Demystifying Crypto Custodians: Ensuring Safety and Accessibility for Institutional Investors

February 6, 2024

Discussions about custody of digital assets are certainly in the news as institutional interest increases—perhaps even more so now after the U.S. Securities and Exchange Commission approved applications from some of today’s top financial institutions to offer spot Bitcoin ETFs, which is adding more capital to the conversations. As the industry continues to evolve, though, one thing remains constant: institutions and investors want reassurance that their digital assets are both safe and accessible—and that’s the primary job of “qualified” or “regulated” custodians. 

Range of Crypto Custodians

In traditional finance, custodians must meet regulatory standards before they can call themselves a custodian. In digital assets, however, companies often call themselves custodians even when they simply offer a software solution for wallets. Qualified digital asset custodians, though, must be fully licensed and regulated. 

Although no two qualified crypto custodians may be exactly the same, they can offer services like these:

  • Segregated accounts: client funds never commingled and are not used for other purposes
  • Cold storage: private keys are stored offline to safeguard them from people with malicious intent
  • Redundancy and Access Control: when already-established value thresholds are reached, this triggers a review from trust officers
  • Security technology: this can include offline signing, cold multi-signatures, key sharding, and so forth
  • Bankruptcy remoteness: if the custodian experiences financial instability, clients’ funds are segregated and therefore still protected
  • Insurance: this may be offered to protect against loss, theft, and misuse so be sure to understand the offering.

Wallet Choice

Qualified custodians may offer a range of wallet types while implementing appropriate safeguards to protect client assets. Non-internet-connected cold wallets provide maximum security, so these can be appropriate to store digital assets not intended to be traded in the near future.

Qualified custodians can create systems to preserve the desired transaction speed while providing security—systems that prevent single points of failure. This can be addressed through quality key management: splitting keys and storing them in different locations; requiring multiple keys for transaction signing; placing limits on who can sign and for how much; establishing how often funds can be moved; who can receive them; and so on. These regulated custodians can also offer for the client to self select safeguarded systems for self-managed wallets and wallets as a service. 

More About Key Management

Wallets with only one key come with a single point of failure; plus, if the key is lost or stolen, this wallet is at risk and, if it’s a hot wallet, the hacking risk increases. Having multiple keys stored in different locations adds layers of defense. 

Qualified custodians could, for example, provide three keys with only two needed to sign transactions. Even if one is stolen, a hacker wouldn’t wouldn’t be able to access the funds. If one is lost, having the other two keys ensures the ability to transact. 

Custody and Staking

Staking has emerged as one of the most popular ways for digital asset holders to earn rewards without having to trade.

Staking involves locking up digital asset holdings to participate in transaction validation and block creation on a blockchain network. It serves as an alternative consensus mechanism to energy-intensive crypto mining.

By staking digital assets, this can help secure a blockchain network while earning staking rewards. The more tokens a holder stakes, the greater the chances of receiving block rewards.

What is Staking-as-a-Service?

Staking-as-a-Service (StaaS) represents a category of business where institutions or users stake by delegating infrastructure operations to a third-party provider.

StaaS allows users to stake tokens without managing their own infrastructure. By leveraging specialized providers like Figment, users can participate in staking without needing to develop technical expertise.

Figment’s StaaS offers features like easy integrations, portfolio rewards tracking, an audited infrastructure, and slashing protection for a smooth staking experience. This enables users to earn staking rewards without sacrificing security or control.

BitGo Checks All of the Boxes

BitGo is a leader in regulated and audited security technology and wallet as a service, providing two-of-three wallets to prevent single points of failure. If users lose one of their keys, they can use the backup key to access the wallet. BitGo also provides recovery tools. 

You can create receive addresses with BitGo wallets to better manage your funds within the same wallet, a feature that not all qualified custodians provide. BitGo multi-sig wallets support fee payments for transactions via a dedicated wallet—a “paymaster” feature. 

BitGo is insured up to $250 million and provides tools for users to securely generate and manage keys in cold storage and also sign transactions in a cold setup. We also integrate with backup key services so clients have the optionality to store their backup keys with a backup key provider.

BitGo offers secure tri-party collateral management. When staking from BitGo wallets (hot or custodial), you can proceed with confidence with our simple, safe, and secure staking process. 

The information herein is being provided to you for general informational purposes only. It is not intended to be, nor should it be relied upon as, legal, business, tax or investment advice. Figment undertakes no obligation to update the information herein. 

©2024 BitGo Inc. (collectively with its affiliates and subsidiaries, “BitGo”). All rights reserved. BitGo Trust Company, Inc., BitGo Inc., and BitGo Prime LLC are separately operated, wholly-owned subsidiaries of BitGo Holdings, Inc., a Delaware corporation headquartered in Palo Alto, CA. No legal, tax, investment, or other advice is provided by any BitGo entity. Please consult your legal/tax/investment professional for questions about your specific circumstances. Digital asset holdings involve a high degree of risk, and can fluctuate greatly on any given day. Accordingly, your digital asset holdings may be subject to large swings in value and may even become worthless. The information provided herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. BitGo is not directing this information to any person in any jurisdiction where the publication or availability of the information is prohibited, by reason of that person’s citizenship, residence or otherwise.

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