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Securing Institutional Investments: The Role of Crypto Custody
23 Jan 2024

Digital asset custody refers to the service where a third party, such as a financial institution, securely stores the private keys of users' digital assets. Compared to individuals managing their own keys and assets, it offers enhanced security levels, as custodians utilize sophisticated measures like multi-signature authentication and cold storage to safeguard assets.

Digital asset custody is primarily concerned with the secure handling of private keys, which are the definitive proof of asset ownership in cryptocurrency wallets. While traditional finance dictates that only financial institutions can act as custodians, the decentralized nature of cryptocurrencies brings more options to users, allowing individuals to also be custodians with control rights.

Depending on the custody method, digital asset custody can be divided into two main types:

  1. Full Custody: Full custody refers to users entrusting their digital asset private keys entirely to a third-party institution, the most common form of digital asset custody. These institutions are usually regulated entities employing various security measures to protect user assets, like multi-signature authentication and cold storage. The advantage is high security, as custodians use advanced measures to protect user assets. The downside is that users lose control of their private keys, and if the custodian faces security issues or bankruptcy, users' assets could be at risk.

Third-party custody can be accessed through various channels:

  • Centralized Exchanges: Centralized exchanges inherently provide custodial services. However, it's crucial to remember that users do not own the private keys to wallets on these platforms, which could be a vulnerability. If an exchange experiences security breaches or operational issues, users' assets could be at risk.

  • Digital Asset Management Platforms: As cryptocurrency becomes an attractive legitimate asset class, professional entities functioning like digital asset banks are increasing. Prominent examples include Anchorage, NYDIG, Paxos, and ChainUp Custody.

  • Custodial Banks: Following the OCC's 2020 directive, U.S. national banks have been permitted to provide digital asset custody services. This development led traditional banking giants like BNY Mellon, Citibank, and Fidelity Bank to enter the competitive field of digital asset custody.

  1. Semi-Custody: Semi-custody is a middle ground between full third-party custody and complete self-custody. In this model, a user's private key is split into two parts, one kept by the custodian and the other by the user. For transactions to occur, both the custodian and the user must sign off on the transaction. MPC Wallet Self-Hosting is a special form of semi-custody using Multi-Party Computation (MPC) technology. In an MPC wallet, the user's private key is held by multiple independent parties, with no single party able to access the complete key. When the user needs to make a transaction, it requires the combined signatures of these parties. This method effectively prevents theft or leakage of private keys while allowing users to retain control and revoke custody at any time.

Compared to other custody methods, MPC Wallet Self-Hosting has several advantages:

  • High Anonymity and Privacy Security: Using multi-party computation protocols avoids single points of failure and exposure risks of private keys, enhancing the anonymity and privacy of digital currency usage.

  • Verifiability and Accessibility: By using multiple nodes for computation and verification, it increases the security and transparency of digital asset transactions while supporting a variety of digital currencies and multi-platform use.

  • Flexibility and Scalability: Adaptable to different digital assets and platforms, it supports various MPC protocols and can be customized and expanded, enhancing the wallet's flexibility and scalability.

Digital asset custody is particularly important for institutional investors, who often have significant digital assets and require professional custody services to ensure asset security. As the digital asset market continues to evolve, the demand for digital asset custody among institutional investors is also expected to grow. According to a market report on digital asset custody by PwC and fintech platform Aspen Digital, the digital asset industry peaked at over $3 trillion in November 2021. In 2022, the crypto market's custody business remained at a level of $447.9 billion. The CEO of Aspen Digital indicated that investors are more inclined to invest in custodial services due to security concerns and generally believe that there is a need for a better understanding of custody solutions.

When institutional investors choose digital asset custody, they need to consider the following factors:

  • Security: The security measures of the custodian are of utmost concern to institutional investors. Custodians should use advanced security measures like multi-signature and cold storage to protect user assets.

  • Compliance: Institutional investors need to ensure that the custodian complies with relevant regulatory requirements.

  • Availability: The custodian should provide custody services that meet the needs of institutional investors, such as support for various digital assets and offering multiple types of custody.

ChainUp Custody is a leading digital asset institutional custody platform, holding a SOC 2 Type 1 security system control attestation report. Leveraging six years of technical service experience from ChainUp, it solves enterprise asset custody challenges efficiently and offers compliant, secure, reliable, and stable digital asset custody services. ChainUp Custody has numerous advantages:

  • Security: Utilizing MPC technology, multi-signature techniques, and hardware isolation to protect digital assets from hacking and theft. The use of whitelists and customized withdrawal approval processes enhances account security levels.

  • Compliance: Meets local regulatory requirements and provides compliance and anti-money laundering tools to help investors avoid illegal activities. KYT and KYC services detect high-risk transactions and understand the background and purpose of the trading parties.

  • Efficiency: A full-chain activity monitoring system automatically oversees the transaction process, offering a wealth of operational and management tools to assist clients in managing digital assets and responding quickly to business needs.

  • Reliability: With a total custody fund of $10 billion, it provides secure encrypted storage and disaster recovery solutions to avoid data loss risks.

  • Ease of Use: User-friendly solutions, customized withdrawal approval processes, and developer custody APIs and SDKs for easy integration and personalization.

  • Flexible Expansion: Suitable for different institutions and individuals, with multiple access methods and a wealth of operational tools to meet diverse needs.

  • Instant Service: 24/7 support and consultation, with an expert team providing tailored solutions to ensure safe, compliant, and efficient asset custody services.

Therefore, ChainUp Custody is an ideal choice for institutional investors looking to custody their digital assets. To learn more about ChainUp Custody solutions, visit Innovation in Crypto Custody: How MPC Wallets Enhance User Control for more insights.

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