With the mass adoption of crypto assets underway, institutional investors, enterprises, and high net-worth individuals are making a beeline to strengthen their portfolio with one of the most exciting financial instruments. The potential of crypto assets to offer better returns than other conventional alternatives has made them quite popular, and this very potential to turn small investments into small fortunes has also made it an attractive target for cybercriminals.
However, the threat of losing crypto assets is not limited to the handiwork of cyber criminals hacking into the devices holding private keys of wallets to siphon the funds held in them. The loss of private keys due to other circumstances, including disasters, accidents, and a more innocent way of forgetting where they are stored, could also lead to owners losing access to their crypto assets.
Irrespective of the reason, any scenario that deprives the owners from accessing their crypto doesn’t have a good outcome. In the case of enterprises and institutions holding or managing their own as well as their customers’ funds, losing funds would spell disaster. As a result, anyone in control of a significant amount of crypto assets tends to lean towards cryptocurrency custody solutions, entrusting them to secure the funds.
So, what are Crypto Custody Solutions?
Simply put, crypto custody solutions are third-party asset storage facilities that employ sophisticated infrastructure to secure funds from any eventual threats and unfortunate events that could potentially cause huge losses to the owners. These solutions are mainly meant for large-scale investors and enterprises like institutions that manage assets for several clients or maintain sufficient crypto reserves as part of their operational setup.
By availing of the services of crypto custody solutions, enterprises and high net-worth individuals can free themselves from the hassle of storing and handling large amounts of crypto assets while ensuring the funds always remain accessible to them whenever the need arises. With funds securely stored on third-party infrastructure, the chances of losses due to theft or mismanagement of crypto storage applications will be minimized to a great extent.
The services of crypto custodian solution providers come at a cost, usually in the form of a storage fee based on the volume and types of crypto assets deposited in storage. Most custody solutions also charge a transaction fee for every transaction over the storage fee. In simple words, crypto custody solutions are similar to renting a safe deposit box at a bank, except in this case, the clients deposit crypto assets instead of precious tangible assets like gold and rarities.
Storing Crypto Assets, Volume Makes the Difference
Cryptocurrency functions based on complex cryptographic algorithms that secure various elements of this financial system, including its transaction and storage. For storage purposes, the digital assets are encrypted with cryptographic private keys. Users can access assets on the blockchain that are associated with their private keys. The assets are only as secure as the keys, which implies that users need to manage them safely. For their safe storage, there exist storage solutions named cryptocurrency wallets.
Wallets are often used as self-storage solutions and are ideal as a basic infrastructure for storing crypto assets when used in line with the best practices. They make more sense for the individual investor storing a limited amount of cryptocurrency. When the need arises for institutional investors or enterprises to store their crypto assets, self-storage wallet solutions just don’t cut it.
The Need for Cryptocurrency Custody Solutions
Crypto platforms and institutional investors handle massive amounts of cryptocurrency. When there is so much at stake, managing private keys by themselves can lead to several problems like hacks, private key loss, and misappropriation of funds by their employees. To prevent such issues from stemming, institutional investors turn to custody services that store and secure funds better than they could with self-storage solutions. In some geographic regions, it is mandatory for institutions to turn to custodians to store the crypto assets they manage as part of the regulation that protects consumer interests.
Cryptocurrency custodians are superior in asset storage as they implement their own robust storage solutions in the form of sophisticated wallet infrastructure and proprietary software in some cases, offer insurance coverage for parked assets in case of any unforeseen events, and follow regulations set out by their state that legally ensure the safety of stored funds.
Higher Security Than Regular Wallets
The technologies implemented by crypto custody solutions are constantly updated with rigorous audits and battle-testing to ensure they withstand any sort of cyberattack aimed at compromising the storage infrastructure.
For the most part, these services deploy their security solutions over familiar storage applications like hot and cold wallets that are used in conjunction. This not only secures stored funds but also allows for lightning-quick withdrawals. Moreover, these firms take extra precautions to reduce the liability faced by their clients in rare events of attacks that penetrate the infrastructure’s security measures.
All Tokens in Storage Are Insured
Top-tier custody solutions in the cryptocurrency segment insure the funds deposited by their clients. In countries recognizing cryptocurrencies as an investment vessel, stringent laws are set in place that demand registered custodians to insure the funds they possess in storage. This offers great peace of mind to institutions as they can store the large volumes of funds they manage without the worry of losing them to cyberattacks targeting the custody’s storage facility.
Regulations Require You to Use One
Regulations on cryptocurrency investments are being implemented in several countries. As a part of these regulations, institutional investors like hedge funds and family offices are legally required to use a licensed custodian to store their clients’ assets under management. Cryptocurrency is a new investment class, and many investors are getting duped out of their investments due to the lack of comprehension of the technology driving these assets. The governments of various countries are cracking down to prevent fraudulent activities that lead to massive losses. They are making it necessary to use cryptocurrency custodians just like how custodian banks are needed in traditional finance.
Crypto Custody Solutions Will Be an Integral Part of Centralized Finance
Institutional players entering the crypto markets signify that cryptocurrency will amalgamate with traditional finance and become mainstream. With governments regulating this financial bracket and mandating the use of asset custodians, great security is being brought to the wild west of finance where the theft of assets worth in the millions comes as no surprise. The services offered by custodians are, therefore, a great need in the world of cryptocurrency.
Liminal specializes in crypto asset storage and management solutions for enterprises. The solutions offered by Liminal provide the necessary secure infrastructure for enterprises to efficiently manage crypto assets within their organization. These very solutions also make for a valuable addition for crypto custodian service providers by helping them enhance their security while reducing their reliance on third-party proprietary solutions they might be employed to safeguard the assets in their custody.
Learn more about Liminal here.