Crypto custody service providers: features and innovative solutions
Crypto custody, an essential to blockchain security
The price of bitcoin and other crypto-assets is again a dinner table conversation due to the latest price correction. However, part of the great benefit of Decentralized Finance is bringing the concept of self-government, democracy, and inclusion. We have talked in the previous articles on what are the associated risks in the crypto-industry: low participation of institutional capital (yet) and high-risk perception compared to the traditional system, both problems faced and partially solved by crypto custodians.
In this article, we will dive into the characteristics of a crypto custody company, their relevance in the current context, and the most important innovative solutions offered in the emerging digital asset industry.
Table of Contents
What is crypto custody?
To define crypto custody and then a crypto custodian, we must first describe how traditional custodians operate. A custodian in the world of traditional finance is a business or company that essentially holds and keeps track of the ownership, exchange, and status of financial assets.
Custodians are often regulated financial institutions and charge a fee for providing the service. Traditionally, a customer transfers the ownership of the asset to a custodian that offers the benefit of security and efficiency to manage these assets.
Almost, in the same way, crypto-custodians are certified companies that deliver security and institutional guarantees to customers while holding their crypto assets. They allow them to be sure that their digital possessions are well protected with different layers of security and with backups or insurance against data loss (among other services).
Crypto custodians, an “essential” for institutional adoption
One big difference to the traditional system is that with crypto, users often interact via self-governance mechanisms (hardware wallets such as Ledger or Trezor) and become de facto their custodians. However, if they would like to manage and save these assets, a hardware wallet is often not approachable by most people.
A more convenient option for individuals and companies is to deliver them to a digital assets custody.
An important aspect to consider is that crypto custody companies are often regulated (Thailand and Singapore are working on their custodian requirements and framework) and provide institutional-grade security with a relatively easy customer experience.
Today it is challenging for a large company that would like to hold digital assets to secure them by itself. Setting up metamask and any hardware wallet would create some technical and sometimes compliance risks that they are not willing to take.
Crypto custodian services are an excellent solution for everyone who wants to support their digital assets in an ecosystem that meets security requirements and local legislation. It is not a surprise that large players such as Paypal or Galaxy digital are acquiring custodians to secure strategic positions in this growing market.
Crypto custody – Security requirements and transaction costs
A pinnacle requirement when working with a digital asset third-party provider is security. Custodians operate almost like traditional custodians but with blockchain technology. They are often using two technologies: Multi-Signature wallet or Multi-Party Computation.
- Multi-signature wallets are a digital signing process that enables two or more users to sign transactions as a group. While multi-sig offers solutions to some of the problems of single-signature wallets (e.g. the single point of failure), it also introduces new issues such as protocol accepted and limitations in terms of policies and security rules
- Multi-Party-computation (MPC) has quickly become accepted as the next generation of private key security. MPC removes the concept of a single private key; such a key is never gathered as a whole, neither during the first creation of the wallet nor during the actual signature. MPC follows a set of steps to guarantee that there is never a single point of compromise of the private key.
While Multi-Signature wallets have been here for longer, MPCtechnology brings additional advantages, especially in terms of security and transaction costs.
All in all, custodians are an essential part of the growing adoption of digital assets. Institutions will not secure their digital assets by themselves but will let specialized technology companies manage this technical and crucial work for them. While custodians are used mainly by exchanges and large financial institutions today, their offerings are growing to offer cost-effective solutions for individuals and small businesses willing to keep a part of their cash reserve in digital assets. Those new players are on the lookout for a simple to onboard custodian, priced accurately, and that ticks all the security boxes that a large company requires.
The Need for Crypto Custody service is Rising and Here’s Why
Everyone talks about how to earn more crypto and the powerful tools and strategies, but what’s even more important is how to protect it. Crypto custody is something you don’t want to wait too long to obtain.
It’s 2022. We’re all in possession of digital properties – one form or another. Some may have sentimental value while others most likely fall under the category of cryptocurrency. If you’re an owner of the latter, then getting crypto custody should be on the top of your to-do list.
It is a dedicated service of safekeeping your digital assets, much more than your wallet (hot, cold, lukewarm, etc) ever could. A qualified crypto custodian puts your mind at ease and your coins in a place no one else can reach.
But don’t jump into it head first. Let’s talk more about crypto custody and why groups and businesses, big or small, need it now more than ever.
Crypto custody services are the key to over-reliance on cold wallets
Crypto custody has the key to your wallet, but in a good way. Part of the reason cold wallets are so popular stems from the fact that we just love anything portable. Some of us are enthralled by it. If you’ve heard of brands like Trezor or Ledger, most of the hype revolves around how easy they are to carry.
But the problem with using a cold wallet or a crypto exchange is that, unlike digital assets custody, it exposes users to a single point of failure. In other words, if someone wants to steal the coins in your wallet, they only have to get past one threshold.
Having a crypto custodian with decentralized security eliminates all those risks. You wouldn’t need to worry about your private key or remember your super long passphrase.
Your crypto custody providers ensure your digital assets will always be there when you need them. A qualified crypto custodian is an expert on security and will make sure every of your transactions go through a layer of approvers. This is also known as MPC protocol. Every approver will have to verify and accept each request before a transaction can be cleared. You can also assign more approvers if the transaction exceeds a certain threshold. For example, if the transaction is more than $1,000, it’d require two approvers. More than $5,000 would require three, and so on.
Crypto custody will also enable you to recover your wallet, which is the greatest advantage you have over using a regular crypto wallet. We’ve all forgotten our passwords at some point and most of the time we brushed it off. If you do that on a crypto wallet, it could be all over. Having a crypto custodian ensures you always have access to your coins.
Using crypto custody services reduces the risk of putting your digital assets in a crypto exchange
The only thing worse than leaving your crypto lying around is giving it to somebody to do as they will with a promise it would still be there when you need it.
That’s basically what you do when you put your crypto in an exchange. Unlike using crypto custody where you retain control over your assets, an exchange essentially holds your coins and grants you access to it. All your hard-earned crypto suddenly becomes a luxury to your own possession.
To be fair, at some point in the past, leaving cryptocurrency in an exchange had been safe and all there was. Almost instinctive. Unfortunately, as technology advanced, so did hackers. Recent years have proved even the biggest platforms aren’t immune to attacks.
Technically, you can still put crypto in an exchange, but will it be there when you need to withdraw? Who knows. And as of now, not even Sam Bankman-Fried could tell you. When FTX, the second largest crypto exchange in the world collapsed, billions of dollars in customer funds vanished. Those who had entrusted their life savings in FTX are now left wondering if they could ever see even a fraction of it return.
When you have crypto custody, you’d never have to worry about your coins being moved elsewhere or exploited in any way.
How to choose a crypto custody service and what happens if you don’t choose the right one?
When it comes to crypto custody, security is the main source of priority. To decide whether someone is a qualified crypto custodian, many factors need to be cleared.
- Credentials. Crypto custody evolves from trust. A crypto custodian needs to be fully audited and licensed by a recognized entity. This is often the threshold before a long term contract.
- Technical capacity. Not everyone is savvy enough to use hardware wallets or able to pop off the 24-digit private key on demand. A better option for these users is using a crypto custody service. A qualified crypto custodian must provide innovative features to make life easier for its clients.
- Emphasis on security. A crypto custodian must be well equipped for you to entrust your digital assets. Wallet recovery system, wallet policy, MPC, etc.
Get to know Atato’s Bring Your Own Chain/Token (BYOC/BYOT) feature that expedites your progress with one click.
As well-rounded as crypto custody is, it doesn’t come without limitations. Most crypto custodians are burdened with the range of assets they can support.
If you choose a crypto custodian who doesn’t support a particular token or blockchain you need, it may take weeks, or even months for them to integrate it. For services without the technology, the complexity of this process could place a strain on your workflow
Bring Your Own Chain (BYOC) lets you add any EVM-compatible network to Atato custody. It’s one of the fastest and least complicated procedures a crypto custodian can offer. Have you ever been told by a custodian that they don’t support a certain chain or token? It’s definitely annoying, but don’t get used to it as BYOC intends to change that for good. With BYOC, you can do all that in a few seconds. To make it even more convenient, you can also use the same wallet address across all EVM networks.
Sign up to Atato custody and enjoy our unique pricing model, which includes a fixed monthly price, no AUM fees, no transaction fees and no withdrawal fees.
Atato was born in 2017 with the mission of securing the crypto world. Our vision encompasses bringing the next generation infrastructure to the future 100 million cryptocurrency users. Atato is headquartered in Singapore and a holder of the TCSP License. More about us.