Digital assets are the underlying value of many online accounts. These include email accounts, social media profiles and even cryptocurrencies.
When stored and transferred carelessly, these assets can be lost by unauthorised parties. Therefore, securing digital assets is a top priority.
The Total Crypto Market Is Now Reaching $US 2 Trillion
The total crypto market is now reaching $US 2 trillion, according to data and market trackers Blockfolio and CoinGecko. The increase in value has prompted a surge in interest from both institutional and retail investors.
Institutional investors have been looking to boost cash returns in the near-zero interest rate environment, and are pouring billions into Bitcoin. Tesla is also accepting the cryptocurrency as payment for its cars, and Morgan Stanley has launched a crypto fund.
While these developments are all positive for crypto, there are still a number of issues to be resolved. These include regulatory compliance and custody.
In addition, millennials have become a major driving force behind crypto adoption. They are using digital assets to respond to stock market volatility.
The Issues of Security
Custody is an essential component of the security of a digital asset portfolio. This is because digital assets are not tangible and can only be accessed with the private keys.
Digital asset custody requires a layered approach to security to prevent losses and mitigate risk. This can include cold wallets, online systems, and other technology that allows for access and control of the private keys without exposing them to theft or hacking.
Regulatory compliance is also a challenge for many custodians. For example, in the US, traditional financial custodians must obtain approval and authorization from regulators.
Similarly, digital asset custodians must seek approval and authorization in jurisdictions where they serve clients. This can present a significant challenge to those looking to expand into this space.
As digital assets proliferate and become increasingly embedded in global finance, a new set of issues need to be answered: how to ensure sound custody and regulatory compliance. Custody is a critical aspect of the asset management business, but is also increasingly becoming a specialised and regulated service for crypto firms.
Digital asset custody providers typically operate under a variety of different business models and serve clients based on their technology solutions, number of assets and activities supported, and level of regulatory oversight. They differ largely in terms of the amount of digital assets they support, but also in their degree of expertise in supporting various blockchains and protocols.
As a result, many of these digital asset custody providers are in the process of bootstrapping into maturity with increasing investment from institutional investors and a model that is akin to the extant traditional custodial and trust world. However, unless the industry can find a way to solve for both the custody piece and how to provide effective control and depository services, it may prove challenging to move this space forward in the near future.
Digital assets are a new and growing market, and they require the services of custodians to store their private keys. Traditionally, traditional asset custody providers protect the private keys on behalf of their institutional clients or provide technology solutions enabling self-custody by the client itself.
In both cases, the custodian is responsible for ensuring that their client’s assets are secure and are not exposed to security breaches. This requires a technological foundation that meets the specific requirements of the crypto space and that is secure and scalable.
There are a variety of challenges that need to be answered in order for the digital asset custody industry to mature and thrive. These include the issues of custody and regulatory compliance, security and more. To assist with this, the Alternative Investment Management Association has recently released a new industry guide on custody for institutional investors. This jurisdiction-neutral guide provides sound practices and key considerations for institutional investors determining how to custody their digital assets.
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