For retail investors, self-custody can be the best option because it is simple, and it gives such investors exclusive control and access over their digital assets. For investors making use of self-custody solutions, they can choose either a hardware wallet, software wallet, or even third-party offline storage in a cold wallet.
Regardless of the form of storage chosen (online or offline), investors who use self-custody solutions are provided with a personal private key, a strong and unguessable number that guarantees their access to the digital assets.
While self-crypto asset custody gives the owner absolute control, it can be dangerous too. In a case whereby the investor loses his private key, he loses his assets completely unlike the other forms of storage where either the crypto exchange or bank can help to recover the key.
Some examples of self-custody solutions include: Trezor, Ledger, My Ether Wallet, Open Dime, Bread, Mycelium, Casa, Blockchain, Electrum etc.
Another form of storing crypto assets is by using crypto exchanges. Through this avenue, investors can protect their assets with two-step authentication or basic multi-signature protections.
Unlike the self-custody option, the owner of the asset does not have absolute control over his assets when using crypto exchanges as the exchange has a measure of right to access the investor’s assets and also co-sign his transactions. They are also prone to hacking.
Some examples of exchanges include Binance, Coinbase, Kraken, Bitfinex, Huobi, Bittrex, Poloniex, etc.
For institutional investors, hedge funds, high-net-worth individuals, or asset managers, who deal with large amounts of digital assets, the self-custody or use of crypto exchanges is not advisable to avoid loss of assets.
The best option for them to guarantee a high level of security is third-party digital asset custody where a third party, usually an expert or professional, stores and protects their cryptocurrencies.
The Need for Third-Party Crypto Custody Solutions
A handful of reports of individuals losing their crypto assets are usually due to forgotten passwords or private keys. Investors who use hardware wallets for their assets often store their private keys on a paper or electronic device.
However, some, in the long run, lose those materials, thereby losing their assets too. Meanwhile, those who make use of online wallets are susceptible to hacking. Even crypto exchanges that some investors turn to have recorded incidents of hacking like Mt. Gox or they fold up.
In addition, the law does not permit Institutional investors or firms that buy assets on their behalf to handle crypto assets the same way a retail investor would.SEC regulation that was publicized as part of the Dodd Frank Act, made it mandatory for institutional investors who have customer assets worth more than $150,000 to store their assets with a “qualified custodian” before they can move into the crypto market.
By qualified custodians, the regulation meant that such investors could make use of banks, futures commission merchants, savings associations, foreign financial institutions, or any registered broker-dealer. But it turns out that there are very few mainstream banks that offer custodian services within the cryptocurrency space.
For the above reasons, institutional investors who have a lot more to lose make use of third-party crypto custodians.
Examples of Crypto Custody Solutions
There are a number of crypto custody solutions already active in the marketplace.
Coinbase cryptocurrency exchange and wallet provider launched its custody service in 2018 and is now one of the largest custodians in the crypto space. The custody is a fiduciary of the New York State Banking Law and is regulated under its financial services department.
Coinbase custody claims to segregate all of its clients’ digital assets for their benefit. It also maintains one of the best insurance policies to protect both online and offline assets across all of its products.
BitGo is another crypto custody for institutional investors, launched in 2013. The company is primarily cold storage custody and is a regulated Trust Company under the Division of Banking in South Dakota.
The custody offers services for over 100 digital currencies and tokens and, like Coinbase custody, claims to hold its clients’ assets in segregated accounts.
Gemini was launched in 2015 by the Winklevoss twins, Cameron and Tyler. The custody is a fiduciary under New York Banking Law and is licensed by the State of New York to store digital assets. It also claims to be the first crypto custodian to have SOC-I and SOC-II compliance.
Gemini provides custody for both individual and institutional investors and claims to have secured $200 Million in cold storage insurance coverage, the largest for any crypto custodian.
How Crypto Custody is Changing the Crypto Landscape
Like every financial system, a good custody arrangement is beneficial for success. One of the hindrances to mainstream adoption of crypto is a good storage system for the assets as investors are scared of losing their funds.
However, with the explosion of new custody services, including crypto exchanges and third-party custodians, to satisfy both retail and institutional investors, the number of people adopting crypto has increased.
For instance, Coinbase alone recorded an outflow of $674 million worth of Bitcoin. Also, the fact that third-party custodians are recognized as qualified custodians has opened the way for many institutional investors to cross into the crypto space.