Why Are Crypto Custodians Necessary for Institutional Investors in 2023?
Currently, crypto custodians play a significant role in the future popularity of the crypto application because they assist in the expert management of the investors' assets and serve as a more convenient and secure entryway to the world of cryptocurrencies. In this article, SCB 10X will introduce you to a different aspect of cryptocurrency custody and show you how to evaluate effective custodial service providers in order to make an important choice for investors.
Why is crypto custody important to institutional investors?
Crypto custody, or the maintenance of the security of digital assets (cryptocurrency), has emerged as a result of the difficulty in remembering and vulnerability of the private key, which is a code for carrying out transactions or accessing the possession of crypto. Similar to cryptocurrency exchanges, methods for storing digital assets, like an online wallet or exchange wallet, carry a high risk of hacking. Even an offline private key could disappear. It is quite challenging to get it back if it is lost.
Crypto custodians become significant and play more roles in the world of cryptocurrencies, especially for institutional investors, who hold more assets and are riskier than retail investors. Having an expert look after those assets for them is then necessary.
To sum up, crypto custody is a method for preserving the security of a private key that is utilized to access funds in digital wallets. A financial institution, as defined by law, serves as the custodian for traditional banking. However, in the world of cryptocurrencies, asset owners have the option of keeping or managing their assets themselves as well as hiring qualified third parties to serve as their custodians. The two main types of cryptocurrency custody are then as follows.
- Self-Custody refers to the holding of private keys by the investors themselves, possibly through the use of hardware or software. Investors will hold their own private keys. It implies that investors will have complete control of their own digital assets without relying on a third party.
- Third-Party Custody: People who do not want to manage the accounts themselves or who are not proficient in complicated technology should use third-party custody. Typically, this custodial service is built to serve institutional investors, raising the standard of security maintenance. In order to act as an asset keeper, the crypto custodian needs to be registered under control and granted a state or national license.
How do institutional investors choose crypto custodial service providers?
It is undeniable that institutional investors should be concerned about custody in order to protect their digital assets from the risk of being attacked by hackers or other factors. Institutional investors must understand the "protocol", "control", and "regulations" of the various crypto custodial services available on the market to effectively protect their digital assets.
Essential elements for custody security maintenance
Numerous operational and management processes for digital assets are essential for institutions. The first and most crucial one is taking into account the rules and technical accuracy that serve as the basis for securely storing assets. According to data from Anchorage Digital, there are four things to be aware of when considering complete custody security.
- Generation: Though frequently overlooked, this stage of the data storage cycle can have some of the most delicate vulnerabilities. The following are things to be concerned about.
- The source of the private key
- The generating process if it is manual or automatic
- Neither third parties nor hackers were involved in the generation process.
- Storage: Another crucial component of determining custody status is the protocol used to store private keys. In addition to realizing the methods for storing assets, it is important to take into account the track record and experience of the custodial service, including the process and location of the storage, as well as the risk in the event of unexpected events or crises that could harm the private keys.
- Usage: Another important aspect of safe custody is the accuracy, scope, and secure framework for using and accessing the elements of the private key. The use of private keys should be protected by a similar standard as other private key components. The protection of assets while they are in use and the consideration of the policy for the creation and use of private keys are a few examples of what should be of concern.
- Responsibility: The technical settings from the beginning to the endpoints, as well as every channel related to the safety cycle, are where the safety of assets begins. It is challenging to make technological safety corrections. The key to assisting the institutions that use the service to clearly trust and can extremely focus on their businesses is reassuring institutional investors about the safety responsibility of the custody. The verification and regulation of the custodian's obligations, as well as the identification of the person in charge of the private key's security, are a few examples of what institutions should take into account.
The crypto custodian is another significant element for enabling the future widespread use of crypto or digital assets. It allows investors to store their assets with custodial service providers who are licensed and trustworthy.
The primary advantage of crypto custody is the protection of assets targeted at institutional investors, such as hedge funds held by numerous digital currencies.