Cryptocurrency investors are betting billions on crypto custody providers, which provide security for digital assets. Israel-based Fireblocks became the highest-valued crypto-asset custodian in January after raising $550 million in a new funding round, pushing its valuation to $8 billion. But what is crypto custody and why are investors willing to pour such huge sums into it?
“Crypto custody providers offer services that enable institutional and private players to access and operate in the crypto market and to securely store and use their funds. Investment banks, hedge funds, asset managers… are exploring the custody market due to high customer demand, (and) as a result we will see more crypto custody providers join the market,” says Oriol Caudevilla, co-head of the digital central bank. (CBDC) and Blockchain Working Group at the Global Impact FinTech Forum.
What are virtual digital assets? Read here to find out.
What is Crypto Custody?
Digital asset custodial providers offer custody and protection of a customer’s crypto assets, including management of a customer’s private keys or related custom solutions from a technology provider. Crypto custody involves the storage, processing, and security measures put in place to ensure maximum protection while reducing the risk of potential theft, hacking, and other forms of misappropriation.
According to a January 2022 report by investment firm Blockdata, since the start of 2019, assets under custody (AUC) have increased by 600%. The same report further notes that digital asset providers raised $4,577 million in January 2022.
Various entities such as Coinbase, Paypal, Genesis, and Gemini have acquired crypto custody infrastructure companies to improve their security for crypto assets and offer new services.
“Cryptocurrency custody is the missing link between web2.0 and web3.0. It is therefore important to create seamless user onboarding experiences for non-crypto natives to enable widespread crypto adoption. The recent phishing attack on the OpenSea NFT (non-fungible token) marketplace, which resulted in the loss of over $2 million worth of NFTs, highlights the importance of having the right training when it comes to the custody of digital assets says Sharat Chandra, Vice President, Research and Strategy, EarthID, a decentralized global autonomous identity management platform.
Learn more about the OpenSea attack here.
Why the need for crypto custody?
With the expansion of the cryptocurrency market, the value of crypto assets goes hand in hand with safe and secure storage options, as they increasingly become attractive targets for hackers and theft.
The Blockdata report highlights that in light of recent events, such as the $196 million Bitmart exchange hack and the $97 million Liquid exchange hack, the importance of storage is an ongoing concern for the industry. ‘industry. Storing assets securely with a custodian can make key management work easier. With a professional custodian taking on this responsibility, investors can be relieved of many of the general risks associated with self-storage.
“Digital wallets and deposits are designed to address crypto security issues. Wallets are for everyone, while crypto custodial services are primarily for institutional investors, including hedge funds and those who hold large amounts of Bitcoin or other digital tokens,” says Edul Patel, CEO and co-founder of Mudrex, a crypto investment platform.
In 2021, Chainalysis reported that around 20% of all Bitcoin in existence appeared to be in lost wallets, worth $205.8 billion as of December 2021.
Despite claims of secure digital wallets (hot wallets; connected to the Internet), they are attractive targets for hackers. Thus, custodians offer investors more secure, regulated and offline storage options (cold wallets, not connected to the Internet) to mitigate these risks.
About 10% of all cryptocurrencies (worth $247 billion as of December 2021) are currently stored by eight custodial providers, the report says. The eight providers are Coinbase, Bitgo, Fireblocks, Gemini, Ledger, Matrixport, Nydig and Bitcoin Suisse.
How is Crypto Custody different from a digital wallet?
A custodial platform solution involves opening an account and then letting the platform manage and secure the digital assets. Digital wallets are intended for individual users, and users are responsible for safeguarding their assets and digital wallets.
Does India Have Crypto Custody Providers?
Currently, India does not have a custodial wallet. “In the current system, there are no major custodial solutions in India. Either you have your digital assets on an exchange, on a cold wallet like Metamask or other crypto wallets. You have to be extremely careful with these Or, you’re on a hardware wallet like Ledger nano, which gives you more security controls and limitations than a cold wallet, making them safer but not the easiest to use,” says Prashant Malik, general partner of Tykhe Block Ventures, a solidifying investment.
Finding the right balance between usability and security is a challenge for digital asset custodians. “Cybersecurity is another challenge, given the online nature of digital assets and their vulnerability to hackers,” says Patel.
According to some experts, most crypto exchanges offer default custodial models on their own online wallets, so there is almost no demand for crypto custodial providers. “The default custodial models for most crypto exchanges is to offer their own online wallet, and this is an integrated service to their main service. Custodial responsibilities place responsibility for the security and custody of the crypto asset on the custodian, and exchanges have in the past been targeted by hackers who may break in to steal the cryptocurrency,” says Harish. Prasad, Head of Banking Services at FIS. He further noted that regulatory compliance related to anti-money laundering laws will likely also extend to any entity offering crypto custody services in India.
Is India ready for institutional custody of digital assets?
Vikas Ahuja, CEO of CrossTower India, a crypto exchange, says institutional custody of assets is more secure. “Institutional custody of assets is more secure since custodians add an extra layer of security to wallets. Some even have their wallets insured. Some wallets have a combination of cold and hot wallets.
At the same time, says Purushottam Anand, lawyer and founder of Crypto Legal, a blockchain law firm, “It is extremely important to regulate companies that provide ‘custody’ services for cryptocurrencies. Most crypto exchanges in India keep custody of cryptocurrencies with themselves and technically provide custodian services to investors as well.”
Compared to physical assets, virtual digital assets are more susceptible to cyber theft, cyber fraud, or even incorrect blockchain transactions. “There are, however, no specific regulations regarding the minimum standard of technology and security to be maintained by these exchanges, which exposes investors to unlimited risk in the unfortunate event of the loss of these assets in the custody of the exchange. “, says Anand.