What is Self Custody wallet?

| January 9, 2024

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Self Custody Wallet

A self custody wallet is a crypto wallet that offers you complete control over your cryptocurrencies and digital assets, including Bitcoin, Ethereum, and VERSE. In contrast to custodial crypto wallets and traditional banks, where they hold your assets for you, a self-custodial wallet ensures that you maintain control, eliminating the need to trust others with the safe keeping of your assets. Various self-custody solutions exist, each differing in terms of security measures and user-friendliness. 

What is a Self Custody Wallet?

Self-custody wallets function as secure repositories for your private keys, serving as an interface for crypto management (the actual storage of which occurs on blockchains). These self-custodial wallets empower users to send and receive crypto and interact with decentralised applications (DApps). In a self-custody setup, you actively manage your private keys with the assistance of a trusted wallet provider, ensuring complete control over your assets.

In contrast, custodial wallets operate differently, with a third party—such as a centralised exchange (CEX)—controlling your private keys and, consequently, having custody of your crypto assets.

Regardless of the type, both self-custody and custodial wallets enable users to perform fundamental tasks like checking balances and reviewing transaction histories for their crypto addresses.

Understanding Private Keys:

In the world of cryptocurrencies, a private key bears similarity to a bank password. Possessing the crypto private key translates to control over the corresponding crypto assets on the blockchain.

Private keys serve as the foundation for generating public keys, which, in turn, create unique wallet addresses. Despite their mathematical linkage, it’s important to note that a private key can never be derived from a public key.

A public key is similar to a visible mailbox: its encrypted address allows anyone to send crypto to it. However, only the owner, armed with the private key, can unlock the mailbox and access the messages (cryptocurrency) within.

Introducing Seed Phrases:

Private keys, represented by lengthy strings of numbers and letters, symbolise ownership of crypto on a blockchain. Individuals may end up with multiple private keys based on the variety of digital assets they hold.

To streamline the accessibility of private keys, self custody wallet providers implement seed phrases. Typically consisting of 12 randomly selected words, these seed phrases grant access to your crypto wallet and all the associated private keys.

Possessing your seed phrase negates the need for individual private keys, as they are algorithmically interconnected. Effectively acting as a ‘master key,’ a seed phrase simplifies the management and security of your crypto assets.

Understanding Various Types Of Self-Custody Wallet

When selecting a self-custody wallet, it’s essential to be acquainted with the different types, with the primary distinction being between software and hardware wallets.

  • Software Wallets: A hot wallet is a cryptocurrency wallet that stays connected to the internet and the cryptocurrency network at all times. It is utilised for sending and receiving cryptocurrency, providing you with the ability to check the available tokens in your possession. 

Note: Caution should be exercised concerning “spoofed” browser extensions, a concern that will be elaborated on later.

  • Hardware Wallets: A hardware wallet is a physical device, often resembling a USB thumb drive, designed to securely store a crypto user’s private cryptographic keys in offline or “cold” storage. These keys are kept safe for later online use when conducting cryptocurrency transactions. Unlike traditional wallets for physical or fiat currency, a crypto hardware wallet does not hold the user’s actual coins. Instead, it safeguards the private keys necessary to access the coins on the blockchain. Many hardware wallets are versatile, supporting multiple blockchains simultaneously, enabling users to manage various types of coins from different exchanges on a single device. The data stored in a hardware wallet can be easily backed up using a single recovery phrase or PIN code.

Self-custody is critical for both Institutions and Individuals

In the traditional Web 2.0 financial system, we rely on centralized entities like banks and governments to safeguard our assets. When we deposit money in a bank, we give a third party control (custody) over our assets, trusting that the bank will have our money available for withdrawal later. In case of any issues, we trust that the bank is insured and our government will compensate for any losses.

Web3, on the other hand, allows you direct control over your assets, eliminating the need to trust banks and governments for custody. Although centralized crypto exchanges (CEXs) have emerged to provide convenient access and custody for cryptocurrencies, the essence of Web3 is about self-custody. Relying on a CEX still involves trusting a centralised corporation, similar to trusting a bank. While there is some centralisation in Web3, it comes with its own set of risks, as seen in the recent issues with the FTX centralized exchange. However, choosing self-custody through a wallet means you are solely responsible for your asset security since you control the private keys. It’s important to note that before CEXs existed, all crypto wallets were self-custody.

The tradeoff is evident: self-custody eliminates the need to trust banks, governments, or CEXs, but it requires trust in the decentralized systems you opt to use. You become solely responsible for safeguarding your private keys against loss and theft.

Advantages of Self-Custody

Self custody crypto wallet provides several notable benefits, including enhanced security and personal control over assets, as briefly mentioned earlier.

  • Censorship Resistance: Self-custody ensures that assets stored in a non-custodial wallet cannot be frozen or confiscated by external entities. This is particularly empowering in regions with capital controls or targeted discrimination, making self-custody a technology of empowerment.
  • Increased Security: Non-custodial wallets offer heightened security by allowing individuals to control their private keys. Unlike custodial wallets, where keys are stored on a potentially vulnerable central server, self-custody minimises risks associated with hacking or counterparty vulnerabilities.
  • Expanded Access: Self-custody can be liberating for unbanked individuals without access to traditional financial services. Even without conventional bank accounts or payment cards, self custody wallet enables them to use cryptocurrency for storing, sending, and receiving funds.
  • Greater Control: Individuals exercising self-custody have complete control over their funds, managing them according to their preferences. This stands in contrast to custodial wallets, where a third party manages the funds, potentially limiting individual control.
  • Decentralization: Non-custodial wallets align with the decentralized nature of many cryptocurrencies, allowing individuals to hold and manage their assets without reliance on a central authority. This promotes a more equitable and transparent financial system.
  • Privacy: Non-custodial wallets often require minimal personal information, enhancing privacy. This feature is crucial for those concerned about the potential misuse of their data.

In summary, self custody wallet presents numerous benefits for individuals seeking secure and private management of their cryptocurrency holdings.

The Significance of Self-Custody 

Self-custody holds paramount importance for several compelling reasons. Foremost among them is the heightened security it affords to your funds. By personally holding your assets, you eradicate the vulnerabilities associated with centralised third parties, including the risks of hacking, bankruptcy, or fraudulent activities.

In addition to providing security, a self-custody wallet empowers users to tap into the distinctive features of cryptocurrencies, particularly in the domain of decentralized finance (DeFi). DeFi opens avenues for crafting decentralized financial instruments like loans and insurance, free from control by any central authority. With self-custodial wallet, users gain the autonomy to actively participate in DeFi actively, capitalising on its manifold advantages.

Beyond financial empowerment, self-custody serves as a safeguard for user privacy. Retaining control over their own assets ensures that financial information remains confidential and beyond the reach of third-party entities, underlining the inherent value of self-custody in preserving individual privacy.

Ensuring the Safety of Your Self-Custody Wallet

When it comes to managing your own crypto, the paramount concern is the safety of your self-custody wallet. With the responsibility of securing your assets squarely on your shoulders, it’s vital to comprehend the associated risks and take proactive measures to mitigate them.

While self-custody does entail certain risks, there are numerous precautions you can adopt to fortify the security of your assets. Consider the following tips to safeguard your self-custody wallet:

  • Choose a Reputable Wallet Provider: Research and opt for a trustworthy self-custody wallet provider with a solid reputation. Scrutinise reviews, seek community feedback and prioritise providers that have undergone independent security audits.
  • Use a Hardware Wallet: Elevate your security by employing a hardware wallet—a physical device storing private keys offline. This significantly diminishes the risk of online attacks like hacks or phishing scams. Ensure you acquire it from official sources and verify the package for tampering upon receipt.
  • Secure Your Seed Phrase: Safeguard your seed phrase, the key to your crypto wallet, by inscribing it on paper and storing it in a secure location, such as a safe or safety deposit box.
  •  Enable Two-Factor Authentication (2FA): Provide your self-custody wallet’s security by implementing two-factor authentication options, such as biometric authentication or text message verification.
  • Beware of Scams: Exercise caution against scams targeting crypto holders. Avoid sharing private keys or seed phrases in response to unsolicited messages or emails.
  • Prioritise Privacy: Given your responsibility for asset security, opt for privacy-focused wallets.
  • Explore Smart Contract Protection Services: Consider utilising a smart contract protection service that offers features like wallet notifications, panic buttons, and backup wallets. 

By adhering to these recommendations and implementing additional security measures, you significantly diminish the risk of compromising the integrity of your self-custody wallet.

Embracing the Era of Self-Custody

The future unfolds with the embrace of self-custody, a paradigm where the blockchain ecosystem flourishes on your terms.

By leveraging a self-custodial wallet, you unlock a world of possibilities. Seamlessly connect your self-custody wallet to Web3 gaming apps, engage in the vibrant market of non-fungible tokens (NFTs), and swap cryptocurrencies like bitcoin (BTC) and ether (ETH) with significantly lower fees compared to centralised exchanges.

Direct access to your private keys propels you into the domain of decentralised finance (DeFi). With this, you can stake crypto to earn interest, lend crypto for yield, and even become your own market maker, collecting fees along the way.

More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture