Published date: 2023/05
What do we mean by digital assets custody? Let’s start with some definitions:
Digital Asset: A digital asset is a virtual record of value held on, and transferred, securely, across a shared cryptographically secured ledger. Not just cryptocurrencies, digital assets include Central Bank Digital Currencies (CBDCs), stablecoins, digital bonds, digital equities, digital real estate, digital share classes of mutual funds and non-fungible tokens (NFTs). The digital asset market is worth trillions of dollars; in the future it is expected that the majority of as all financial products will be ‘tokenised’.
Custody: In financial and capital markets, custody refers to the secure safekeeping (and settlement) of assets such as shares and bonds. In the same way that ‘traditional’ assets are looked after by custodians, new digital assets must also be ‘held’ securely.
Quantum-safe cryptography: This refers to efforts to keep assets secure with cryptographic algorithms that are resistant to attacks by both existing and quantum computers.
Why is custody so important?
Security is the key element of effective custody. It leads to trust, specifically with respect to authorised access to financial assets. Traditional custodians prevent non-authorised persons from accessing or otherwise misusing financial assets; similar measures are also required to safeguard digital assets. In fact, ‘security of digital asset custodians’ ranks ninth out of the ten standards described in the ISO Standards for Blockchain and Distributed Ledger Technologies (ISO/TC307).
While safekeeping requirements are simple to define, in practice, they are much harder to implement. Security, speed and scalability are the trifecta of challenges that must be overcome by any provider with respect to delivering financial services and it is no different for digital assets custody solutions. In keeping with the old school technology model of ‘better, faster, cheaper’, however, it is often difficult to satisfy all three criteria simultaneously; one tends always to be sacrificed. (Many traditional custody solutions focus more on security and scalability aspects, offering various flavours and combinations of hot wallet, warm wallet and ‘cold vault’ solutions).
As we emerge from the ‘crypto winter’ there is pressure on regulators to ensure assets (and consumers) are protected properly. Digital assets custody is not just about technology; it is about the ability to deliver multi-layered physical and digital security processes. It is also about quickly and securely matching diverse customer needs with the right tools and services.
Balancing risk and innovation, is real-time cold storage the Holy Grail of digital custody?
Given regulatory changes, market infrastructure developments and enhanced risk awareness, the drivers for success for digital assets custody are trust, transparency, and integrity. Custodiex is the first custody solution to resolve these three key issues. Leveraging blockchain technology and storing assets off-line (but accessible within seconds), its cold storage solution also meets the core criteria of security, speed, and scalability.
Each Custodiex cold storage vault contains fully segregated assets; in seconds, users can create multiple (indeed, millions of) separate vaults,. Customers can create millions of cold storage vaults in seconds, and validate, authorise and execute transactions in milliseconds, with assets independently verifiable on the chain and completely segregated for safekeeping and compliance purposes. (In terms of accessibility, the actual storage of digital assets can be held in multiple jurisdictions through a variety of cloud providers).
What sets Custodiex apart is that its workflows are completely ‘trustless’, totally automated processes ‘authorise’ transactions without any human intervention as in, no need to ‘trust’ (rely on) the actions or intentions of any human. It is also quantum-safe, cryptographically agile, standards-based, and compliance-focused with best-in-class, financial institution-compliant security across its physical facilities (ex-Ministry of Defence buildings), hardware, software, people, and processes. Digital asset-agnostic, the solution also has automated authorisation workflows, user authorisations, flexible security and access policies, and leading-edge cryptographic technology.
How do we restore trust in a ‘damaged’ industry?
On the heels of recent bad actor events like FTX, the continuing thaw in the so- called ‘Crypto Winter’ will be predicated largely on shifting negative market perceptions towards digital assets and regaining institutional and consumer trust. Institutional-grade custody solutions, mandatory segregation of trade execution and custody functions and improved financial transparency (audits/proofs of reserves) will go a long way to restoring that trust.
You can read Kam's article and further industry insights in the latest edition of The Financial Technologist. Download your free copy here.
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