Institutional Crypto Custody Infrastructure for Exchanges

Many firms will need to stand up new operations specifically designed for digital asset custody. By deploying robust, institutional digital asset custody infrastructure, crypto exchanges can overcome these challenges and unlock new revenue models across digital asset use https://www.xcritical.com/ cases. Let’s dig into a few of the ways exchanges can prepare for this next evolution.

Digital Asset Custody 101: Guide to Self Custody, Wallet Options, and More

Like financial institutions that secure your traditional monetary assets, crypto custodial services protect your digital assets from theft and unauthorized access. Owners What Is a Crypto Custody of cryptocurrencies and other digital assets will increasingly rely on crypto custody providers such as banks and other financial services firms to store their assets. In that sense, the distinctions between crypto and other types of financial assets will blur or even disappear.

What are the different types of crypto custody storage solutions?

According to the Securities and Exchange Commission (SEC), such entities include banks, savings associations, and registered broker-dealers. Futures commission merchants and foreign financial institutions must adhere to these regulations. There are very few traditional banks within the cryptocurrency ecosystem that provide custody services. Kingdom Trust, a Kentucky-based custodian, used to be the largest such service for cryptocurrencies Cryptocurrency wallet until BitGo, a San Francisco-based startup, acquired it. As cryptocurrencies have matured as their own asset class there has been an emergence of digital asset managers that act like banks for crypto holders.

• A user-friendly interface and seamless transaction processes contribute to a positive experience for crypto asset holders.
• A rapidly growing number of businesses and individual investors recognize the value of digital assets such as cryptocurrencies and are seeking to own them.
• The decentralized nature of cryptocurrencies means that users are solely responsible for safeguarding their private keys, which are required to access and transfer their funds.
• As the cryptocurrency market continues to evolve, the importance of robust and reliable custody solutions will only grow, providing a secure foundation for the future of digital asset management.
• A common complaint about these benefits, however, is that they mostly apply to newbies (convenience) or high-net worth individuals (liquidity and some bank-style protections).
• For example, online or hot wallets are connected to the internet and therefore generally more easily accessible.
• They must provide clear, unbiased information on crypto transaction risks, pricing, fees, and environmental impact data.

How to Think About Custody of Digital Assets

In addition, they offer off-chain storage where you can store your private keys and keep your crypto holdings safe from theft. For those seeking complete control over their digital assets, a self-custody solution might be the best choice. This option affords you complete control of your cryptocurrency via a personal private key — a well-formed and unguessable number that grants you access to your assets. Within self-custody, there are software wallets, which come in the form of desktop wallets, mobile wallets, and online wallets, and hardware wallets, which store your private key in a secure hardware device. While controlling your own storage might sound appealing, there are inherent risks to this option, as there is no third party like a bank or cryptocurrency exchange that can intervene if you lose your private key. Custody in the context of cryptocurrencies refers to a digital asset management solution that supports the safe storage and security of sizable digital currency holdings.

Blockchain can make many things easier, but reconciliation isn’t one of them. To accomplish a reconciliation of your and your clients activity, you may need to gather huge volumes of data for each blockchain you operate on. You may also find (if you’re prepared) highly detailed data, such as the source and purpose of many transactions on the blockchain and the history of many assets involved. Giant crypto exchange Kraken has just launched a new suite of crypto derivatives for wholesale clients in Australia. Just be sure to follow best practices so that you are able to recover it should you lose it. With that in mind, there are two main types of crypto custody for you to know.

Those who do not want to take the responsibility of managing their own accounts or find it too intimidating to deal with the tech might want to turn to a third-party custodian. These are registered, regulated financial institutions that have acquired a state-level or national license to act as a custodian. Crypto custody is a solution to help address the evolving security needs of cryptocurrency users. As such, it’s an essential topic for traders and users of all experience levels to understand and apply.

Only after regulators step in and establish ground rules for the industry will it be able to evolve. The company waives the setup fee so you don’t have to pay to open an account but any withdrawal from the account costs $125, which is deducted from the crypto asset you withdraw. As you move through the due diligence of finding a crypto custodian, don’t forget to consider the legal requirements of the jurisdiction you’re based in. As the global regulatory structure continues to take shape, you may find that your local authority has specific demands when compared to another, which inevitably impacts your custodian of choice.

The keys are held online and transactions can be created automatically, but human involvement is needed to sign the transaction and send it to the blockchain. Custodians hold approximately US$220B of digital assets, representing 10% of the total crypto market capitalisation. People have developed many ways to store private keys offline—on paper, hard disk, or in commercially available electronic wallets manufactured for security. However, these devices can be lost or stolen, and in some cases, they can be hacked, so recovery may not be an option. Multi-signature wallets require multiple private keys to authorize transactions, adding an extra layer of security. For example, if you lose or forget your private key, there is no backup, and you cannot approach a third party to provide you access to your funds.

By utilizing a robust framework, custodial solutions can be objectively and thoroughly assessed, enabling an advisor to unlock the unique benefits of digital asset custody. Here we review the basics of our framework which can be expanded to fit individual needs. If you build a digital asset custody service from the ground up, you’ll potentially have some big advantages.

Strong governance and prudential safeguards are essential, ensuring capable and reputable directors and managers. Compliance with MiCAR, including a minimum capital requirement of €125,000 for Crypto Custodians, is mandatory. All these firms offer a diverse mix of products and services, including staking, prime brokerage, lending, decentralised finance (DeFi), accounting, and trading. The Ethereum Foundation’s latest financial report shows that as of October 31, 2024, it holds $970.2 million in both crypto and non-crypto assets, with $788.7 million in cryptocurrencies,… When you’re weighing which crypto custody solution to choose, first consider your needs.

They provide a much-needed service for the crypto industry, serving as crypto on-ramps. In this regard, CEXs are very bank-like, giving users some familiarity and confidence in the services they provide. These incidents have emphasised the need for independent and robust custody solutions as trust within the ecosystem has eroded. Since the launch of BitcoinMarket in 2010, crypto exchanges have been buffeted by constantly changing market dynamics. From evolving customer needs and rapid crypto cycles to new regulatory frameworks, crypto exchanges have lived by the mantra that the only constant is change.

In contrast, custody services offer an experience akin to traditional asset custodians. For asset managers and advisors, custody services are the likelier choice given regulatory interpretations, risk management, technical capabilities, and best practices. These custody service providers oversee asset movements, settlement times, and security.

Goldman has been conspicuously absent from the list of names offering cryptocurrency solutions, but this doesn’t mean they are not involved. The financial giant has been quietly working behind the scenes on cryptocurrency and blockchain solutions, which may, in time, include crypto custodial services. Another large financial services provider, Fidelity, created its Digital Assets Services for cryptocurrency custody. The main utility of cryptocurrency custody solutions lies in safeguarding cryptocurrency assets.

As a result, digital custody will be critical to enabling the continued expansion of digital assets. Crypto custody involves the safe storage and management of private keys that grant access to cryptocurrencies. It’s akin to a digital safekeeping service that prevents unauthorized access while allowing owners to engage in transactions. Crypto custody solutions bridge the gap between security and usability, catering to both individual and institutional investors. Governments worldwide are creating new regulations for managing digital assets and clarifying how existing regulations should be applied to digital asset custody.