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  • Writer's pictureTeam Sygnum

Institutional Take on Digital Asset Custody

Institutional investors are increasingly open to adding digital assets to their portfolios, but a few factors stand in their way of embracing digital assets. Mainly, current digital asset custody solutions do not meet institutional investors’ legal, security and liquidity requirements.

Private keys have been stolen, lost, and even forgotten. Lax security has cost retail investors billions and could cost institutions trillions. The safest way for institutional investors to store digital assets would be to store their private keys offline. However, this method of storing digital assets also makes these assets illiquid. While HODL[1] retail investors accept the illiquidity, institutional investors cannot.

We believe that any digital asset custodial service provider should adopt the immutable and transparent features of public blockchains and provide the market depth and liquidity offered by traditional banks.

Understanding the current solutions: Choosing between liquidity or security

Exchanges such as Coinbase and Gemini provide custodial services that are integrated with trading facilities. They are therefore able to offer instant trade settlement and withdrawals[2]. However, assets are not segregated, and individual asset ownership is recorded off-chain, resulting in increased counter-party risk. Further, numerous major digital asset exchanges tend to suffer temporary service outages during periods of acute price volatility leaving many users unable to access their portfolios.

An alternate solution would be to adopt self-custody - storage of digital assets offline in hardware or paper wallets. This custodial method is highly secure and cost-effective. However, physical storage of the hardware or paper wallet is required. Storage of digital assets offline also removes the possibility of integrated trading facilities.

Finally, we arrive at custodial service providers. These could be regulated and offer the high-level of security required by institutional investors. On the flip side, these custodial service providers may not be integrated with a trading facility and withdrawals could take over 24 hours.

In addition, most of the above-mentioned options do not provide multiple parties access to a single account or provide for complex multi-authorization processes needed by institutional investors.

We believe that any digital asset custodial service provider should adopt the immutable and transparent features of public blockchains and provide the market depth and liquidity offered by traditional banks.

Can one have both liquidity and a high level of security?

There is an innovative solution that builds on the best-practices of traditional banks and takes advantage of blockchain technology. Institutional investors can have both liquidity and a high level of security, while meeting legal requirements. This approach builds on the following:

Integration: The solution integrates with the current banking system. It includes first class trading partners so there is enough liquidity for asset managers to trade digital assets. It makes converting fiat currency to cryptocurrency, and back again, as seamless as converting Dollars to Yen and Yen to Dollars.

Don’t trust, verify: The solution takes advantage of blockchain technology and the individual private keys are not accessible by the custody bank (or their partners). Each client’s digital assets should also be kept segregated.

Anti-money laundering (AML): It adapts and innovates current AML best practices, tailored to digital assets.

Ease of use: It doesn’t require technical knowledge and is as seamless as the traditional banking experience.

Regulation: The solution is held to the same legal standards as that of traditional banks.

Security: The banking infrastructure architected to provide institutional-grade security for custody of digital assets.

With the above principles implemented in a custodial solution, such as that provided by Sygnum, institutional investors will have the security and confidence needed to enter the digital asset economy.

[1] A misspelling of “hold” that refers to a buy-and-hold strategy in the cryptocurrency community

[2] Depending on how long the transaction stays in the mempool and how long it takes for the changes to propagate

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