In the volatile world of
cryptocurrencies, safeguarding your digital assets is all-important.Crypto custodians are crucial in this ecosystem, providing secure storage and managing digital assets.
You can do self-custody, which gives you control but brings significant risks, such as potentially losing your private keys and passwords or managing security breaches yourself.Custodians can mitigate these risks by using sophisticated security protocols and policies.
Choosing the right custodian is critical for protecting your digital holdings.If cryptocurrencies are to gain much wider adoption, then robust custody products will be essential for individual and institutional
investors alike.
Key Takeaways
– Qualified crypto custodians are trusted third parties you use to secure your digital assets.
– They offer services to prevent the loss or mismanagement of private keys, hacking, or theft.
– Different custody services cater to varying needs and potential risks.
– Checking a custodian’s reputation and track record is essential.
– Fees should align with the services and level of security offered.
Understanding Crypto Custody
A qualified crypto custodian is a financial institution expert in guarding and managing your digital assets like cryptocurrencies and
non-fungible tokens (NFTs).Custodians securely store the assets and support digital transactions with advanced cryptography and hardware security measures.
By contrast, self-custody is when you secure your own private keys.While this gives you complete control, you’re on your own in case of forgotten keys and passwords, hacked devices, or simple mistakes.Crypto custodians should prevent these risks through robust protocols like
multi-signature wallets and offline cold storage.
Custody services usually include insurance coverage, regulated storage, account monitoring, reporting, and transaction processing.
For cryptocurrencies, custody services are essential to protect holdings from theft, loss, or misuse.
Crypto Custodian Regulatory Compliance and Security Standards
A qualified custodian not only guards assets but also complies with the relevant laws, regulations, and best practices.
These standards, set by organizations like the U.S.
Securities and Exchange Commission (SEC) and the U.S.Commodity Futures Trading Commission (CFTC), should ensure your custodian has robust security protocols in place to protect digital assets.
It’s vital for you to select a custodian that meets these regulatory requirements and has up-to-date security measures, like encryption and multifactor authentication, to prevent unauthorized access and other
cybersecurity threats.Here are key elements you should spot if a custodian is worth your business:
– Regulatory compliance: Custodians should follow the relevant laws and regulations, including
Know Your Customer (KYC)and anti-money laundering (AML)rules.Proper licensing and oversight should help you breathe easier, knowing that your custodian meets reporting, auditing, and fraud detection standards.
This provides accountability and gives you some recourse if anything goes wrong.
– Security standards: A qualified custodian should have up-to-date cybersecurity measures such as cold (offline) storage, multi-signature wallets, multiparty computation, biometrics, and hardware security modules.Robust protocols like proof of reserves should be audited regularly.Insurance coverage would add another layer of protection.Advanced cybersecurity standards include penetration testing, data encryption, protection against distributed
denial of service(DDoS), and 24/7 monitoring to prevent breaches and data loss.
– Asset segregation: Custodians should segregate your assets from their own holdings.Proper protocols prevent the mingling of funds and help protect your assets in cases like
bankruptcy.
– Transparency: Custodians should be fully transparent about how holdings are secured and managed, which requires frequent
auditingand reporting.Real-time account overview and transaction tracking should be available so that your holdings are also visible to you.
There should be no fudging in this area—legitimate and expert custodians won’t give you the runaround on any of this.
Crypto Custodian Services and Offerings
Crypto custodians offer various services, including hot wallets for quick access, cold storage for long-term security, and multi-signature wallets for enhanced security and accountability.Each has its benefits and risks.For example, hot wallets provide convenience but are more vulnerable to online attacks, while cold storage offers more security at the expense of accessibility.
Reputation and Track Record
A custodian’s reputation is a testament to their reliability.Evaluating a custodian involves reviewing their management, client feedback, and past security events.Due diligence should show that the custodian has a proven track record of reliability and trustworthiness.
Here are the key parts of crypto custody services:
– Hot wallets:
Hot walletsare internet-connected wallets for active assets you use for frequent trading or transactions.Benefits include convenience and quick access, but the major drawback is the greater risk of hacking or loss.
– Cold storage:
Cold walletsare offline, with private keys stored on hardware not connected to the internet.
The benefit is that this is extremely secure against online threats.The drawback is that it’s offline for making trades or transfers.Another drawback: You don’t want to join the too-long list of people who have lost their crypto thumb drive or other cold storage device or made it inaccessible for other reasons.
– Multi-signature wallets: “Multisig” wallets require several keys to make transactions (e.g., three out of five authorized keys).Benefits include greater security, loss prevention, and oversight.
Drawbacks include slower transfer speeds and the need to coordinate key holders.
– Hybrid models: This is a combination of hot wallets and cold storage for both security and convenience.Hybrid models allow quick transfers from hot wallets while the bulk of your assets are offline.
– Institutional grade vaults: Physical high-security vaults and bunkers for storing crypto assets offline have the highest level of asset security.
– Insurance coverage: A qualified custodian should have comprehensive insurance coverage, including internal and external policies, to offer complete asset protection.
Custodians should also give you flexibility to customize your coverage based on your needs.
Crypto Custodian Trading Capabilities and Integration
The ideal crypto custodian offers seamless integration with
cryptocurrency exchanges and robust trading capabilities.Thus, they are responding to the need for seamless exchange integration while keeping assets secure.
Look for custodians with a comprehensive trading platform alongside asset storage, enabling easy access to liquidity across exchanges like Coinbase, Kraken, and Binance for rapid trading, lower slippage, and application programming interface capabilities from your secure client account.
Streamlined trading integration improves liquidity and lets you capitalize on market opportunities faster while protecting assets.A custodian platform with trading functionality, research tools, and real-time market data would enable savvy crypto investing, all from your custody account.
The SEC has warned that crypto exchanges do not automatically count as qualified custodians.
Crypto Custodian Fees and Pricing
The costs for a crypto custodian depend on the platform and the type of services offered.Generally, there are three types of fees you’ll encounter:
– Custody fee: This is charged annually as a percentage of the value of the assets under custody.It’s usually less than 1%, but it can depend on the provider and the amount of assets you store with them.
For example,
GeminiCustody charges 0.4% or $30 per month per asset, whichever is higher.
– Setup fee: A flat fee is charged for opening a custodial account with the provider.
Some firms waive this fee and let you open an account for free, while others charge a one-time fee ranging from a few hundred to a few thousand dollars.For example, Casa charges $250 per year for its standard plan, which includes a multisig wallet and a hardware device.
– Withdrawal fee: This is charged every time you withdraw crypto from your custodial account.The fee depends on the provider and the amount of crypto you withdraw.Some providers charge a flat fee, while others charge a percentage-based fee.
Etana, for example, charges $35 for each outgoing
wire transfer.
Along with these fees, you should consider the provider’s security, reliability, reputation, assets and currencies supported, insurance coverage, and customer service.
Choosing a Qualified Crypto Custodian
First, do your research and compile background information on potential custodians, including how long they’ve been in business, who’s on the management team, the number of clients, the amount of assets under custody, and their reputation.Search for media coverage and independent reviews to help you make a more objective evaluation.
When you’ve narrowed your list of possible custodians, find online or request documents like audit reports, insurance policy coverage, security protocols, regulatory compliance certificates, and service level agreements.
Don’t be afraid to ask detailed questions on infrastructure, encryption methods, cold storage procedures, insurance claim processes, and incident response plans.
Here is a checklist of factors to pay attention to when deciding:
– Regulatory licenses and compliance
– Independent third-party audits
– Multi-signature wallets
– Cold storage amount and procedures
– Insurance coverage and limits
– Security protocols and encryption
– Transparent proof-of-reserves reporting
– Experience and tenure in the industry
– Client asset segregation methods
– Reputation and client satisfaction
– Exchange trading integration
Conducting thorough due diligence is essential to find a custodian that meets your security needs and
risk tolerance.Prioritize regulatory compliance, auditing, infrastructure, and insurance when making this critical choice.
Examples of Crypto Custodians
Many crypto custodians are in the market, and many more financial firms are developing the ability to offer these services.Here are the most reputable and popular:
– Anchorage Digital: Anchorage Digital is a regulated and compliant crypto management and custody platform.It offers staking, governance, trading, lending, and borrowing.
– Coinbase Custody: The exchange giant
Coinbaseoffers institutional custody products as part of its Coinbase Prime platform.It supports over 90 crypto assets and provides cold storage, insurance, and audit trails.Clients can access other Coinbase products for trading, lending, and borrowing.
– Fireblocks: Fireblocks is a crypto custody provider that uses a secure transfer network to move funds among wallets, exchanges, and other platforms.It also offers multiparty computation technology, which eliminates the need for private keys and should reduce the risk of theft.
Fireblocks supports over 500 crypto assets and is integrated with over 200 partners.
– Fidelity: Fidelity offers crypto custody services through its subsidiary,
Fidelity Digital Assets.
It provides secure storage, trade execution, and client support for institutional investors.It also offers research on the crypto market and industry trends.Fidelity Digital Assets also provides services for Fidelity Crypto, enabling individual investors to buy and sell digital assets in its Fidelity Investments app.
– BitGo: BitGo is a popular crypto custody provider that provides institutional-grade security, multi-signature authentication, and insurance coverage.
It supports over 700 crypto assets and offers trading, lending, and borrowing services.It also provides compliance and reporting tools.
– Casa: Casa is a crypto custody company that offers three core products and services: Keymaster, Casa Node, and Casa Covenant.Keymaster is a self-custody solution using multi-signature technology, hardware devices, and a recovery key to secure crypto.Casa Node is a plug-and-play device that runs a
Bitcoinand Lightning Networknode.
Casa Covenant is an inheritance product for designating a third-party executor who can access your bitcoins in case of death or incapacitation.
– Gemini: Gemini is a regulated and compliant crypto exchange and custodian that offers trading, lending, borrowing, and staking.Gemini Custody uses multi-signature technology, role-based governance protocols, physical security, and biometric access controls to guard customer assets.Gemini also provides insurance coverage for up to $75 million of digital assets in cold storage.Gemini Custody supports over 90 crypto assets, including bitcoin,
ether, and various stablecoins and ERC-20 tokens.
– Etana: Etana is a licensed and secure digital asset custody provider that operates globally.
Etana’s custody platform uses hot, cold, or multiparty computation wallets for cryptocurrencies,
stablecoins, NFTs, and other digital assets.Etana also provides fiat currency custody, trade support, and securitization services.Etana works with financial institutions and crypto exchanges to provide secure and scalable digital asset products.
Why Would I Need a Crypto Custodian?
Custodians provide greater security against threats like hacks, fraud, and lost private keys.They can mitigate the risks associated with self-custody through robust protocols and insurance protections.
For large crypto holders, regulated custodians add oversight and financial controls.
What Is Self-Custody in Crypto?
Self-custody is when the owner of digital assets holds and controls their own private keys, which are essentially the passwords that grant access to these tokens and funds.Self-custody can be done using hardware devices, software wallets, or
paper wallets.
Do Custodians Provide Staking Rewards for Proof-of-Stake (PoS) Tokens?
Some custody services of
proof-of-stake (PoS) coins give staking rewards to users.Staking is locking or delegating crypto holdings to secure the blockchain network and earn rewards.However, not all custody services offer staking options, and the rewards depend on the type and amount of coins, the level of service, and the fees involved.
The Bottom Line
Selecting a qualified crypto custodian is crucial for the security and protection of your digital assets.It requires careful consideration of regulatory compliance, security standards, service offerings, reputation, insurance coverage, and fees.Making an informed decision in this selection process helps safeguard your digital assets for a more secure crypto investment experience.
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Correction-Dec.4, 2023: This article has been corrected to remove incorrect information about Anchorage Digital..
