What Are Cryptocurrency Custody Solutions?
One topic not talked about much in crypto circles is cryptocurrency custody, so we’re going to talk about it instead.
A cryptocurrency solution is a security and storage system that is completely independent and is there to hold digital tokens and crypto in large quantities.
These custody solutions have only been introduced in the last couple of years and further highlight how important crypto is becoming. It’s a massive step in the right direction in getting businesses and institutions to take digital tokens and coins seriously.
But why are they necessary? And what options are there to choose from? Let’s take a look in more depth below.
Why Are Cryptocurrency Custody Solutions Needed?
The overall purpose of a custody solution is to keep crypto safe and secure, especially in large quantities. But don’t we have crypto wallets for that?
Well, yes. When you have Bitcoin or altcoins, you can choose hot wallets, cold wallets, or even paper wallets to keep your crypto safe. You can have multiple ones in use at once and some don’t even have limits.
However, hot wallets require an online connection, and anything that is online has the potential to be hacked. In the past, online wallets have been hacked as well as currency exchanges. While it’s rare, it’s not impossible.
Added to this, private keys, which are issued alongside a wallet are difficult to remember. Because of this, people often write their private key down and end up losing the number or having it stolen. If it’s stolen, all the crypto in the associated wallet can be emptied in just a few minutes.
Between the possibility of losing paper, having numbers stolen, having wallets hacked, or even, for example, in the case of paper wallets, losing your private key due to wear and tear over time, many investors want an even more secure way to hold their cryptocurrencies. In particular, investors that are businesses or large organizations rather than private individuals.
If an individual loses their crypto, they could lose a few thousand dollars, if a large organization loses their crypto, they could lose millions. Due to this, large investors have consistently taken “dramatic” steps to safeguard their assets.
For example, major investors have been known to section off the private key onto multiple pieces of paper and store the pieces of paper individually in separate storage units in different locations.
This means someone has to have all the locations and then all the pieces of paper to know the private key. Is this extreme? Well, if there are millions of dollars on the line, then no, it probably isn’t that extreme.
Safety and security have played a big role in the need for custody solutions. However, another reason for them is regulation.
According to the Securities and Exchange Commission of America, “Institutional investors that have customer assets worth more than $150,000 are required to store the holdings with a qualified custodian.”
And with hefty fines in place for any institution not following the rules, it’s essential that these custody services are available.
How Do Cryptocurrency Custody Solutions Work?
Custody solutions are provided by third parties to ensure that large amounts of crypto are kept safe. These types of storage solutions are tailored for large corporations, organizations, hedge funds, and the like rather than individuals. The storage mixes both hot and cold storage facilities called vault storage and is closely monitored.
Hot storage is beneficial because crypto can be quickly liquidated or accessed, however, due to it being online, it is more vulnerable to hacking.
Cold storage is offline, therefore, hacking is not an issue. However, crypto cannot be liquidated quickly because of its offline nature. You must plan ahead if you want to sell or exchange any crypto you have on a cold storage solution.
So, vault storage uses both, where the majority is held offline in cold storage with some in hot storage for quick access if the investor needs it.
Who Provides Cryptocurrency Custody?
As of now, Coinbase is the most well-known option for a custody solution. Like most features and innovations in crypto, Coinbase is always there to implement new services and keep up with the community. Most notably, Coinbase currently works with California's Keystone Capital and provider Xapo.
Recently, Swiss bank Vontobel also launched a Digital Asset Vault aimed at institutional investors who needed storage solutions for their crypto also.
What Does the Future Hold?
Custody solutions are exactly what the crypto space needed in terms of storage for large investors and organizations. As time goes on, it’s expected that more and more established names will start offering custody crypto storage. When this happens, this could shake things up, but for now, Coinbase is doing most of the work.
Another aspect that could change custody solutions is the regulation aspect. Especially, if each country has its own regulations in place or makes changes in the future regarding the regulation of crypto.
However, as of right now, the custody solutions being provided by some top companies are far safer and more secure than anything introduced previously.
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