase Custody. The company, which operates independently of its parent company Coinbase Inc., is a fiduciary under NY State Banking Law, and a Qualified Custodian. That means it is fully regulated to provide custodial services in the crypto space.
Coinbase Custody stores its customers’ funds in “dedicated on-chain addresses secured by Coinbase’s battle-tested cold storage wallets” that are insured and regularly audited to provide state-of-the-art crypto custodianship.
Additionally, Coinbase Custody has enabled staking for proof-of-stake-based assets it holds on behalf of customers.
Other leading crypto custodians service provider include BitGo, Gemini, itBit, and Kingdom Trust.
Why Crypto Custodian Service is Big for Bitcoin
The primary reason why the emergence of crypto custodians services is such a big deal for bitcoin and digital asset markets is that it enabled well-heeled institutional investors to enter crypto world. This provides the much need assurance and insurance that their crypto coins will be secured against hackers and theft with top-notch security protocols.
Many institutional investors are required to hold their securities and other assets with qualified custodians services providers, which has been a barrier to entry that has prevented potentially more money flowing into crypto space.
Now that there are a large number of regulated crypto custodians that investors can choose from, we can expect more institutional money to start flowing into blockchain assets.
While the big wave of institutional money that the crypto market has been talking about for years is yet to hit bitcoin, the growing crypto investment ecosystem, which includes crypto custodians, is making it increasingly likely that this could be the year.
Digital asset custody solution gets up to $500 million insurance coverage.
Today GK8, the digital asset wallet provider, announced that it secured an insurance policy from an Arch Underwriting Lloyds syndicate via broker Aon UK. The cold wallet coverage could be up to $500 million (per customer according to GK8).
Earlier this year, the company enticed hackers to break their wallet for a bounty of $250,000, but none were successful. Its wallet solution is already in action with the likes of eToro. The cold wallet or offline wallet allows only one way connectivity from the wallet to the internet, so attackers cannot access the wallet. It also has an MPC (multi party computation) hot wallet.
“The cold wallet, which only transmits data and therefore (is) totally unhackable, protects the vast majority of the transaction, while the MPC wallet protects the rest,” said GK8 in its announcement. “This means a hacker would have to invest much more in breaking into the MPC wallet than they could ever gain from stealing from it. GK8’s solution therefore enables hot-wallet functionalities through its MPC, all while leveraging the security standard of the fully hack-proof cold wallet.”
GK8 also claims the premiums are low because of the low risk. Generally, cold wallet insurance is much cheaper than hot wallet insurance.
The company provides an on-site digital asset custody system, which it says enables financial institutions to get high access to digital assets. Leading Israeli cybersecurity experts founded and advise the company. For example, the former head of Israeli intelligence cybersecurity, Ilan Levanon, is an adviser.
But there is a caveat on the insurance. The clients have to comply with security recommendations.
“We have worked hard to demonstrate the validity of GK8’s solution to insurers so that the company’s clients can benefit from pre-negotiated insurance coverage to protect the digital assets in their care, custody, or control,” says Tom Davis, Client Director of Aon UK Ltd.
In the last year or so, the availability of insurance coverage for digital assets has increased significantly. And both Arch and Aon have been very active. It brokered hot wallet insurance for Coinbase to the tune of $255 million and a similar kind of cover for the Gemini Trust (Winklevoss twins). Plus, it has secured coverage for multiple specialist custody solutions with big name backers, including Trustology (Two Sigma, ConsenSys), Anchorage (Visa, Andreessen Horowitz) and METACO (Swisscom).
Update: GK8 says the coverage is up to $500 million per wallet. We previously stated in aggregate.
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