Understanding the importance of regulations in choosing a crypto custodian
Cryptocurrency is no longer a foreign aspect of the financial industry, and as it evolves and the more benefits it brings, the more complicated it can get. We’ve seen a series of legal exposures in the field in recent years, including the fallout of major crypto firms, so it’s not surprising that individuals and institutions are turning to crypto custodians, seeking digital shelter for their valuable assets.
Crypto custodians are third-party service providers that offer secure storage solutions for digital assets, such as bitcoin and Ethereum. You may compare crypto custodians with traditional financial institutions like banks, but they specialize in digital properties and some banks even employ their own crypto custody services.
Crypto custodians provide a safe and secure way for individuals as well as companies to store and use their assets, making them an essential part of the digital economy. However, not all custodians are created equal, and this comprises many factors, one of which is how compliant they are with regulations.
Qualified crypto custodians are regulated
Regulations come in a variety of measures but are put in place to protect users and ensure safe and secure operations by custodians. When a crypto custodian is regulated, it is subject to specific rules and comply with the law of the region and all regions by whom the regulations are imposed. Some of them may include compliance on conflict of interest and AML (anti-money laundering). It’s helpful to obtain a fair understanding of these regulations before signing up to a company.
In many cases, regulatory guidelines may impact a custodian’s procedures and manner of operation. For example, they may be required to employ specific features, like MPC, as a factor of compliance. But this also means that users will enjoy a higher level of security and a wider range of available options.
It’s also important to keep in mind that custodianship does extend beyond cryptocurrency. Centralized applications that provide money services are considered custodians since they keep account of and sometimes manage your funds. Regulatory compliance also applies to those companies, if not on an even stricter level.
Unregulated custodians are a huge risk
As opposed to those who follow the rules, unregulated custodians are not subject to the same guidelines as the rest of us, and that exposes their users to a critical range of vulnerabilities.
A crypto custodian who doesn’t abide with regulations may not feel obligated to employ adequate security measures to protect their clients’ assets. In some cases, this also implies that client assets are at risk of being interfered with or transferred without their knowledge.
Unregulated custodians don’t often have policies in place that protect users from getting their funds appropriated. This, in turn, increases the possibility of fraudulent activities or simply critical mistakes that wouldn’t have happened had they had proper technology implemented.
While definitely a red flag, an unregulated crypto custodian isn’t automatically fraudulent or unsafe. However, it’s difficult to determine if a custodian is trustworthy or reliable without the benefits of regulatory oversight. Due to uncertainty, experienced users and large companies often choose to work with regulated custodians to ensure optimal protection.
What to consider when choosing a crypto custodian
On top of regulations, you may want to consider several other factors when choosing a crypto custodian.
Security measures: a qualified custodian must provide robust security protocols, such as MPC and wallet recovery.
Track record: a trustworthy custodian is seldom found in public scandals, especially when they involve finances. You should also be able to find positive feedback from their past clients.
Identifiable experts: crypto custodians should have a team of security experts to watch over your assets. While these experts don’t necessarily need to be public figures, they should have verifiable credentials and a respectable background.
Fees: custodial services may come in a range of fees depending on the client’s needs. You should be able to choose from a wide variety of pricing options and find something reasonable to your budget.
There are many overstatements in life, like Dogecoin and climate change, but the importance of regulations when using a crypto custodian cannot be overstated.
Regulated custodians can provide not only superior security but a peace of mind that those on the other side of the coin simply cannot. If you’re considering using a crypto custodian to store your digital assets, make sure to do ample research and verify their regulatory compliance before making a decision. It’s great to learn from your mistakes and all, but it’s not great when you realize you’ve made one and it’s too late.