The need for flexibility and security in today’s digital asset economy – A multi-custody approach
Investing in the new digital asset class means investing in its underlying technology, understanding the dynamics of these new markets and securely storing digital assets. This is why a multi-custody approach is at the core of Sygnum’s secure digital asset banking.
This solution also reflects Sygnum’s principles: to ensure our clients’ trust is protected, to build tech solutions that support this, and to operate in the spirit of the open networks made possible by Distributed Ledger Technology (DLT).
There are increasing benefits to a multi-custody approach:
Higher transaction frequency
More flexible transaction types
Process smaller ticket sizes
Meet retail bank requirements
Support B2B banking adoption
The irreversible nature of blockchain transactions will always pose security risks for crypto investors of all kinds. Investing in this new asset class also means investing in its underlying technology. Processes are virtual, complex and interconnected via multiple networks, requiring innovative new forms of orchestration to ensure transfers are always secure and trustworthy.
Crypto assets provide investors with accessibility into an array of new market use cases, but the risk is also higher when these services are used regularly (i.e. they can result in wrongful transactions, bad key management or hack attempts on exchanges or platforms). When investing large amounts of capital in crypto assets, stakes are that much higher, and the responsibility for private key management poses even greater risks, should you lose your private keys or recovery phrases.
The rising value of digital assets has led to an increase in the demand for storing and safeguarding these assets in a secure and reliable manner. Many crypto exchanges and platforms hold a substantial number of assets on their exchange wallets, making them prime targets for hackers who have consistently tested their security systems or exploited vulnerabilities in their smart contract codes. Successful hacks and flaws in protocols have led to wallets being drained and billions of funds stolen from customers without any recuperation means possible (USD 3.2 billion from 251 hacks in 2021 alone).
Many investors attempt to circumvent these risks by storing their digital assets on hardware devices (i.e. from Ledger or Trezor), but for institutional investors, the responsibility of managing these devices (and private keys as well as transfer processes) can become burdensome. For institutions, it is also a matter of upholding their fiduciary obligations as a trustee. This means they require best-in-class custody solutions, which are developed and managed by industry experts. Without such custody solutions, institutions are limited, if not incapable of entering the crypto markets as many are dependent, due to regulatory obligations for regulated solutions. In this regard, custody solutions will always be a vital organ supporting institutional adoption of digital assets.
Flexibility equals accessibility
Custody solutions are in abundance and their additional services may vary, so what makes some of them unique? Digital assets are continuously evolving, both from a technological and regulatory perspective. They may flow into innovative new channels and client demand may shift in accordance with these changes, so custody solutions need to remain agile, adaptable and heterogenous in nature.
Crypto custody solutions need to attune to and exploit new opportunities that were non-existent a few years ago (on top of providing a “safe haven” for storage). The challenge for crypto custody solutions is offering customers these opportunities while ensuring the custody infrastructure provides the highest standards in security, reliability and regulation. With all of this in mind, this is how Sygnum approaches its custody solution and strategy.
Sygnum custody strategy and guiding principles
Sygnum is not just a regulated bank. We are also a technology group, which allows us to align with the technological advancements of a fast-changing digital asset ecosystem. Our clients have both bank-grade security and access to an array of decentralised finance (DeFi) opportunities, which may seem contradictory if your only reference is crypto market news headlines.
Not only does this allow Sygnum to benefit from dFMI (decentralised financial market infrastructure), but our regulated status ensures that we uphold our guiding principles and core convictions, which are the key drivers behind our multi-custody strategy. This combination of guiding principles and core convictions is (and always has been) the premise of Sygnum’s multi-custody platform approach.
Principle 1: Protecting our clients’ trust is Sygnum’s highest priority
Protecting our client’s trust means that our banking platform is built on infrastructure that complies with the highest industry standards. These standards ensure we meet our fiduciary duties without exception, incorporate client protection measures from both a reliability and security standpoint and adhere to our regulatory obligations as a bank.
Our unique approach ensures our clients’ assets are held off-balance sheet, in a regulated, highly secure and fully segregated environment.
Our clients own their crypto assets, no matter what – even in the unlikely event of a Sygnum insolvency.
Our bank-grade operations and hosting of our infrastructure is audited and certified by reputable independent parties (i.e. PwC).
Principle 2: Provide a heterogenous, scalable offering with a great user experience
To broaden the scope and use cases of our offering, Sygnum invested heavily in the development of its own custody solution that combines our own technology with leading third-party solutions. This combination allows us to optimise user experience for our clients, refine our custody solution and scale up to the volumes they require. Furthermore, this combination enables us to be a pioneer instead of relying on off-the-shelf products.
Together with Swisscom, Sygnum launched the joint venture Custodigit AG, the first institutional-grade digital asset custody platform that was fully integrated with traditional banking infrastructure. Custodigit has servers hosted in multiple Tier IV data centres, integrates with other leading digital asset technology providers (including METACO and AlgoTrader) and is both ISAE 3000 and ISAE 3402 certified by PwC.
Sygnum launched its end-to-end tokenization solution, which includes an on-chain primary market issuance platform, secondary market trading facility as well as a Digital CHF stablecoin – the first of its kind issued by a regulated bank.
Operating our own custody solution enables us to exploit our technological capabilities and build proprietary applications to interact with blockchain and smart contract functionalities. This equips Sygnum with a flexible bank-grade solution to access and exploit opportunities across a broader set of use cases.
Our custody solution also serves as the core technical infrastructure for yield-generative use cases, such as Ethereum and ICP staking. Our core infrastructure allows us to tap into DeFi (i.e. by depositing assets held under Sygnum custody in a decentralised lending pool).
Principle 3: Always operate in the spirit of DLT and open networks
Sygnum will always operate in the spirit of Distributed Ledger Technology (DLT) and open networks, and not behind walled gardens, making us a core contributor to a rapidly evolving ecosystem. We continuously review our approach to ensure we remain in sync with blockchain and digital asset tech advancements. This includes adapting to evolving client needs and exploiting new opportunities while aligning with the required regulatory and legal developments to consolidate our multi-custody platform into its best form.
Our principles and core convictions will continue to guide Sygnum’s strategy now and in the future. In the spirit of DLT and open networks, we will continue to develop Swiss infrastructure that can integrate with the ecosystem’s most advanced and proven solutions and include these seamlessly in our regulated digital asset banking platform.
Learn more about digital asset banking at Sygnum here.
This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.