Crypto Custody and Why it Matters

The inherent complexities associated with owning and managing digital assets as well as the way value is stored and transferred creates complications and confusion for many investors. In this article, we go through what a crypto wallet is, the importance of secure crypto custody and how Zerocap assists with security needs by providing institutional-grade custody services combined with comprehensive insurance.

What is a Crypto Wallet?

A cryptocurrency wallet is categorized by a 24+ digit alphanumeric sequence, which can be administered by two key characteristics – ‘hot’ and ‘cold’ wallets. A hot wallet, such as a web-A cryptocurrency wallet is categorized by a 24+ digit alphanumeric sequence, which can be administered by two key characteristics – ‘hot’ and ‘cold’ wallets. A hot wallet, such as a web-based, mobile or desktop wallet, is connected to the internet and is therefore prone to security vulnerabilities. Cold wallets are stored offline and offer a more secure method of storage, where access is only granted to the individual who holds the hardware or paper wallet. Without the implementation of proper security measures, cold and hot wallets are prone to breaches.

Why Is Crypto Custody Important?

For institutional investors, the safekeeping of keys, addresses, and crypto assets are essential to their participation in the crypto market, and the lack thereof has been a significant barrier to them doing so.

The technicalities and extensive operational processes associated with the management of digital assets create technicalities for institutions. Internally developing and grasping such challenges can be both expensive and time-consuming. Hence, custodial solutions are a crucial element that has promoted the continued growth of institutional participation over the last year.

Innovative and secure crypto custody models present near limitless opportunities. Security allows businesses to realise the economic and strategic benefits associated with mechanisms such as staking and governance. Via staking,  participants on the blockchain promote network security by validating transactions and are rewarded for this service. Additionally, some digital assets grant participants the ability to vote on suggested changes to projects that often have a significant impact on the future of that protocol. The value associated with earning passive income with the security and resilience through an insured custodial solution is attractive to both institutions and individuals who possess a vested interest in the underlying project.

Risks Investors Face

Investors that do not have their own sustainable custodial practices face the same risks that millions of existing digital asset holders have faced over the last decade.

With a private key, users are confined to a single point of failure. This exposes individuals to various risks. Generally, misplacing or forgetting your key means you lose your investment – becoming another figure within those that have lost millions after losing access to their keys. 

Contrastingly, many users leave their funds on exchanges, often to take advantage of short-term opportunities. or to bypass the complexities associated with storing their digital assets through a cold-storage solution. 

Historically, this method of storage has proven to be insecure. Since 2012, at least 46 exchanges have lost funds due to security breaches, resulting in a cumulative total loss of $2.66 billion (USD value at the time).

Data Source: https://www.hedgewithcrypto.com/cryptocurrency-exchange-hacks/

The most common form of hack is the infiltration of an exchange’s private keys. This grants access to an exchange’s main wallets thereby exposing all user funds. The seemingly regular exchange hacks as well as the lack of information exchanges provide regarding their internal security has resulted in many investors choosing to hold funds elsewhere.

   Major Exchange Hacks

In the past year, we have seen exponential growth in the software wallets Metamask and Phantom, which can be downloaded and accessed as browser extensions using your preferred search engine. These types of easy-to-use wallets have been key to the growth of DeFi (decentralised finance) and NFT (non-fungible token) sectors.

Whilst these applications employ security features aimed to reduce the risks associated with hot/online wallets, these types of applications are highly vulnerable to phishing and malware attacks. Mistakenly authenticating wallet access to certain websites or links has commonly resulted in user wallets being compromised, and regularly using such wallets must be done so with caution.

In addition, Metamask recently banned all Iranian IPs access to their non-custodial wallets, shutting out users from accessing their own funds, angering the wider crypto community which is ultimately founded upon the idea of decentralised accessibility for global consumers.

What Is The Best Crypto Custody Solution?

Possessing a solution to oversee and manage the custodial facets related to your digital assets has never been more important. Innovations in this critical function have been the bridge for institutions to move into this maturing space. Institutional-level technology now provides vigorous custody solutions that investors can trust.

Leading custody solutions will offer users an array of protections, including: 

• Segregated funds across client wallets 
• Bespoke rules governing access and authorisation including signing policies and procedures for transfers
• Sharding of private keys, stored on multiple servers
• Multi-signature keys, eliminating single points of failure
• Comprehensive insurance that provides a much-needed layer of protection for investors

Zerocap’s Crypto Custody

Zerocap’s own custodial product provides users with multi-layered security, tailored governance over your assets, succession planning and disaster recovery, all of which is underpinned by comprehensive insurance by Lloyds of London.

In addressing the single point of failure risks that a private key creates, Zerocap utilises a combination of:
1. Multi-party computation (MPC) with hardware isolation, eliminating a single point of failure and insulating digital assets from cyberattacks, internal collusion and human error.

2. Multiple distributed bank vaults for redundancy in a disaster recovery scenario.

3. Best crypto insurance policy, providing additional layers of protection and guarantees for investors. 

With this in mind, Zerocap implements our own internal governance procedures that allow us to employ a similar custodial approach to traditional finance firms.

FAQs

What is a Crypto Wallet and what are its types?

A cryptocurrency wallet is a 24+ digit alphanumeric sequence that can be categorized into ‘hot’ and ‘cold’ wallets. A hot wallet, such as a web-based, mobile, or desktop wallet, is connected to the internet and is therefore prone to security vulnerabilities. Cold wallets are stored offline and offer a more secure method of storage, where access is only granted to the individual who holds the hardware or paper wallet.

Why is Crypto Custody important for institutional investors?

For institutional investors, the safekeeping of keys, addresses, and crypto assets are essential to their participation in the crypto market. The technicalities and extensive operational processes associated with the management of digital assets create challenges for institutions. Hence, custodial solutions are a crucial element that has promoted the continued growth of institutional participation over the last year.

What risks do investors face without sustainable custodial practices?

Investors without their own sustainable custodial practices face the same risks that millions of existing digital asset holders have faced over the last decade. With a private key, users are confined to a single point of failure. This exposes individuals to various risks such as misplacing or forgetting your key which means you lose your investment.

What is the best Crypto Custody solution?

Leading custody solutions offer users an array of protections, including segregated funds across client wallets, bespoke rules governing access and authorisation, sharding of private keys, stored on multiple servers, multi-signature keys, eliminating single points of failure, and comprehensive insurance that provides a much-needed layer of protection for investors.

What does Zerocap’s Crypto Custody offer?

Zerocap’s own custodial product provides users with multi-layered security, tailored governance over your assets, succession planning and disaster recovery, all of which is underpinned by comprehensive insurance by Lloyds of London. It addresses the single point of failure risks that a private key creates by utilizing a combination of multi-party computation (MPC) with hardware isolation, multiple distributed bank vaults for redundancy in a disaster recovery scenario, and the best crypto insurance policy.

About Zerocap

Founded and bootstrapped in 2017 by three individuals with a mix of tech, finance and entrepreneurial backgrounds, Zerocap is a market-leading digital asset investment bank, providing unique investment products and technology to forward-thinking investors and institutions globally. We have a growing team of 50 staff, focused on providing the smartest advice and technology for wholesale investors and institutions. 

– $1B in notional spot volume to date

– Regulated with a Financial Services License (AFSL) with bilateral derivatives capability

– Backed by Australia’s largest Family Office, the Victor Smorgon Group

– Bespoke Lloyds of London Insurance on custodial assets

– SOC 2 Audit (Due Q2, 2022)

To learn more, contact the team at [email protected] or visit our website www.zerocap.com